While approving the new 'subsidy policy' for power sector, the government has decided to release quarterly subsidy amount to Wapda's Distribution Companies (DISCOs) and Karachi Electric Supply Corporation (KESC) from budgetary allocations after at source adjustment of the budgeted debt servicing liabilities of each entity, sources in Finance Ministry told Business Recorder.
"New subsidy policy backed by the World Bank, Asian Development Bank and International Monetary Fund is being notified as the Prime Minister Shaukat Aziz has already approved it," the sources added.
According to the subsidy policy, a copy of which was obtained by this scribe from the Finance Ministry, the data and annual estimates will be collected both for debt servicing liabilities (DSL) of the DISCOs/ KESC towards the federal government and subsidies payable by the government to the utilities. These estimates would be included in the budget.
The policy says that subsequent to the issuance of policy guidelines to the National Electric Power Regulatory Authority (Nepra) under Section 7(6) of the Regulation of Generation, Transmission, and Distribution of Electric Power Act, (XL of) 1997, the Government of Pakistan feels the necessity to issue guidelines relating to subsidies that it might provide to consumers of electric power for achieving its socio-economic objectives.
The intention of the Federal government, in this regard, is to provide a well-defined mechanism for the calculation and timely payment of subsidies. This would in turn enable the to project their cash flows accordingly, thus helping them to meet their financial obligations in a timely manner.
In accordance with the policy guidelines, Nepra will determine tariff, based on the cost of supply and without any cross-subsidies between various power sector entities, for all three categories of electricity suppliers, ie generation, transmission and distribution.
In line with the federal government's intent to gradually move towards a fully differentiated tariff regime for Wapda 's successor companies and KESC, consumer-end tariff will be separately notified by the Federal government within a period of 30 days of Nepra 's tariff determination, unless a review motion is filed by DISCOS or the government has asked the Authority to reconsider the tariff.
However, the Federal government intends to reduce these subsidies gradually, with the ultimate aim of eliminating all (government-provided) subsidies over time. Both public and private sector entities will be eligible to avail those subsidies wherever applicable.
1. GUIDELINES FOR DETERMINATION OF SUBSIDY:
In order to ensure the financial viability of DISCOs, consumer-end tariffs must reflect each entity's supply in the long run. However, in view of the public policy and social objectives of the Federal government, it would not be expedient to immediately charge Nepra determined tariffs from the consumers of all DISCOs. For the purpose of determination of the amount of subsidy, the following road principles will be kept in view.
1.1 The average of category-wise and slab-wise tariff of selected four top performing DISCOs as benchmark.
1.2 Special consideration for socio-economic/political factors where compelling.
1.3 While determining category or slab-wise subsidy to be provided to any particular consumer, the difference in tariffs for the same consumer categories/slabs across various DISCOs would remain within up to one rupee.
1.4 The ultimate objective is that no subsidy will be provided after a suitable period (presently targeted as 2010, to be reviewed on the basis of experience), the tariffs would be fully differentiated, thus reflecting the DISCOs' cost of supply to its total consumers.
1.5 The government will also explore other avenues to reduce the cost of power distribution companies such as financial restructuring.
2. CROSS-SUBSIDY BETWEEN VARIOUS CONSUMER CATEGORIES:
Since, Nepra has been mandated by the federal government to set consumer-end tariffs on a cost-reflective basis, eventual elimination of cross-subsidies becomes necessary in the long run. Therefore, while moving towards differentiated tariffs, Nepra and the DISCOs should also work on tariff rationalisation, ie balancing tariffs by reducing the number and size of various slabs within consumer categories, as well as cross-subsidies within and between different consumer categories.
3. SUBSIDY PAYMENT MECHANISM:
In order to enable DISCOs /KESC to adequately meet their financial obligations through efficient cash flow management, the said entities would be provided the subsidy amounts, subsequent to Nepra tariff determinations, in a timely manner. This assurance of timely subsidy payment to the DISCOs /KESC is critical also for their smooth privatisation. Wherever applicable, the payment made during any particular month in this regard, would be net of any loan-related payment (worked out on a monthly basis) to be made to the federal government by the DISCOs /KESC, in order to meet the entity's loan obligations. The process would be as summarised below:
3.1- Data shall be collected and annual estimates both for the (a) debt servicing liabilities (DSL) of the DISCOs /KESC towards the Federal Government, and (b) subsidies payable by the federal government to the power utilities will be determined. These estimates would be included in the budget.
3.2- The DISCOs /KESC shall submit monthly invoices to the Ministry of Water & Power for the payment of subsidies, simultaneously with the issuance of electricity bills to the consumers. The Ministry, after duly scrutinising these invoices, shall make payment within 25 days of receipt of invoices.
4. SETTLEMENT OF ISSUES:
For settlement of issues that may arise with respect to the amount of subsidy, an adequate dispute resolution mechanism will be developed. However, the undisputed claims shall be paid to the concerned company within 25 days of receipt of invoices whereas the disputed amount shall be settled within a given timeframe.
5. MONITORING AND AUDIT:
A system of quarterly audit of the performance of DISCOs /KESC will be institutionalised by the Ministry of Water and Power. This will include quarterly monitoring of the units of electric power received by the DISCOs /KESC from the National Transmission and Dispatch Company (NTDC) and the units billed by the receiving entity. The government may also, as and when deemed necessary, carryout an audit of any DISCOs /KESC in this regard, by itself or by engaging any third party.
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