The draft guidelines for the new power regulatory regime and price has been formulated by CERC and it is expected to hit NTPC the worst

National Thermal Power Corporation Ltd (NTPC) share crashed 11.26% Tuesday on BSE following news of new draft guidelines issued by Central Electricity Regulatory Commission (CERC), which may make it tougher for power producers to earn healthy profits.
 

As per the draft guidelines, the new regulatory regime is expected to commence from 1 April 2014 and will extend to 31 March 2019. In the new guidelines, the method of calculating incentives is the same—return on equity method—but tightening has been done in other areas, particularly in the taxation and expenses front. This is seen as harsh and is likely to affect the profitability and operations of power plants over the next five years. Other power companies like Power Grid Corp (Power Grid) is also expected to be hit by the new norms. Share price of Power Grid was seen down 3% and Neyvelli Lignite Corporation closed down 1.29%.
 

As per the draft guidelines released by CERC, the post tax return on equity (RoE) has been maintained at 15.5%, but the incentive structure has been linked to actual generation (PLF) beyond the threshold level of 85%. This number has been pegged 50 paisa/kWh for “ex-bus scheduled energy corresponding to scheduled generation in excess of ex-bus energy corresponding to Normative Annual Plant Load Factor (NAPLF).” This means, producers like NTPC, have to crank out power with a high load factor to make returns worthwhile, regardless of the expenses (such as import of coal from abroad).
 

The new regime is expected to benefit end consumers (read: other big power companies, large corporations to who buy power from NTPC and Power Grid). Previously, power generating companies like NTPC, Damodar Valley Corporation and NEEPCO were previously “grossing up” their tax liabilities and claiming it from end consumers. However, as per new regulatory guidelines, they will have to claim only on the ‘actual tax paid’. This will reduce margins for companies like NTPC and Power Grid. Edelweiss Securities in a research report said, “We believe the new norms have been framed by tightening operating rules to ensure end consumer benefits from higher efficiency in the system.”
 

The scope of this regulation is only applicable to companies or power stations where tariff is decided by the CERC. Private players who have sought tariffs through competitive bidding have been excluded from this regulation as are renewable energy companies. The draft regulation states the scope: “where tariff of a generating station or a unit thereof and a transmission system or an element thereof including communication system used for inter-State transmission of electricity is required to be determined by the Commission under section 62 of the Act read with section 79 thereof.”
 

Edelweiss expects NTPC to be affected badly and sees the company generating 9% RoE instead of the 24% it has been generating so far. The report said, “NTPC, which has historically earned higher RoE (over base rate of 15.5%) of 24% plus via incentives, operational efficiency and tax benefits (we estimate  about 9% under existing norms), will likely see pressure on profitability/RoE impacting valuations.”
 

On Power Grid, Edelweiss says it will be marginally affected. “Tighter operational norms will also impact Power Grid, we estimate it to be limited since RoE of approx 16.5%-17.0% (over base RoE of 15.5%) has marginal contribution from incentives,” the report said.

The CERC has called for views and recommendations from stakeholders and there could be modifications to the guidelines before 31 March 2014. Even if the new norms are enforced, it remains to be seen how companies like NTPC and Power Grid Corporation will be able to recover tariffs as many power companies and power utilities are cutting down on expenses due to the paralysis in the power sector and lack of government initiative to get it off the ground.
 

NTPC closed Tuesday 11.26% down at Rs136, while Power Grid Corp and Neyveli Lignite ended the day 3% and 1.5% down at Rs98.3 and Rs61.2, respectively on the BSE. The 30-share Sensex also ended the day marginally down at 21,255.