Agreement with IMF: Government to further increase power tariff by Rs 3.5 per unit

The government is committed to further increasing power tariff by Rs 3.5 per unit as per agreement with the International Monetary Fund (IMF) by clubbing impact of hike in gas prices from current fiscal year, well informed sources told Business Recorder. Power Division, as per IMF prior condition, has implemented a quarterly automatic tariff adjustment in the electricity sector by about 10 percent to generate Rs 150 billion in additional revenues to reduce the circular debt accumulated over the first half of FY 2019.
The remaining quarterly adjustment costs will be subsequently passed on by end-August 2019. Moreover, the government will also notify the FY 2020 electricity tariff schedule as determined by the regulator by end-September, 2019 (structural benchmark).
The sources said, Power Division recently suggested following measures to bring down losses to zero: (i) to stop any further addition in debt (flow) due to quarterly adjustments per unit cost for consumers would be between Rs 12.98 per unit to Rs 13.85 per unit in March 2019 and Rs 15.31 per unit in June 2019; (ii) the flow in 2018-19 is estimated at Rs 223 billion (Rs 2.14 per unit additional tariff) and flow in 2019-20 is projected at Rs 97 billion (Rs 0.94 per unit additional tariff) after the initiatives; (iii) to bring the flow to zero starting from FY 2019-20 in addition to quarterly adjustment notifications, an additional increase of Rs 0.94 per unit will be required; (iv) total tariff will be Rs 16.24 per unit from Rs 12.98 per unit, indicating a net increase of Rs 3.26 per unit; (v) this tariff adjustment is in addition to monthly FPA which will result in an increase of Rs 1.5 per unit on the basis of gas supply @ 824 mmcfd from July 1, 2019. On June 26, 2019, the Power Division had submitted the following proposals to the ECC: (i) to notify Nepra''s approved quarterly adjustments after incorporating the targeted quarterly subsidy and additional charge so as to fully protect the lifeline consumers, domestic consumers consuming upto 300 units per month and partially protect consumers consuming above 300 units including the domestic TOU category from price escalation.
For this purpose subsidy of Rs 54 billion was approved along with additional charge of 31 paisa per unit maintaining uniform tariff on all category of consumers except lifeline and all domestic and agriculture consumers, so that the consolidated revenue requirements pertaining to quarterly adjustments would be as approved and determined by Nepra.
According to the IMF Staff Report, quasi-fiscal losses have increased further and represent a significant fiscal risk, and that following several years of steady decline in the flow of circular debt in the power sector, new arrears were accumulated over FYs 2018 and 2019, reaching close to Rs 800 billion (around 2 percent of GDP).
The authorities acknowledged that over Rs 200 billion of new circular debt was accumulated in the first half of FY 2019 from delays in updating tariffs. Introducing automaticity of quarterly tariff adjustments, similar to the process followed for automatic monthly fuel price adjustments, will be an important step to recover costs in a timely manner and reduce the flow of circular debt. "We will submit to Parliament by end-December 2019 changes to the Nepra Act to (i) ensure full automaticity of the quarterly tariff adjustments and (ii) eliminate the gap between the regular annual tariff determination and notification by the government (structural benchmark)."
The IMF Staff Report further stated that this is essential to eliminate the accumulation of circular debt as new capacity comes into the system to make the sector a more attractive investment opportunity. The authorities have initiated the automatic quarterly adjustment of tariffs with a first tariff increase of over 10 percent to generate Rs 150 billion in additional revenue. This adjustment will help address the circular debt accumulated over the first half of FY 2019. A second quarterly adjustment will take place before end-August. Moreover, the FY 2020 electricity tariff schedule will be notified as determined by the regulator by end-September 2019 (structural benchmark). Going forward, the authorities are committed to streamline and make more predictable the tariff notification process. To this end, amendments to the Nepra Act will be submitted to parliament by end-December 2019 (structural benchmark) with a view to (i) ensuring full automaticity of the quarterly tariff adjustments and (ii) eliminating the gap between the regular annual tariff determination by the regulator and the notification by the government.