The NTPC stock tanked 11 per cent in reaction to the draft tariff regulations put up by the Central Electricity Regulatory Commission (CERC) for the FY15-19 period. Two major changes in the existing norms seem to have spooked the market.
Change in method
The first relates to a change in the method of calculation of power tariffs to be charged by the company.
NTPC operates on a cost-plus model. This allows recovery of costs such as fuel charges, interest on capital, operation and maintenance expenses, and provides an assured return on equity (ROE) for the company.
The existing norms allow the company an ROE of 15.5 per cent, on pre-tax basis. To arrive at this return, the applicable corporate tax rate is used.
CERC has now recommended a shift to a post-tax ROE with income tax recovery to be based on actual tax liability rather than on applicable tax rates.
Power companies enjoy a host of tax incentives. Because of this the actual tax liability is often lower than that calculated at the applicable tax rate. This could impact NTPC’s profit by around Rs 800 crore a year.
Change in parameter
Another crucial recommendation is the change in the parameter used for calculation of incentive (50 paise a kilo Watt hour) earned by power companies — from plant availability factor (capacity available) to plant load factor (capacity utilised).
Currently, to earn the incentive, companies such as NTPC have to only ensure that their plants are available for generation. But according to the draft regulations, the incentive is to be given only if power is actually produced. Power production could be lower than potential if demand for power is weak. A fall in demand from State distribution utilities (as seen in recent times), due to their poor finances, could cause slippage in the plant load factor.
It, however, needs to be seen by how much the final tariff regulations (to be notified sometime early next year) differ from the draft regulations. In the past, final regulations have deviated from those proposed in the draft.