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MOSL: UTILITIES-CERC tariff regulation 2019-24 is constructive; Raise earnings by 3-4% for NTPC and by 5-6% for PWGR

Utilities: CERC tariff regulation 2019-24 is constructive; Raise earnings by 3-4% for NTPC and by 5-6% for PWGR; Re-iterate Buy

 

The Central Electricity Regulatory Commission (CERC) has notified the tariff regulations for FY20-24. The regulations are applicable to thermal and hydro generation projects, and also to transmission projects that are regulated by CERC (including all majority-owned central PSUs and a few regulated private power projects). The tariff regulations are a benchmark for state regulators to frame their respective state tariff policies. 

Ensures continuing and reasonable returns on regulated assets…

• The regulations have kept regulated RoE unchanged at 15.5% (and 16.5% for hydro assets) - the third-consecutive five-year tariff regulation period when the regulators have not tinkered with regulated RoE. Thus, providing a strong direction for long-term assured returns for developers and investors.
• The two-part tariff structure has been retained (fixed charge for capital returns based on plant availability and variable charge for covering the fuel cost).
• The allowance of 85 kcal recognizes the loss in GCV of coal between 'as received' and 'as fired' point. It is a welcome relief for coal-based plants.
• O&M allowance for coal-based plants was hiked by more than ~8% over FY19 for the base period FY20, which recognizes impact of the recent wage increase in public sector companies. Annual inflation in O&M allowance was, however, cut from the ~6.3% earlier to 3.5% (but better than 3.2% proposed in the draft).
• The O&M allowances have become more accommodative over the years. Water charges and capital spares was already based on actuals (since the FY14 regulations). The new regulations will reimburse security expenses as well on actuals. It will improve recovery and management of overhead cost for regulated generation and transmission projects.

There is marginal increase in normative auxiliary and station heat rate allowance for certain unit sizes of coal-based plants.