Ministry-Nepra war of words intensifying

MUSHTAQ GHUMMAN

ISLAMABAD: The war of words between Ministry of Water and Power and National Electric Power Regulatory Authority (Nepra) is intensifying as the Ministry has sent a very strong rejoinder to the regulator on its letter written on February 4, 2017 accusing the Ministry of sowing the seeds of discord in society and weakening the foundations of Federation of Pakistan.

The use of unprofessional language in the communication is regretted. Instead of addressing the core defects identified in the K-Electrics tariff determination, Nepra has attempted to take refuge behind national interest which would have been better served if Nepra had provided timely relief to KE consumers instead of ensuring that massive profits are posted to KEs financials for two years, then it rests only on the disputed evidence of collision at the cost of one of the largest electricity consumer bases in the country, the Ministry said in its letter dated February 9, 2017.

Water and Power Ministry taking strong exception to Nepras defiance further stated that the so-called seeds of discord are also sown when the regulator turns a blind eye towards the interests of consumers of a particular area and national harmony would in any case be better served if highlighted issues were to be addressed to provide judicious relief to people across the country.

Syed Mateen Ahmed, Section Officer (tariff) in his letter, approved by senior officials, wrote that the Ministry, in its earlier letter, had neither sought nor required a response to the issues highlighted therein, instead it was expected that Nepra would account for the deficiencies, inaccuracies and anomalies identified in the upcoming tariff determination of K-Electric (KE). Surprisingly, however, Nepras first reaction was to give KE a clean chit on its own earlier finding of 2014 that K-Electric was overbilling consumers. This was followed by a long-drawn explanation amounting to an admission that Nepra has not fulfilled its regulatory responsibility towards the KE consumers in FYs 2015 and 2016 by delaying the decision for almost two years despite having had adequate opportunity in around eight quarterly adjustments.

Importantly, had the KE consumers been treated with equity and provided relief by Nepra , more than 18000 complaints would not have been filed with Federal Ombudsman, making it about 90% of the total complaints on power sector from all over the country, it says.

The letter further maintains that it is also worth noting that in 2008, when the oil prices were higher, the Nepra-determined tariff for K-Electric was around Rs.7.14/- per unit, while in 2016, when oil price was substantially lowered, the Nepra determined tariff for K-Electric had risen to almost double. Even if other costs associated with the tariff have increased, this is by any standards legally and financially unjustifiable and disproportionate increase in tariff. It is thus clear that the upside in tariff has been generously allowed while no regulatory responsibility was undertaken for reduction in favor of consumers when due.

Moreover, when a Multi-Year Tariff ( MYT) regime requires the tariff fundamentals are to be kept unchanged, it is unclear why a revaluation of assets by KE has been allowed thereby giving room to KE to keep its return-on-assets lower than the level where these profits would be passed on to consumers through a tariff reduction.

The MYT regime is a performance based regime how could KEs failure to meet the target of 15% T&D be rewarded by allowing higher profits. Not only is inefficiency in KE therefore being encouraged, non-penalizing of this failure to achieve targets is likely to have a spill-over effect by leading to higher bench marking for future MYT determinations - resulting in continued losses to the end consumers of KE for years to come, the Ministry questions.

The letter further argued that there was inadequate accountability of KE for its disastrous performance during the heatwave of 2015 and 2016, which was sufficient evidence of inadequacy of system improvements, despite Nepra s admitted leniency to KE for allegedly enabling investment in the improvement of KEs systems.

Water and Power Ministry is surprised that for an entity to concede its independence of decision making by blaming inadequacy of comments given by parties interested in a matter, or guidelines issued by the Federal Government. Since Nepra has the statutory mandate to determine a tariff to the exclusion of all others as per section 7 and 31 of the Nepra Act, 1997, it would be pertinent of Nepra to ensure that it undertakes its responsibility in an impartial, fair and non-partisan manner, within the parameters of the legislative framework which governs its functioning. Therefore, even though form its response Nepra appears to have every intention of continuing with a biased regulatory attitude in favor of K-Electric, the provision of section 7(6) of the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997, cannot be ignored insofar as explicitly mandates Nepra to..protect the interests of consumers and companies providing electric power services in accordance with guidelines, not inconsistent with the provisions of this Act, laid down by the Federal Government.

