CERC proposals on equity returns evoke mixed reactions

Written by Sanjay Jog | Mumbai | Updated: Feb 11 2009, 05:26am hrs
The Central Electricity Regulatory Commission's (CERC) proposal to increase return on equity to 15.5% from 14% in the tariff regulation for 2009-14 has evoked mixed reactions. Private entities like Power Dodson LHPL, Energy Infratech, Avanta Power, CESC and Torrent Power, have proposed a post-tax rate of return on equity of at least 16%, considering the financial markets.

On the other hand, beneficiaries like GRIDCO, UPPCL, GUVNL, BSEB and KSEB have objected to providing a higher return on equity to the utilities. They feel the CERC should review all the benefits available to the utilities along with return on equity and permit the recovery of cost of electricity at a reasonable manner. Some of the consumers have even proposed to reduce the return on equity from 14% to 12%. UPPCL and MPPTCL have proposed a pre-tax rate of return of 14% for the new projects and 19% for the existing ones.

However, the CERC has said it has the mandate to fix a rate of return for equity that will not only attract investment and generate sufficient resources for further growth in the sector but also take care of consumers interests. Considering the investment pattern of 70:30 debt-equity, utilities are required to build up sufficient internal accruals to meet the target of investing at least 30% of capital cost in the form of equity. A higher investment in the form of equity will also help the entities in negotiating and availing loans at competitive terms and conditions.

The CERC has also made it clear that the return on equity will be computed in rupee terms, on the equity base determined in accordance with regulation 12 and will be computed on pre-tax basis at the base rate of 15.5%, to be grossed up according to clause (3) of this regulation.

NHPC has proposed to allow depreciation at 5.83% for the first 12 years and spread over the balance depreciable value of the assets over the balance useful life of the assets at 1.09%. SJVNL had advocated for a depreciation of 5.28% and also proposed to allow depreciation against the land for reservoir in case of a hydrogenerating station. Companies like PGCIL, NTPC, Gujrat Industries SEDCL, Universal Infratech, India Energy Forum and NTPC have proposed rates of depreciation as prescribed in the Companies Act, 1956.