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Jun 27, 2012, 03.17 PM IST | Source: CNBC-TV18

Tariff hike trends augur well for power sector: Rel Infra

In an interview to CNBC-TV18, Lalit Jalan, chief executive officer, Reliance Infra says low tariffs were leading distribution companies or discoms to face a loss of almost Rs 2 a unit which was leading to a loss of Rs 20 crore a day.

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In a move that's seen benefitting stocks like Reliance Infra and Tata Power , power tariffs in Delhi are set to rise effective July 1. Domestic prices will go up by 24% and commercial prices will go up by 19.5%.

Additional charges of Fuel surcharge will put a further burden on the bills. The Delhi Electricity Regulatory Commission (DERC) has said there won't be another hike in prices for the next two to three years.

In an interview to CNBC-TV18, Lalit Jalan, chief executive officer, Reliance Infra says low tariffs were leading distribution companies or discoms to face a loss of almost Rs 2 a unit which was leading to a loss of Rs 20 crore a day.

He expects the hike in power tariffs to help pare losses that companies were facing in Delhi. In the last 10-years, Jalan says tariffs have been hike by over 36%. This trend of hiking prices definitely augurs well for the power sector, he adds.

Below is an edited transcript of his interview. for more.

Q: How much will this help narrow your losses? Could you take us through what the gap would still be after this tariff hike takes effect?

A: With the tariff increase I think the current bleed that the discoms were facing of almost Rs 2 a unit which was leading to Rs 20 crore a day, that bleed for the Delhi discoms together should get bridged. But the old unrecovered dues would still take a few years to be recovered through tariff.

Q: Has there been a promise from the regulator with a plan for you to recover the past dues or there is no concrete plan yet?

A: There is a concrete plan. The detailed tariff order is not available yet, but in the short media release that we have seen, they have given us an 8% surcharge on the tariff towards old unrecovered dues. This is an exemplary step. This is totally inline with the directions of the Appellate Tribunal of November 2011 of giving essentially three things, a cost effective tariff which I think this tariff order is, second is a full fuel power purchase pass-through which also this is and third is a regulatory asset recognition and to have a path for it. We will have to see the detailed order but this is totally compliant to the Appellate directions to all the regulators in the country.

Q: Prices have been hiked in August last year, then in February, then in May but this time around the DERC order also seems to suggest that now you cannot raise tariffs again for the next two to four years. Why is that?

A: No, I haven’t seen that piece. If you really see, 80-90% cost of any distribution company is made up of power purchase costs and in the last 10-years that we have been running the Delhi discoms, the power purchase costs have gone up by more than 300%. 100% of the power in Delhi is bought by central and state utilities. The biggest supplier to us is NTPC which supplies 70% of power to Delhi and 15% is by the state gencos or power generating companies.

This entire tariff is regulated by the state regulator or CERC (Central Electricity Regulatory Commission). So we have almost no control over power purchase costs. These have gone up by 300% over 10 years. However, owing to a period of five-six years when the tariff in Delhi was not allowed to increase at all, the tariff increase in the last 10 years has barely been 36%, leading to huge under-recoveries which are what has been the problem.

If you look at the cost elements, there are two elements; one is the commercial losses which at the time of privatisation were in excess of 40%. They have been bought below 5%, saving Rs 30,000 crore to the Government of Delhi. The second is the operating costs. These have actually come down by 40% in spite of inflation at 7% a year for the last 10-years. So, by all these savings, the efficiency has gone to the government and the consumers. In fact, today the cost of power in Delhi is less than half that of Gurgaon.

Q: Tariffs have been hiked in other places as well including states like Tamil Nadu. Is this something that is going to spread to other states? Will the quantum will be as large as Delhi has announced because it’s the largest in the NCR?

A: In Tamil Nadu it is 37% which was announced a month back which was larger than the 21% that has happened in Delhi. What I have seen is that the trends have been good. Having seen no increases for many years FY12 saw about 16 states giving new tariff. FY13 in the current year this is the 14th state giving the tariff. Many tariffs have been in excess of 15-20%. States like Bihar, Chhattisgarh and Orissa have given tariff increases both years. What is happening is SEBs have no ability to pay. If you cannot pay, you will have to force load-shedding.

Q: By when do you think distribution companies like you can get into profitability? Your losses are getting cut, but looking at the shape of your past dues, when do you think recovery can happen and you could become net positive?

A: I think we will just go through the details o the tariff order. This order should give us the regulated profits for the year, if I do not include my losses of the previous five years. Those we have shown in our books as regulatory assets so that the year-to-year we do end up showing a little profit. We will recognise the actual state of the operating performance of the discoms. But the regulatory asset recovery will take a few years.

Reliance Infra stock price

On October 30, 2014, Reliance Infrastructure closed at Rs 597.20, up Rs 17.25, or 2.97 percent. The 52-week high of the share was Rs 820.00 and the 52-week low was Rs 350.85.


The company's trailing 12-month (TTM) EPS was at Rs 58.37 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 10.23. The latest book value of the company is Rs 809.64 per share. At current value, the price-to-book value of the company is 0.74.

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