A worrisome tariff order

Published : Jan 20, 2001 00:00 IST

The Central Electricity Regulatory Commission's order on financial and operational norms for power generators is likely to affect the cash flows as well as capacity addition plans of the National Thermal Power Corporation.

WHILE the country's power sector in general faces a dismal situation, the Navaratna public sector undertaking, the National Thermal Power Corporation (NTPC), has had a record of putting up additional generating capacity without quibbling over escrows, gu arantees and other comfort mechanisms. But now the Central Electricity Regulatory Commission's (CERC) December 21 order on electricity bulk tariff structure for inter-State generation and transmission companies is likely to undermine that utility and lea ve it to Independent Power Producers (IPPs) to light up people's lives and homes. If the track record of the IPPs and the tariffs charged by the multinational Enron in Maharashtra are anything to go by, an investment in candles will not be a bad idea.

The CERC order, which addresses a range of operational and financial norms, is the product of a suo motu review undertaken by the commission under Section 13 of the Electricity Regulatory Commission Act, 1998. The order, which comes into operation from April 1, 2001 and is effective until March 31, 2004, is applicable to all central generating utilities (CGUs) including the NTPC, the National Hydroelectric Power Corporation (NHPC), the Neyveli Lignite Corporation, the Nuclear Power Corporation an d the Power Grid Corporation of India. The CERC's stated objective is "to promote investment, competition, efficiency and economy in the sector and also improve quality and discipline in the Grid." It also wants to be "fair to the consumers and facilitat e mobilization of adequate resources for the power sector."

The impact of the revision prima facie would be to force down the tariffs charged by the CGUs to the State Electricity Boards (SEBs), which purchase their power. The IPPs are exempted from the provisions of the order as they come under the jurisdi ction of the State Electricity Regulatory Commissions (SERC). However, the same concession has not been extended to the private sector mega generating stations spanning more than one State, which fall under the purview of the CERC. The recent order will not be applicable to tariffs charged by the 3,960-megawatt (MW) Hirma project in Orissa, the first mega CGU promoted by the private sector Reliance-SEAP, since the CERC is of the view that "those stations which were cleared for implementation on certain parameters should be allowed to charge their tariff based on existing terms and conditions". In other words, the existing power purchase agreements (PPAs) of mega projects based on memorandum of understanding would not be reopened to accommodate the CERC 's revised norms. However, the regulator has recommended that the new operational norms should constitute guidelines that the SERCs could apply to IPPs, but the latter could very well take a view similar to that of the CERC in respect of tariff agreement s already concluded with IPPs.

While the order is applicable to all CGUs, the NTPC, will perhaps be the hardest hit. The CERC's ruling on the rate of depreciation and operation and maintenance (O&M) costs, when implemented in conjunction with its order on availability-based tariffs (A BT) issued in 2000, is likely to reduce the revenue streams for the NTPC substantially, jeopardising its plans for capacity addition.

1.Depreciation: The regulator has tinkered with depreciation rates on the plea that the existing practice of accelerated depreciation adopted in 1994 led to front-loading of tariffs. The existing depreciation rates are 7.4 per cent for coal-based stations and 8.24 per cent for gas-based ones. The regulator has recommended 3.6 per cent and 6 per cent respectively, on historical value base. It has argued, and perhaps rightly, that depreciation should span the life of the asset, as "this would smoot hen out the tariff, reduce tariff shocks due to excessive front-loading of tariff, bring uniformity of depreciation rates across various utilities ..." While there is merit in the argument against front-loading of tariffs, the immediate impact would be a reduction in the NTPC's cash flows: the NTPC claims it will lose as much as Rs.18,000 crores over the next 12 years. The CERC maintains that this estimate may be on the higher side considering that the NTPC has taken into account existing stations as we ll as projects in the pipeline, but some reduction in cash flows is certain to happen.

