CERC’s rules for disciplining gencos were overdue
Given the howls of protests, it is natural to think the Central Electricity Regulatory Commission’s (CERC) latest draft rules are draconian since they lower the effective returns for generators. According to a Kotak analysis, the guidelines will lower the effective RoE for NTPC from 21.4% right now to a still healthy 16.7%. The current system, however, is biased in favour of generating companies (gencos), and all CERC has done is to redress some of this. Close to 15 years ago, interestingly, CERC did the same when NTPC made a killing since, while its plants operated at a plant load factor (PLF) of 80% anyway, the incentive structure allowed extra payments to it for any PLF of over 62.7%—CERC then ruled that the incentive would operate at PLFs of over 80% which made NTPC even more efficient.
This time around, CERC has been less harsh. So it has kept the post-tax return on equity at 15.5% with an additional 0.5% for projects completed on time, and the inflation rate for reimbursing operational expenses has been raised. But easy pickings that make NTPC-type firms less efficient have been done away with. Today, gencos get incentives if their plant availability factor (PAF) is more than 85%. This has been tweaked and, while fixed costs can be recovered if PAF exceeds 85%, incentives will be given only if PLF crosses 85%—the idea is to reduce the load on buyers where, often thanks to the lack of fuel supplies, the PAF is over 85%, but since the plant is idle, the PLF is well below 85%. This change alone will take away R600 crore from NTPC’s balance sheet, but think of what that means to buyers who didn’t get power due to lack of coal but had to pay NTPC this amount anyway. CERC has also upped the threshold beyond which transmission companies can earn incentives. In order to give gencos incentive to complete their projects on time, some cost escalations due to ‘controllable’ delays are to be denied.
Perhaps the biggest change, and this is akin to the 62.7%-PLF-incentives, relates to tax rates. Today, gencos are allowed to recover tax rates of up to 34% while they pay out only 26%—the new rules state that taxes will be recovered at the rates they are paid. Given how it is mainly gencos that are making profits while most SEBs/discoms are bleeding, the new rules will change things for the better—if only CERC holds its ground and doesn’t water down the rules.