Not a bed-time story for power consumers

Something in the power sector is on the rise, unfortunately that is not the power generation, rather the tariff structure. So, nothing new in it as withdrawal of subsidy from power sector in a phased manner was agreed upon with the IMF back in June 2009. But whats new is the rate of hike in power tariff for Jan-Mar 2010 which would be 13.6 percent, not 12 percent as previously agreed upon.
In November, the IMF demanded an immediate increase in power tariffs, as government did not increase the required tariff for agriculture and lifeline consumers in Oct, but government refrained from it. This is why the remaining 1.6 percent will be added to the already decided 12 percent increase.
So far so good - but the flipside has another tale to tell, which is certainly not a happy bed time children story, even if not a horror one. The agreement with IMF has a clause of fuel adjustment, in addition to the compulsory tariff increase to adjust for the variation in furnace oil prices during the period. Some sources in the industry fear that the upcoming tariff revision in January might well be in excess of 15 percent instead of 13.6 percent, given the higher average furnace oil price.
Furnace oil prices have a very strong positive correlation (0.98) with international crude oil prices but are slightly more volatile in nature. With the global crude oil price forecast of $82/bbl for 2010 by the EIA short term outlook, there is a risk of further upside revision in power tariff, as it is likely to drive the furnace oil price further north. Henceforth, the power tariff in January and April is more likely to jack up more than 13.6 and 6 percent, respectively.
What is more worrying is the fact the devil of circular debt still has its strong ugly presence on the horizon which gives birth to more concerns In the near future. It is no secret that the collection inefficiencies and the poor transmission and distribution networks have been the pinnacle of the power sector woes, giving rise to the circular debt.
So in essence, it is the consumers who are going to face the brunt of the system inefficiencies; currently its both the consumers and the government. The failure to rectify the line losses issue is clearly evident by the mounting circular debt which has soared to Rs423 billion as per the latest numbers - up from Rs277 billion reported by the government back in June 2009, in its LoI to IMF. What needs to be known is that it is somebody elses mess that the general public has to deal with in the form of raised electricity tariffs.
Even worse is the fact that the ministry has failed to get the circular debt audited by a third party as agreed upon with IMF - the audit is now three months overdue, which might force IMF to ask government for more raise in tariffs or delay the budgetary support. Given the fiscal constraints, it would be highly optimistic to believe that the government would wipe off the humongous circular debt in the near future.
As if this was not enough, gas tariffs are all set to take off by 18 percent from January 2010 and would definitely have an impact on the fuel adjustment of the power tariffs. Happy New Year!!!

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IMF agreed tariff structure

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Period             Tariff increase

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Jan-Mar 09               1 percent

Apr Jun 09               4 percent

July-Sep 09             17 percent

Oct-Dec 09               6 percent

Jan-Mar 10             12  percent

Apr-Jun 10               6 percent

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Source: IMF