Government's commitment to IMF: Q2 FY20 tariffs to be adjusted by end-January 20

The government has committed to the International Monetary Fund (IMF) that it will adjust second quarter fiscal year 2020 tariffs for capacity payments by end-January 2020 and will issue key near-term measures for power sector quarterly notification of tariffs, saying that until the process of adjusting quarterly tariffs becomes fully automatic, the government will continue to timely notify tariffs on a quarterly basis.

According to the staff level report uploaded by the IMF for the first quarter of EFF, the government stated, "In this regard, on November 29, we announced the increase in tariffs for capacity payments by around 2 percent, effective for first quarter fiscal year 2020 (prior action) and we will adjust quarter 2 fiscal year 2020 tariffs for capacity payments by end-January 2020 (new SB)." About the recovery of Net Hydel Profits stock of arrears, the tariff update of January 2020 will incorporate the recovery from consumers of half the outstanding stock of remaining net hydel profits arrears, equivalent to Rs 73 billion;

For eliminating delays in tariff adjustments and reintroducing the government's power to introduce tariff surcharges, the government committed that it is preparing amendments to the NEPRA Act focusing on (i) giving the regulator the power to determine and notify quarterly tariffs; (ii) ensuring timely submissions of quarterly and annual petitions by the DISCOs; (iii) eliminating the gap between the regular annual tariff determination and notification by the government; and (iv) reinstating the power of the government to levy surcharges over and above the system's revenue requirements under the NEPRA Act.

"We will submit these changes to the NEPRA Act to parliament, in consultation with international partners, by end-December 2019 (a modified end-December SB)."

About ensuring timely disbursement of power sector-related subsidies, the government committed, "We will aim to streamline and facilitate the disbursement of sector-related subsidies and, to this end, by end-November 2019 the Ministry of Energy will streamline the required auditing procedures to ensure the timely disbursement of subsidies."

About performance-based management of Discos, the government committed that to improve efficiencies and collections, the government will sign performance-based contracts with all Discos by end-January 2020. The contracts will contain KPIs for improvements in collection, reductions in losses, and meeting the regulatory timelines for petitions submissions, with mechanisms to reward good performance and/or compensate for shortfalls. DISCOs will submit quarterly performance reports to NEPRA and will published in NEPRA's website." The government while ensuring compliance with the Consumer Service Manual, said, "We will immediately start abolishing running defaulters categories and disconnect non-paying consumers, with reconnections made with higher security deposits and/or prepaid meters. The Ministry of Law will ensure that all legal aspects are adequately followed."

About the recovery of late payment charges, in connection with Rs 110.6 billion of late payment charges accumulated prior to FY 2016, the NEPRA will allow this cost in the tariff by end-June 2020 so that it can be incorporated in the tariff from FY 2021.

About targeting of subsidies, the government committed, "Before end-March 2020, we will revisit all government-provided power sector subsidies with a view to their streamlining and rationalization. In particular, in the FY 2021 budget we will aim to better target the subsidies provided to residential consumers, the industrial sectors, and the agricultural sector."

About reassessing regulatory benchmarks, the government committed that currently, NEPRA assumes in the determination of the tariffs 100 percent recoveries for all Discos. This feature of the system leads to the structural accumulation of circular debt. The Ministry of Energy will engage all stakeholders on possible options to adequately address this aspect of the system and will propose to the CCI by end-December 2019 revisions to the benchmarks and standards, including permission for write-offs, while preserving the adequate incentives to improve Discos performance.

About introduction of surcharges, the government committed to introduce new surcharges as needed to ensure that the circular debt reduction targets under the plan are met.

About the medium-term measures, the government committed to addressing tax refunds in the power sector. The Ministry of Energy and the Federal Board of Revenue will work together to address the various tax issues outstanding, including the timely payment of tax refunds to Discos.