Sh 2014 q3 2 Icra Power

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ICRA LIMITED 1

Fver

Summary

Power Sector: Limited tariff hikes so far by SERCs for FY 2014-15, coupled with rising subsidy

dependence for the sector as a whole; Subsidy estimated at Rs. 720 billion for FY 2015

JULY 2014

ICRA RESEARCH SERVICES

Contacts:Sabyasach i Majumdar

+91 124 4545 304

sabyasach i@icra ind ia .com

Gir i shkumar K adam

+91 22 6179 6341

g ir i shkumar@icra ind ia .com

Vikram V.

v ikram.v@icra ind ia .com

+91 40 4067 6518

This report covers ICRAs analysis of the tariff orders issued so far for state owned electricity distribution companies (discoms) by SERCs for FY

2014-15.

Delays observed in many states for issuance of tariff orders, despite the satisfactory progress in filing of tariff petitions for FY 2015:While the filing of tariff petitions by the distribution utilities for FY 2014-15 have been done in most of the states, SERCs in 16 out of

29 states have issued tariff orders for FY 2014-15 so far. Delays in issuance of tariff orders by SERCs could be attributed partly to the

General Elections held in April-May 2014. Out of these 16 states where SERCs have issued tariff orders for FY 2015, SERCs in seven

states namely Arunachal Pradesh, Bihar, Gujarat, Jammu & Kashmir, Odhisa, Uttarakhand & Madhya Pradesh have not approved any

tariff revision for the distribution utilities, while SERC in Himachal Pradesh, has approved a marginal tariff decline as a result of tariff

rationalization. In case of other eight states, tariff revision allowed by SERCs has been moderate i.e. in the range of 5-10% (except in

Meghalaya where tariff revision was at 15%). Importantly, among the discoms which have implemented financial restructuringscheme (FRS), SERCs are yet to issue tariff orders for utilities in the states of Tamil Nadu, Rajasthan and Uttar Pradesh which is a

deviation against the terms of FRSand thus remains an area of concern for the sector, in ICRAs view.

Limited tariff hikes, also accompanied by regulatory assets in some states: Tariff hikes by SERCs for FY 2015 have been very modest insome of the states like Haryana & Karnataka, wherein SERCs have estimated the revenue gap at current tariff; however, such

revenue gap has not been recovered through tariff revision in full and this in turn has led to an unrecovered revenue gap in the form

of regulatory asset. For example in case of utilities in Haryana, SERC has allowed regulatory assets to the tune of Rs. 66.7 billion

which includes unrecovered FSA for FY 2011-12 and regulatory asset brought forward as per the previous tariff order for FY 2013-14.

While regulatory asset for utilities in Haryana is significant and it may increase further in case of any true-up variation allowed for FY

2013/ FY 2014 which is still pending, the SERC has also not mentioned any time-bound recovery plan for such RA. In case of tariff

order for discoms in Karnataka, SERC has approved regulatory asset of Rs. 12 billion as on March 2014 which is allowed to be

recovered over a two year period.

No tariff hike observed for discoms in eight states so far: In case of tariff orders for utilities with no tariff revision, SERCs haveestimated revenue surplus position for distribution utilities in FY 2014-15 in few states and the same is observed mainly on account

of a) allowing loss reduction targets strictly in line with pre-approved trajectory by SERCs as part of MYT control period (while utilities

projecting for much higher distribution loss levels based on actual), b) variation in the consumption mix in the licensee area

compared to what utilities have projected and c) limited revenue gap requirements based on true-up variations for the past periods,

also led by similar factors. In case of utility in Arunachal Pradesh where SERC has estimated revenue gap but did not allow any tariff

hike, the said gap has been proposed to be met through a state government subsidy support/budgetary allocation.
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ICRA LIMITED 2

Wide variation in approved distribution loss levels against the actual:In case of distribution loss levels, actual losses for utilities across a majority of the states haveremained higher than the loss trajectory approved by the SERCs and such higher losses have been disallowed by SERCs, while approving the truing up of costs &

determination of retail tariff. Among the tariff orders issued so far, a wide variation ranging between 5 to 15% is observed between actual and allowed distribution

loss levels in case of utilities in the states of Odhisa, Haryana & Uttarakhand. Under these circumstances, ability of utilities to speedily reduce their losses so as to

approach the approved loss trajectory remains critical.

