Tariff variations, write-off claims: Nepra’s ‘indecisiveness’ blamed for KE’s worsening woes

ISLAMABAD: The “indecisiveness” of National Electric Power Regulatory Authority (Nepra) in finalization of quarterly tariff variations and write-off claims has worsened financial woes of K-Electric (KE).

According to official documents, quarterly determination for the power utility from quarters April-June 2019 to January – March 2020 are still pending with the regulator. The impact of pending adjustments and write-offs claims of for FY 19 (claims for FY 17 & FY 18 are also pending) has been calculated at Rs 122 billion. The additional cost of claims financing due to the undue delay has been estimated at Rs 8 billion.

“Uncertainty around write-offs will adversely impact sustainability and viability of the power utility,” said one of the officials of the company.

In MYT, Nepra has included a mid-term review mechanism i.e. 3.5 years into the tariff control period (December 2019), to reassess certain assumptions made in the tariff Accordingly, KE filed for adjustments in tariff to account for the following factors ;(i) significant rupee devaluation (December 2019) – Rs 159 billion actual versus Rs 120 billion assumed ;(ii) changing operational dynamics and service requirements requiring revision in investment plan – these changes are due to factors beyond KE’s control and necessary for KE being a vertically integrated utility to fulfill its service obligations ;(iii) other factors including working capital requirements, sent-out growth, cost of debt etc. – beyond KE’s control.

The power utility requested the regulator to allow adjustment in tariff in accordance with MYT and under Section 31 of the Nepra Act to ensure recovery of prudent costs, enable KE to make investments required to meet service obligations including managing the demand-supply situation and to strengthen safety and reliability of network and ensure viability and sustainability of the company.

KE claims that it has overspent in non-project capex during the period July 2016 to December 2019 and has requested for an investment plan of Rs 443 billion against Nepra allowed Rs 299 billion for the tariff control period.

In a presentation to a select group of journalists, the officials of KE gave a detailed overview of the company including its current status of generation, transmission and distribution and future plans.

The company argued that while dipping returns are definitely a cause of financial stress upon the company, a significant factor is the delay in regulatory approvals, including the determination of quarterly tariff variations for the period April 2019 to March 2020. These also include write-off claims for FY 19 (claims for FY 17 FY 18 are also pending) that have been filed as per the mechanism provided by Nepra.

Some of these claims were filed more than a year ago and have still not been approved by the regulator. None of these constitutes any special or preferential dispensation but are legitimate claims that are filed by all Discos in Pakistan, under a mechanism provided by Nepra in the tariff, specifically for this purpose. Further, as part of the MYT mid-term review, KE has requested Nepra for revision in investment plan, critical for KE to meet the growing power demand and make requisite investments in power infrastructure; however, this too is awaiting Nepra's approval.

K-Electric’s average Return on Equity (RoE) has remained well below that of other private industry players in the generation segment, mainly due to unreasonable tariff setting for distribution segment.

According to available numbers, KE’s average RoE in the last 10 years (2010-2019) has hovered around 5%, whereas Independent Power Producers (IPP) have recorded returns between 26% to 37% during this period. A comparative analysis of some IPPs shows that Nishat Chunian has averaged 37% RoE over the past 10 years followed by Kot Addu Power Company (KAPCO) at 30%, Hub Power at 29%, Nishat Power and Saif Power at 28% each, and Engro Powergen with an average RoE of 26%. Unlike these IPPs, K-Electric is the only vertically integrated power utility in the country which does not have a sovereign guarantee. Furthermore, being vertically integrated, it has operational challenges that are unique to it, which need to be taken into account during tariff setting. The one-size-fits-all approach in tariff setting has severely impacted the power utility’s ability to maintain operational sustainability.

KE officials are of the view that unlike IPPs, K-Electric has constantly reinvested its earnings back into the business and not paid out any dividends to its shareholders in marked contrast to many other IPPs. Kapco has on average paid out a dividend of 74% to its shareholders, while Hub Power has paid out an average dividend of 68%. Nishat Chunian, Engro Powergen, Saif Power and Nishat Power have all paid out significant dividends over this period, ranging from an average of 31% to 43%.

KE's officials claim that the lack of a sovereign guarantee also means that KE’s risk profile is much higher. IPPs are guaranteed an average dollar-based rate of return of 15% to 17%. In contrast, KE’s average RoE (USD based) since privatization has been negative. Not only this, but because of acute rupee devaluation since privatization, KE’s equity has eroded by almost 43%.

"Increased risk profile and declining returns have made it increasingly difficult for the power utility to raise financing which can potentially impact the timelines of its downstream projects, that are essential to balancing the supply/demand gap in Karachi. On top of that, due to significant stuck up receivables from government entities, leading to a severe cash crunch, KE has had to resort to increased borrowings over the last few years, which has led to a sharp rise in its finance cost," the official added.

KE in its presentation revealed that by constantly reinvesting into the business, KE has managed to reduce T&D losses by around 16.8% since 2009 (2009-2019) along with significant capacity additions, whereas Discos on average, saw their T&D loss go up by 1%.

KE has also reduced its AT&C losses by 18.1% points while Discos' managed to reduce by 2.1% points only in this time period. However, if the tariff differential claims and investments requested as part of mid-term review are not resolved in a timely manner, the negative impact on targeted investments planned by KE over the next few years can potentially lead to increased suffering for the consumers as well.

Copyright Business Recorder, 2020