POWER POLICY 2002 DISCREPANCIES AND EXPECTED AMENDMENTS

MARIAM NASIR
June 11 - 17, 2007

Electricity constitutes one of the most important components of infrastructure and plays a key role in national growth and development. With only about half of the population having access to electricity, a huge population base provides an ideal opportunity for expansion of electricity generation. The growing pace of urbanization and industrialization also puts a premium on demand for electricity. Demands for augmenting the power infrastructure, unsatisfactory performance of public sector entities, ever-squeezing budgets in the public sector provides motivation for resource mobilization. In order to promote fair competition in the Power sector and to protect the rights of consumers as well as producers and sellers of electricity, the GOP came up with a new policy in 2002. The previous power policy of 1998, failed to attract private power investors. The Government felt it necessary to create an environment and craft a new set of incentives which, on the one hand, offer attraction to investors and, on the other, keep the consumer prices within affordable limits.

SALIENT FEATURES OF POWER POLICY 2002

* Scope of the Policy covers private, public-private and public sector projects.

* Invitation of bids on tariff through International Competitive Bidding (ICB).

* Encourage exploitation of indigenous resources including hydel, coal, gas and renewable resources through active involvement of the local engineering, design and manufacturing capabilities.

* Customs duty at the rate of 5% on the import of plant and equipment not manufactured locally.

* To enhance share of Renewable Energy Sources, hydel and fuels other then oil-based fuels, full levy of income tax on oil-fired power projects.

* For projects above 50 MW One Window support to be provided at the Federal level. For projects below and upto 50 MW One Window support to be provided at the respective Provincial/AJK level.

* Ministry of Water and Power (through PPIB) to remain the focal point at Federal level.

* To develop raw sites whose feasibility studies are not available, unsolicited bids would be welcomed. The sponsors of feasibility studies on raw sites will have first right of refusal.

* Two-part tariff structure consisting of fixed capacity and variable energy component is recommended with the proviso that fixed capacity payment for Hydel projects would fall between 60% to 66% of the total tariff.

* Hydrological Risk to be borne by power purchaser (WAPDA/NTDC/KESC).

However on one hand the 2002 Policy brought favors on the other hand it had some discrepancies as well. These issues which rose in the Policy are as under:

Currency Exchange Rate: The "Policy for Power Generation Projects 2002" states that: 'bidders may include separate components in the Capacity Purchase Price (CPP) and Energy Purchase Price (EPP) which are subject to adjustment only for variations in the exchange rate between the rupee and dollar. However, Engineering Procurement and Construction (EPC) contracts of IPPs were not necessarily in dollars because of sourcing of equipment and financing from various markets (eg US, UK, Japan and Europe). Therefore, IPPs had been contending that they were being exposed to impact the currency exchange rate variation affecting their costs, which was a risk beyond their control.

Parity In RoE For Local And Foreign Investors: At present NEPRA allows return (currently 15%) in dollar terms on foreign exchange component of RoE while local component of equity was allowed the return in rupees. The lPPs had been contending that this discrimination should be removed.

Non Supply of RFO to Be a Pakistan political force majeure (PPFME): The ministry further proposed that present policy of not guaranteeing payment obligations of fuel supplier should continue. However, the nation wide shortage of fuel needs to be recognized as Pakistan political force majeure (as opposed to be an other force majeure event, under which case for RFO Projects no capacity payments were guaranteed but rather the concession period would have extended by the period of force majeure, which would have meant forced rescheduling for RFO projects) and procedure / mechanism allowed in the 1994 contracts be adopted to address the issue).

The dark and frightening shadows of load-shedding have again started to loom large. The start of the year has been very treacherous due to power outages. The city of Karachi, with a population base of above 10 million, is already bearing the brunt of power shortages. Hence with the new budget round the corner we anticipate slight changes in the previous policy which will be as under:

* Previously only US$ denominated currency was factored in cost escalation part of the final tariff. However we expect in the budget that Euro, Pound Sterling and Japanese Yen-denominated risk will now be added as well.

* Previously, only foreign investors had guarantee in US dollars on Return on Equity (ROE). The 15% ROE will now be guaranteed in US dollar terms for both foreign and local investors.

* Previously only local component of O&M cost was indexed. Hence we expect the foreign component of Operating & Maintenance Cost (O&M) is to be indexed with US CPI as well.

These amendments if implemented would only be applied to those power projects that got license under Power Policy 2002.