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Home News Power Sector News New Tariff Regulations- CERC raises pre-tax return on equity to 15.5% upto 2014

New Tariff Regulations- CERC raises pre-tax return on equity to 15.5% upto 2014

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CERC Chairperson - Pramod DeoLet the power generators rejoice! Generating companies  will now be able to earn a higher rate of return on their equity investment in power projects. The Central Electricity Regulatory Commission (CERC) issued new tariff regulations for next five years(2009-14) under which the base rate for return on equity (RoE) has been raised from 14% to 15.5% to attract private generators at the cost of consumers. Analysts feel that this will result in increase of power tariff in the country.

As an incentive, CERC has also allowed additional RoE of 0.5%, to those projects which are commissioned on time. The move will help power generating and transmission companies get higher profitability, and thus, attract increased investment in the current depressed market conditions.Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested.

“We have finalised regulations that tries to balance the requirements of both the power producers and the beneficiaries. Changes were incorporated mid-way keeping in mind the changed economic conditions,” CERC chairman Pramod Deo said while giving details of the new tariff regulations. The new tariff regulations will be for five years (2009-14) and would be implemented from April 1, 2009.

As per the new regulations, RoE will now be pre-tax, for which the base rate of 15.5% would be grossed up through the applicable tax rate for the company. This will, in turn, translate into nearly 23.5% post-tax return on the equity as against 21%, previously. This would incentivise investment promotion as the benefit of tax will now be available to the project developer. On the other hand, consumers would not have to bear the burden of income tax on the unscheduled interchange (UI) earning, incentive earning and efficiency gains of the projects.

“This has been a major grievance of the beneficiaries. The changes would result in income tax savings of Rs 1,000-1,200 crore by the consumers buying power from central utilities. The regulations provide a win-win situation for both generators and beneficiaries,” CERC secretary Alok Kumar said.

Under the changes, CERC has also done away with advance against depreciation (AAD), a development that may not go in favour of the power companies. It has, however, reworked depreciation rates to take care of repayment of debt obligations on new projects. Once the initial period of 12 years is over, remaining depreciation would be spread over the balance useful life of projects.

Asked whether the new regulations would help in bringing down electricity charges for end consumers, Mr Kumar said without the regulations, the tariff may have scaled up 15-20% due to rise in input cost. “This (the increase in tariff) could now be controlled within 5-10%,” he said.

The CERC regulations also said that in a project if equity is deployed over 30% of the capital cost, the excess equity shall be treated as a normative loan. If equity is below 30%, then it shall be considered for determination of tariff. In case of generating stations and transmission systems operating before April 1, 2009, CERC will allow the debt-equity ratio to be considered for the period ending March 31, 2009, for determination of tariff.

Expenditure beyond April 1, 2009, will be treated as an additional capital expenditure for tariff determination. The regulations have also taken care of the hydropower sector by insulating new projects from hydrological risk during first 10 years of operations. CERC has also decided to separately bring out the tariff regulations for renewable energy-based projects.

Source - Economic Times


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