CERC's guidelines could reduce utility profits by Rs 14 bn

The Central Electricity Regulatory Commission's (CERC's) recent draft tariff guidelines for power utilities have potential, if implemented in the current form, to reduce aggregate annual profits of CRISIL-rated utilities by Rs.14 billion, or nearly 7 per cent of their profits in the last fiscal.

CRISIL, however, believes that the guidelines will not impact the credit risk profiles of these utilities. Says Mr. Pawan Agrawal, Senior Director, CRISIL Ratings, "The guidelines retain the crucial feature of availability-based fixed-cost recovery, which covers debt servicing for these utilities. This will help them maintain stability in cash flows, and therefore, in credit quality."

This analysis covers 13 CRISIL-rated power utilities that come under the purview of CERC.

The draft guidelines stipulate a change in the manner of reimbursement of tax, a stringent incentive structure, and stricter operating parameters for utilities. The adverse impact of these provisions is only marginally offset by benefits such as higher escalation rate for operating and maintenance expenses and increase in late-payment charges.

The most important stipulation in the draft guidelines is the change in reimbursement of expense on tax relating to return on equity, which will now be linked to actual tax outflow, rather than the applicable statutory tax rates as in the existing guidelines. Moreover, reimbursement of tax on incentives needs to be borne by the power utilities themselves. The impact of change in the manner of reimbursement of tax expense is expected to be greater on the central power utilities.

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The incentive structure for power utilities is also being made stringent. The guidelines propose that for generation companies, the incentive be calculated on plant load factor (PLF), rather than on plant availability factor as in the current norms. Furthermore, generators will now have to share a fourth of their incentives with beneficiaries. For transmission companies, the threshold for availing of incentives has been enhanced. Adds Mr. Agrawal, "These provisions will reduce the power utilities' profits from existing as well as under-implementation projects. Specifically for generators, the shift to a PLF-linked incentive structure can result in significant loss of incentive income, given the fuel availability challenges faced by the sector."

The draft regulations also propose stricter operating parameters such as station heat rate and secondary fuel consumption. This will primarily impact the older plants, which may find it difficult to meet the proposed parameters.

The CRISIL-rated power utilities will, however, maintain stable credit risk profiles. This is because the bedrock of the regulatory framework continues to be availability-based fixed cost recovery, which covers the utilities' debt servicing needs. Therefore, the cash flows of utilities will continue to be stable.

The CERC guidelines, applicable for five years beginning 2014-15 (refers to financial year, April 1 to March 31), are currently in draft form, and may undergo changes like in the past. These are applicable only for plants regulated by CERC and do not cover either the competitively bid ultra mega power projects or plants that are covered by state-level regulations.

Disclaimer: CRISIL has taken due care and caution in preparing this Press Release. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of information on which this Press Release is based and is not responsible for any errors or omissions or for the results obtained from the use of this Press Release. CRISIL, especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Press Release.

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