This provision specifically requires Nepra to maintain a balance between the interests of the consumers and companies, instead of allowing one sided favors to companies at expense of consumers.

Ministry of Water and Power has reiterated that necessary steps should be taken to ensure that in the pending MYT determination for KE consumers, KEs failure in achievements of targets in the past ten years by the company should not be borne by its consumers in coming years. The benefits of claw back mechanism, which has been delayed since 2014, also need to be determined at the earliest possible, so that consumers are rightfully given their lawful and overdue benefit in electricity invoices, according to the letter.

Earlier, Registrar Nepra in a letter drafted by a group of officials stated that there has been no excess amount charged from the consumers of K-Electric owing to the fact that a uniform tariff is applicable throughout Pakistan including K-Electric consumers. Although, Nepra determines separate tariff for each of the Ex-WAPDA DISCOS and K-Electric, however, the GoP, following its own socio economic objectives provides subsidy or levy surcharge in order to make the consumer end tariff uniform, all across the country. Thus, the presumption of overburdening K-Electric consumers is not correct.

Nepra had explained that MYT determination of KE, issued by the authority on September 20, 2002, was a performance based tariff which was approved keeping in view the guidelines of MoW&P and the tariff model proposed by international consultant M/s Price Waterhouse Coopers engaged by Privatisation Commission. Comments from all stakeholders including Ministry of Finance, Ministry of Commerce, Ministry of Industries & Production, Planning Commission etc. were taken into consideration. Under the MYT determination, a tariff of Rs 4.74/kWh was approved thus raising it by 6.5% as against KE proposed increase in tariff of 16.0%. Further, the tariff was set at T&D losses of 35% against the actual reported T&D losses of 40.1% thus providing an upfront relief to the consumers to the extent of 5.1%. The concept of performance based tariff awarded to KE was such that it was not allowed a predetermined fixed return on its existing and future investments unlike the tariffs allowed under cost plus regime. The only avenue for KE to earn profits was through bringing in efficiency by making investments from its own resources in its generation, transmission and distribution system. To cap any excessive profits and to extend relief to the consumers, a clawback mechanism was made part of the MYT determination though which KE was required to share its yearly profit above 12% with consumers on the allowed Regulatory Asset Base (RAB).

The regulator further argued that the performance based tariff regime of KE is different from the tariff regime on ex-Wapda Discos and power generation companies. In the case of the latter, a predetermined fixed return on investment is made part of the tariff.

The letter also stated that KE remained in loss till FY 2011 since its privatisation in 2005 and started making profit in FY 2012 and thereafter. The excess profits earned by the KE in the financial years 2012, 2013 and 2014 have already been adjusted to the tune of around Rs.12 billion with the approved clawback mechanism and the Authority has already issued its decisions in this regard. Further, the application of clawback mechanism with respect to excess profits earned by KE for the FYs 2015 and 2016 is currently under consideration of the authority and the relief in this regard shall accordingly be provided to the consumers in accordance with the framework of MYT.

Nepra maintained that the conclusions drawn by the Ministry are not only incorrect but based on sheer misunderstanding of performance based MYT regime.

An effort has been made through the said letter to give an impression that the consumers of Karachi have been discriminated against as compared to the rest of the Pakistan. This is not only deplorable but also tantamount to sowing the seeds of discord in society and weakening the foundations of Federation of Islamic Republic of Pakistan. It appears to be a blatant attempt to malign and undermine the performance and achievements of NEPRA and the present Government. Such baseless and unfounded allegations could have serious repercussions on the smooth functioning of the entire power sector, Nepre added.