>UTILITIES SECTOR (ICICI SECURITIES)

Merchant cap – On or off?

The recent draft order by the Central Electricity Regulatory Commission (CERC) capping the merchant tariff has left the market worried about possible CERC intervention in the market pricing mechanism in power. Such a step could be a possible deterrent for attracting capital in the sector. We met Mr R Krishnamoorthy (a member of CERC) to understand the implication of the draft and discuss other issues. Essentially, the commission believes that the draft order should be seen in the light of the shortage created by drought and the onset of festive season, and should not be considered as setting a precedent.

■ Drought and festive season led to draft order on capping merchant tariff. The drought has seriously hit hydro generation, leading to further power shortage. Also, onset of festive season (Ramadan) has led to pressure on state electricity boards (SEBs) to procure power at higher rate. CERC has intervened to cap merchant rate so as to control rising tariffs due to the shortage caused by drought and onset of the festive season. The draft proposes a cap at Rs11/KwHr for 45 days and a subsequent review.

■ No plan to control market pricing mechanism, except in exceptional cases. CERC believes it has no role to play in controlling merchant power tariff. The discipline should start from buyers – they should be ready for load shedding if prices rise beyond a particular point. Merchant power rate should move in relation with unscheduled interchange (UI) charges, which have been already capped at Rs7.33/KwHr by CERC.

■ Power trading margin under review as 4paisa/unit insufficient to cover risk. Currently, CERC is reviewing the 4paisa/unit power trading margin cap and is likely to come out with a draft note. It believes the margin is insufficient to cover risk.

■ CERC unlikely to take suo motu action against states with alternative power purchase model. Some states are entering into fixed price-power purchase agreements (PPA) with non-PSUs, exploiting loopholes in the Electricity Act, 2003 and Competitive Bidding Guidelines, 2006 – States such as Chhattisgarh and Orissa signed PPAs for less than a year with 5% power at variable cost and 30% at fixed price in lieu of assistance on coal linkage. CERC can not take action suo motu unless there is a complaint and rule implementation is in the state Government’s hand.

To see full report: UTILITIES SECTOR