• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Raghuvir Srinivasan

Mr C. P. Jain

Recently in New Delhi

NATIONAL Thermal Power Corporation (NTPC), with almost 20,000 MW of generating capacity, accounts for about 19 per cent of the total capacity in the country and has ambitious plans to add a further 9,000 MW in the medium term. However, two orders of the Central Electricity Regulatory Commission (CERC), on tariff norms and availability based tariff (ABT), could affect NTPC's capacity addition programme by reducing its cash flows drastically. A combative Mr C. P. Jain, Chairman and Managing Director, elaborates, in this interview with Business Line, on the adverse effects of the CERC orders on NTPC.

Excerpts from the interview:

How would you assess the current situation in the power sector, especially the generation segment?

There is a shortage. The sector is not a financially viable one today. If the policy initiatives taken by the Power Ministry now are implemented in the right spirit, we are hopeful that things will change for the better. A large number of States are implementing distribution reforms and about 22 States have signed MoUs with the Power Ministry to achieve reform related milestones.

The current emphasis on distribution, compared to the earlier focus on new capacity creation by IPPs will tackle the real issue of revenue flow within the sector, which, in turn, will attract investment from outside. The proposed Electricity Bill and the conscious attack on the issue of power theft are likely to make a real difference in improving things.

How do you foresee the demand-supply mismatch moving in the next five years?

We face energy shortage of 7 per cent and peaking shortage of over 12 per cent. Whether this improves depends on many factors the most important of which is that to attract capacity addition, the sector has to be viable. Viability is at two levels - first it should be financially viable for those already present in the sector and second, the sector should itself be viable to attract outside investment. In today's situation, is it neither financially viable for existing players nor is the sector itself viable for attracting new investment.

How do you see NTPC's role in increasing generation over the next five years?

NTPC has a plan of adding 9,160 MW of capacity. But there is a big issue before us. The Central Electricity Regulatory Commission (CERC) has reduced our cash flow availability. Today, we have 4,800 MW under construction and almost 7,800 MW worth of projects approved by the Central Electricity Authority (CEA). While we are ready, ultimately it will all depend on whether we have money to implement them.

You are obviously referring to the ABT order of CERC. What is NTPC's financial loss due to the order?

We had anticipated a total cash flow of Rs 35,000 crore in the next ten years when we made up the plan. That leverage would have been sufficient for us to add 20,000 MW and also for renovation and modernisation. This has now come down to about Rs 9,500 crore due to the ABT order. The CERC order affects not just the equity portion but also our borrowings, as repayments is out of free cash flow.

When cash flow reduces, our borrowing capacity also correspondingly goes down. Our capacity addition will also now go down to just about 6,000 MW from 20,000 MW possible earlier.

For the time being, the ABT order is applicable only to NTPC which is why we called it discriminatory. That is the legal issue which we have taken up in Court. The bottomline is that the order is going to affect our cash flows and unless either the tariff policy compensates for it or there is support from the government in terms of additional funds, capacity addition will not be possible.

Could you elaborate on specifically how the orders affect you?

There are several minor and major implications. They have reduced the rate of depreciation in the tariff order which affects my cash flow. Earlier, fixed costs were recovered at 68.5 per cent and any generation beyond that was being supplied at variable cost and we were paid incentives. The disincentive has now been increased. Earlier, if you improved or fell 1 per cent on your PLF, your gain or loss was the same. Today, the ratio is 1:11. The annual loss to us due to this based on today's operational levels is almost Rs 500 crore.

The third is aging has been totally disallowed; we will be allowed only 6 per cent escalation irrespective of whether it is a new or an old plant. Earlier, it was 10 per cent when our normal increase in maintenance and spares was about 12 per cent. This loss will only increase as our operations increase.

But is not recovering fixed cost at 80 per cent better for the final consumer as his tariff will be lower?

You can supply free of cost too, the consumer will benefit more! The question is: At what rate is it viable for us? When you go to the supermarket for purchases you buy at the appropriate cost. The tariff can be reduced further also. But what will be the impact on the sector? Unfortunately, though the intention is to protect the consumer, it works the other way round.

Since you do not give remunerative tariff to the generator, he is not able to add capacity or operate efficiently. So, the quality of power supplied goes down. This is the basic problem in the power sector. You want to be more socialistic and charitable rather than commercial.

NTPC's capex programme will be curtailed terribly unless the tariff order is revised. Even IPP investments may not materialise under the new norms.

Looking at it differently, should not NTPC's efficiency in being able to operate plants at 80 per cent and above PLF, be passed on to consumers in the form of lower tariffs?

If a person gets a distinction will you set his pass mark at that level? The benchmark has to be common for everybody. 80 per cent is alright if you are operating under a single part tariff not under the two-part tariff. What happens is that after 68.5 per cent PLF you get only the fuel cost. Let us say that power is supplied at Rs 2 per unit, Re 1 each going to fixed costs and fuel charges. After the plant has run at 68.5 per cent, you are billed only the fuel charge of Re 1 and other expenses of about 1 per cent, which is 2 paise. So your cost of power is only Rs 1.02 compared to Rs 2 otherwise.

Is the benefit not being passed on to you? 98 paise, is being passed on to you. Now, should you not give an incentive to the person who operates efficiently. Just because the national average is below 68.5 per cent and some individual operator (NTPC) is operating some plants at 80 per cent, you increase the level to 80 per cent. Of course, above 80 per cent, I would now get Rs 1.04 instead of Rs 1.02. That is the only advantage I would get. The gains of efficiency are anyway passed on under the two-part tariff system.

