The Capitalist | Power business a big game at the moment

The Capitalist | Power business a big game at the moment
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First Published: Wed, Jul 22 2009. 09 43 PM IST

Power packed: The costs for power generation vary significantly from project to project. Ramesh Pathania / Mint
Power packed: The costs for power generation vary significantly from project to project. Ramesh Pathania / Mint
Updated: Wed, Jul 22 2009. 09 43 PM IST
Power generation appears to be the big game at the moment. On the one hand, Reliance Infrastructure Ltd is battling it out with the electricity regulator in Mumbai on the issue of its sharp tariff hikes. On the other,
Power packed: The costs for power generation vary significantly from project to project. Ramesh Pathania / Mint
there are companies such as Adani Power Ltd. Adani Power has signed competitive power purchase agreements (PPAs) with Gujarat, Maharashtra, Rajasthan and Haryana and hopes to spread its footprint further. Whichever way you look at it, power is big business, and has lately begun grabbing headlines.
However, one fact that stands out is that the costs for power generation vary significantly from project to project. This cost becomes easier to understand when broken up as capital expenditure per MW of installed capacity. Most projects awarded on global auctions involve costs of around Rs3.5-4 crore per MW.
For some strange reason, some power projects cost a great deal more. There is no satisfactory explanation for this difference.
Normally, the differences would not matter much. But there are two reasons why they become important. First, when multiplied by the number of MW of generation capacities being set up, one begins to realize the amounts of money that have been “padded” on. Secondly, these capital costs become critically important when calculating tariffs because, under Indian laws, power distribution companies are allowed to earn a rate of 16% on the capital employed. When customers are outraged over power tariffs, as they are in Mumbai, capital costs have to be revisited.
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Policing the policemen
What does one do when a policeman joins hands with crooks? That is a question that is now being decided in the US courts, thanks to a case filed by the California Public Employees’ Retirement System (CalPERS), a big pension fund company, which is suing three of the largest bond credit-rating companies for issuing “wildly inaccurate” rankings on investments, which in turn cost its pensioners “perhaps more than $1 billion (Rs4,840 crore)”.
CalPERS had sunk approximately $1.6 billion in structured investment vehicles (SIVs), which had been rated by these bond rating companies—Standard and Poor’s, Moody’s Investors Service and Fitch Ratings—and had seen its valuations decline in the market meltdown last year. In its suit, CalPERS said: “The competition between rating agencies led to a market share war, which deteriorated into a race to the bottom for standards of quality credit rating. The casualties were the accuracy of the models.”
According to media reports, the rating agencies themselves called the allegations without merit and said they would seek a dismissal as quickly as possible.
But closer home, market regulators are worried. India, too, saw the simmerings of similar anger when spokespersons for Azim Premji’s Trust said they had been misled by a bank when they were persuaded to invest Rs230 crore in distressed discount retailer Subhiksha Trading Services Ltd.
A similar case surrounds Satyam Computer Services Ltd, Maytas Infra Ltd and a host of funds that are currently being peddled in the market.
Since credit rating companies earn their fees from the client companies, there is an inherent conflict of interest in the manner in which they may choose to rate the company.
The US lawsuit will be interesting because it may throw up some new guidelines on the way credit rating companies should work. It will definitely have a bearing on India as well, not just for credit rating companies, but also for trustees of debt instruments (such as debentures), who are supposed to ensure that the interest of depositors is never jeopardized.
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Of birth and immigration
Canada’s leaders are in a big quandry. On the one hand, they would like to retain the demographic profile of their country, where the ruling class is mostly white. On the other is the reality that its population is ageing rapidly, which means that there are less people to do the jobs that could keep the country comepetitive and prosperous, with ever increasing standards of living.
A study by Urban Futures has found that birth rates fell below the 2.1 babies-per-mother replacement level in 1970 and have stayed there ever since.
Meanwhile, the country has one of the longest life expectancies in the world. As a result of this, the number of Canadians aged between 70 and 89 will double by 2035 to 6.4 million, and by 2055, a million people are expected to live until they are 90. This means that the country will have to actively woo immigrants. Unfortunately, in order to achieve the working population numbers it wants, immigration numbers will have to be doubled over 50 years. Regardless of the economic climate for immigrants wanting to move to Canada, there will always be jobs because the percentage of people active in the labour market is expected to reduce to 58%, compared with current levels, by 2035.
Many Indians can be expected to head that way.
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
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First Published: Wed, Jul 22 2009. 09 43 PM IST