New Delhi: The Central Electricity Regulatory Commission, or CERC, the country’s apex power sector regulator, has announced tariff regulations which ensure that power generation and transmission firms can earn a return of up to 16% on their equity capital, in a move aimed at encouraging companies to invest in the power sector.
The increase in guaranteed return, currently at 14%, could increase the cost of power for individuals and companies. And in case the state electricity boards that distribute power do not pass it on, it could increase their losses. However, this will depend on the ability of the companies to meet stringent efficiency criteria laid down by CERC.
Analysts say the new norms could increase tariffs by 8-10%.
Incentivizing: CERC chairman Pramod Deo says the commission has increased the return on equity keeping in view the need to attract funds. PIB
The new regulations are for a five-year period ending 2014 and are aimed at helping the cause of state-owned companies such as NTPC Ltd, NHPC Ltd and Power Grid Corp. of India Ltd, which have a mandate to invest largely in power generation and transmission.
CERC has enhanced the return on equity, or ROE (the after tax profit of a company as a proportion of its equity, expressed in percentage), from the current 14% to 15.5%. In addition, the regulator has allowed an additional return on equity of 0.5% to those projects which are commissioned within the given timeline.
“The commission has increased the ROE keeping in view the need to attract investments in the current market conditions... As the financial market meltdown started, we realized that the investment will primarily come in the public sector and these rules will incentivize investment,” said Pramod Deo, chairman, CERC.
The tariff norms are applicable to so-called negotiated projects. These are projects that are negotiated between the power generation firm and the relevant government body, and that involve no competitive bidding, unlike the Union government’s ultra mega power projects, where the firm quoting the lowest cost per unit of power generated is awarded the project. The new norms will also be applicable to private projects, which have got the so-called mega power project status.
“ROE will be now pre-tax, for which the base rate of 15.5% would be grossed up by applicable tax rate for the company,” CERC said in a release. That translates into an effective post-tax return on equity of 23.5% from the current 21%.
CERC has also mandated that only firms that have an availability level of at least 85% are eligible for the guaranteed ROE.
While R.S. Sharma, chairman and managing director of NTPC, declined comment, citing the need to give a detailed look to the tariff order which also lists several other changes, PowerGrid chairman and managing director S.K. Chaturvedi said: “It is very encouraging as, beside increasing the ROE, an additional return on equity of 0.5% has been provided for timely project completion.”
A power sector analyst at a Mumbai-based brokerage, who did not want to be named, said, “NTPC’s profits can go up by an additional 15% after these regulations come into effect.”