NTPC's revenues to dip following SEB recast

Unbundling of state electricity boards (SEBs) will adversely affect revenue flows of National Thermal Power Corporation (NTPC).

Under the Electricity Act, SEB's, which buy almost 99 per cent of NTPC's generation, are required to unbundle their operations into separate generation, transmission and distribution companies.

"Following unbundling of SEBs which are financially in mess, power purchase agreements (PPA) with SEBs, will have to be with one or more of the unbundled entities. These entities, particularly distribution companies, will have lower creditworthiness than the original boards. This could adversely affect their ability to make payments to us," said Chandan Roy, director-operations, NTPC.

"Further, upon divestment of ownership or control of a SEB or any unbundled entity, in favour of another company not owned or controlled, directly or indirectly, by the state government, the tripartite agreement (TA) relating to SEBs or unbundled entities as applicable will expire. In such an event, the board or the new entity will no longer be required to establish letter of credit (LC) in our favour, which could have an adverse impact in our realisation of dues from them," he explained.

The TA require each SEB to establish a LC in NTPC's favour with a commercial bank which are required to cover 105 per cent of the average monthly billed amount for the preceding twelve months and are required to be updated twice every year. As of now if the LCs are not in place the company has the right to reduce power supply to the Board which might go away if unbundled.

SEBs accounted for 99 per cent of NTPC's power sales and it is obligated to supply power in accordance with the terms of allocation of letters issued by the government for each of its plants.

The power major estimated commercial losses of all SEBs at a whopping Rs 330 billion and NTPC had problem recovering dues from the boards.

Nevertheless, a one-time settlement and TA under SEBs were required to establish LCs and covered most of the revenues due to it from SEBs in 2004.

Prior to tripartite agreement, it obtained LCs from SEBs securing payments, but these LCs did not cover a significant portion of billing.

Under the agreement, overdue amounts to NTPC were securitised by issuing tax-free bonds amounting to Rs 16,410 crore against outstanding dues from 1998 to 2001.

Unbundling and privatisation could lead to loss of validity of these agreements not requiring the unbundled entities to establish LCs resulting in losses to NTPC.