Bold Measures

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[HIGH RETURNS: The return on equity for power plants has been hiked to 15.5 per cent (Pic by Bivash Banerjee) Last week, the power regulator, central Electricity Regulatory Commission (CERC) changed the way power generation tariffs &mdash; for both thermal and hydro power &mdash; are calculated. The new tariff regulations for the next five years have some very bold initiatives that may help companies but can hurt consumers. Corporates investing in power projects will have an additional incentive to park their money in the sector as they can get up to 2 per cent higher return on equity (RoE). The RoE for power plants has been hiked from 14 per cent to 15.5 per cent with an added bonus of 0.5 per cent for projects that are completed on time. But these companies may gain at the expense of the consumers who could end up paying an extra 5 per cent initially for the power they consume from existing plants. The increase could be higher if the extra transmission and distribution costs are added. The consumers will also have to indirectly foot the renovation and modernisation (R&amp;M) bill of power plants as this cost can now be included in the generation tariff. R&amp;M hitherto was often neglected for lack of funds by power firms, leading to very low generation levels and extended breakdowns. A case in point is the 500 MW Patratu plant in Bihar. The only good news for the consumer could be that CERC wants efficiency gains in power utilities to be passed on to &ldquo;beneficiaries&rdquo; or state utilities that buy power. These may eventually reach the end-user. The regulator has also attempted to do away with providing incentives to power generators on the basis of plant load factor (PLF) and instead linked it to the internationally accepted norm of &ldquo;declared availability&rdquo;. &ldquo;The broad direction of the tariff regulation is to incentivise investments and share efficiency gains,&rdquo; says Pramod Deo, chairman of CERC. This will raise tariff to consumers initially. Though the new RoE may help attract fresh investments, it needs to be mentioned that the new rules announced after a gap of 5 years (the last one was announced in 2004) would have a financial impact on existing power plants especially those of the National Thermal Power Corporation (NTPC) &mdash; a central power PSU with a capacity of over 27,000 mw and sells power to states. There has been a feeling that central power utilities such as NTPC have been able to improve their profitability through better efficiency but have failed to pass it on to its customers. CERC seems to have hit the nail on the head by raising the normative level of PLF from 80 per cent to 85 per cent in thermal power plants for fixed cost recovery. &ldquo;This has been a long standing demand from states,&rdquo; says Deo. Generation power tariffs are split into two components, fixed and variable. Fixed costs include costs such as debt servicing, return on equity, operation and maintenance (O&amp;M) expenses that need to be recovered irrespective of the level of generation. Variable costs are running expenses and primarily include the cost of the fuel. Under the methodology of tariff calculation, formulated in late early 90s, fixed costs are recovered at a &ldquo;normative&rdquo; level of generation of the power plant. While NTPC has not publicly expressed its view on the new tariff regulations, NTPC&rsquo;s chairman and managing director R.S. Sharma reluctantly told BW that &ldquo;this is a very balanced tariff regulation&rdquo;. Deo says CERC calculations show that eventually the loss in terms of tariff increase will be balanced out by efficiency gains. kandula dot subramaniam at abp dot in (Businessworld Issue 3-9 Feb 2009) &nbsp;