Three years after its initially planned completion date, Neelum-Jhelum Hydropower Company has finally filed a tariff petition with the National Electric Power Regulatory Authority (Nepra). It will be interesting to see what the actual tariff awarded will be against the request of a levelised tariff of Rs13.24/Kwh (USc12.62/Kwh) over the 50 year project life.
Recall that the cost estimates for the project have quadrupled since 2002. The original projection was Rs84.5 billion which was subsequently revised to Rs277.5bn in 2012 to accommodate changes in design caused by the earthquake. The cost currently hovers around Rs506 billion with the major components that have resulted in such massive cost escalation being the interest during construction (IDC) component at Rs87.7 billion, exchange loss of Rs94 billion and cost escalations/indexations of Rs73 billion.
The project is being financed by a debt:equity:grant ratio of 79:9:11 with Rs401 billion in debt, Rs46.9 billion in equity and Rs58.2 billion in a grant which is basically covered by the Neelum-Jheelum surcharge. The government imposed a 10 paisa per unit surcharge in 2007 which has since been extended in line with the massive cost escalation.
There are many questions that have arisen during the construction of this project. For one the capacity of Wapda to undertake projects of this scope and nature have come under doubt considering the massive cost overruns that have been incurred till date.
According to sources in the Planning Commission the project has been mismanaged from the start with the original financial targets and geographical surveys inaccurately conducted. Resultantly, the poor design had to be changed mid-way during construction and affected the dam and hydraulic structure as well as the tunneling process. However, given the harsh terrain where the project is being built, there have also been natural calamities such as landslides and water flow seepages affecting tunnel construction.
Nepra is seeking stakeholder input for the public hearing next month. Some questions that have been raised include the total amount of NJ surcharge collected from consumers and its impact on tariff of projects. The construction period of 8 years will also come under deliberation as will the 17 percent Return on Equity (ROE) and Return on Equity during Construction (ROEDC) computed in the tariff application.
The regulator will also assess if the project qualifies as a built-operate-own-transfer project and whether equity redemption is justified. It will also decide if the tariff control period of 50 years is justified. Another important issue is the claim in the application to grant a take or pay based tariff given the high project cost and the uncertainty about future generation because of Kishanganga dam built by India which might affect river flows.
The regulator has its work cut out for it and the issues framed for hearing are pertinent when it comes to holding the project management accountable. It is important to asses if cost escalation of Rs73.2 billion and exchange losses of Rs94.3 billion are justified or are they simply the by-product of incompetence on the behalf of the project executioners. More on this in the coming weeks.
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