By Ruma Dubey

The Central Electricity Regulatory Commission (CERC) released today an exhaustive draft guideline to decide the multi year power tariffs for 2014-19. It is truly very elaborate and all those wanting to get indepth information on the working of the Indian power sector, would do well to simply read through this huge document.

Well, looks like markets did have a good read and are not happy with what it read. Power stocks continue to remain the big losers of the day, lead by NTPC, which will be impacted the most (Read ‘What’s Buzzing’ column for NTPC specific details).  What also comes forth is that power tariffs are set to come down – good news for us, naturally, not good for the power companies.  It also aims to increase the onus of improving efficiency on power companies if they want to recover better revenues.

So let us take a detailed look at the highlights of the draft guidelines. Mind you, these are just a draft and not the norms which will be implemented.  The final regulations are expected by January-February 2014. There could be a few more changes and some screws tightened and it will come into practice only from 1^st April, 2014. These tariff rules would be mandatory for all power plants selling electricity under norms set by CERC cost-plus mechanism.  Directly and negatively impacted would be PSUs – NTPC, Powergrid, SJVN and NHPC and in the private sector, mainly Tata Power and Lanco.

A small introduction of this process – This practice of fixing 5 year tariffs started in March 2004, wherein multi year tariff for 2004-09 was fixed and then subsequently for the period 2009-14 in January, 2009. The present tariff period 2009-14 would end on 31st March 2014 and the Commission proposes to specify the terms and conditions of tariff for the next control period i.e. for 2014-19.

This is not a draft made ad-hoc, just with the centralized view of CERC. This is called as the ‘approach paper” and solicited comments of stakeholders on the basis and assumptions to be considered while framing the new terms and conditions of tariff regulations.  Accordingly, it received comments from various stakeholders including State Governments, SERCs, Central sector utilities, State sector utilities, private sector utilities, financial and other organizations, and individual experts.  It is based on all these inputs and its own that the draft is made.

Tariff and Commercial Operation Date

CERC proposes that if the date of commercial operation is delayed beyond 180 days from the date of issue of tariff order, the generating company or transmission licensee shall file a fresh application for determination of tariff after the date of commercial operation of the project.

Bringing efficiency during construction phase is an area of concern. It is felt that the construction period may be standardized with the provision for normative IDC to bring efficiency in construction period.

Capital Cost

As the equity in excess of 30% of capital cost has been considered as notional loan for the purpose of tariff, the Commission proposes that the said capital shall also be entitled for interest during construction, financing charges and foreign exchange risk variation up to the date of commercial operation of the project.

The benchmark capital cost is considered by the Commission as the guiding parameter for allowing capital cost of the projects and not the normative capital cost. However, the benchmark capital cost would be used for prudence check by examining variation of actual cost with benchmark capital cost and the capital cost above benchmark level will be allowed only after detail justification to the satisfaction of the Commission.

Incentive:

Incentive for thermal power plant is linked to generation at 50 paise above 85% of Plant Load Factor (PLF).

To recover complete fixed cost, the power producer need to show availability of 99% , up from 98% earlier.

Incentive for hydro tightened with normative plant availability factor (PAF) has been increased by 5%.

Initial Spares:

The Commission is of the view that typically the initial spares are supplied by the OEM suppliers and it may not be appropriate to consider the cost of initial spares as percentage of the total capital cost. Thus keeping this in mind, the CERC the Commission proposes that the cost of initial spares should be linked to the plant and machinery cost and shall be capitalised  as a percentage of the Plant and Machinery Cost, subject to the following ceiling norms:

(i) Coal-based/lignite-fired thermal generating stations - 3.00%

(ii) Gas Turbine/Combined Cycle thermal generating stations - 3.00%

(iii) Hydro generating stations including pumped storage hydro generating station - 4.00%

(iv) Transmission system

a. Transmission line – 1.00%

b. Transmission Sub-station – 3.00%

c. Series Compensation devices and HVDC Station- 4.50%

d. Gas insulated sub-station (GIS) – 4.00%

e. Communication System under ULD&C - 3.50%

International Competitive Bidding:

CERC has proposed that the competitive bidding be made mandatory for all the packages and International Competitive Bidding will be an option available to the procurers depending upon the availability of technology and cost effectiveness. In case of single bidder, it would be difficult to consider that cost as efficient cost for determination of tariff due to lack of competition.

Cut-Off date:

The concept of Cut-Off date remains same - in case the date of commercial operation falls in the last quarter of the financial year, the cut off date shall be the financial year closing after two years of the date of commercial operation of the generating station or the transmission.

