The beleaguered power sector has been hit by a triple whammy over the past month: the downward pressure on tariffs fuelled by populism, the CERC move to restructure the compensatory tariff structure and the government´s move to hike gas prices. Till a new regime comes to power, the entire industry now has its fingers crossed and is in a wait-and-watch mode.
One politically savvy move by a newly formed political party is all it took to stir the hornet´s nest. In power for just about a month, the Aam Aadmi Party (AAP) dispensation managed to change the rules of the game by announcing a power tariff cut, and the repercussions are still being felt across the country. Other political parties have also jumped on the populist bandwagon, demanding cuts in power tariff to woo the electorate in view of the upcoming elections.
Analysts and sector observers widely believe that bringing down power tariff is, of course, good for power consumers who are already reeling under across-the-board inflation, but higher subsidies are not good for the industry and various stakeholders over the long-term.
Queering the pitch, the government has also decided to hike gas prices from 1 April 2014. Power monitoring authority Central Electrical Authority (CEA) has pointed out a couple of problems with the oil ministry's move on raising gas prices, saying that it would have a negative impact on consumers. CEA has noted that pricing gas in dollars and mismatch between the timelines for revising gas and power tariffs will further hamper the sector´s performance.
Because domestic gas is priced in dollars but power plants pay in rupees, ´prices are susceptible to foreign exchange fluctuations and, consequently, fluctuations in power tariffs. Therefore, methodology for capping foreign exchange fluctuations needs to be looked into,´ says CEA in its latest release.
Adding more fuel to the fire, is the reported move by five states (Gujarat, Maharashtra, Rajasthan, Punjab and Haryana) who are preparing to approach the appellate tribunal court against the direction of the Central Electricity Regulatory Commission (CERC) to compensate Tata Power and Adani Power for their losses of around Rs 1200 crore incurred due to expensive Indonesian coal.
All these developments have had a negative impact on the sector. The industry is worried that these factors could have a direct impact on the hope for revival in the sector. Power players were expecting that the government would steer policy reforms in order to revive investor sentiment in the sector, which requires massive investments over the next five years. In fact, the overall growth prospects for the country also depend on how the government will ensure energy security, along with adequate infrastructure development.
What went wrong
The newly formed AAP government of Delhi took the lead by end of December and announced tariff cuts by 50 per cent for households consuming up to 400 units of electricity per month. Following this, the government of Haryana withdrew a tariff increase of up to 13 per cent levied last year on households consuming 500 units a month. In the month of January, Maharashtra also announced its decision to slash power tariffs by 15-20 per cent in all parts of the state, excluding Mumbai. State governments say that they are planning to compensate electricity distribution utilities through subsidies.
Power players fear that these populist measures will push the discoms over a financial precipice, as the financial restricting process currently underway will be hampered. Banks had started an exercise to restructure the debt of discoms in 2012 under a government-sponsored Rs 2 trillion bailout package. The discoms of Delhi and Maharashtra have not taken advantage of the facility.
At least four states-Rajasthan, Tamil Nadu, Uttar Pradesh and Haryana have agreed to the package. Three more states including Andhra Pradesh, Jharkhand and Himachal Pradesh are in the process of joining it and discussions are underway.
However, with the states revising the tariff downward, bankers are likely to take a second look at the quantum of support they were planning to give to the financial restructuring programme. Many of them now argue that the populist measures might derail efforts to put the crisis-ridden discoms back on track through loan recasts.
At the time when the loan recast was announced, discoms had promised to increase their tariffs regularly in line with their costs and reduce high T and D losses.
A senior banking official told this publication on conditions of anonymity, ´These moves by various states to cut tariffs has the entire banking industry worried. Populist measures might derail the entire loan-recast programme.´ This was a sentiment echoed by a number of other banking executives. But almost none of these officials were willing to be named, citing the sensitivity of the issue and the involvement of some powerful political figures.
Even in the case of Delhi and Maharashtra, where the discoms haven´t turned into financially sick companies, banks are worried that their finances could be undermined by the delivery of subsidised power. ´Banks can face difficulties in getting their payment back in case the state governments fail to extend the subsidies on time,´ said a public sector banker.
As part of the restructuring package, banks had agreed to provide working capital loans to discoms, if necessary, to help them back to financial health through tariff hikes and control over operational losses.
In a latest report, Citigroup has warned of the serious consequences of populist measures in the form of cutting tariff.
´We believe these developments are not only negative for Indian electric utilities, but also industrials and infrastructure as this delays hopes of a capex revival in the power sector in the near future,´ the report said. Subsidies themselves do not harm the financials of the state electricity boards (SEBs) as long as they are paid on time.
However, the report says that numerous times, SEBs book the subsidy in their financials, but the payment does not happen. This can potentially negate the positives of the SEB debt restructuring exercise and the tariff hikes carried out by the various SEBs over the last three years.
According to a report by CARE rating agency, a 20 per cent cut in power tariffs in Maharashtra would cost the state exchequer Rs 706 crore per month or Rs 8,472 crore per year. ´Owing to the increased government subsidy, the state would move from a revenue surplus position to a revenue deficit,´ says CARE.
Moreover, analysts cite the possibility of banks taking a hit in case the subsidies don´t come through. ´Downward tariff revision would have a negative impact for state government finances and could also create difficulty in getting finances to the discoms,´ said Vaibhav Agrawal, Vice-President-Research, Angel Broking.
