CERC raises return on equity to 15.5 per cent.
In a big move to attract investment in power generation and transmission, the Central Electricity Regulatory Commission (CERC) has raised the return-on-equity (RoE) allowed from 14 per cent to 15.5 per cent. The change is part of the new tariff policy for 2009-2014.
It has also allowed an additional RoE of 0.5 per cent for projects that are finished within timelines.
“These regulations are a compromise between attracting investment and protecting the interests of consumers,” said CERC Chairman Pramod Deo.
The regulations, which would also serve as guiding principles for state regulators, would enhance returns for power generation and transmission companies. The announcement, effective from April 1, led to a surge in power sector stocks today. On a day when the Sensex was down 2.45 per cent, the sectoral index for power was up 1.44 per cent, with NTPC being the main gainer (it was up 4.27 per cent at Rs 185.70).
The regulations cover all power stations of central public sector generators like NTPC and inter-state projects with “mega” status.
Also, the RoE will now be computed pre-tax and not post-tax, as is being done at present. These two measures will help new generators, which enjoy a tax holiday, increase their returns. However, old power stations will not benefit, say analysts.
“The change from post-tax to pre-tax system will benefit buyers as they will not have to pay tax on other income of generators like from unscheduled interchange. This will now be paid by the generator. This will lead to savings of about Rs 800 crore for buyers,” said Alok Kumar, secretary, CERC.
| MAJOR CHANGES IN TARIFF REGULATIONS |
| * Return on equity (RoE) raised from 14 per cent to 15.5% |
| * Provision of additional RoE of 0.5% for projects commissioned on time. |
| * RoE to be computed post-tax. |
| * Advance against depreciation removed, depreciation rates increased to 5.28% from 3.6 per cent. |
| * Incentive payment linked to availability rather than plant load factor |
When asked how would the new regulations affect tariffs for consumer, Kumar said that for old stations of NTPC, there would be a marginal gain of 5 per cent on account of higher operation and maintenance cost, while there would be a marginal loss of 4.5 per cent for new stations. The commission has also scrapped the provision of advance against depreciation (AAD) which is currently available to generators to offset their loan repayments. “The AAD has been removed but depreciation rates have been reworked to take care of the repayment of debt,” said Kumar. The CERC has increased depreciation rates to 5.28 per cent, from 3.6 per cent for thermal power plants and 2.5 per cent for hydro power plants.
While this would benefit developers of new projects, it might not translate into higher returns for old power projects that do not enjoy a tax holiday. “It looks as if the change from post-tax to pre-tax system will aid generators but it is not quite so. New power plants might gain but old ones might lose out,” said a senior analyst from an accounting and consultancy firm.
