CERC draft norms to impact NTPC, Power Grid most: CARE

The electricity regulatory body CERC released draft regulations for power generation companies that will decide power tariffs for the five-year 2014-2019 period. Among other things, the draft guidelines suggest that power tariffs are set to get cheaper which saw its first casualty in NTPC. The stock crashed more than 10 percent.

Also Read: CERC releases draft multi-year power tariffs for 2014-2019
Revati Kasture, Head of Research, CARE Ratings — the orgnisation came out wih a detailed analyses of 30  Discoms in 11 states — expects NTPC to be affected the most because of the new CERC draft norms.
"With stricter operational and maintenance norms coming into play and tax benefits slated to be passed on to the consumer, NTPC would see a deceleration in its RoE," she told CNBC-TV18. Power Grid is another stock that will be impacted, but lesser than NTPC. Below is the verbatim transcript of Revati Kasture's interview on CNBC-TV18 Q: First the sector issues, these draft norms - which are the companies that are likely to be affected and will it be a fairly severe impact, the Central Electricity Regulatory Commission (CERC) draft norms?
A: The CERC draft norms are for central utilities so NTPC is the company which is going to be affected because they were earning high return on equity (RoE) around 23-24 percent which was more incentive based RoE. With stricter operational and maintenance (O&M) norms coming into play and tax benefits slated to be passed on to the consumer, NTPC would see a deceleration in its RoE. Q: What kind of an impact would Power Grid have?
A: Power Grid would have an impact because of stricter, tightening O&M norms but norms for the transmission sector were tight, which were there in place. So, I do not see Power Grid having a larger impact than NTPC per se. Q: You mentioned in your report that the southern grid will be connected to the northern grids in FY14 or in 2014. When does the grid connection come and what will be the impact when surplus power is available to the southern grid?
A: We have said that in the next one year we will probably see the southern grid connected to the northern, eastern and western - that is NEW grid. Perennially south has been a deficit region in terms of power situation. So, we see that situation improving a bit with power from the surplus western region especially states like Gujarat, Chhattisgarh which are today surplus and states like Maharashtra, which are suppose to get surplus FY15 onwards, we see some of that power moving towards southern states and the southern states getting some respite because of that.
We also see that there are some policy initiatives, which are of good nature in Tamil Nadu so Tamil Nadu is going to see better power days ahead with this connection with a lot of central power generation coming up in the state and interstate grid connectivity coming up. Q: What would you time it as; one year from now would it be December next year or would it be earlier than that?
A: A little earlier than that is what I estimate. Q: Second half of FY15 could be good for southern based companies in terms of power availability?
A: Yes. Q: What about tariff hikes because most of the managements are confident that perhaps by the end of this year there will be some clarity on compensatory tariff hike. What are your views and how much it could impact the sector?
A: A lot of states have already seen a lot of tariff hikes in the past three years and if you look at the data which is available across different states then we see most of the states have also effected double digit tariff hikes. We have covered this issue in our report. We have covered about 11 states and 30 distribution companies (Discom) in our report. Why 11 states and 30 Discom. Because we tried to cover about 80 percent of the power demand in the country.
When we look at these states and Discom, it is not that tariff hikes have not happened or tariff revisions have not happened but still the Discoms have not benefited much from the tariff hike. Let us see what are the problems that are facing these Discom – (a) these Discoms have high aggregate technical and commercial (AT&C) losses (b) the regulatory assets, which means cost not approved by the state is very high (c) there is subsidy but it doesn’t come on time and there are some hyping customers which move into the captive mode.
So, unless we attack these structural issues and the financial issues which are facing distribution companies, tariff hike is not going to be the panacea of all evils for these companies. So, we will have to see a reduction in the AT&C losses of these companies by more investment in the operational efficiencies, control of theft.