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`Energy' talk for the `power' hungry
January, 25th 2007
While the idea of passing on benefits of lower crude prices to consumers seems good, it is important to understand its long-term impact.


Power is a happening sector. Newer projects have been coming up to meet demand, and grids carry power across borders. Meanwhile, energy prices continue to cause concern. To know more about energy-related issues and the economics of power, Business Line interacted with Mr Hiranyava Bhadra, a member of the Infrastructure Advisory Group in KPMG. He is an MBA (from XLRI) and a B Tech in Electrical Engineering (from IIT Madras). Mr Bhadra has a special interest in the energy sector, and has been involved in assignments on policy formulation, portfolio analysis, transaction advisory and risk analysis, business restructuring and change implementation. Here is, Mr Bhadra answering a few quick questions.

Excerpts from the interview:

What is the economics of cross-border flow of power among States?

The main cost components to be considered while assessing inter-State transmission costs are transmission charges payable to the source State Transmission Utility (STU), inter-State transmission charges payable to the Central Transmission Utility (CTU) and transmission charges payable to the beneficiary State STU. Inter-State transmission charges payable to CTU are 10 -16 paise per unit. STU transmission charges are around 15 paise per unit. In addition, operating charges are payable to each SLDC and RLDC involved, and cross-subsidy surcharge is payable in the beneficiary State. Transmission losses also need to be factored in while computing the overall cost of power purchased.

In case of inter-region transfers, additional inter-region transmission charges payable to CTU and operating charges are payable to each RLDC. Inter-region transmission charges are 6-13 paise per unit.

On tax sops that favour alternative sources of power.

Indirect taxes: Wind operated electricity generators up to 30 KW, wind operated battery chargers up to 30 KW and a majority of the components of wind operated electricity generators have a reduced 5 per cent Customs duty. Specified non-conventional energy devices/systems are exempt from excise duty. Exemption/reduction in Central Sales Tax (CST) and General Sales Tax (GST) are available on sale of renewable energy equipment in various States.

Direct taxes: Accelerated depreciation up to 100 per cent is allowed in the year of commissioning of specified renewable-energy-based devices/projects. There is income-tax exemption on all profits for five years and on 30 per cent of the profits thereafter.

Others incentives: Interest subsidy, capital subsidies, guaranteed purchase agreements and subsidised land are some of the other incentives offered.

It may be noted that lack of technology is not a constraining factor for growth in this sector. More entrepreneurial interest is required.

Your comments on recent reports that the Government is to review retail fuel prices by the month end?

While the idea of passing on benefits of lower crude prices to consumers seems good, it is also important to understand the long-term impact of such price cuts. The objective should be to drive such decision-making through a balanced policy framework, so that such price cuts do not have a distorted impact on any one stakeholder. In the long run, such distortions tend to become roadblocks on the way to a market-driven mechanism. If the price cuts are likely to increase under-recoveries, reduce competition, and not significantly reduce inflation, a deeper study of the intended objectives may be required.

Have there been changes in the refinery margins of oil companies?

Refinery margins are a function of (i) crude price and grade; and (ii) product slate and price.

Based on these we have: Crack spread = weighted average product price (depending on slate) - crude price.

Changes in refinery margins, therefore, can occur through changes in the above parameters. Indian oil companies are hit by global crude fluctuations as product prices for petrol, diesel, kerosene and LPG are regulated. These constitute 70-80 per cent of product slate of Indian refiners. Another aspect is refinery complexity higher complexity allows you to take in more low-priced sour crude. Most Indian refineries have low to medium complexity.

Do Indian companies make more profit exporting oil than selling it here?

This is product dependent. For regulated products (petrol, diesel, kerosene and LPG), the companies are better off exporting than selling at regulated prices. However, there are issues in exporting mainly competitiveness of Indian refineries (mostly the inland ones) on production and logistics factors vis--vis the competing refineries in East and South-East Asia (markets where the companies can possibly export to).

Accounting for reserves (oil and gas): How do our norms compare tomm global practices?

The US Financial Accounting Standards Board (FASB) has guidelines for disclosure of annual estimates of proven oil and gas reserves. A set of disclosures in the annual financial statements should include, inter alia, proven oil and gas reserve quantities and a standardised measure of discounted future net cash flows relating to these reserves.

A Reserves Categorisation Procedure has been prescribed by the Society of Petroleum Engineers (SPE). In Canada it is mandatory for a company to provide an independent assessment of its estimated reserves either through a full third-party evaluation or an external audit of its evaluation. Such rigorous disclosure requirements are not part of the accounting norms in India.

D. Murali

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