CRISIL fears that power utilities’ profits would be hit if power regulator’s recent tariff norms are implemented in the present form. However, credit profiles of the firms will remain stable.

“The Central Electricity Regulatory Commission’s (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,” said a statement of the Rating agency, which analysed 13 CRISIL-rated power utilities that come under the purview of CERC.

The draft norms stipulate a change in the manner of reimbursement of tax, a stringent incentive structure, and stricter operating parameters. The adverse impact of these provisions is marginally offset by other benefits.

The important stipulation in the 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 existing guidelines. Moreover, reimbursement of tax on incentives needs to be borne by the power utilities themselves. The impact of this change is expected to be greater on the central power utilities.

The incentive structure for power utilities is also being made stringent. The guidelines propose that for generation companies, the incentive be calculated on plant load factor (PLF), rather than on plant availability factor as in the current norms. Furthermore, generators will now have to share a fourth of their incentives with beneficiaries.

“These provisions will reduce the power utilities’ profits from existing as well as under-implementation projects. Specifically 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,” said Pawan Agrawal, Senior Director, CRISIL Ratings.

However, believes that the guidelines will not impact the credit risk profiles of these utilities. This is because the bedrock of the regulatory framework continues to be availability-based fixed cost recovery, which covers the utilities’ debt servicing needs. Therefore, the cash flows of utilities will continue to be stable, it said.

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