Depreciation is normally used for amortisation of debt and the NTPC fears that the regulator's move could result in a higher interest burden. The CERC argues, "We do recognise that the above (depreciation) may result in some reduction in cash flow to uti lities which are presently using accelerated depreciation. However, no utility shall suffer on account of lack of funds for repayment of loans as the concept of advance against depreciation is a flexible measure. It should be ensured that once the loans are repaid, the depreciation rates are readjusted to spread the balance depreciable value over the balance life of the assets." Sources in the CERC allege that the NTPC has not had an optimal debt-equity ratio and that it had remained at 1:1 all these ye ars. They point out that the NTPC has idle reserves of around Rs.600 crores parked in deposits, which it could have effectively leveraged to raise debt and carry on with its projects, a charge that is denied by the PSU.

H.L.Bajaj, Director (Commercial), NTPC, points out that the PSU has been raising funds through bonds, from banks and even through external commercial borrowing. "If there is any occasional mismatch it is only because of the delays in four gas-based proje cts - delays over which we have no control," he said.

2.Operation & maintenance costs: Currently, O&M accounts for 2.5 per cent of current capital costs (which are the costs approved by Central Electricity Authority (CEA) in the year of fixation of the tariff of a similar project) for the NTPC's coal -based stations. Annual escalation of 10 per cent on O&M is allowed in accordance with the recommendations of the K.P. Rao Committee. However, the CERC mandates that the annual escalation should be not more than 6 per cent on actual O&M expenses calculat ed as an average of the previous five years after ironing out the spikes and abnormalities which will be dealt with on a case-by-case basis.

The NTPC claims that this will result in its cash flows dipping by Rs.2,000 crores over a 12-year period for which it has drawn up plans for expansion. Its Chairman and Managing Director C.P. Jain told Frontline that the actual O&M expenses of NTP C stations since 1991-92 worked out to 12.17 per cent. The difference between the actual and admissible O&M escalation could increase exponentially, especially in a situation where half of the NTPC's plants were more than a decade old and hence had a hig her O&M cost, he said.

According to S.L. Rao, CERC Chairman, the new method adopted to calculate O&M will actually create a cushion for the NTPC since it uses actuals as the base, unlike in the earlier system where it was pegged at 10 per cent over 2.5 per cent of the capital cost. Besides, he says that the method for computation of the Special Index - one that uses selected parts from the Wholesale Price Index (WPI) and the Consumer Price Index for Industrial workers - is a more realistic index one and would actually be in t he NTPC's favour. "What is the basis of this 2.5 per cent of capital costs in the case of new plants? If your capital costs are high, does it mean that your O&M should be commensurately high even for a new plant?" he asks.

Jain, however, feels that since more than half of the PSUs plants are more than a decade old and spares for these are expensive, the O&M costs would be pushed up. This argument has obviously not cut much ice with the CERC.

3.Development surcharge: In an attempt to compensate the NTPC for the drop in cash flows when the new norms are implemented, the CERC has created a category called 'development surcharge', which is to be factored into the tariff. The order envisag es a 5 per cent development surcharge over fixed charges, which would go to a development fund. One-third of this is to go towards the equity of new projects.

While this sounds good on paper, there could be problems at the level of implementation because of the NTPC's receivables position, which is now in the region of six months' outstandings from the SEBs. Jain points out that the NTPC recovers no more than 80 per cent of the billed amount, letters of credits and threats of turning off power supply to errant SEBs notwithstanding. The surcharge, which will add to the NTPC's tariff levels, will further slow down payments from the SEBs and swell outstandings. Besides, the NTPC claims it will have to pay income tax on this surcharge since it is not a statutory levy. Bajaj says that income-tax is paid on accruals not on realisation and hence the NTPC will end up paying tax whether or not it realises the dues f rom the SEBs.

The CERC has cited a Supreme Court judgment in its order to state that the surcharge is not a Special Appropriation under Schedule VI of the Electricity Supply Act (ESA), 1948, but an income that is diverted by obligation, before it reaches the assessee and hence is not taxable. It has also written to the government to exempt the levy from tax and to put it in a separate fund to be administered by itself. However, until an express sanction is obtained from the government regarding tax exemption for the levy, the NTPC would be justified in treating it as a taxable surcharge and make provision accordingly.

