Payment made after taking undertaking, parliamentary panel told

Ministry of Water and Power has informed a parliamentary panel that payment to the independent power producers (IPPs) was made after taking a written undertaking for operating power plants at optimal generation capacity, etc. A sub-committee of Senate Standing Committee on Finance, formed to discuss the payment of Rs 480 billion circular debt to the power sector, was informed on Wednesday that payment was made after taking a written commitment from the IPPs.
The IPPs have committed to operating their plants at optimal utilisation of generation capacity as well as conversion of Hubco, Lalpir, Pak-Gen & Saba power plants to coal to reduce cost of generation. Additionally, it was also agreed upon to grant one more month's extension in the payment time period by the IPPs to Pepco/ CPPA as well as an undertaking by IPPs to resolve disputes relating to liquidated damages and capacity payment deduction presently raised by the parties before the Supreme Court, in accordance with a dispute resolution mechanism as provided in respective Power Purchase Agreements (PPAs).
The undertaking was made between IPPs and Pepco/CPPA in the presence of secretaries of Ministries of Water & Power and Finance. The meeting was further informed that gross transaction amount was Rs 503 billion, however the government paid Rs 480 billion on account of circular debt to the power sector while withholding liquidity damages (LDs) Rs 22.916 billion. Cash payments to the IPPs and PSO were Rs 161.446 billion and Rs 33 billion respectively. Bonds of Rs 127.801 billion were issued and Rs 33.127 billion were borrowed from a bank to settle the circular debt while intra-government settlement included Rs 157.861 billion.
According to a proposal moved by Water and Power Ministry on June 27, 2013 for settlement of the circular debt, whose copy was provided to the committee, the Ministry of Finance in consultation with the Ministry of Water & Power has prepared a plan for settlement of debt stock of Rs 503 billion outstanding as on May 31, 2013. For this purpose, the Finance Division has allocated Rs 326 billion for settlement of this debt, including all IPPs, before 30th June 2013. The remaining amount was settled within 60 days by 12th August 2013 as was announced by the finance minister in his budget speech.
The ECC was also requested in order to ensure that this problem does not resurface, the tariff structure may be rationalised and move towards full cost recovery with the purpose to phase out subsidies in the medium term except for the weakest consumers.
The CPPA may be allowed to take a consolidated tariff petition of all Discos with a weighted average tariff for approval by Nepra in the future. An appropriate amendment in the Nepra Act/policy direction may be carried to empower the regulator to notify single weighted average tariff after determination. The tariff announced by Nepra should be the tariff charged to consumers.
The Nepra may be allowed to move towards a system of multi-year tariffs with a clearly-defined adjustment mechanisms for variable costs such as late payment surcharge, higher losses than Nepra targets and interest payments. The Nepra may determine FPA on a forward-looking basis with adjustments in the following months as required.
The Ministry of Water and Power further proposed that Federal Board of Revenue (FBR) may charge GST on billed amounts but if those are not collected in six months, refunds should be made.
The Pepco/CPPA should improve efficiency in the system through reduced T&D losses-to-Nepra targets in a prescribed timeframe. An independent and fully functional CPPA should be put in place immediately to improve financial flow of the power system. The CPPA may be empowered to collect payments from the DISCOs through formal and enforceable power purchase agreements (PPAs). The ECC was also proposed that an agreement should be reached with provinces for at source deduction of at least 70% of billed amount through the Federal Adjuster.