The Economic Co-ordination Committee (ECC) of the Cabinet has directed Petroleum Division to work out modalities for waiver of Liquidated Damages (LDs) of Rs 3 billion to be recovered from consumers against non-supply of gas to Habibullah Coastal Power Company (HCPC) in consultation with stakeholders, official sources told Business Recorder.
Giving the background, the sources said M/s Sui Southern Gas Company Ltd (SSGCL) was engaged in transmission and distribution of natural gas to various consumers within the province of Sindh and Balochistan. The company has 73.15% indirect/direct shareholding of Government of Pakistan. The company provides gas supply/connections in accordance with the ECC approved merit order amended from time to time and allocation of gas for particular project approved by the competent forum.
The Federal Cabinet in its meeting held on June 05, 1995 while considering a summary submitted by erstwhile Ministry of Petroleum & Natural Resources approved allocation of 25 MMCFD gas for 140 MW combined cycle independent power plant namely M/s Habibullah Costal Power Company (HCPC), Quetta.
As per breakup of 25 MMCFD gas allocation, 21 MMCFD gas was to be supplied on firm basis and 4 MMCFD gas was to be supplied on as and when available basis'. Accordingly M/s SSGCL entered Into a Gas Supply Agreement (GSA) with M/s HCPC on February 28,1996 which was subsequently amended, on March 31,1996. M/s HCPC is a venture project between Habibullah Group ( Pakistan ) and El Paso Coastal Power Company (USA). The GSA is due to expire in September, 2019.
Under Section 3.1 of the said GSA, in the event seller (SSGCL) fails or is unable to deliver gas In accordance with the agreement, buyer (HCPC) will utilize its back-up supply of alternate fuel for which alternate fuel cost would be paid by the seller. The alternate fuel in the agreement is defined as distillate fuel oil or fuel oil whereas alternate fuel cost is defined as cost differential between gas and alternate fuel utilized by the buyer (HCPC). The Power Purchase Agreement (PPA) was executed on March 25, 1996 between WAPDA and HCPC which was valid for 30 years ie until year 2026. The Implementation Agreement (IA) was executed on 20-3-1996 between GoP and HCPC. Under the provisions of PPA, HCPC would make available to WAPDA and WAPDA would purchase from the HCPC the dependable capacity (126 MW net) / the net electrical output In the event the complex was dispatched from the date of commercial operation of complex until expiry of PPA. WAPDA would have the right to depatch the complex in accordance with Economic Dispatch. M/s HCPC would operate the complex consistent with WAPDA's depatch and in the event the company fails or is unable to comply with the depatch instructions, WAPDA's sole remedy shall be collection of liquidated damages in the form of capacity damages amount in rupees per MW and equal to average capacity purchase price (Rs Per Kwh per month).
Before 2004, against non supply of gas on account of high domestic demand of Quetta during winter months, M/s SSGCL either paid the price differential of alternate fuel or M/s HCPC waived off the price differential. Currently the gas transmission capacity to supply gas to Quetta from various fields with diminishing production was 149 MMCFD whereas the demand for gas has significantly increased with the passage of time resulting in a shortfall of 31 MMCFD. Post execution of GSA ie 1996, the gas supply system of Balochistan was faced with severe supply constraints vis-à-vis ever increasing demand in domestic and commercial sectors.
According to sources every year due to harsh weather conditions, the domestic households keep themselves warm by utilizing gas heaters and water geysers which necessitates increased gas supply in accordance with the demand. The gas producing fields supplying gas to Quetta and M/s HCPC have significantly declined I.e. from 331 MMCFD during 1999-2000 to 106 MMCFD during year 2016-17. Due to these very reasons, from 2004 and onwards M/s SSGCL was constrained to curtail gas supplies to M/s HCPC to meet the demand of domestic & commercial sectors during winter months in accordance with the GoP approved gas despatch order. Owing to non-supply of gas, M/s HCPC referred the matter to International Chamber of Commerce (ICC), Singapore in January 2007 for dispute resolution in accordance with the terms of GSA. The ICC tribunal in its award upheld M/s HCPC point of view and directed M/s SSGCL to pay the liquidated damages to M/s HCPC. M/s SSGCL filed an appeal before the High Court in Singapore to set aside the award but it was also turned down. The differences between the parties to the GSA grew against non ­supply of gas in view of quantum of claim of the M/s HCPC for alternate fuel, liquidated damages and interest thereon and M/s HCPC started setting-off the amounts equivalent to IDs imposed by WAPDA/power purchaser from M/s SSGCL's gas bills. Starting from June 2015, M/s HCPC started raising debit notes of the liquidated damages to M/s SSGCL and setting off the amounts from gas bills and as of June 30, 2017 HCPC has raised a claim of Rs 3,090,726,738 for the period September, 2010 to June, 2017. These amounts were based on the liquidated damages claimed by WAPDA/CPPA(G) from M/s HCPC whereas WAPDA/CPPA(G) has already received certain amounts from HCPC. However, further increase In liquidated damage claim of HCPC towards SSGCL was contingent upon imposition of LDs by WAPDA/CPPA(G) to HCPC.
