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CRISIL: CERC Norms Hit Profitability of Power Utilities

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Published on : Dec 18, 2013

The draft tariff guidelines for 2014-2019 formed by the Central Electricity Regulatory Commission for power utilities now have the potential to minimize the comprehensive annual profits of CRISIL-rated utilities by Rs 1,400 crore. This profit was reduced by almost 7 per cent during the last fiscal.

CRISIL believes that the norms will not affect the credit risk profiles of these utilities. The guidelines are there to retain the feature of the availability-based fixed-cost recovery that covers the debt servicing for these utilities. It also helps to maintain the steadiness in the cash flows, thus resulting, in credit quality. Around 13 CRISIL-rated power utilities rank under CERC said, Pawan Agrawal, Senior Director of CRISIL Ratings. He also said that these provisions will minimize the power utilities’ profits from developing as well as existing projects. Speculating the fuel availability challenges seen in the energy and utilities sector, the shift to the PLF-linked incentive structure could result in a loss of incentive income.

The draft norm revolves around stringent incentive structure, stricter operating parameters for utilities, and change in the pattern of reimbursement of tax. The only setback of these provisions is the marginally offset like higher escalation rate for maintenance and operating costs, and rise in the late-payment charges. 

Another notable and vital stipulation in the draft guidelines is the alteration in the reimbursement of cost on tax to return to equity. Instead of any applicable statutory tax rates present in the existing norms, the tax to return to equity policy will be linked to the actual tax outflow. Moreover, the incentives will now be calculated based on the plant load factor instead of the plant availability, and the generators will share fourth of their incentives with the beneficiary. 

Agrawal also said, the draft norms propose stricter operating parameters; as secondary fuel consumption and station heat rate. This in a way will affect the older plants and make it difficult to be able to meet the proposed parameters. 

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