CERC caps power exchange tariff rates at Rs8 per unit and allows new weekly contracts

Since CERC's order to cap to the day-ahead power tariffs, these have been averaged to Rs2.91 per unit. On Friday evening, CERC issued its final order in this matter and has tightened the price cap from Rs11 per unit in its draft order to Rs8 per unit now. The present order is valid for a period of 45 days. The change in pricing for the day-ahead tariffs is shown in the graph above. Since the earlier order, the highest price has been Rs10.5 per unit, and this too was on the day after the order. If this is excluded, the highest tariff was Rs6.00 per unit. We believe that this clearly highlights the effectiveness of CERC in curbing the abnormal tariffs at which power was being traded. Given that since the draft order power traded has been at a maximum rate of Rs6.00 per unit, we believe that this final order capping the day-ahead power tariffs at Rs8 per unit for a period of 45 days would not have any impact on the stock prices of companies selling merchant power. The companies dealing in merchant power are the likes of GMR Infra, JSW Steel, JSPL, Nava Bharat, etc. We reiterate our sell recommendation on GMR Infra with a target price of Rs110. We do not expect power trading companies, like PTC India, to be impacted by this order as their margins are independent of this order, and capped at 4 paise / unit, irrespective of the power tariff or the volume. In a related move, the CERC has permitted the power exchanges to introduce new contracts. The IEX is hence introducing the following contracts from 15-Sep-09: Region-wise intra-day contracts: are contracts for delivery of power on the same day. These contracts would be avaiable on a hourly-basis from 19:00 hours to 24:00 hours only. Thus, only six hourly contracts would be available in this product. Regional day-ahead contingency contracts: These are similar to the existing day-ahead product, except that these would be traded at the end of the day (between 3:00 PM and 5:00PM). We believe that this would help those buyers / sellers who otherwise were not able to buy / sell during the normal segment, or received late instructions from their PPA counter-party with regard to power supply the next day. Region-wise daily contracts: These are week-ahead contracts for supply of daily/hourly power. These contracts are available for the following blocks: (a) 8-hours night period; (b) 11-hour day period; (c) 5-hour evening peak; and (d) full day or 24-hour period. Region-wise weekly contracts: There would be contracts specifc to each region (north, south, east, west and north-east). In addition, these would be available in four time blocks: (a) 8-hours night period; (b) 11-hour day period; (c) 5-hour evening peak period; and (d) full day or 24-hour period. It should be noted that all these new contracts are also based on actual delivery and cannot be settled in cash. To us the biggest take-away is that the regulator is open to introduce longer duration contracts in power trading. We believe that more longer duration contracts would be permitted sooner rather than later ensuring a deeper power trading market.