Alternating currents

It's difficult enough to set up a power project in a country where the biggest buyers, the state electricity boards (SEBs), are bankrupt. What's making things worse is the growing confusion over what exactly the power policy is.

Last month, the N.K. Singh task force came up with some retrograde recommendations aimed at perpetuating guaranteed returns for power projects. Then, the ministry of power came up with an even more bizarre proposal to force centrally-owned undertakings like NTPC and NHPC to compulsorily buy the power produced by mega-power projects owned by private firms (a sort of back-door counter-guarantee) on the pretext that this would make the projects more bankable.

Naturally it would, since the risks would all be transferred to NTPC and NHPC, while the profits would accrue to the private producers.

And now there's the new tariff order issued by the Central Electricity Regulatory Commission (CERC). While the order isn't quite what Mr Singh would have liked, the Planning Commission member told this newspaper that the order wasn't inconsistent with his recommendations either, and government officials have indicated the ministry could come up with a new tariff policy by June 30 which would override the CERC's order!

Meanwhile, the Singh task force may be getting ready to revise its view on assured returns, and switch to recommending a specified rate of return on equity as a cap, not a floor "" which would make more sense.

In many ways, the CERC order is not dramatically different from the original recommendations of the Singh task force that may now be reversed. The task force recommended a 14 per cent return for generation projects and 16 for power distribution ones "" CERC wants a 14 per cent return for both.

The task force wanted depreciation rates hiked (this would hike allowable tariffs for producers) but the CERC order keeps them unchanged. Both the CERC and the task force are talking of implicit government guarantees since a fixed return structure can only apply to cases where government-owned SEBs or PSUs are buying power.

Neither the CERC nor the task force, however, explains the rationale for a minimum 14 per cent return, when interest rates have crashed to between 6 and 10 per cent.

The redeeming feature of the CERC order is the brief statement it makes about how new investments in transmission and distribution must be based on competitive bids instead of the present assured-returns system. The problem is that the CERC doesn't indicate any road map, with dates, as to when this is going to happen since it also talks of an unspecified transition period.

In any case, the ministry of power reserves the right to change things, in exactly the same manner that it managed to delay the proposal in the power bill to bring in more competition through 'open access'. The big problem in the power sector today is that the ministry of power is determined to continue with high returns to incumbent players.