Tarriff cut not in interest of sector: former MERC member

He said that it providing for over Rs 7500 crore of power subsidy annually would strain the state’s finances.

Also read: Maha discom account not a worry post power tariff cut: Bank of Maharashtra

Below is the verbatim transcript of his interview on CNBC-TV18

Q: Right now there doesn’t seem to be too much of a stock impact but do you think going forward if this kind of trend was to continue first you had this in Delhi and now in Maharashtra that would lead to a bit of sentiment hit and potential derating of some of these power stocks, we have already seen in case of Tata Power quite a bit of derating since the start of the year?

Dole: You are right, I think over the last 12-18 months what the sector had expected was actually coming out to be true. Firstly the State Electricity Boards (SEBs) were revising tariffs year by year, there was continuous support coming in from the state as well as the central government. Then you had the financial restructuring going through very well and therefore it was hope that over the next 12 months at least the key issues that the sector was encountering. There is a systemic way to approach these issues which will ensure that the long-term viability of the sector remains very much intact.

However, it appears that the power tariff cuts or subsidy extended by the state government are actually quite contagious and the states are in a race to roll out more and more subsidies one after the other.

Maharashtra has actually gone a step ahead and actually cut the tariffs even for the industrial side which thankfully was not done by the other two states. I hope this is not taken forward to a great extent by the other states. I will be particularly worried if the states such as Bihar, Uttar Pradesh, Rajasthan, and Tamil Nadu where financial state of the SEB is very bad, if these states were to be given subsidy, I think it will only worsen the risk reward from here on.

Q: You spoke about the contagion effect on Bihar, Uttar Pradesh, Rajasthan, Tamil Nadu taking place because these are the ones that have signed the FRP and hence are possibly in the most vulnerable financial position at this point in time with regards to the discoms, in that case if in case there are some power tariff cuts that do take place, in that scenario which will be the companies that will be most affected according to you?

Dole: As such the financial hit to the players is a bit tricky situation to assess. The most vulnerable category will be the merchant power players because essentially, if the working capital has to be contained by the SEBs, the first hit will come actually on the power purchase and the first one to go out of the system will be the merchant power players.

So the merchant power players such as JSW Energy, to an extent Jindal Steel and Power Limited (JSPL) or the power trading companies will see some impact if at all the kind of effect flows through across the SEB.

Secondly, if the finances actually worsen from here on and that is a second step or a derivate impact of what has happened - it could actually lead to extension of working capital to companies such as National Thermal Power Corporation (NTPC), NHPC or even Power Grid which is really disastrous in the long run. So in the first step I would be wary of players who are directly dealing with the merchant power and at the second level, if the risk of further subsidy or tariff revision continues, then the system as a whole will be vulnerable to these shocks.

Q: Yesterday when we spoke to the Maharashtra Chief Minister, the issue that came out was that the cost of power in Maharashtra is way higher than what it is in states like Delhi. You think there is merit in doing a bit of an audit of how these cost structures are especially in states like Maharashtra?

Velayutham: Actually the rate cut or tariff cut is not in the interest of the government also but government will decide. Therefore the tariff fixed by the regulatory commission that has to be honoured and whatever the government decides they can actually pay the subsidy upfront. However, if they pay subsidy beyond a certain limit, it will definitely affect the government too and other sectors will be affected. Therefore, in any case the tariff fixed by the regulatory commission has to be honored in the interest of power utilities and power sector.

Since we don't have very realistic tariff to get annual revenue requirement for utilities. The power utilities will definitely suffer, also further growth of the utilities as well as the sector will definitely be affected.

Q: The subsidy burden for the Maharashtra government is now expected to be higher by around Rs 6000-7000 crore, do you think that they are in a position to possibly finance this comfortably?

Velayutham: I don't think so. It is not only subsidy, some of the amount may be around Rs 700 crore to be borne by the utility also from what I could see but the utility will also not be able to absorb that much amount. In my opinion for government also it will be difficult to absorb but if they absorb it will be at the cost of certain other factors because the subsidy has to be paid by them.

Q: The other key point is that may be Mumbai could be next in terms of possible power tariff cuts and obviously the two big companies that could be affected would be Tata Power as well as Reliance Infrastructure. If in case that does come through which the CM did indicate that may be it could be something they could consider in the next three-four days itself then what would your P&L assumptions change into if in case that does come through for Tata Power and Reliance Infrastructure?

Dole: The important point here is under the electricity act the state government actually has to extend the subsidy upfront if the end level power tariffs have to be cut down by the incumbent utility.

In case of Maharashtra Discom since the owner is the Maharashtra government, possibly there is scope for them to maneuver and delay the subsidy payment to these Discoms. But it really needs to be seen with what delay the Maharashtra government actually extends such subsidy because I have not seen in recent few years that a state government is actually extending subsidy to the private distribution companies to contain the end level tariffs. That to me is one of the rare instances which have happened in last few years if one analysis the select distribution companies which are owned privately.

Just to complete the point I think as of now Reliance Infrastructure is carrying a regulatory asset which is close to about Rs 2500 crore and if the subsidy is extended I think the regulated asset should remain very much intact. However if the subsidy payment is delayed, there is a risk that this regulatory asset would only improve, which will actually extend the working capital which is already very stretched for companies such as Reliance Infrastructure in Mumbai.