Apr 05, 2012, 02.18 PM | Source: CNBC-TV18

Power fin cos hail TN tariff hike, say others must follow

CNBC-TV18 caught up with HD Khunteta, director of finance, REC; Harshvardhan Dole, power analyst at IIFL and SK Tuteja of the Shunglu Committee for a discussion on the 37% power tariff hike that Tamil Nadu has taken for the first time in nine years.

HD Khunteta, Director - Finance, REC
Tamil Nadu belled the cat with the State Electricity Board (SEB) hiking power tariff. This is the first time in over nine years that tariff is being increased. This 37% hike comes as a harbinger of hope for the power finance companies such as PTC , REC and PFC that hopes to get timely payments from the SEB henceforth.

CNBC-TV18 caught up with HD Khunteta, director of finance, REC; Harshvardhan Dole, power analyst at IIFL and SK Tuteja of the Shunglu Committee for a discussion on the matter.

The Tamil Nadu SEB owes nearly Rs 9000 crore to REC, while AP and Rajasthan together owe the company Rs 14000 crore. Khunteta expects the other states to follow suit TN with tariff hikes, which he says will improve business for the power finance companies.

“Asset quality will definitely improve,” he says, adding that disbursement growth for the company is likely to grow 20-22% in FY13.

According to Dole, PTC is going to be the biggest beneficiary of the cost hike since that will help the company bring down its working capital.

Tuteja however feels more measures need to be implemented than just tariff hikes. “We need to invite more private investments in the distribution sector,” he says. Tuteja stresses on the integration of technology in the activities of power companies.  “Though the tariff hike is a welcome move, SEBs need to do these hikes on an annual basis and not once in nine years,” he says.

On the negative side, companies such as JSW Steel, Lanco and JSPL may see marginal pressure as they have high exposure tot he spot market and spot prices may come down as an effect of the tariff hike.

Below is the edited transcript of the discussion. Also watch the accompanying videos.

Q: Are you encouraged by the tariff hikes or do you think it's a first step and a lot more needs to be done for SEB’s to fix their problem?

Tuteja: It is very encouraging, but two more important things need to be done. One is the integration of technology in the activities of power distribution companies. Whether it is consumer friendly approach or whether it is a question of metering, all this needs to be done in a more transparent and with no default activity. The second is that they definitely need to address the question of inviting more private investment into the distribution sector. The franchisee model, for example, is one such thing which needs to be taken care of. All the three needs to be done and rate increase is one of the factors. Obviously, all this is intended only for that limited purpose that is how they reduce their distribution and transmission losses.

Q: Part of the mandate that was set out was that some of the state regulators could go ahead with these price increases on an annual basis. Are you confident that that kind of move can actually take place? Is it looking more like an ad hoc move by Tamil Nadu of moving 37% and then they’ll see how it goes or do you think this can be sustained over the next couple of years every year?

Tuteja: That is precisely the objective, that is why the act provides for preparation of an annual business statement, annual resource statement. The regulator is then supposed to determine the increase or no increase. That point will depend upon the financial position of the company. But more importantly, it has to be done on an annual basis.

Q: What about the accumulated losses? While this will improve the cash flow clearly the raising of the tariffs do you think you need to see far more action in terms of restructuring of loans, may be a far bigger line of support from the states themselves in their budgets to deal with the accumulated losses which stand on their books?

Tuteja: The accumulated losses are a problem that, as we mentioned in our committee, needs to be addressed in two ways. One evolves this question of restructuring of loans which is linked to certain parameters. One of the parameters was that there will be a revision in the rates. This will enable the distribution companies in two ways, firstly their liquidity position and secondly, it is definitely now going to attract more private investment in the distribution activity.

The other point that we should not miss in this is that if it happens across the board in all the states, then the accumulate loss of Rs 80,000 crore would get restructured. But if it does not happen then it will not get restructured. You appreciate the concerns of the lenders are also there. They are willing to consider a restructuring, provided they see the light that yes the restructured money will come.

Q: Has any plan being worked out with these lenders in terms of restructuring, how it could be done, what kind of compensation or relief could be provided to them?

Tuteja: We had said in that report that restructuring will be done on case-to-case basis by the state government and distribution company with the lender concerned. If after two years of that, there is a situation, then we had suggested a special purpose vehicle (SPV) to take care of this. The basic point is that restructuring in any case will get linked to their effort to raise their income and to reduce their losses.

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