Contaminated furnace oil supply: PSO accused of defrauding Pepco of $25 million yearly

Pakistan State Oil (PSO) has been accused of earning $25 million annually through supply of contaminated furnace oil to the public sector power generation companies (genco), sources in Pepco told Business Recorder here on Wednesday.
"We are being supplied polluted furnace oil by the PSO, which is pocketing $25 million annually from this business. We are taking up this issue at a higher forum," sources said.
Pepco argues that PSO's furnace oil has 10 percent water content, which is affecting the machinery of power generating plants. PSO challenges the 10 percent pollution claim and maintains that it is much lower and is according to international standard.
On December 16, 2010 at a meeting under the chairmanship of the then Secretary Finance, Salman Siddique, it was decided that PSO would supply 23,000 tons fuel per day to gencos/ PPs against the requirement of 27,000 tons per day.
Therefore, to ensure the required quantity of fuel, the Ministry of Finance/Pepco will release an amount of Rs 45 billion to PSO by January 6, 2011. The required funds have already been released to PSO as decided in the meeting. However, despite release of required funds of Rs 45 billion PSO has not been able to ensure uninterrupted fuel supply of 23000 tons per day.
Currently, hydel generation in the country has declined substantially due to routine annual canal closures, which is likely to continue till the end of current month. Therefore, the supply of uninterrupted fuel to power sector companies is very crucial in these days, but PSO is supplying an average of 14,300 tons per day which translated would imply 2000 mw less than capacity.
This non-supply of fuel oil despite the commitments and upfront payment is leading to substantial unscheduled load shedding with extremely negative consequences. Further, the quality of oil being supplied to Kot Adu Power Company (Kapco) and Pakgen Limited is a cause of grave concern and has further complicated the situation.
According to sources, gencos will be allowed to import furnace oil directly on International Competitive Bidding (ICB), which is 7-8 percent cheaper than the fuel being supplied by the PSO. The Ministry of Water and Power, in its fresh summary for the ECC has stated that the financial difficulties of Pepco cannot be overcome until cost recovery tariffs begin to be charged and arrears from provincial governments and KESC are received.
Meanwhile, GoP has embarked on power sector reforms to correct the financial imbalance by fostering efficiency, nurturing better governance, lowering costs through appropriate changes in the fuel mix and rehabilitating and improving efficiency of generation at the gencos. Simultaneously, tariffs are being rationalised to minimise the subsidy element. The goal is to achieve lower costs with matching tariffs by June 30, 2011. Nonetheless, because of the previous year's subsidy overhang and non-payment by provinces and KESC, Pepco has not been able to fulfil contractual commitments to suppliers.
As a result, IPP have started to serve notices of intent to invoke sovereign guarantees and, at the same time, PSO has intimated that fuel supplies would be curtailed and the gas companies have started serving intent of disconnection notices.
To make funds available for continued operation of the power sector the Ministry of Finance had agreed, in principle, that the subsidy hangover may be parked in the Power Holding Company Ltd(PHCL) through fresh borrowing. However, Ministry of Finance has now said that fresh borrowing by PHPL will only be possible if enabling amendments in the Nepra Act are made to directly notify prices and effect full cost recovery. The proposed amendment process, though currently under active consideration, may take 6-9 months to mature.
Ministry of Water and Power argues that in order to avoid default with the fuel suppliers and IPPs, in the absence of fresh borrowing for PHPL, the government may: (a) pay the balance of the tariff differential overhang till the loans can be raised for PHPL; and (b) allow generating units to purchase fuel oil on deferred term basis besides support Ministry of Water and Power to get resolution and payment of dues from provinces and KESC.
"If the government follows the request of generating units to purchase fuel oil on deferred payment, gencos and Kapco may be allowed to purchase furnace oil on deferred terms basis. Approximately 350,000 tons/month furnace oil is required which at the existing price of Rs 55,000 will cost Rs 19 billion/month," sources quoted the Ministry of Water and Power as saying in its fresh summary.
According to the Ministry, purchase of fuel through open competition on deferred payment will introduce an element of open market competition into the fuel oil supply, leading to cost reduction, besides reduction of circular debt to manageable levels, and keep the sector solvent.
The Ministry has further proposed that logistics for handling imports and delivery of oil to the generating units will be contracted with PSO or one of the other oil marketing companies. It has also been proposed that payment of the deferred amount for fuel oil shall be made through proceeds of funding raised through PHPL on account of the unpaid tariff differential.
The Ministry has forwarded the following proposals to the ECC: (i) Seek competitive bids for fuel oil supplies on deferred payment basis; and (ii) allow gencos to issue necessary guarantees to the fuel oil suppliers backed by sovereign guarantee, only if necessary (sovereign guarantee would also be required for PHPL borrowing to cover the subsidy overhang, in any case).