Power cost to rise by 25p/unit on coal pass-through: Altius

Recent ruling of cabinet committee on economic affairs (CCEA) of allowing imported coal cost pass through would be positive for power financing companies like Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) and would also result in increase in power tariffs at least by 20-25 paise per unit, HD Khunteta, Former Dir-Finance, REC and Chairman, Altius Finserv told CNBC-TV18

Khunteta, however stressed that government needed to come up with benchmark or a model to fix pass on cost of coal. "Basically they have to also form the modalities of this. The question may arise about the pricing of the coal because they can ask about the transparency in pricing of the imported coal," Khunteta noted. Many states in past few years have not been able to increase power tariffs along with the rise in input cost. As a result of which many power distributing companies are running in to huge losses. Imported coal cost pass on will allow these companies to increase power tariffs which in turn will enhance their revenue stream aiding them to service their repayment of loans and interest. REC's loan book has around 45 percent exposure to power generation companies and 32-33 percent from DISCOMs. Also read: Tariff hike due to coal imports temporary measure: CERC Khunteta also warned that if power fuel supply pacts issue is not solved within a year then it may create huge problems for power generation companies and power finance companies like REC. Below is the verbatim transcript of the interview Q: The recent ruling on cabinet committee on economic affairs (CCEA) allowing coal pass through, how do you see it impacting Rural Electrification Corporation (REC) and Power Finance Corporation (PFC)? A: It is beneficial to REC and PFC both because of the pass through of the coal price. On account of imported coal the tariff will increase and the revenue inflow of the power developers will also increase. They will be in a position to service their interest and repayment of the loan that is a positive for this. Q: You have been around to see these efforts at fuel supply over the past several months, are you not apprehensive that this may also end up in litigation because the power purchase agreements (PPAs) very clearly state that the power prices can be raised only if Coal India raises prices. That is why those cases are stuck with the Central Electricity Regulatory Commission (CERC) not just one, three-four cases are stuck with the CERC. Is it possible that this effort also can end in the law courts or with the regulator? A: Basically they have to also form the modalities for this. The question may arise about the transparency in pricing of the imported coal. So the benchmark or some modality needs to be fixed by the government. If the State Electricity Regulatory Commission (SERC) or CERC approves the increased tariff on account of the difference in the pricing of imported coal then it will be better. So, the recommendations have been done by the CCEA, it is subject to approval of the CERC or SERC. So the power developers have to take up the matter with the CERC or as the case maybe and they have to submit the proper documents. So the tariff can be revised. Q: It will benefit REC, PFC if the power tariffs are allowed to increase, there was a Barclays report, which said that the annual impact on the state electricity board (SEB) due to the transfer of extra cost of imported coal according to them would come in at USD 15 billion in FY15 so that is one year amount that one of the brokerages has calculated. Given the fact that SEBs have already try to increase the tariffs in the last two years, do you see them able to increase such a substantial tariff increase, which will come into play because of the imported coal? A: In fact on the tariff will be around 20 paise to 25 paise. The problem is that in last eight years before year 2012-2013 or 2011-2012, tariff has not been increased by many of the states so they are facing difficulties in raising the tariff. They have to see whether the public or the consumer should not object if the tariff is increased by 30-40 percent every year. That point has to be considered. Ultimately, whatever things have been done in Gujarat, where the total revenue and the accretion on account of purchase of power or sell of energy both are on the positive side. So SEB has committed that within three years they will also reach to a breakeven point where the inflow will be equivalent to the outflow. So every year they have to increase that tariff around 10 percent. In current year around 19 states have already submitted the application for revising of the tariff. So I hope that they will do it. If tariff is not increased then the recommendations or directions of the CCEA will be wasted. So on ground level, things have to be done. Q: For REC in particular, what is the share of exposure to power generators and how much to distribution companies (DISCOMs)? A: The share of generation companies is around 45 percent and DISCOMs is around 32-33 percent. Q: With the generation companies, are you a bit worried about the credit quality of both PFC and REC since they will have lent to a lot of generators. After all fuel supplies have not been coming, do you think there is a chance that in the power generation category, you might start to see defaults? A: So far payments are being received from most of the companies. If the problem or issue involved in the power sectors are not being sorted out then definitely the problems may arise. Q: How much time do you have as a lender to hope that things will turn, do you have one year, do you have six months, you may have lent to even a lot of the gas based plants like Samalkot, have you? A: We have not provided the funding to this project. Q: You were speaking about the time element, if the fuel supplies are not arranged in the next one year, do you think that there could be an accentuated default list? A: If the issues are not being sorted out then the problems may arise within a year. I hope that since the power sector is the part of the life of everybody and nobody can live without power, things have to be sorted out. So I am little positive and I feel that within one and a half years or two years, the things will improve. SERC or CERC should also frame the policy as far as the pricing of the imported coal is concerned. Developers should also know that if they follow the proper procedure then it is easy to pass through the cost of the imported coal. Q: Is there any loan growth at all or is it only working capital that an REC would be doing now? A: Growth is coming from both sides, distribution as well as generation. Last year, growth from the distribution side was much more. Loans which are being given are subject to number of conditions and government guarantees also. So the amount will be totally secured.