The NTPC estimates that as a result of the order, the average tariff of its stations is likely to decrease by about 10 paise a kwh whereas the surcharge restores approximately half of that, that is, five paise.

THE new norms come in the wake of the ABT order which stipulated a plant availability of 85 per cent for full recovery of fixed charges. The order was modified to fix a figure of 80 per cent after the NTPC filed an appeal with the CERC. The incentive all owed for availability over and above 77 per cent has been capped at 21.5 paise a kwh. Since half of all NTPC stations are already more than 10 years old, the capacity for the NTPC to realise even this 21.5 paise incentive is restricted. As for the new un its where it could have earned more, the incentive is capped at 21.5 paise. Either way, the NTPC is the loser.

The NTPC alleges it is being meted out step-motherly treatment vis-a-vis the IPPs and other private sector central generators. The IPPs recover full fixed cost at 68.5 per cent plant load factor (PLF) and earn handsome incentives for generation ov er this level, taking their return on equity (RoE) to 24 per cent. Hirma, the only central utility that comes under the purview of the CERC, will also recover full fixed charges at 68.5 per cent and get 36 paise a kwh for anything above this availability . The NTPC, on the other hand, will get just 8.5 per cent RoE at 68.5 per cent availability and 16 per cent at 80 per cent availability. All this even as the NTPC puts up the cheapest generating stations in the country and charges the lowest tariffs.

THE CERC defends its decision to apply different norms to public sector CGUs on the plea that it can act only on matters that are under its jurisdiction. Even among PSU utilities, differential norms are applicable to different utilities on the plea that each one of them warrants different treatment. "In a Rs.5,000-crore power industry, you cannot have uniform or identical norms for everyone. They will have to vary according to the situation and the requirements," says the CERC Chairman. CERC officials b elieve that the order will benefit the SEBs, which lack a united voice to protest against the arbitrary manner in which NTPC tariffs have been fixed all these years.

What will be the impact of the order on the balance sheet of the NTPC? The PSU estimates that it stands to lose Rs.18,000 crores in the next 12 years. It would have leveraged this to raise three times as much as debt and would have been in a position to put up 20,000 MW of additional capacity. Now, at the new level of cash flows, its capacity for additional generation stands truncated at 6000 MW. This goes against the Planning Commission's estimate of future capacity requirement from the NTPC. Crucially , it goes against the CERC's own mandate under Section 13 (e) II of ERC Act, 1998 "to facilitate mobilisation of adequate resources for the sector". Instead of facilitating resources mobilisation, the CERC order will close the tap for the NTPC, forcing i t to scale down operations.

Officials of the CERC point out that the NTPC is being unrealistic when it announces plans to set up 20000 MW capacity in the next 10 years. How can the NTPC, which has put up only 7352 MW in the last eight years claim that it plans to put up 20000 MW, t hey ask. It is simply not feasible for the PSU to create the kind of capacities that are being talked about because the managerial and engineering infrastructure is not available, they point out. It is not easy to ignore the fact that the NTPC is among t he top 10 generating companies in the world in terms of performance, by far the largest in the country, accounting for one-fifth of the total generation capacity and one-fourth of the supply.

What does the CERC order imply for the consumer? It will imply that NTPC power sold to SEBs will cost perhaps 10 paise less a kwh (out of which five paise will be surcharge) leaving the net reduction to just five paise a kwh. Whether this cost reduction will be passed on to consumers as lower tariffs especially in those States where there is no regulator as yet, is unclear. On the contrary, consumers may end up paying much more for the power sold by the IPP, since they will have to step in to fill the g ap left by the NTPC's inability to put up the targeted 20000 MW. Enron's Dabhol Power Company in Maharashtra is truly a precursor of things to come. The CERC's order, if implemented, is likely to hasten the process of relying increasingly on the IPPs to meet the power requirements.

Suresh Prabhu, Union Power Minister, has gone on record as saying that he will not intervene under Section 38 of the CERC Act to overrule the regulator's order. Rightly so, since tinkering with institutions will undermine their credibility. But he will h ave to find a way out for the Navaratna generator, which lights up a quarter of the country.

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