Subsidy dependence for distribution utilities on all India basis estimated at Rs. 720 billion for FY 2015: Overall subsidy dependence for FY 2014-15 for distributionutilities in the 16 states (based on the allowed subsidy levels in tariff orders) has also shown an increase by 17% over the previous FY, mainly on account of upwardpressure on cost of power supply & continued subsidized nature of tariffs for agriculture consumers. On all India basis, subsidy dependence for the state owned

distribution utilities for FY 2014-15 is estimated in the range of Rs. 720 billion, which is estimated to have increased at CAGR rate of 16% since FY 2010. Among all

the utilities, subsidy dependence for discom in Maharashtra is estimated to increase sharply by about 55% on y.o.y basis in FY 2015 as a result of tariff subsidy of

20% announced by State Government for 11 month period (Jan Nov 2014) and also for Jammu & Kashmir where the subsidy burden is projected to increase by

51% due to continues support for funding the high T&D losses, while the same for utilities in other states is estimated to increase by 8 to 20% in FY2015 as compared

to FY2014. This implies that the timeliness & adequacy of subsidy support to utilities from their respective State Governments remains extremely crucial.

Delays in implementation of FPPCA framework by utilities in key states persist :Implementation of the fuel & power purchase cost adjustment (FPPCA) frameworkhas still remained absent in states such as Tamil Nadu, Uttar Pradesh & Rajasthan as well as has seen a significant lag in recovery of FPPCA in many other states. This

itself remains an area of concern for the distribution sector, given that power purchase cost is uncontrollable expense and contributes about 80% of cost of supply

for any distribution utility. Also, the principles vary across the states, which include ceiling (10%/ 20%) imposed by SERCs on recovery of FPPCA in few states, while

the same has been discontinued in last fiscal by SERC in Andhra Pradesh. ICRA hence notes that the cost reflective nature of tariff determination with timely

recovery of FPPCA, time-bound recovery of the regulatory assets by SERCs & efficiency improvements remains critical for the utilities to improve their financial

position in a sustainable manner.

Source: ICRA Research, SERC Tariff Orders in Respective States

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Chart 1: Trends in Retail Electricity Tariff Revisions across States

FY 2013 FY 2014 FY 2015

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ICRA LIMITED 3

TABLE OF CONTENTS

I. Status on Issuance of Tariff Orders by SERCs for FY 2014-15II. Trends in Tariff Revision by SERCs across the States for the period (FY 2013 till FY 2015)III. Summary of the Tariff Orders issued by SERCs for FY 2014-15IV. State-wise Analysis of Tariff Orders issued for Discoms by SERCs for FY 2014-15

a. Gujaratb. Odishac. Meghalayad. Madhya Pradeshe. Uttarakhandf. Haryanag. Karnatakah. Arunachal Pradeshi. Himachal Pradesh

V. Status on Implementation of Fuel & Power Purchase Cost Adjustment (FPPCA)

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Mr. Leander RayenMobile: 9940648006

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HYDERABAD

Mr. M.S.K. Aditya

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MUMBAI

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KOLKATA

Ms. Vinita BaidMobile: 9007884229

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234/ 3A, A.J.C. Bose Road,

Kolkata-700020.Tel: +91-33-22876617/ 8839,

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PUNE

Mr. Amit KhareMobile: 9763200633

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Range Hills Road, Shivajinagar,

Pune-411 020Tel : +91- 20- 25561194,

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GURGAON

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Tower A, DLF Cyber City, Phase II,

Gurgaon 122002Ph: +91-124-4545300, 4545800

Fax; +91-124-4545350


AHMEDABAD

Mr. Animesh BhabhaliaMobile: 9824029432

907 & 908 Sakar -II, Ellisbridge,

Ahmedabad- 380006Tel: +91-79-26585049/2008/5494,

Fax:+91-79- 2648 4924


BANGALORE

Mr. Jayanta ChatterjeeMobile: 9845022459

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Unit No. 1004, 10th Floor,

Level 2, 12-14, 1 & 2, Murphy Road,Bangalore - 560 008

Tel: +91-80-43326400,

Fax: +91-80-43326409E-mail:[email protected]

Please contact ICRA to get a copy of the full report
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Sh 2014 q3 2 Icra Power

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