See recovery in power sector order from H2FY14: Rel Infra

K Ravi Kumar, Independent Director of Reliance Infra told CNBC-TV18 regulatory bodies like the Central Electricity Regulatory Commission (CERC) should be free to fix tariffs. He also advocated the need to place mechanisms that will ensure reduction of Aggregate Technical and Commercial (AT&C) losses.

Kumar emphasised on the need to ensure free flow of power across grids. He believes distribution lines should be strengthened to lower transmission and distribution loss. Besides, he is also in favour of a single national grid for transmitting power across regions.

Moreover, Kumar stressed on the requirement for single window clearance model adopted for ultra modern power projects. Going forward, he sees recovery in power sector orders in the second half of fiscal year 2014 onwards and expects some margin pressures continuing for BHEL.

Here is the edited transcript of the interview on CNBC-TV18.

Q: Part of the power sector problems are with the Central Electricity Regulatory Commission (CERC) that is a regulatory body, part of them are perhaps impacted by environmental related issues and some of which could even be in the courts. So what exactly can the CCI resolve? If you have to order their agenda for the power sector, what will be the first two problems that you will put on their plate?

A: One thing is that the regulatory bodies must be free from political interference. That is not only CERC, the State Electricity Regulatory Commissions (SERCs) are also there. The SERC is independent of what is going on in the centre.

So as far as CERC and SERCs are concerned, they must be totally free to fix the tariffs depending on what is necessary and what is actually the rate of return for various developers, whether it is the state generating stations or central generating stations like National Thermal Power Corporation (NTPC) or it is private developers independent power producer (IPP) and all that.

If the electricity sector has to grow, they must be compensated by real tariff which is not too bad for consumers and at the same time, it is fair to both consumer as well as the generating companies. That is one thing which is necessary. Second thing is there is a lot of shortage in south and the rates are quite high. The merchant rates in the south are very high.

Whereas if you see in the western, eastern or in the northern region, it is around Rs 3.5 which will not compensate the IPPs to put up new plants or will not allow new IPPs to come up for the existing developers. So there is a need for rationalization and there must be enough corridors for transmitting power from north to south. The SERCs and CERCs must be independent, the regulators must be independent and there must be a regular tariff revision. Last year, there was good tariff revision and this financial year was one of the best years. There was a rise in tariffs almost everywhere.
 
Second is Aggregate Technical and Commercial (AT&C) losses. Competition is also very difficult and AT&C losses should be brought down to at least 12 percent in the country. It is quite high today, around 30 percent and in some places it is around 55 percent.

Q: Isn't that because there is wholesale pilferage at the state level and if it is not pilferage, then it is actually blessed by state level politicians? Can a cabinet committee of ministers really do much about these kinds of transmission and distribution (T&D) losses? May be some high-tension wires were recommended long back by Suresh Prabhu’s ministry and that requires a whole lot of investment. What can they do about T&D losses?

A: Actually there must be separate feeders for agriculture and also other feeders and a meeting should be done electronically. In foreign countries, if you look at US or Europe, the pilferage is almost nil. Of course attitude of the people have to change but, definitely there must be some mechanism. One is tariff hike and recently the power ministry has told tariff hike is the last solution.

So definitely, there is necessity to reduce AT&C losses and also ensure tariff hikes. This is one thing that is necessary and there must be free flow of electricity from all grids and there must be a national grid so that a developer in the north should be able to pump electricity to the south.

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Q: Do you think the national grid should be a priority for CCI?

A: Grid is on priority because in the south, there are power cuts of 14 to 15 hours. Export related industries are suffering and there is high diesel consumption. We do not see the diesel consumption which is going into the households. So there is a necessity to avoid power shortage throughout the country.

One way is through increasing the power production as such and second is the power that is produced must be distributed to all the states. For that, enough transmission lines should be available. Distribution lines should be strengthened so that transmission and distribution (T&D) losses can be minimised. As I said, there must be a will amongst the people to reduce the T&D losses.

Also, the government can do that by enforcing some discipline in this regard. This is one area. The second area of course is that most of the infrastructure sectors need a lot of capital. Recently, there is only a 25 basis point cut on CRR. At some places it is cut by 10 basis points by banks. It is capital intensive and therefore, the rate of interest must come down.

Also, the clearances must be also done very fast. If you see, a lot of clearances are required for establishing projects. Three to four years ago, it was only in these clearances like land acquisition, environment clearance, forest clearance etc. If a single window clearance can be given by the government, it would be beneficial.

Q: The CCI, while it will set deadlines with regards to some sort of regulatory clearances, what road blocks do you see once there is some approval come in from the CCI with regards to expediting the project. Could you elaborate in terms of these regulatory road blocks that companies might face despite a CCI clearance.

A: Some of them are becoming concurrent subjects. If you see, it has to go through the State Environment Clearance Board, then it goes to centre in most of the cases. I don’t know how far the committee will have influence on states, that has something to be seen.

The second thing is every state has its own laws. It was done for ultra mega power projects, a single window clearance for various sectors is one thing that they have to look at and how it can be done. Total clearances like forest clearances, water linkage, transmission linkage etc. must be done through a single window clearance.

All the things should be done together so that the developer doesn't waste three-four years in all these areas. This is one thing that the government can help in these areas.

Q: We can't let you go without asking your opinion on BHEL as well. This is more as an example. We are seeing it in the T&D space as well. So I want your opinion on the entire BHEL as well as the T&D space. Margins of T&D players have collapsed and it looks like BHEL should follow suit. After all, when we opened ourselves to competition in FY07 we had a bunch of orders. So the competition did not hurt but after orders collapsed in FY12 and even project delays crept in FY13, margins are under serious pressure. How much do you think BHEL margins can fall to and for how long before they start stabilising?

A: Four years back I used to tell there is a 15 percent CAGR which is possible in this sector. But now, if it is becoming flattish, definitely there will be pressure on margins. But, how effectively it is being dealt with? The recent custom duty must help the indigenous players.

I should not talk only on BHEL but, definitely all the indigenous players are facing a lot of problems with imports and Chinese equipments. Definitely, there must be small import duty which may help and also the recent devaluation of the rupee might help. But, at the same time, there is a necessity to maintain margins. Investors don’t want margins to go down. But, there will definitely be some pressure on margins from the next financial year because the order books earlier had good margins. So that will go up this year.

Q: You are on the boards of many power companies. Do you still have your finger on the pulse of the generating industry? When do you think orders will come back?

A: Orders will come back from the second half of next year. Basically, I expect some 40 percent orders to come from central PSUs and 35 percent to come from state discoms and 25 percent from IPPs. The IPPs have a problem basically because the developers want rate revision for their old projects. Their old projects, as you said, CERC may intervene and give some kind of rate revision which is reasonable.

Then probably they will put up new projects because the developers numbers can be counted. If they are given for the existing projects, some rate revision probably will put in some new projects.