For the upcoming five years starting April 2014, the power regulator CERC is currently in the process of reviewing the existing tariff norms for both generation and transmission projects in the country.
Two areas that could merit changes are the normative debt-equity ratio for new projects and the treatment of equity after the debt is paid off.
The debt-equity ratio is an important factor for the promoters as it fundamentally impacts any calculation of the return on investment. In case of existing projects, a normative ratio 70:30 has been adopted, in line with the provisions in the Government Tariff Policy, 2006. This norm perhaps warrants a review, which would require action on the part of both the CERC and the government, with the latter needing to amend its Tariff Policy to suitably amend the norm. Especially so, as the gradual structuring of the debt markets has commensurately lead to higher availability of funds for corporates across most infrastructure sectors, including power. Plus, there are obvious tariff implications that could percolate down to the retail level.
Tweaking the norm to a more reasonable 75:25 or an 80:20 ratio for future projects is also pertinent, considering that the scale of project funding has gone up several times over the years, with most mega hydro projects and thermal ultra mega power projects entailing financing of well over Rs 20,000 crore. International experience too bears this out, with countries such as the US following a 90:10 normative D:E ratio for power projects. Keeping in view the widening of the debt market, better due diligence at banks to decide on serious promoters and the increased ability of developers to raise bonds, there might be a compelling case to revisit the existing approach.
With regard to the servicing of equity post debt repayment, the existing approach is to continue to service the entire equity to the tune of 30 per cent, even though the equity is being repaid to the developer through the depreciation route under what is known as the ‘liability side’ approach.
Paying returns on portion of equity that has been returned via depreciation route (assets already being written off up to 10 per cent salvage value), simply increases the tariff. This treatment of equity, which has been enshrined in the tariff policy 2006, and is being happily followed by the regulators, is tantamount to double-charging the consumers. Its impact is more pronounced in distribution sector where the capex is continuous as the new equity is added to the non-existent normative equity, resulting in an inflated ROE and hence higher consumer tariff.
Anil is a senior editor based in New Delhi.
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