Tariff Regulation 2014-19 - ICRA

CERCsFver MYT Tariff Regulations for FY2015-19 to remain Negative for Thermal Generation Utilities, Marginally Negative for
Transmission Licensees, & to Benefit the Distribution Utilities February 2014

Summary
CERC has vide its order dated February 21, 2014 approved regulations for cost-plus or normative principle based tariff determination for the next control period commencing in April 2014 up to March 2019 (FY 2015-19). These regulations are applicable for power generating companies owned or controlled by the central government, generating companies supplying power to more than one state under a composite scheme and for inter-state transmission licensees. In ICRAs view, the tariff regulations approved by CERC for next tariff control period (FY 2015-19) are expected to benefit the distribution utilities and consumers by way of lower tariffs. However, they are negative for generation utilities & marginally negative for transmission licensees. Tightening of operational efficiency norms: CERC has tightened the normative operating performance norms by lowering the normative station heat rate, secondary fuel consumption norms and auxiliary consumption for existing as well as upcoming coal/lignite/gas based thermal power projects. This is based on the actual operating performance of the thermal generating stations during FY2009 to FY2013. This could result in a reduction in tariff by about 3-4 paisa/unit based on normative principles in case of energy charges applicable for central sector utilities. Also, CERC has introduced sharing of financial gains/losses due to controllable factors with the beneficiaries on monthly basis which will affect the quantum of such gains available with the generation & transmission companies. However, CERC has lowered the normative plant availability factor for recovery of fixed charges for generating stations to 83% from 85% in earlier regulations, in view of the prevailing uncertainty over supply of domestic coal availability. Linking of incentives to actual PLF: The incentives for a generating station are linked to plant load factor (PLF) in the tariff regulations for 2014-19 as against the provision of linking with plant availability factor (PAF) in the earlier tariff regulations which were applicable for the period of FY 2009-14. The incentive is at the rate of Rs. 0.50 per unit for excess energy delivered beyond the normative annual PLF. This is a negative for generating stations as plants may operate at PLFs lower than the availability because of reasons beyond their control. ICRA estimates that this would result in a tariff reduction for thermal plants by about 6 paisa/unit due to lower incentives. Tax payments on actual basis instead of gross-up at applicable tax rates: CERC has modified the existing provision of the pre-tax RoE being grossed up by the applicable tax rate to pre-tax RoE grossed up with actual effective income tax rate, which would be arrived based on estimated advance tax for the respective financial year and subsequently, trued up at the end of the financial year. This would be negative for entities that have been implementing multiple generation assets on the books and thus, have benefitted from tax arbitrage resulting from the lower actual effective tax rate as compared with the applicable tax rate used for grossing of the allowed return on equity. As per ICRAs estimates, the net impact would be at about 7 -8 paisa/unit which would be equivalent to reduction by 3% RoE, in case of entity where the actual effective tax rate is at 24% while the applicable tax rate is at 33.99% for tariff recovery. Lower fuel stock allowed for normative Working Capital: CERC has reduced the provision towards coal/lignite stock from 45 days for pit head stations and 60 days for non-pit head stations to 15 days and 30 days respectively. This modification has been approved based on the actual annual average fuel stock held by generating stations from FY09 to FY13, which was lower than normative days allowed as per the existing tariff regulations for FY 2009-14. This reduction in the primary fuel stock norms would be negative for the generation entities as it would lead to disallowance of about 2 paisa/unit in tariff recovery which would be equivalent to reduction by 0.7% RoE as per ICRAs estimates.
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ICRA LIMITED
CERCs tariff regulations would also have a marginally negative impact on transmission licensees given the reduction in escalation rate along-with the allowed O&M expenses and tightening of operating norms for line availability both for recovery of annual fixed capacity charges and incentives. Overall, the tariff norms approved by CERC for FY 2015-19 remain favorable for distribution utilities and in turn for the consumers. This is because the cost of power purchase for the utilities is likely to go down by about 10 paisa/unit in the case of purchases from project SPV and by about 18 paisa/unit in case of the purchase from generation entities having multiple assets on the books, assuming that the additional savings over and above its allowed RoE at 15.5- 16% are curtailed. While some of the generation stations continue to operate at better efficiency norms than the revised levels, ICRA expects overall reduction in the RoE at about 6-7% on equity for generation utility with multiple assets on the books and which in turn, is expected to provide a relief on retail electricity tariff by about ~0.8% (~4 paise/unit) based on average electricity tariff prevailing in the country and also, the current share of generation by large central sector generating entities to meet the electricity demand.
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TABLE OF CONTENTS
Impact Assessment of CERC Tariff Regulations for the period 01-04-2014 to 31-03-2019 Background Analysis of CERCs Regulations for Determination of Tariff for FY 2015-19 & Comparison of the same with the Existing Tariff Regulations Capital Cost & Filing of Tariff & True-up Petition Impact on tariff determination for Thermal Power Projects Fixed Capacity Charges Energy Charges Illustrative Assessment for impact on Levellised Cost Components of Generation and RoE for coal based project Impact on tariff determination for Hydro Power Projects Energy Charges Fixed Capacity Charges Impact on tariff determination for Transmission Licensee Fixed Capacity Charges
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CERCsFver MYT Tariff Regulations for FY2015-19 to remain Negative for Thermal Generation Utilities, Marginally Negative for

Transmission Licensees, & to Benefit the Distribution Utilities February 2014

ICRA RESEARCH SERVICES

Please contact ICRA to get a copy of the full report

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