IS THERE ANY JUSTIFICATION OF TARIFF HIKE?

ISMAT SABIR
Feb 02 - 08, 2009

On one hand load shedding is in its full bloom in Karachi and on the other the National Electric Power Regulatory Authority (Nepra) has allowed Karachi Electric Supply Corporation (KESC) to raise power tariff by Rs1.85 per unit for all consumers, except lifeline consumers.

The Corporation said tariff was raised because of variation in fuel price and power purchase cost for July-September 2008, inclusive of leftover (unadjusted) amount of previous quarters totaling Rs20.232 billion.

According to details, the KESC in a petition on October 17, 2008 had sought adjustment in its tariff. It claimed that variation in fuel cost, due to fuel price variation, worked out at Rs10.408 billion or 95.05 paisa per unit, whereas variation in cost of purchase of power was calculated to Rs4.9 billion or 44.98 paisa per unit, totaling Rs1.40 while Nepra permitted KESC to raise tariff by Rs1.85 per unit.

The KESC further gave justification of tariff hike that cumulative effect after incorporating leftover of previous quarter was estimated at Rs3.192 billion for the fuel price and Rs1.712 billion for the power purchase cost, which becomes Rs1.85 paisa per unit. The utility had applied previous fixed power price of 396 paisas per unit keeping in view variation in the cost of purchase of power from NTDC.

KESC had requested for the authority's consideration on the facts: Pursuant to Authority's determination of September 14, 2006 as notified by GoP on September 12, 2008 to be effective from 1 July 2008, the quarterly adjustment in KESC's tariff be made without application of 4 percent price cap; and adjustment of loss in revenue amounting to Rs6.754 billion.

According to KESC, the Corporation suffered a loss in revenue to the tune of Rs6.754 billion due to application of 4 percent price cap on all its past quarterly adjustments in tariff as per the prescribed adjustment mechanism. In support KESC also referred to the ECC decision of October 10, 2008. Therefore, total variation in cost due to the fuel price and the power purchase cost including the leftover (unadjusted) amount of the previous quarters will be adjusted in KESC tariff.

However, the Authority clearly said that there is no provision under the existing mechanism, for adjustment in tariff due to fuel price and the mechanism for adjustment in tariff due to power purchase cost for the adjustment of such loss in revenue as requested by KESC.

According to tariff determination formula, the Authority said that before KESC is allowed the requested increase in tariff, a committee comprising Nepra professionals would verify the data/information submitted along with its quarterly adjustment request.

The committee, which visited KESC on January 9 and 10, 2009, pointed out some discrepancies and weaknesses in the KESC system for reporting accurate data/information, which is being taken up with KESC separately.

The KESC claimed that variation in cost due to power purchase price for the said quarter worked out to Rs14.434 billion. It said the leftover (unadjusted) amount reached Rs26.023 billion. Total variation in cost of purchase of power, therefore, amounted to a total of Rs42.457 billion.

Out of this total amount Rs35.820 billion relates to purchase of power from NTDC at marginal cost rate for the period July 2007 to September 2008, while the balance amount of Rs6.637 billion pertain to purchase of power from other sources, i.e., IPPs and others.

The Authority said that the committee is working on the dispute between NTDC and KESC over past arrears on the basis of marginal cost rate. Therefore, the Authority has decided not to adjust Rs35.820 billion pertaining to accumulated arrears till the committee resolves the issue.

However, KESC was allowed an adjustment of the balance amount of Rs6.637 billion, power purchased from sources other than NTDC. In order to compensate the Corporation, the Authority has decided to allow a uniform increase in consumers for all categories, by Rs1.85 paisa per unit except lifeline consumers.

The experts are of the view that around 40 percent of the load shedding could be reduced if the present government had paid attention on growing circular debt of Pepco. Now as a prerequisite for the approval of the $7.6 billion IMF loan and to take second installment, the government has to prepare a plan for abolishing the inter-corporate circular debt within the fiscal deficit target, by end March 2009. However, it is to be seen how such a huge amount would be paid within about 60 days.

Advisor to the Prime Minister on Finance Shaukat Tarin said that the piling up of circular debt is the main reason of long hours of load shedding, as oil companies have reduced supply of furnace oil to power producers.

Recently the advisor has announced a plan to pay Rs150 billion circular debt of Pepco. Elaborating his plan the Advisor said that Rs16 billion has already been released to ease load shedding, which has yet not been reduced. Further, administrative measures would be taken that led to an increase in generation of 1,400 to 1,500 MWs electricity. The remaining debt will be arranged by issuing Term Finance Certificates (TFCs) of Rs75 billion while Rs75 billion would be generated by selling assets of power companies, mainly to meet the conditions of IMF.

He also stated that there would be no load shedding beyond 2010. For this purpose public private partnership would be sought; cheaper resources of power generation such as hydel, coal, wind, renewable energy and solar would be developed and arrangement will be made to import power from neighbouring countries.

The government intends to generate additional electricity of 4,000 MW by the end of this year with the support of private sector. In this regard an Energy Purchase Agreement was signed. A Turkish company would set up the country's first wind farm. The minister assured on this occasion that there will be no load shedding after December 2009 and the government will overcome power deficiency by completing all short-term projects within a year.

The minister said a huge amount of $30 billion is required for investment in power sector for generating electricity of 16,000 MW by 2015 to get rid of load shedding, which is hampering the economic growth of the country. Out of the total amount the share of private sector would be $20 billion.

He disclosed that to overcome energy shortfall in 11 months the government has also made a strategy of rental projects, about 11 projects have been initiated while 12 projects are in the pipeline to be started soon.

Moreover, 964 MW fast track power projects would be set up with an investment of $1.16 billion. Three parties have submitted the bids for 627MW Engro PowerGen (Pvt) Limited at Bhikki near Sheikhupura, 171MW Saba Power Generation (Pvt) Limited near Lahore and 166MW Reshma Power Generation Limited at Jhang. The LoS will be issued by early March. These IPPs are expected to be operational by 2010-11.

The 780MW of rentals expected to come on line by end 2009 and a fast track 172MW to be produced by the IPPs by mid 2010. Presently, the government is mainly considering fast track projects for 2010MW and 2011MW.

The country is suffering an average of 3,500MW shortfall daily. To meet this shortfall plans are made to generate 2,517MW up to next year. The government has set up a power generation target of 3,497MW for 2011 and about 602MW for 2012.

Let us hope that the government would stay firm on its commitments and plans, as the energy shortage has led to slowdown in economic activity, higher unemployment and high inflation rate, besides creating social unrest all over the country.