CERC compensation formula for Tata Power, Adani Power disappoints

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The Central Electricity Regulatory Commission’s (CERC’s) much-awaited compensation proposal for the power plants of Tata Power Co. Ltd and Adani Power Ltd has proved to be a major dampener.

According to analysts, the compensation formula will not be able to end the cost under-recoveries at Tata Power’s Mundra power plant. Worse, the proposed formula does not even let the company recover half of the cost under-recoveries.

In a sample calculation for August 2015, CERC pegged the tariff relief at 5 paise per unit, compared to Tata Power’s claim of 27 paise per unit.

“For FY16, the Co (Tata Power) had stated fuel cost under recovery of Rs7.1 billion of which Rs2.1 billion (Rs210 crore) will be recovered as per the given formula. In FY16, CGPL incurred a loss of Rs3 billion which will reduce to Rs1 billion post this adjustment,” Antique Stock Broking Ltd said in a note. CGPL is Coastal Gujarat Power Ltd, a Tata Power subsidiary that built the Mundra plant.

The regulator is said to have set stringent parameters in the compensation formula and this has significantly reduced the relief amount.

“There is disconnect in Tata Power and CERC assumptions. One is the auxiliary consumption. CERC took it at 4.75%, which is very stringent. Mundra plant’s auxiliary consumption is at around 7.75%. Even NTPC has higher auxiliary consumption rate than what the CERC assumed in the formula,” says Bhargav Buddhadev, an analyst at Ambit Capital Pvt. Ltd. Auxiliary consumption is energy used by the power plant in the generation process.

“Second is the variation in coal cost. There is disparity in rates between CERC and what Tata Power is quoting,” he adds.

For Adani Power, the tariff relief is significantly lower than what the company is claiming or booking in its revenues, Nomura Research points out.

Buddhadev of Ambit Capital says Tata Power may seek clarification from CERC or approach the courts as the proposed formula does not address the problem of cost under-recoveries. According to Antique Stock Broking, Tata Power has the right to discuss the proposed formula and assumptions again with CERC, after which a final number will be arrived at.

If the companies and the regulator do not agree on a solution, then the issue can drag on for a prolonged period as the affected parties will contest the formula in court. That will further undermine shares of Tata Power and Adani Power, which have seen a prolonged period of underperformance.

“As CERC’s calculations suggest any eventual tariff relief (i.e. if Supreme Court upholds appellate tribunal’s ruling and CERC’s quantification basis) will likely be substantially below current expectations, near-term stock price performance may be adversely impacted,” Nomura said in a note.

For Adani Power, the proposed formula can further muddy its finances. The company is already booking compensation in its accounts. With CERC proposing a lower compensation, the company will be forced to write off those amounts (if the formula is not altered). Overall, the compensation formula brought anything but relief for Tata Power and Adani Power.