Over Rs 17 billion are reported to have been accumulated under the claw-back formula but the relief was never passed on to the electricity consumers as K-Electric has taken a stay order from the court against it, according to a report of Research & Development Department of Karachi Chamber of Commerce and Industry (KCCI).
The report said that at the time of privatization, K-Electric was offered a lucrative, multiyear tariff formula to revive the company from losses. The formula gave a certain level of assurance to the investor that the revenue accrual from the approved/allowed tariff would not be curtailed by a downward adjustment of tariff till his financial losses in the initial years are recovered along with a reasonable return. This tariff mechanism also included a claw-back clause which allowed certain percentage of surplus return to be shared with the consumers when the 'annual rate of return on the regulatory asset base' (ROA) exceeds the prescribed limits.
To cater to all the electricity needs of this mega city, K-Electric is the sole vertically-integrated transmission and distribution company having complete monopoly in the city. In 2008, UAE-based Abraaj Group acquired a controlling stake of the K-Electric which now 2,900-3,000 megawatt electricity where the consumers' demand varies between 2,800 and 3,200MW. After the acquisition, it recorded a net positive income in FY-12 for the first time in 17 years.
It posted profit after tax of rupees 2.6 billion in FY-2012 which surged massively by 1162% to rupees 32.8 billion by fiscal year 2016 where its net profit margin jumped to 17.3% from mere 1.6% in FY-12. The KCCI report said that it is interesting to note that when international crude oil (Opec basket) prices nose-dived by 71.35%, the decline in the electricity tariffs in Karachi remained only 28% from first quarter of 2013 till the end of 2015.
This phenomenon was the result of the multi-year tariff formula under which the maximum variation in fuel cost was capped at 2.5% which explains one of the reasons of steep rise in profit margins of KE. Moreover, since the electricity tariffs were also benchmarked with inflation, when the international price dropped massively, the government raised the level of taxes on petroleum products limiting the drop in local fuel prices due to which neither the cost of production and nor inflation eased off much which also kept the electricity tariffs sturdy at the higher side.
Although, the entity brought in a lot of technological upgrade, improved service quality, and operational efficiencies; a seemingly endless list of consumer complaints continued to persist which sometimes even turned into mass street protests. The KCCI report further said that it was observed that many complaints could have been easily avoided if all the information and standardized policies were made public, transparently, accompanied by prompt and fair redress of complaints.
It cited that the report of the World Bank on Doing Business, Pakistan ranked very poorly at 167 out of 190 with regard to getting electricity that revealed inferior performance of KE. The price of electricity stood at 18.8 Cents/Kwh which is among the highest in the region with exorbitant cost of new connection and very high number of time delays. This poor rank of getting electricity pulled back the overall rank of Pakistan in doing business which kept investors at bay and created challenges for the economy.
Therefore, the situation is urging the lawmakers and regulatory authorities to revisit the existing laws, rules and regulations and make them more stringent, impose hefty penalties on the Disco in case of violations and even imprisonment of officials involved in wrongdoings to deter the utility company from indulging in malpractices and to rebuild consumer confidence. The KCCI report proposed it would be more appropriate to strengthen control on all the services of the Discos, rationalize all the costs for the consumers, devise a mechanism of reliable third party verification, testing and certifications, and regulate unnecessary time-lags and over-billing issues.
In September 2015, Nepra notified the 'NEPRA (Alternative & Renewable Energy) Distributed Generation and Net Metering Regulations 2015.' K-Electric could not operationalize the net metering facility in Karachi despite a lapse of more than two years whereas other Discos successfully initiated this project a year ago. Though, in the recent MYT decision, upon the request of Sindh government, Nepra directed KE to ensure net metering arrangement for the consumers. It is yet to be seen as to when it will actually be rolled out for consumers of Karachi in the absence of any announced deadline.
Net-metering is a very lucrative business proposition with an approximate payback period of 2 years which should be made available to the consumers of Karachi. The agreement between net metering customer and the Disco is for a term of 3 years as per the existing law. It is emphasized that this period should be enhanced to at least 10 years with an additional clause stipulating that the Disco will issue a new agreement after the end of a term, if no relevant objections are observed, to encourage investors to take it up as business with better security of investment.
However, even in the absence of net-metering option, solar power generation is still a viable option for reducing electricity bill on personal consumption. The KCCI report emphasized that there is now need to shift from monopoly to competition for which Pakistan is yet to allow multiple private electricity transmission and distribution companies to operate targeting the same consumers through infrastructure sharing.
There are indeed challenges but these should be handled through all-encompassing reforms on war-footing to promote investments which have become very critical for economic prosperity as balance of payments situation of the country is not very promising while China-Pakistan Economic Corridor (CPEC) is opening up new opportunities for investment which the country cannot afford to miss.
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