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VOICE OF ELECTRICITY WORKERS
Power firms miffed with tariff policy
Pointers
on draft tariff policy
The proposal
• A national tariff frame work, sensitive to distance and related to the quantum
of power flow be developed.
• Agreements with lenders should have a provision for re-fixing interest rates
after every three years
• Return-on-equity in generation and transmission projects shall conform to the
overall risk assessment The criticism
• At a time when there is a shortage of power, such a pricing policy will make
tariff of far-off plants unviable.
• If the interest rates are on a long-term upward trend, it can increase the
burden on the developer
• Power companies have said they would prefer a return –on-investment rather
than on equity.
Power sector majors are unhappy with certain aspects of the tariff policy
proposed by the power ministry.
What have raised their hackles are the guidelines on transmission pricing,
regulation of interest rates for project-lending and the uncertainty over
whether the regulation will be applicable to new plants. “It is not clear
whether these tariff regulations will apply only to future projects or not.
On transmission pricing, the draft tariff policy says that a national tariff
frame work, sensitive to distance, direction and related to the quantum of power
flow (as instructed by the National Electricity Policy), be developed by the
Central Regulatory Commission (CERC) and implemented before April 2006.
“While the principle cannot be argued against, the time is not right to
introduce distance-based transmission tariffs. At a time when there is a
shortage of power, such a pricing policy will make tariff of far off plants
unviable.
The policy is however based on a more rational transmission pricing system.
While tariffs would have to be adjusted, the changes would not be very sweeping.
States would be consulted and informed about the extent to which their tariffs
would change before they could be expected to view the matter.
In an attempt to decrease project costs and share benefits with consumers, the
draft also suggested that it was desired that the agreement with lenders have a
provision for re-fixing interest rates after every three years. This would
reduce the interest rate risk on project developers.
“This proposal has been made envisaging a falling interest rate scenario. If,
however, interest rates are on a long-term upward trend, it can increase the
burden on the developer.
The policy says that the CERC may determine a suitable ceiling on allowable
interest rates, considering the type of project, market conditions and credit
worthiness of the borrower.
Return-on-equity in generation and transmission projects shall confirm to the
overall risk assessment and cost of capital. If a company invests premium raised
while issuing share capital or internal resources from the free reserves in
capital expenditure, it shall be excluded while calculating return on equity.
Companies will, however, prefer a return-on-investment rather than on equity.
One of the positive aspects of the draft, companies say, is the provision
calling for aligning the repayment period of long term debt with the permissible
depreciation rates. The move will reduce front loading of tariff, according to
the draft, capital investment required for renovation and modernization (R&M) to
be covered in the multi-year tariff should be assessed after thorough scrutiny,
including public hearing.
The power companies said the issue of R&M expenditure was a technical one and
should not be decided in public domain.
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