Regulator’s tariff norms harsh on the nation’s largest power producer

The stock of public sector power producer NTPC on Monday tanked on Dalal Street to a more than five-year low after the electricity regulator announced the final tariff order for 2014-15 to 2018-19.

The order, which has further tightened norms for claiming incentives on capacity utilisation and tax treatments, will negatively impact earnings of the country’s largest power producer.

The NTPC scrip closed at ₹117.05, down 11.43 per cent or ₹15.10 on the BSE. This is the steepest slump since October 2008.

“With regard to NTPC, the regulations were against our expectations. We expected the regulator to give some leeway to the national generator from the draft guidelines by giving some respite on the change in plant availability factor (PAF) to plant load factor (PLF) based incentive; however, this did not happen,” said SBICap Securities.

The key changes include shift in the incentive regime from plant availability factor to plant load factor. Now, this is dependent on the buyers (discoms) and is not within the control of power producers, such as NTPC.

Besides, 40 per cent incentives earned from heat rate/auxiliary consumption efficiency are now required to be shared with State electricity boards. At the same time, Central Electricity Regulatory Commission (CERC) has given its go-ahead for the removal of tax arbitrage, and auxiliary and heat rate norms tightened further, and increase in escalation rate for operation and maintenance expenses.

Some positives: NTPC

However, NTPC maintains that the latest tariff order has some positives for the power producer and it would not bring down its return on equity.

“The target availability has been reduced to 83 per cent from 85 per cent earlier for fixed cost recovery. At the same time, heat rate for 35 units of 200 MW each being run by NTPC has been relaxed by 25 kilo cal. Capital spares will now be a pass through,” said the NTPC spokesperson.

Meanwhile, CERC has allowed return on equity grossing up with effective tax rate. However, water charges, increase in special allowance, higher escalation on operation and maintenance charges, among others remain, the spokesperson added.

“We believe the new regulatory norms are very harsh for efficient power producers such as NTPC, especially given the challenges facing the sector mainly from domestic fuel shortages and weak SEB finances, and lopsided judgments delivered by the CERC in favour of IPPs in their petitions relating to compensatory tariff,” said Credit Suisse India Research.

The research firm has cut earning per share (EPS) for 2014-15 and 2015-16 by 6 per cent and 4 per cent, respectively. And target price has been reduced nearly 5 per cent to ₹161.

“But, we continue to see operating efficiencies at NTPC. Besides, given the regulatory overhang now away and 14 per cent correction in stock price post draft regulations, we maintain our positive view on the stock,” said Credit Suisse.

siddhartha.s@thehindu.co.in

(This article was published on February 24, 2014)
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