Interest during construction (IDC), Incidental Expenditure during Construction (IEDC):

 Interest during construction, shall be computed corresponding to the loan CERC from the date of infusion of fund or date of financial closure, whichever is later, and after taking into account the prudent phasing of funds upto SCOD.

Renovation & Modernisation expenditure:

Special Allowance for Coal-based/Lignite fired Thermal Generating station - The Special Allowance shall be @ Rs. 7.5 lakh/MW/year for the year 2014-15 and thereafter escalated @ 6.35% every year during the tariff period 2014-19, unit-wise from the next financial year from the respective date of the completion of useful life with reference to the date of commercial operation of the respective unit of generating station. When a unit is in commercial operation for more than 25 years as on1.4.2014, this allowance shall be admissible from the year 2014-15.

Tariff Application Methodology:

The Commission has proposed to continue tariff determination on projected capital expenditure basis. It has also decided to continue with existing approach of filing petition prior to commercial operation based on anticipated COD with certain modifications. However, the existing provision of filing petition prior to six months from anticipated commercial operation date has been modified to120 days (four months). In case of transmission systems, it will be 180 days.

In the event of excess recovery of tariff in case the capital cost considered in the tariff exceeds the actual capital cost by more than 5%, the generating company or transmission licensee will refund the excess tariff recovered corresponding to excess capital cost, as approved by the Commission along with interest at 1.20 times of the bank rate as prevalent on April 1 of respective year. On the other hand, in case of under recovery of tariff in case the capital cost considered in the tariff falls short of the actual capital cost by more than 5%, the generating company or transmission licensee will recover the shortfall in tariff, as approved by the Commission along with interest at 0.80 times of the bank rate as prevalent on April 1 of respective year.

In case of the existing projects, the generating company or the transmission licensee, as the case may be, may be allowed tariff by the Commission based on the admitted capital cost as on 1.4.2014 and projected additional capital expenditure.

Depreciation:

CERC does not intend to re-introduce the concept of advance against depreciation and proposes to continue with the same approach of providing higher rates of depreciation during initial 12 years of useful life of the Projects with remaining depreciable value at the end of 12 years to be spread over the balance useful life of the assets. 

Depreciation shall be chargeable from the first year of commercial operation. In case of commercial operation of the asset for part of the year, depreciation shall be charged on pro rata basis.

Depreciation shall be calculated annually based on Straight Line Method.

Debt-Equity ratio:

CERC proposes to continue with existing debt: equity ratio of 70:30 for the next Tariff period.

Return on Equity:

The CERC has clear mandate to fix a rate of return for equity (RoE) that will not only attract investment but generate sufficient resources for further growth in the sector.

The Commission had specified a post-tax ROE of 16% for tariff period 2001-04 and 14% for the tariff period 2004-09. However, after prolonged deliberations on ROE, while framing the 2009-14, the Commission had decided post-tax Return on Equity at  benchmark rate of 15.5% for entire tariff period to be grossed up by applicable tax rate. Further, w.e.f. 31-12-2012, return on equity for storage type generating stations including pumped storage hydro stations and run of river generating station with pondage has been increased to 16.5%.

Interest on loan capital:

The repayment of loan shall be considered from the first year of commercial operation of the project and shall be equal to the depreciation allowed for the year or part of the year.

The rate of interest shall be the weighted average rate of interest calculated on the basis of the actual loan portfolio after accounting for interest capitalized.

Working Capital:

CERC proposes that the cost of fuel towards fuel stock shall be considered as 15 days for pits head stations and 30 days for non pit-head stations subject to maximum storage capacity. In case of gas based stations, the Commission proposes to retain the current norm for primary fuel cost of 30 days.

Operations and Maintenance Expenses :

CERC has not changed the operating and maintenance expenses, which according to analysts, was set to increase bringing in relief for power generation companies like NTPC. 

CERC for the purpose of escalation till FY 2013-14 proposes to consider the escalation rate of 5.72%, 6.19% and 6.04% for coal, gas and hydro generating stations respectively.

Scheduling of Power in case of Fuel Shortages:

Securing fuel is prime responsibility of generator and in case of non fulfillment of supply of committed quantity of coal the generator is free to procure either e-auction coal or imported coal and schedule power on the basis of the same. If the generator is not able to schedule power due to fuel shortage the same shall be considered as loss in availability of the unit or station as the case may be.

CERC through its specific tariff orders for each generating station shall approve the base price of fuel price for the FY 2014-15.