The federal and Sindh governments on Tuesday joined hands with Karachi Electric (KE) for an upward revision in Multi-Year Tariff (MYT) for seven years to be effective from July 2016 to June 2023, aimed at making the company financially viable by lowering recovery and losses benchmarks. This was the crux of a public hearing presided over by Chairman National Electric Power Regulatory Authority (Nepra) Brigadier Tariq Saddozai (retired) on the government of Pakistan's tariff reconsideration request for MYT of KE.
Nepra Members from Punjab, KPK and Sindh, Saif Ullah Chatha, Hamayat Ullah Khan and Syed Masood ul Hassan Naqvi respectively were also present in the hearing.
The opponents of KE tariff's reconsideration request like Jamaat-i-Islami were mysteriously absent from the hearing because of KE team's proper homework and "friendly" interaction with the interveners. However, Federation of Pakistan Chambers of Commerce (FPCCI), Pakistan Business Council (PBC), United Bank Limited (UBL), Habib Bank Limited (HBL) and even two chairmen of union councils who were in Islamabad to attend the 50th anniversary of PPP supported increase in tariff. Only one person was seen opposing the petition. No representative from Ministry of Finance or Central Power Purchasing Agency (CPPA) was present in the hearing.
A team of M/s China's Shanghai Electric Power (SEP) was also present in the hearing to witness the proceedings. Hasan, a consultant of KE, presented the GoP's reconsideration request which was forwarded by the Ministry of Energy (Power Division) without formal approval of the federal cabinet, a prerequisite of Supreme Court's decision which says that federal government is federal cabinet, not the prime minister, federal minister or secretary.
However, Zargham Eshaq Khan, Joint Secretary (Power Finance) who represented the Power Division in MYT reconsideration request, clarified that he has obtained approval from the federal minister of Power Division. "Tariff given in review petition of KE merits reconsideration as it might affect consumers," he added.
He said the federal government is in the process to privatise more public sector entities and any adverse decision with regard to KE's tariff will have negative impact on the financial viability of the company and subsequently consumers will suffer.
According to him, any determination which compromises KE's financial viability, liquidity and performance as a going concern will have negative impact as this is a private entity which is entirely running as a going concern. The chairman Nepra, who is former managing director of the then KESC, was of the view that the KE is in profit but the question is how a company could be in profit whose recovery ratio is 89 per cent against target of 96 per cent and losses of 22 per cent against allocated losses of 15 per cent.
"Both key benchmarks are missed. Which miracle has brought the company into a profitable organisation? Is KE in profit due to low recovery and higher losses or higher tariff?" Chairman Nepra questioned. The operational performance of the company was unchanged and if it would have been improved, the company could raise funds on its performance.
"Earlier KE got everything on tariff structure and again it is relying on tariff structure. In entire country tariff is Rs 12 per unit which is being charged from consumers whereas in Karachi tariff is Rs 16 per unit of which Rs 4 per unit is being given through subsidy. The GoP is paying Rs 32 billion every year as subsidy," he maintained.
The chairman Nepra was of the view if the government has to pick up the losses and the company does not improve its performance then what the benefit of privatisation was as the company is also not committing to improve performance during next seven years. The company has made commitment to increase recovery up to 94 per cent in next seven years.
He was of the view that recovery was 96 per cent in 2006 which has declined to 89 per cent; however, losses have reduced to 22 per cent from 37 per cent which is still higher by 7 per cent vis-a-vis benchmarks of Nepra. Hasan said the company is in profit but if the current level of tariff remains in place, it will not be able to invest further in the system, adding that the company has not given dividend to its shareholders since 2016.
To a question raised by the Authority, Joint Secretary (Power Division) Zargham Eshaq Khan said the federal government would pay a subsidy to KE in case of further increase in KE tariff. However, the KE consultant said the company has no objection even if consumers' tariff is increased to improve financial viability of the company. He further asked that the cost of operational losses should also be made part of the tariff. He acknowledged that most of the profit of the company came from generation.
He said the KE cannot be compared with other Discos, adding that KE has taken a decision in accordance with its own financial viability. The power utility argued that Nepra, by allowing bad debt allowance of just 1.69%, with impractical conditions and not recognizing the KE's actual recovery of 87.6% as a performance measure in tariff, means a severe gap in cash flows for KE over the next seven years. As a result, the tariff determined is not cost-reflective and will continue to result in solvency issues for KE. This will directly impact KE's investments planned to improve the available and reliability of supply to its consumers.
Chairman AF Ferguson Syed Shabbar Zaidi said that 100 per cent recovery is not possible in Karachi keeping in view the city's dynamics. The GoP has requested Nepra to consider recovery loss of KE based on recoveries of 87.6 per cent. Zargham Eshaq Khan said that recovery in 2005 was 96 per cent and losses were at 34 per cent. Member KPK Hamayat Ullah Khan reminded Zargham Eshaq Khan about his previous letters that he wrote against KE saying: "Zargham once you were very clear."
The chairman Nepra made it clear if the KE is seeking performance-based tariff from regulator then it should also keep in mind that the amount of Rs 1.08 per unit granted in tariff determination for investment purpose would be done away with. When Member Sindh Syed Mazoor ul Hasan Naqvi asked KE consultant if he was asking for the same return whatever was available for Independent Power Producers (IPPs), he replied in the affirmative.
The representative of Sindh government proposed that KE should be given a reasonable tariff for the quality, quantity and reliability of its system.
The KE was of the view that the definition of Regulatory Asset Base (RAB) has been revised from capital employed (i.e. sum of equity and debt) to written down value of fixed assets (on cost basis). Moreover, the base tariff has been determined on the basis of a notional debt equity structure of 70:30 instead of actual, whereas under the previous MYTs, no such restriction was applicable to the company.
During a discussion on Return on Asset Base (RAB), the chairman Nepra asked joint secretary (Power Finance) if he agrees a on 70:30 per cent debt equity, he replied that it was up to the regulator to decide about it.
Chief Executive Officer (CEO) KE, Tayyab Tareen, also presented the company's case for rebasing of tariff on the base actual recovery and losses but the chairman Nepra gave him the cold shoulder. According to the federal government, KE has a different tariff structure from other power sector companies; therefore, instead of a notional debt equity assumption of 70:30, tariff should be based on actual debt to equity for the purpose of determining the base tariff with a targeted debt to equity in the future. Otherwise, investments would not be made being unviable, which would lead to drastic consequences for KE's consumers.