Nepra has approved monthly Fuel Price Adjustments (FPA) for eight months starting November 2019. Expectedly, the total impact amounts to a relief to the consumer. It remains to be seen how the government decides to deal with it. Nepra has okayed collection of the monthly FPAs in the bills of August and September.
The quarterly tariff adjustments are still pending, and that is a bigger worry, as it amounts to Rs162 billion or Rs1.5 per unit. From the looks of it, the decision will come soon, and the ball will be back in the government’s court. The relief in lieu of monthly FPA should definitely provide breathing space for the government which is trying to achieve tariff stability. But the balance of the IMF program hinges on meaningful progress on the pending quarterly tariff adjustments.
Monthly FPA adjustment is by no means an indication of the government’s readiness or lack of to also act on the quarterly tariff adjustments. Once done, one hopes the year-end collection is not portrayed as “growth in recovery”. That is where a large part of problem lies, and hardly gets much attention.
Yes, rationalizing tariffs is important, timely adjustments are critical, managing affairs within allocated subsidy is imperative. But all these revenues measures are not a substitute for the structural part of the reform. The structural reform has sadly gone at a snail’s pace, which is why solutions focused solely around revenue measures keep resurfacing. Needless to say, they are just stopgap, which is why they “re-surface”.
The recovery position of discos tells a tale that needs more ears. The T&D losses still gets some attention, at least in terms of “mentions”, if not actions, but the billing collection does not even get lucky to be mentioned at most times. The billing collection recovery ration in FY16 was 88 percent. The same in FY19 was 90 percent – virtually stagnant at FY18’s level.
You would say the T&D losses are higher and the pace of improvement is no different. You will be right. T&D losses in FY19 at 17.7 percent hardly instill confidence, given that the losses in FY16 were 17.95 percent. And that number too is believed to be underreported, as none other than the regulator has solid grounds to believe the discos engaged in systematic manipulation of the T&D losses.
But the T&D losses are pretty much covered in consumer tariffs. The tariffs account for 15.29 percent of T&D losses – the differential is born by discos, which annually runs around Rs30 billion on 100 billion units sold. But the problem with recovery rate is that Nepra assumes 100 percent billing collection on the part of discos – and a 10 percent shortfall means the loss on this account runs north of Rs120 billion annually.
Forget about the capacity issues, the political will, the tariff delays, the demand debate, the idle capacity and capacity charges, as well as the generation mix; the elephant in the room is the billing collection that has no allowance for in the tariff mechanism. This ensures circular debt in excess of Rs100 billion gets birth to itself without any other factor. If this has not been understood by those running the affairs, then nothing will. Simply unbundling the discos to independent entities didn’t help. There is no guarantee that privatization will. But at least, the loss won’t be the state’s and there will be incentive for improvement.