COMPLEX POWER TARIFF STRUCTURE

KESC TO RECOVER RS 6.8 BILLION ARREARS FROM CONSUMERS

AMANULLAH BASHAR
(feedback@pgeconomist.com)
June 14 - 20, 20
10

The fuel oil consumption for power generation was at all time high at 0.93 million tons last month which widened the gap between cost of generation and existing tariffs.

It will not be out of place to note that furnace oil is approximately 2.5 times more expensive than gas. High cost of fuel resulted in Rs6.8 billion arrears of KESC.

Obviously, the consumption of fuel oil is likely to take a jump in the months to come when more rental power projects based on fuel oil are likely to come online. Increase in electricity prices or for that matter of any other commodity is not a one side game. Before determining the price the consumer the prime stake holders have to be taken into confidence prior.

The Karachi Electric Supply Company (KESC) operates 90 per cent its power generating machines on natural gas yet it claims stuck up arrears of Rs6.8 billion due to gap between cost of power generation and existing tariffs. Nepra has allowed Rs1.70 per cent to the company with retrospective effect from July 2009 to March 2010, it is learnt.

The Finance Minister Dr Abdul Hafiz Shaikh, it may be recalled, had pointed out in his budget speech that power shortage is the major cause for arresting economic growth which has to be addressed amicably if we have to ensure sustainable economic growth in future. Yet the exorbitant rise in electricity rates continued to hamper socioeconomic development besides igniting unrest among the masses. Unless the power rates are made affordable it would not be possible to put the economy on the path of progress.

It is interesting to note that on one hand the consumption of fuel oil is increasing as the majority of the IPPs are running on fuel oil and on the other hand the consumption of diesel has dropped 17 per cent MoM primarily due to increasing prices of diesel.

The Chairman Standing Committee, FPCCI and President Pakistan Businessmen and Intellectuals Forum (PBIF), Mian Zahid Husain commenting on Nepra's decision to raise power tariff with retrospective effect has said it is another step towards complete destruction of country's industrial and export base.

He said that it seems that government has no consideration for the country's industry and foreign exchange earning sector as well as the general masses. Zahid said that the present government has allowed increase in power tariff more than 25 times which is a world record. There is no other example of such extortion of this type and no government could survive by taxing its people without any justification. He warned the rulers that extortion of the masses by the government has now become unbearable.

He demanded of the Prime Minister, Yousuf Raza Gilani to immediately order withdrawal of power tariff increase to save the industry from total collapse as hundreds of industries have already been closed down during his brief tenure and the survival of thousands of industries has been threatened. The industry has also questioned the existence of National Electricity and Power Regulatory Authority (NEPRA) which according to them does nothing but keeps securing interests of the power companies.

Meanwhile the KESC while justifying the recent increase in tariffs said that KESC's tariff is adjusted for variation in fuel and power purchase cost and change in fuel mix on a quarterly basis. No such tariff adjustment has been made since July 2009 whilst the price of furnace oil (purchased from PSO) and power (purchased from IPPs, WAPDA, etc) has increased significantly since then. At the same time, KESC's fuel mix has deteriorated in this period as there has been a significant reduction in gas supply (and corresponding increase in furnace oil consumption) from last year.

Nepra delayed the quarterly tariff determination until now and an amount to be recovered for the 9 month period (July '09 - March '10) is Rs6.8 billion (the "Arrears").

According to KESC, the tariff is split into two parts: Determined Tariff (by NEPRA) and Applicable Tariff (by Ministry of Water & Power). The difference between the two is the Consumer Tariff Subsidy paid by the Ministry of Finance.

The Applicable Tariff paid by the consumers of Karachi is Rs7.60 per unit (average across the residential, commercial, industrial, etc consumers) whilst the average Applicable Tariff paid by the consumers in other cities of Pakistan is Rs0.77 per unit higher.

As per NEPRA decision of 4th June, 2010, KESC should recover Rs4.35 billion (out of the total arrears of Rs6.8 billion) directly from the consumers as Fuel Adjustment Surcharge during the next 6 months. The remaining Rs2 plus billion (difference between Rs6.8 billion and Rs4.35 billion) will be adjusted separately (methodology to be set out by NEPRA later).

KESC had strongly argued that the entire Rs6.8 billion arrears should be treated as part of the Consumer Tariff Subsidy to be paid by the Ministry of Finance (and not charged to the consumers.

In addition to the arrears, KESC's tariff will increase by Rs2.16 per KWh to reflect the increased cost of furnace oil and power purchase from IPPs, WAPDA, etc as of March 2010. Going forward, any increase or decrease in the price of fuel or power purchase will be automatically passed on to the consumers on a monthly basis as per directions from the government.

KESC has pleaded that it is getting much less gas (and therefore burning much more furnace oil) this year compared to last year. Every 25 mmcfd of gas reduction replaced with equivalent furnace oil (to maintain the same load shedding schedule) increases the tariff by Rs0.5 per unit.

As KESC runs its plants on furnace oil, and also receives dispatches from Gul Ahmed and Tapal at full load (both these IPPs burn furnace oil), there will be an automatic increase in consumer tariff since Ministry of Finance is not budgeting for the Consumer Tariff Subsidy anymore. KESC said it needs more gas (or furnace oil at gas equivalent price) to keep the tariff at a reasonable level; and/or Ministry of Finance should continue to subsidise the consumers.