New CERC guidelines gladden power generators

To the approval of the power generation industry, the Central Electricity Regulatory Committee (CERC) has issued a new notification that deals with the tariff computation for the years 2009-10 to 2013-14.

The new rules increase the return on equity for the period between 2009 and 2014 from 14 per cent to 15.5 per cent. The enhanced returns for generation companies would flow directly to the bottom line, as tariffs for power generation and transmission companies are fixed based on the sum of certain specified fixed and variable costs, to which the permissible return on equity is added.

In addition, projects that are completed on time will get an extra incentive of 50 basis points, or 16 per cent ROE. However, the regulation that only 30 per cent of the capital cost of a project may be funded by equity remains unchanged. The rest has to be funded by debt.

Under the new norms, the depreciation rate goes up to 5.28 per cent from the earlier 3.6 per cent, which will improve generating companies' top lines as well.

The irritating 'advance against depreciation' (AAD) clause has also been removed. AAD was introduced mainly to ensure that higher fixed costs are recovered in the earlier years so as to enable the project developer to repay loans.

In a move to encourage efficiency, fixed cost recovery would now be based on 85 per cent plant availability factor (PAF), as against the earlier 80 per cent plant load factor (PLF). The latter is an indication of demand, which is generally not within the control of the producer.

Though these steps will bring immediate benefit only companies that are subject to CERC, there may also be indirect benefits to private players in the future, as state governments will tend to follow the central guidelines. However, each state has a different timeline for this - Maharashtra's is 2009-10, while Gujarat is aiming at 2010-11.

The immediate beneficiaries would be the National Thermal Power Corp, Neyveli Lignite Corp, and Powergrid Corp. Prasanna Kumar, chairman and managing director of Neyveli, said in a TV interview that profits will increase and there will be incentive for generators to produce more power. He sees additional profit for future projects at Rs 32.5 crore, and is of the view that the additional depreciation will not impact bottomlines.

Sanjiv Goenka of the Calcutta Electric Supply Corp (CESC), an RPG group company, said that the CERC guidelines are equally good for private companies and it is up to state regulators to implement them.