Last week came the much awaited but somewhat expected result of Karachi Electric Limited’s (KEL) multi-year tariff (MYT) petition to Nepra. The regulator once again chose to reject the plea for revising the earlier determined MYT for KEL at Rs12.07 per unit in March, 2017 which was subsequently reviewed and revised upward to Rs12.77 per unit in October, 2017 for a control period of seven years.

The latest decision by Nepra raised the tariff by a negligible Rs0.05 to make the revised tariff Rs12.82 now. This is well below the previous MYT of Rs15.57 per unit and even lower than KEL’s petition of Rs16.10 per unit for a control period of ten years.
This last reconsideration request was filed by the federal government and a number of pertinent issues were discussed in the hearing. These included whether the newly determined MYT would turn KEL into a loss-making entity with significant cash-flow shortage over the next seven years, whether it would have significant adverse implications on consumers, its debt-to-equity ratio justification, recovery loss level, Regulatory Asset Base (RAB) calculation methodology, and whether higher return to KEL with dollar-indexation should be allowed on transmission and distribution business.

Except for allowing dollar-indexation on transmission and distribution, NEPRA rejected all other claims by the utility. By KEL’s own projections, the determined MYT would result in Rs144 billion in losses for the seven-year period. Additionally, the resultant cash-flow shortage would render it impossible for the utility company to make planned investments amounting to Rs355 billion.

Interestingly, this view was supported by the majority of stakeholders in the hearing including banks and financial institutions, business chambers and the Government of Sindh. They all believed the determined MYT would indeed render KEL’s operations unviable and unsustainable while hindering future investment and availing financing.

But the regulator maintained that KEL’s used assumptions for its projections are contrary to the approved MYT which distorted actual financial position of the utility. It further contended that none of the stakeholders backed up their claims of insolvency and deterioration in cash-flows by any concrete number-backed analysis.

Nepra also believes there will be no adverse impact to KEL’s consumers under this MYT which has again drawn serious reservations from the majority of stakeholders. The regulator argued in the order that the investments made by KEL under previous MYT have mostly been in generation while transmission and distribution have seen a much smaller share.

It goes on to say that KEL could not substantially reduce the T&D losses and improve the quality of service to consumers but it did generate profitability through retention of efficiency gains in generation.

Another major demand was to keep the tariff structure as performance-based similar to the previous MYT where the responsibility to undertake investments and realise returns on them would be on the KEL. Once again, the majority of stakeholders chose to side with KEL on the subject and against the award of a fixed-rate tariff structure.

However, the regulator pointed out that under the previous performance-based MYT, KEL did not serve the best interests of the consumers by only investing in generation and pretty much ignoring transmission and distribution segments. There was also the fact that KEL was a loss-making entity at that time whereas now it was turning a profit.

Overall, lenders and industry analysts term the tariff as disadvantageous for KEL in no uncertain terms. The determination will also put a drag on the already under pressure sale of Abraaj’s majority stake to Shanghai Electric Power Limited. The Abraaj Group is already undergoing court-supervised liquidation and the latest decision in KEL’s MYT won’t be making things any better for the embattled private-equity group.

Copyright Business Recorder, 2018

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