Power tariff reforms: risk of too little, too late says Fitch

Power sector reforms, required to restore the financial viability of state power utilities, though the timely and consistent implementation of Shunglu Committee recommendations over the medium term could remain a daunting task in 2012, warns rating agency Fitch in its 2012 Outlook: Indian Power.

The sector will also remain exposed to both fuel availability and price risks during 2012.

Despite these issues, the 2012 outlook on Fitch-rated power entities continues to be 'stable' as they are expected to manage these risks by way of implied and tangible support from the central and state governments, strong liquidity and favourable tariff mechanisms.

It expects regulatory mechanisms for the existing power plants to provide full cost recovery and a reasonable return on capital.

However, on distribution utilities Fitch is not as optimistic. Ut says, "Regulatory frameworks for distribution utilities, though present, are marred due to political interference in tariff fixation and operational inefficiencies on the part of discoms. Improvements in the credit profile across the value chain rest on the strengthening of the regulatory mechanisms for discoms."

Fitch believes that domestic fuel availability will be low in 2012 compared with the rising demand from power projects due to environmental and land issues faced by the largest domestic coal supplier Coal India Limited. This should lead to increased reliance on imported coal for fuelling the additional power capacity; however, the cost of imported coal and boiler design will play an important role in deciding the overall use of imported coal and hence the overall capacity that can be commissioned.