Decapitalization refers to reducing assets from the balance sheet. Under the Electricity Act, 2003, annual returns on equities of power utilities are fixed at a maximum 16% of their equity bases. Decapitalization, in effect, leads to a reduction of the equity base, resulting in lower returns and, thus, lower tariffs.
But removing assets at book value than at market value limits this lowering of tariffs.
Last year, Tata Power transferred assets on its books including residential flats and a guest house worth about Rs.35 crore in total to business units outside the Mumbai licence area at book value.
The company had in its application to MERC for reconciliation of aggregate revenue requirement (ARR) for fiscal year 2008-09 asked permission to decapitalize assets that included prime real estate.
Power utilities have to file ARRs with the regulator at the beginning of every fiscal year, based on which MERC invites suggestions and objections from the public, conducts hearings and passes orders on tariffs.
Tata Power is looking to remove assets no longer used in its Mumbai licence area.
Tata Power did not reply to email queries sent on Saturday.
"Consumers have paid for purchase of these assets through tariff and also paid for their depreciation through tariff, so they are entitled to get full benefit of appreciation of such assets," said Shantanu Dixit of Prayas Energy Group, a Pune-based think tank which carries out research on policy issues related to the energy sector. "The commission should throughly scrutinize whether there is a need for decapitalization of such assets or not."
Prayas is among the groups that have sought a review of MERC's decision.
"If a power utility transfers its immovable assets out of licence business to unlicensed business then such transaction should ordinarily happen at the price which is near to the circle rate price at which stamp duty will be charged," said Munish Sharma, partner in Delhi-based legal firm Dua Associates. Political parties have got involved in the issue.
Nawab Malik, a state legislator belonging to the Nationalist Congress Party, a part of the ruling coalition in Maharashtra, has demanded a state government inquiry into the issue.
Madhav Bhandari, spokesman of the Bharatiya Janata Party's state unit, said MERC should protect the interest of consumers and "not of the utilities. So it must review its order." Chartered accountant and consumer activist Sandeep Ohri, however, said Tata Power was within its rights to remove its assets at book value. "Since Tata Power remains a single entity its transfer of assets from one unit to other is not a sale and it can be done at book value," he said.
MERC chairman V.P. Raja said there was no specific dispensation under MERC Tariff Regulations 2005 or guidelines of the Central Electricity Regulatory Commission (CERC) on appropriate regulatory treatment to deal with the transfer of assets within the company. "In view of this, book value-based approach may be considered as most appropriate, transparent and easy to implement and was adopted" for Tata Power, he said.
Source- Live Mint