According to analyst estimates, Canara Bank has the largest exposure of about Rs 16,000 crore to the sector. Other lenders that have significant exposure to discoms include Union Bank of India (about Rs 12,000 crore), Bank of Baroda (about Rs 5,800 crore), Punjab National Bank (about Rs 7,700 crore), Bank of India (Rs 10,196 crore) and Syndicate Bank (Rs 10,189 crore). Indian banks are already feeling the pain of mounting bad loans and restructured debt packages amid slowing economic growth. In addition to this exposure, banks have also restructured about Rs 4 trillion in loans of stressed borrowers, according to the Mint newspaper.
Assessing the situation
Vinayak Chatterjee, Chairman, Feedback Infrastructure, summed up the mess: ´The issue is the current mismatch of wavelength between the political establishment in Delhi and the private sector discoms. In fact, in areas like Delhi, the states and discoms are (supposed to be) in a partnership. The private discoms are your agents to distribute power to millions of homes and consumers.´ But on the ground, that is not happening. The state has created this enormous monster called a regulatory asset, says Chatterjee. ´The regulator agrees that you should be earning more tariff as a power supplier based on the cost structure but because the authorities feel that it may be too harsh to immediately pass on increased tariffs to consumers, they create a basket called regulatory assets, which effectively tells you that hopefully we will give you this cash tomorrow. That seems to be reasonably unfair when you have close to Rs 20,000 crore worth of regulatory assets stuck in Delhi and the commensurate number in Maharashtra is a little short of Rs 12,000 crore,´ added Chatterjee. Though Maharashtra Electricity Regulatory Commission (MERC) has recently mandated a 90 paisa increase in the power tariffs for Mumbai consumers, the amount outstanding to the state discoms is too huge a figure to be contained by such ad-hoc moves. ´If you have Rs 20,000 crore of liquidity stuck, even a very efficient discom will have problems paying power suppliers. That is the macro picture,´ said Chatterjee.
CERC steps in
The recent CERC order allowing 'compensatory tariff' for the 4620 MW power plant of Adani Power and the 4000 MW of the ultra mega power project (UMPP) run by Tata Power would take more time to be implemented.
´We continue to believe that resolution of this issue would take time. SEBs would now seek approvals from their state cabinets, which are unlikely to accept it in a hurry. This is because first it is lopsided towards developers, second it has wider ramifications as most independent power producers would be eligible for similar hike requiring 7 per cent all-India power tariff hike or over Rs 24,000 crore subsidies and third imminent elections," say Amish Shah and Abhishek Bansal of Credit Suisse India Research in their latest report. The research firm added that the CERC order on compensatory tariff is very positive but its ´translation into cash flow unlikely in the near term.´
CERC´s order for award of compensatory tariff to Tata Power's Mundra UMPP broadly permits pass-through of the entire fuel cost for the project. Such compensation would be payable by SEBs of five states on a retrospective basis since the start of the project (nearly Rs 1,730 crore for 2013-2014). According to the order, compensatory tariff would be adjusted for profits earned by Tata Power from Indonesian mines (however, there is no clarity on the impact from Tata Power's recent decision to sell one of these mines), 1 per cent return on equity (RoE) on invested equity, and 60 per cent of profits earned from sale of power beyond 80 per cent of plant availability factor (PAF) to third parties. Any potential benefit from cut in duties, interest or loan restructuring has to be passed on to the customers. In case of Adani Power, compensation would be payable by SEBs on a retrospective basis since the start of the project of nearly Rs 830 crore for 2012-13. Adani is of course elated by the move. ´This order will facilitate in sustaining operations at Mundra and enable us to continue honouring PPA commitments. The order shall mitigate hardships to some extent on account of impact of enactment of Indonesian regulation and shortage of domestic coal supplies from Coal India Ltd (CIL). Power supply from Mundra shall continue to remain competitive even with compensatory tariff, in comparison to other sources of procurement of power by the State of Gujarat and Haryana,´ said Adani Power in a release. ´Assuming Adani Power gets similar hike for its Tiroda and Kawai projects, it could report a profit of Rs 930 crore in 2015-16 (against Rs 1,130 crore loss),´ said Credit Suisse in its report.
While welcoming the move, ICRA says that a number of issues still remain to be addressed. ´Such projects with competitively bid PPAs still remain exposed to under-recovery in fixed capacity charges, given the steep INR depreciation against USD till date and the fact that fixed capacity charge component in tariff bid is predominantly non-escalable. The timely implementation of these orders remains to be seen, given that there are possibilities that the state utilities could appeal against the same. Utilities in Haryana have already appealed to the Appellate Tribunal of Electricity (ATE) against CERC´s earlier order in April 2013 for allowing compensatory framework; utilities in Punjab have (been) opposed to tariff compensatory framework and utilities in other states such as Rajasthan, Maharashtra and Gujarat have given in-principle consent subject to several conditionalities & modifications suggested,´ says ICRA.
The road ahead
We spoke to a number of industry leaders to solicit their opinions on how the development of the sector will play out. However, apart from analysts, major stakeholders are unwilling to comment on the industry´s prospects, given the extent of political involvement in charting the course the power sector will take. As of now, the entire sector is in a wait-and-watch mode.
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