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ISLAMABAD: The government and Karachi Electric (KE) are said to have narrowed down differences on Terms of Reference (ToRs) on Arbitration Agreement (AA) but there is a bumpy road ahead as influential "spoilers" are making last ditch effort to create confusion at the top level, well informed sources told Business Recorder.

"We are making our best effort to sort out differences. Consensus has evolved on most of the issues but a couple of matters still require an agreement between the parties,"

the sources added.

The legal counsels of both sides i.e. Privatisation Commission (PC) and KE are holding meetings almost everyday to discuss the disputed clauses of the Arbitration Agreement.

KE's Syed Ali Zafar Advocate and PC's Mohin Abbas are going through the proposed Arbitration Agreement clause by clause to sort out legal complexities like appointment of Arbitrator, the name of Arbitrator, payment mechanism, guarantee of agreement's implementation, award and conditions etc.

"It is not a simple issue. Actually, it is the process on how the dispute on receivables/ payables is settled," the sources maintained. However, claims of receivables/ payables have not yet come under discussion.

When things were moving towards a resolution, a top aide of Prime Minister Imran Khan and an "insider" of KE affairs, Tabish Gauhar jumped in to the dispute.

Gauhar, former CEO of KE who earlier claimed he is keeping himself away from KE issues has now written a letter to PC just days after the visit of Abdulaziz Hamad Aljomaih to Islamabad, copies of which have also been sent to Finance Minister, Energy Minister, Planning Minister, Law Minister, Attorney General of Pakistan etc, in which, he has opposed some of the under consideration proposals.

Commenting on the clause "principles of equity and fairness" Gauhar said if the laws of Pakistan are inherently based on such principles, there ought to be no legal need to specifically mention these twice in the ToRs (under clause 3 and 8); and if they are not, what's the implication of any conflict between these "principles" and specific clauses of underlying contact(s) and laws?

Cost of funds-Gauhar says that from CPPA's standpoint, the only applicable cost of funds is the late payment interest formula spelled out in its Power Purchase Agreement (PPA) with KE, otherwise, there would be a debate on the federal government's actual borrowing cost on PIBs, Sukuks, etc. that are often used to pay CPPA-G for onward payments to various IPPs (including late payment interest).

"If we open the Pandora's Box, we may as well look at the IPPs's actual cost of funds vis-a- vis the late payment interest they contractually charge to and receive from CPPA-G under their respective PPAs," he added.

Gauhar has also suggested that the amount determined by the Arbitrator as owed by KE to CPPA-G must only be set off against the Tariff Differential Subsidy (TDS) amount (owed by MoF and KE), per provision of the PPA, adding that it cannot be against the Karachi Water & Sewerage Board (KW&SB) payables that may very well be government of Sindh's liability as per recent SC's observations.

Compensation amount, if any, payable by MoF to KE for delayed payment of Tariff Differential Subsides- the Arbitrator needs to also account for the various actions and policy choices of KE over the last several years, for example, appealing, contesting, including in courts of law, against Nepra's Multi-Year Tariff (MYT) determinations that led to, among other things, delay in the crystallisation of TDS claims with MoF (i.e. the "causes & effect" principle), leading to delayed or non-payment of KE's dues to CPPA-G and the resultant build-up circular debt (whilst there was no corresponding relief to CPPA-G on its own payment obligations towards the IPPs under the PPAs).

Commenting on proposal 5(b) of the proposed arbitration agreement, Tabish Gauhar reiterates his opposition to any proposed policy direction by the Power Division to Nepra to pass on the "cost of funds" in the tariff of honest, regularly paying Disco consumers due to delayed payment of subsidy by the federal government for any reason.

"Although, the Nepra Act amendment (under consideration by the Parliament) would allow imposition of ‘any financial obligation of the federal government with respect to electric power services’ to the consumers in the share of ‘surcharges’ (subject to a cap), this ‘enabling’ provision has to be applied extremely judiciously and sparingly in the future to avoid such future increases in tariff (and the resultant adverse impact on power demand) and commercial losses," he added.

Tabish Gauhar said that unlike the IPPs that have a contractual arrangement with CPPA-G, the Discos (whilst regulated) do not and, in his opinion, this ought to remain a "working capital" and "cost of doing business" consideration for investors in the distribution space of Pakistan.

Copyright Business Recorder, 2021

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