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LAHORE: The federal government is paying Fixed Capacity Charges (FCC) on about 50 percent of unutilised capacity of Independent Power Producers (IPPs), said sources.

They said this legacy is based on a dollar-based tariff structure as a result of agreements with the IPPs. They said the FCC are the cornerstone of all these agreements which, at today’s exchange rate, comes to Rs 8/kWh and the total impact runs into huge sums of charges if calculated the annual impact in Pakistani rupee.

According to the sources, the terms and condition described in the clauses related to Forced Majeure of all such agreements are altogether surprising ones. “It is not only confined to IPPs but extends to LNG terminals, oil and gas exploration etc,” they added.

They have mentioned the Reko Diq dispute as an example of this phenomenon. Today, they said, if the biggest oil and gas exploration company, having assets worth at $5 billion on historical cost basis, is priced on market capitalization basis at about $1 billion only tells us a lot about the current effects of these agreements on the country and the economy.

They said the country had embarked on this path of self-destruction a long time back in mid-90s and we are facing the adverse affects of such agreements today. It does not include the historical inefficiencies which crept into the transmission and distribution system in the early to mid-80s, they added.

They said the tariff structure should be based on economic efficiency, cost recovery, simplicity, transparency and non-discrimination and a linear (flat) tariff rate is the best way to maximize revenues and minimize inefficiencies in the sector.

It may be noted that Pakistan Institute of Development Economics’ Power Commission has asked the government to conduct a forensic audit of IPPs in the wake of alleged inflated and fraudulent charges secured from the national exchequer.

It stated forensic audit of both public and private generation companies should be conducted, followed by recoveries without any relaxation from IPPs. In the future, no sovereign guarantees should be doled out and all investments must be based on competition and financial dynamics of the sector.

Copyright Business Recorder, 2022

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