CERC needs to be complemented for taking away the carrot when none was needed by the sector
Central Electricity Regulatory Commission’s (CERC) recent regulation on electricity tariff underscores the strides taken by the power sector over the years. Apart from fixing the manner in which tariff will be calculated over the next five years, CERC’s regulation demonstrates the maturity of the regulator in taking hard decisions.
The mission statement of Central Electricity Regulatory Commission (CERC) states that it is expected to promote competition, efficiency and economy in bulk power markets, improve the quality of supply, promote investments and advise government to remove barriers to bridge the demand supply gap and thus foster the interests of consumers.
Thus when India was a power deficit nation and desperately needed investment in the sector, CERC offered a minimum return of 15.5 per cent return on equity (almost double the risk free return in the country) and offered liberal return over and above this figure.
The regulator allowed power generating companies to charge higher taxes to consumer but pay lower (actual) taxes to the government. NTPC earned nearly Rs 850 crore through this arbitrage. CERC’s idea was to promote investment and supply of electricity in the initial years and did not mind generating companies earning some extra money.
Further, recognising that even though generation capacity will be set up, there would be times when there will be no buyers for electricity, given the poor health of state electricity boards (SEBs), CERC allowed generation companies to be compensated for being idle, but ready. It thus allowed companies to be compensated on the basis of plant availability factor (PAF).NTPC earned nearly Rs 650 crore a year by keeping its plant ‘available’ but not selling any power.
However, the sharp increase in generation capacity expected over the next five years will bring down the peak power deficit from the current levels of nearly 8 per cent to less than 1 per cent. Under this scenario, it makes little sense for CERC to continue incentivising the sector. It is under this context that the changes suggested by CERC needs to be viewed.