M/s HCPC has again filed a request for arbitration under the Rules of the ICC before the International Court of Arbitration in Singapore on November 30, 2015. The dispute is primarily based on the failure of M/s SSGCL to provide M/s HCPC with its gas allocation under the GSA from December 2009 onwards. The proceedings are already underway and hearing of witnesses from both the sides ie SSGCL (Respondent) and HCPC (Claimant) concluded in July 2017. The Counsels of both the sides have submitted their formal written arguments along-with the respective costs schedules of the parties which relate to cost incurred by each individual party ie lawyers professional fees and other expenses Including travelling, boarding, lodging and other miscellaneous expenses.
The Petroleum Division argues that the liquidated damages claimed by WAPDA/CPPA(G) from M/s HCPC would actually be paid by SSGCL which clearly depicts the flow of payment from one GoP entity to another GoP entity without yielding any substantial benefit to any claimant party, therefore, recovery of the liquidated damages under an international Arbitration which would not only involve substantial expenses on account of engagement of lawyers / visits of the management but would also bring a bad repute to the country in case the decision of award by the tribunal is decided against the GoP entity ie M/S SSGCL.
Accordingly, Petroleum Division proposed that in the larger interest of the country, the liquidated damages claimed by WAPDA/CPPA(G) from HCPC which are subsequently claimed by HCPC from SSGCL may be waived till June 30, 2017 by treating the period of 'no despatch' owing to unavailability of gas as other force majeure event (OFME) under the PPA.
The sources said, Power Division has no objection to the recommendation of Petroleum Division if waiver is approved by the competent authority, it would be acted upon by the CPPA-G being implementation agency working under Government of Pakistan. However, in case Force Majeure Event (FME) was assumed to be an Other Force Majeure Event (OFME) then the term of the PPA would be extended without any capacity payment during the period of OFME and an extension in the term of the PPA pursuant to section 4.1 requires an amendment to the PPA pursuant to section 17.4 of the PPA. Further, Section 17.4 (c) of the PPA-says, "settlement or waiver of any dispute or breach related to Article IV, XI and Section 3.1 & 3.6 shall be effective only if agreed to, in writing by WAPDA and the GoP". Since PPA is not yet in favour of CPPA-G, thereof novation of the PPA would be required by WAPDA In favour of CPPA-G prior to any such amendment.
Finance Division maintains that both Power and Petroleum Divisions may highlight the financial impact to electricity consumers due to proposed arrangement and that the Petroleum Division / SSGCL may outline the way forward for supply of gas to the company after expiry of its GSA in 2019 so as to avoid similar situation In future.
During ensuing discussion in the ECC, Secretary Finance Division stated that there was no clarity on the term of Force Majeure Event (FME), therefore term was required to be defined/clarified to address the issue of payment of LDs in the instant case. He was of the view that in case of payment of the LDs by the SSGCL to M/S HCPC in pursuance of the decision of International Chamber of Commerce, Singapore , the ultimate affectees would be the consumers from whom it would be recovered.
Secretary Planning, Development & Reform Division stated that the term of Force Majeure Event (FME) needed to be deliberated upon holistically to address this issue. He suggested that while drafting such agreements, a protection clause should be incorporated to safe guard the public interest as well as to avoid any litigation on this account. Secretary Power Division endorsed the views of the Secretary Finance Division and stated that they supported waiver of Liquidated Damages (LDs), however, modalities regarding Other Force Majeure Event (OFME) may be worked out in consultation with stake holders. The Prime Minister agreed to the proposal.
After detailed discussion the ECC approved the proposal in principle, regarding waiver of Liquidated Damages (LDs) with the direction to Petroleum Division to work out modalities in consultation with stake holders.