Setback for K-Electric as Nepra refuses tariff hike

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ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) on Thursday rejected a demand of the Power Division to substantially increase seven-year tariff of K-Electric to facilitate additional private sector investment but gave a five-paisa per unit allowance for indexation against recent exchange loss.

The regulator also ordered KE to halt bill collection charges separately from the consumers, pay interest on security deposits to the consumers through their bills and also stop charging of meter rent from those consumers who pay their cost of meter.

As such, the regulator set Multi-Year Tariff (MYT) for KE at Rs12.82 per unit instead of Rs12.77 it had allowed in October last year. The term of the MYT expires on June 30, 2023 starting July 1, 2016.

Company sought Rs3 per unit increase, but got five paisa instead; courts only option now for the power utility

This completes the regulatory process for KE’s seven-year tariff that would determine if the $1.77 billion sale of majority stakes by troubled Abraaj Capital to Shanghai Electric of China materialises. Abraaj group has been facing mounting difficulties after allegations were levelled at it earlier this year by investors for misuse of funds. The firm is under court supervised liquidation in the Cayman Islands.

The KE had filed a petition for increasing tariff to Rs16.10 per unit to facilitate additional investments into the network and higher returns on expiry of the previous MYT, envisaging Rs15.57 per unit.

Nepra, however, originally set MYT for KE at Rs12.07 per unit in March 2017, showing a reduction of Rs3.50 per unit from previous Rs15.57 per unit rate on the premise that enough allowances had been allowed in the first two MYTs for the private investors to improve the company, earn efficiency gains and make profits.

The KE filed a motion for leave for review against the said determination on the basis of which the regulator revised determined average tariff at Rs12.77 per unit in October 2017, up from Rs12.07 it allowed in March.

Dissatisfied, the KE requested the Power Division on Oct 9, 2017 to intervene and help lift the tariff. The Power Division led by then minister Awais Leghari forwarded the request to the regulator on Oct 26, 2017 with a request for reconsideration even though two successive secretaries of the Power Division disagreed and opposed any increase.

KE had pleaded in the fresh letter through the Power Division that significant essential costs of recovery had not been appropriately accounted for in the revised determination. Supported by Power Division, KE suggested recognition of recovery as performance measure in the base tariff and allow realistic improved trajectory so that tariff remain cost reflective and doesn’t lead to insolvency.

Secondly, it was contended that performance based regime should continue in tariff as was allowed previously wherein onus to invest and make return was on KE.

Third, KE pleaded that assessment of Regulatory Asset Base (RAB) should be worked out from equity side including the impact of operational losses. Fourth, actual debt-equity ratio be allowed instead of 70:30 assumed in the fresh MYT and the return component be increased in addition to allow indexation to US dollar on transmission and distribution business.

The regulator rejected all the four grounds for tariff increase, arguing they were against industry practice except for allowing US dollar indexation on transmission and distribution segment of KE considering the expected decline in the value of rupee against dollar. This indexation resulted in increase in the tariff by about 5 paisa per unit to Rs12.82 per KWh.

In doing so, the regulator did not allow Rs16bn recovery of losses against doubtful debt, treated efficiency levels at actual 37 percent instead of previous 30pc and transmission and distribution losses at actual 20.9pc instead of previous 35pc.

The regulator believed the consumers now deserved sharing the benefit of improved conditions of the utility after paying enough for the losses and inefficiencies for more than a decade. Even then, it said it had provisioned for about Rs300bn investment over the seven year period.

Until notification by the government, the existing base tariff would remain unchanged at the existing level under the government’s uniform countrywide tariff, involving subsidies and cross-subsidies.

The tariff would be subject to mid-term review after three years and will be subject to realisation of the allowed investments, and in case of under investment and performance by KE, the base rate adjustment component will be adjusted accordingly.

The regulator has also allowed T&D losses in tariff control period. In first year, KE has been allowed 20.90pc loss, 19.80pc in second year, 18.75pc third year, 17.76pc fourth year, 16.80pc fifth year, 15.95pc sixth year and 15.36pc in seventh year i.e 2023.

KE was originally known as the Karachi Electric Supply Corporation (KESC) and saw its first multi year tariff in 2002 in preparation for its privatisation. It became effective in 2009 due to delayed sale of Karachi’s integrated utility and then its resale to Abraaj Group. It expired on June 30, 2016. The new tariff now becomes effective from the date of its notification by the federal government, legally required within 15 days unless challenged in the court of law.

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