The disincentives for the generators are very high. What the order effectively says is that if somebody is in the habit of getting distinction marks, he should be failed if he does not continue to get that while the others will be passed out.

Today, there is a benchmark which has been changed in such a way that my losses have increased and my gains decreased. Effectively, I have been punished for being efficient. The wrong message has now gone out that if somebody were to improve his efficiency, he will not get the advantage out of that. The investment in improving efficiency will go waste.

There have also been some changes in the depreciation rates in the tariff order. What is the impact of that?

Today, there are some depreciation rates provided after due consideration of the cash flows. Now this rate has been substantially reduced. The CERC has appointed a consultant to give an opinion on this. The consultant came up with two depreciation policies. The basic idea was to recognise it as a cost so that the investor gets replacement value of the asset over its life. The first recommendation was that you give him accelerated depreciation based on the historical cost which is the one being followed today.

If you look at the rates under the Income-Tax Act or Companies Act, they are much higher. The Electricity Act rates were more than that anyway but for thermal plants it was 7.8 per cent and gas plants it was 8.2 per cent. The second recommendation was that you charge depreciation over the life of the plant based on the optimal replacement cost. But what the order says is that depreciation will be charged on historical cost over the total life of the plant. It combines the worst aspects of the two recommendations. The objective is to supply power at the cheapest possible cost no matter whether it is available even for only 10 hours in a day!

We have requested the government to decide on its priorities and then prescribe a norm which is applicable to everybody. We have told the government: You have estimated that 1 lakh mega watt has to be added to capacity, you have to reform the distribution sector which needs heavy investment, you decide whether you can give from the budget or you need outside investment. The government has to first decide whether it wants to provide power to the public and if yes, see how much is needed and then, from where it would come. NTPC's capex programme will be curtailed terribly unless the tariff order is revised. Even IPP investments may not materialise under the new norms.

What is your current outstanding from SEBs and how are you planning to recover them?

Rs 22,000 crore.

You signed an MoU recently with the Tamilnadu Electricity Board for setting up a 1,000 MW coal-based station. Is this the start of a trend where NTPC will set up exclusive plants for States in association with the concerned SEB?

It is difficult to say. But wherever it is workable we will try to come forward. This is the first project of its kind and there is no particular strategy behind it. It will depend on whether similar opportunities come by in future.

You scalded your fingers badly with the liquid fuel project at Kayamkulam. What is the way forward there now?

Liquid fuel prices went up with the rise in oil prices. We are still better off that we are able to run the plant. The plant per se is a cheap one, so fixed charges are reasonable. We have some surplus power available in the Eastern region. We are now discussing with Tamil Nadu and Karnataka that we will give them 90 MW each from Kayamkulam and similar power from the Eastern region. The idea is to average out the cost to almost Rs 2.50 per unit. We are only waiting for the connection between the Eastern and Southern regions to be established. Kayamkulam will then continue to operate at full capacity with Kerala taking up 170 MW from there.

You had plans to add another 1,950 MW there…

That will take time. We are planning a dedicated LNG terminal for this for which we will call for bids. This is our 11th Plan project to be completed around 2009.

Your experience with gas-based plants has not been too good. How are your projects at Kawas and Gandhar doing?

They are doing well except that the limitation is fuel because of which their PLF is low. We are incurring heavy losses because there is no gas. On an average we have a PLF of 60-62 per cent.

You experimented with taking over SEB stations in lieu of their dues, such as Tanda and Talcher with UP and Orissa respectively. Have you been able to turn them around?

Yes, we may do more of it in the future. It has proved beneficial to us. They may not be very profitable financially since the plants are old needing investments in renovation and modernisation. But physically, they are doing well with higher generation than was the case earlier. With the new tariff norms, they may not be good financial propositions.

You have a joint venture with SAIL for operating their captive power plants. Is it another emerging business strategy of NTPC to forge more such JV's?

Certainly, if something comes up. Operating power plants is our core strength and we get part ownership of the plants.

Do you think that with IPPs failing to take off, you will be forced to bear the burden of capacity generation henceforth?

I do not think NTPC will have to bear (the burden). Ultimately, the consumer has to bear. Let us be realistic. The businessman makes a product only when he can make money out of it which means that the consumer pays for it. In the power sector, we have so far depended on budgetary support. But thatsupport is going down and the consumer is also not being asked to pay for the power. If you look at the macro picture, either the government will have to invest or a businessman will have to do it.

For example, if you get Colgate toothpaste in the market, it is not because it is the responsibility of Colgate to give you that. Colgate makes the toothpaste because it makes money out of it. It is the same with power too. Either the government takes it upon itself to create capacity or the private entrepreneur decides to produce the product based on demand. Why is the latter not happening in the case of the power sector?

The oil sector is attracting investment, the communication sector is attracting new players. Why not power? The fact is that the market conditions are not conducive. The fundamental mistake is that we all think that it is the government's responsibility to provide power and the government's only objective is to provide it cheap. But where will it come from? Why not set things right in the sector? The government simply does not have the resources to invest Rs 8,00,000 crore in the next 10 years in the power sector. What we need is reform, such that the consumer pays the right price and the private entrepreneur sees profits. Investment will follow in due course.

Send this article to Friends by E-Mail

Stories in this Section
Nursing his portfolio through tough times

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line