Power companies may not be able to avail themselves of benefits on assets which have completed their useful life. Draft amendment to the National Tariff Policy 2016 proposes electricity generation, distribution and transmission firms to mandatorily pass on benefits of low cost of depreciated assets to consumers with tariff reduction.
Why is this important?
As per policy draft, benefit of reduced tariff after the assets have been fully depreciated shall remain available to the consumer.
Depreciation is a major component of cost-plus tariff, besides return on equity (RoE) and interest cost. It becomes a cash flow to the investor by enabling recovery of capital investment. As per regulatory accounting, initial 70% portion of depreciation is intended for repayment of principal amount of loan. Hence, according to industry experts, payment of depreciation beyond 70% implies repayment of equity to the investor. Many regulators currently allow RoE on original equity to power companies. This encourages power companies not to retire old assets. If return on equity is continued on old assets and new assets are continuously added, tariff increases more.
If the proposed amendment is brought into effect, there would be subsequent reduction in power tariff and hence, would be beneficial for consumers.