CERC draft guidelines may dent power firms' profits: Crisil

MUMBAI: Draft guidelines released by the central electricity regulator, if implemented in current form, may reduce the annual profit of Crisil-rated power utilities by Rs 1,400 crore as compared to figures of the last fiscal, a report said today.

However, Central Electricity Regulatory Commission's ( CERC) guidelines will not impact the credit profile of these utilities, rating agency Crisil said.

"The CERC's recent draft tariff guidelines for power utilities have potential, if implemented in the current form, to reduce aggregate annual profits of Crisil-rated utilities by Rs 1,400 crore, or nearly 7 per cent of their profits in the last fiscal," the agency said in the report.

On zero impact on credit profile, Senior Director of Crisil, Pawan Agrawal said, "The guidelines retain the crucial feature of availability-based fixed-cost recovery which covers debt servicing for the utilities. This will help them maintain stability in cash flows, and therefore, in credit quality."

The guidelines stipulate a change in the manner of reimbursement of tax, a stringent incentive structure and stricter operating parameters for power utilities.

"The adverse impact of these provisions is only marginally off-set by benefits such as higher escalation rate for operating and maintenance expenses and increase in late- payment charges," the report noted.

The rating agency said the most important stipulation in guidelines is the change in reimbursement of expense on tax relating to return on equity, which will now be linked to actual tax outflow, rather than the applicable statutory tax rates as in the norm now.

Moreover, reimbursement of tax on incentives needs to be borne by the power utilities themselves, it said. "The impact of change in the manner of reimbursement of tax expense is expected to be greater on the central power utilities."

On the provisions of incentive structure for power firms, which has been made stringent in the CERC draft, Agrawal said, "these will reduce the utilities' profits from existing as well as under-implementation projects.

"For generators, the shift to a PLF-linked incentive structure can result in significant loss of incentive income, given the fuel availability challenges faced by the sector."