Margin cap hits power traders

Supreme Court decision on rationalising margins likely on January 8.

Are power traders headed for a slow, painful death? There is clearly a "slump" in the business, thanks to the capped margins on the businesses of these traders.

Their fate, however, will be decided on the outcome of their appeal in the Supreme Court for "rationalising" the margins, which comes up on January 8.

Power traders have been hit by the margin cap of 4 paisa per kilowatt hour (unit), which is a fraction of the margins pocketed by them before the Central Electricity Regulatory Commission (CERC) capped them. They were enjoying trading margins which were as high as 20 paise per unit.

The CERC order on margin compression has affected the businesses of all the major players in the sector like the Power Trading Corporation (PTC), Adani Exports, Subhash Kabini Power Corporation and Tata Power Trading Company.

Take the case of the PTC, which is the largest power trading company in the country. The latest figures (July-September) show that while there is a 52.7 per cent increase in income (reflecting growth in volumes), there is a 9.5 per cent decline in net profit to Rs 8.65 crore, much below Rs 9.52 crore the firm made in the same period last year. "There is a slump in the business," says a PTC official. 
 

ON THE EDGE Average trading margins in 2005-06                             (In Rs)
	Purchase  price	Sale  price	Trading  margin
PTC India	3.13	3.19	0.06
NTPC Vidyut Vyapar Nigam	3.05	3.10	0.05
Adani Exports	3.20	3.40	0.20
Tata Power Trading	3.05	3.15	0.10
Reliance Energy Trading	3.20	3.26	0.26
Subhash Kabini Power	3.17	3.33	0.16
Lanco Electric Utility	4.48	4.52	0.04
Source: Crisil

Losing business: "The 4-paise margin does not even meet the cost," complains Mahendra Kumar, chief executive, Reliance Energy Trading. "This is also against the principle of free-market, where sellers and purchasers arrive at the price based on demand and supply," he adds.

Since the issue is sub-judice, many officials refused to comment, but some did go far enough to say that they may be forced to "quit" the business.

There are 21 companies licensed to trade in the power sector. However, only a handful are operational. "This speaks volumes about the state-of-affairs in power trading, and in such a scenario, putting a ceiling on margins is totally uncalled for," says an official of Tata Power Trading Company.

Power traders are eagerly awaiting the Supreme Court order, which may bring some respite. Says NK Gupta, chief executive, Tata Power Trading, "We are hoping the court will rationalise the 4-paisa capping and give a favourable directive".

While some analysts feel that a margin of 5-6 paise per unit will ensure fair returns, there are others like N Nagarajan of Crisil Research & Information Services who calls the 4-paise margin "pretty decent" because "power trading is not a capital-intensive business".

For those companies which were planning to ride the low tide by increasing volumes, the outlook is not too positive. Volumes in power trading have been in the range of 8-12 billion units, equivalent to 2,000 Mw capacity.

And experts say volumes will be limited by regional deficit scenario and short-term requirements. "No great increase in volumes is expected in medium-term requirements," says Nagarajan.

The intra-state story: Even as traders struggle with capped margins to continue inter-state trade of power, which forms the main part of the trading business, there is a directive from the Electricity Appellate Tribunal to the various state electricity regulatory commissions (SERC) to fix the intra-state trade margins to a "reasonable" level.

Aghast at the order, traders are questioning the tribunal's latest move. "Talking about intra-state margin is illogical because there's no trading happening at the intra- state level", says NK Gupta.

However, Power Secretary RV Shahi is confident that a solution to the crisis will emerge in the near future. Power trading is set to become "transparent and efficient" with the proposed power exchange.

Similar to stock and commodity bourses, the power exchange will act as a platform for buying, selling and trading of electricity. "It is expected to be operational in 2007 itself, " say officials of the CERC.

On the other hand, the UP Power Corporation is more than happy with lower margins. After buying power from the PTC and Tata Power Trading at margins which were almost three times (11 paise) higher than the 4 paisa they pay now, it can ultimately ensure lower prices for the consumer.