Power Majors’ Hit By Ruling On Provision Tariff

If we take a look at the performance of the power sector over the last one and half years, it has been quite dormant. Various factors like delayed projects, non-availability of coal and gas, and last, but not the least, difficulties faced in raising finances on account of escalated costs. No wonder then that the BSE Power Index has remained muted on the bourses for a quite some time now.

However, after the Central government took a few exceptional steps towards improving the business environment in the sector, it showed some signs of revival in the Sept 2012 quarter. During the quarter, the government announced a bailout package of Rs 1.9 lakh crore to the State Electricity Boards (SEBs). Under this, half of the SEB debt will be taken over by the state governments, while the remaining half will be restructured by providing softer repayment terms. Further, the government was also forthcoming on resolving the issues on the coal linkage front.

Besides the bailout package, many state governments have raised their tariffs, which are now reflecting on the results of companies. For the Sept 2012 quarter, NTPC and Power Grid Corporation managed to show good profit growth.

However, a recent order by the Calcutta High Court on the provisional tariff front indicates that while the government has taken one step ahead, it will now be forced to take two steps backwards. According to the order, power plants generating 50,000 MW will have to cut their tariffs. The HC has said that regulators will not be allowed to fix provisional tariffs for new units.

The court has quashed the regulation that empowers the Central Electricity Regulatory Commission (CERC) to fix provisional tariffs for generation and transmission. Provisional tariffs are the interim price that is typically charged by the power company for a new power station or transmission asset until the final tariff (post full commissioning) is fixed. Usually these rates are fixed for the next five years as it takes a whole year for fixing the prices.

While fixing provisional tariffs, there is always a case that a major portion of fixed costs (full project fixed cost) get freeloaded in it, thereby jacking up the tariff charges. This means that though the company has started only one unit (where multiple units are planned), they will charge tariffs based on the fixed cost of the full project. State-owned producers NTPC, NHPC and Damodar Valley Corp (DVC, Unlisted Entity) are those that operate with this system, and will thus feel the heat following this order. While the impact of the ruling will be seen on power generators, this will also affect Power Grid Corp, which has 96,000 circuit km of transmission lines and also charges tariffs on a similar basis. However, private companies are not being getting impacted here as these companies quote provisional tariffs by adding fixed costs on a proportional basis.

Though the impacted companies NTPC, PGCIL and NHPC are likely to join CERC and DVC in filing appeals in the Supreme Court, we feel that not much would change. The order is certainly bad news for the companies concerned, and will keep their stock prices under pressure.