The National Electric Power Regulatory Authority (Nepra) has announced integrated multiyear tariff of K-Electric Limited (KE) for seven years, ie, (2016-2023) slashing average tariff by Rs 3.50 per unit due to reduction in losses and improvement in efficiency.
The regulator has also done away with territory exclusivity rights of KE, opening access to all generation and transmission companies. Nepra's Senior Advisor (tariff), Sajad Qureshi, Director (Tariff) Sajid Akram and Legal Advisor, Irfan Gill briefed a group of media persons about the new tariff for KE. The first time KESC (now KE) was granted multi-year tariff was in 2002, with the projection that the company will be privatized in 2003 but it was privatized in 2005 and its tariff continued till 2012.
Nepra claimed it has rebased the tariff and reduced it from existing tariff of Rs 15.57kW/h to Rs 12.07 kW/h against the claim of KE for Rs 16.23 kW/h which will remain applicable for the current fiscal year. However, if fuel prices rise again, tariff will be readjusted. With the new tariff, Rs 48 billion financial benefit will be passed on to the KE consumers. The company's losses have come down from 35 per cent in 2009 to 22.1 per cent in 2015-16. The average national tariff is Rs 11.45 per unit.
"We have passed on reduction in losses and efficiency in generation and transmission to the consumers and this was the objective of multi-year tariff," Nepra official added.
KE has been bound to invest an amount of Rs 237.6 billion: generation (Rs 48.1billion), distribution (Rs 69.4 billion), transmission (Rs 115.7 billion) and others (Rs 4.2 billion) over the control period of seven years. KE has been further made accountable and would be subject to a midterm review to ensure that proposed investments have been carried out.
T&D target losses have been reduced and target for FY 2016-17 fixed at 20.40 percent. The consumers have been given immediate benefit of reduction of 9.6 % losses from 30.0% already built-in in the existing tariff. Further the consumer end tariff will now be adjusted with the yearly targeted T&D losses in accordance with provisions and adjustment mechanism framework provided in the determination. At the same time the Authority being mindful of the interest of the KE has ensured a reasonable return to KE on its existing asset base as well as adequate cash flows to carry out the proposed investments. Nepra has also allowed 3.6 per cent losses as law and order margin for Hesco, Sepco, Qesco and Pesco.
Giving justification of margin of 3.6 per cent loss, Nepra officials said that theft is uncontrolled in several areas like Malir, Korangi and Orangi. KE can also challenge the determination of Nepra within specified timeframe and if the company's request is not entertained, federal government can file a review. In case the review is not filed or rejected, Ministry of Water and Power is bound to notify tariff.
In reply to a question, Nepra officials said that the government has yet to inform the regulator about the proposed subsidy to the consumers but it is a fact that the volume of subsidy will be lowered. In another milestone decision, Nepra official claimed that keeping in view the interest of the consumers, the Authority has disallowed KE from collecting bank collection charges from the consumers through monthly billing and has also directed the KE to pay interest on security deposits to consumers through their bills. Moreover, KE has been restrained from charging meter rent from all the consumers whether existing or new.
KE is also directed to start billing immediately on TOU rates to consumers having installed TOU meters. Further TOU meters are to be provided to all existing consumers having sanctioned load of 5kW and more by December 31, 2017. In future, the new consumers with the said sanctioned load of 5 kW or more will have the said meter provided with TOU metering facility.
The new connection charges shall be determined by the Authority in separate proceedings and till then KE is directed to ensure that new connection charges levied to the prospective consumers are comparable with the other DISCOs. KE is the only vertically integrated utility in Pakistan and is principally engaged in the generation, transmission and distribution of electrical energy to over 2.4 million consumers. The Authority allowed a multiyear tariff to KE in 2002. After privatization of KE in 2005, multiyear tariff was set to expire in 2012. Consequently, on signing of amended implementation agreement by new management of KE with Ministry of Water and Power, KE filed a tariff petition in 2009 for certain amendments in tariff. While deciding on the proposed amendments, the Authority extended the multiyear tariff to next seven years till June 2016 in line with the tariff control period provided in the amended implementation agreement.
After expiry of abovementioned tariff, KE submitted a petition on 31 March 2016 for an integrated multiyear tariff for a period of ten years. In its petition KE requested the Authority to continue the existing multiyear tariff till 2026 with the increase of Rs 0.66/kWh in respect of its O&M costs.
After taking into account the extensive input and feedback received from interveners and commentators and conducting public hearings, the Authority approved the tariff determination for 7 years (2016-23). The Authority observed in the tariff determination that previously multiyear tariff awarded to KE was a performance based tariff. KE was not allowed a pre-determined fixed return on its existing and future investments unlike the tariff allowed under cost plus regime. KE was required to earn profit by bringing in efficiency through investment from its own resources in its generation, transmission and distribution system. For this reason KE was guaranteed that no downward revision would be made till expiry of the control period of tariff. Previous tariff was awarded to KE, in view of circumstances prevailing at that time, ie, inefficient generation plants, T&D losses hovering at a level of round 40 percent, etc. Therefore, KE was allowed a number of incentives for optimization through its own investment.
The Authority observed that previously KE was given targets for T&D losses based on the premise that KE will make investments in its transmission and distribution business to reduce losses. However, KE focused its investment in its generation business and lack of investment in the transmission and distribution resulted in deterioration of the system over time, consequently increasing the technical losses. Considering the change in ground realities, the Authority deemed it appropriate to reassess the tariff based on heat rate, T&D losses and investment to make it more cost reflective so that neither the utility nor the consumers bear any unnecessary burden. To this end each generation facility has been assessed individually in terms of heat rate and auxiliary consumption instead of cumulative assessment of the entire generation fleet. In case of new generation facility is added, benefit of its efficiency in form of relief will be shared with the consumers.
For this reason among others, the Authority has decided not to continue the existing multiyear tariff and instead to rebase the same by taking into account the efficiencies achieved by KE over time and at the same time allowing KE a reasonable return on its existing and future proposed investments.
The Authority also did not cede to the request of KE to allow tariff for ten years and decided that seven years is a reasonable allowed tariff period to provide certainty to the utility to raise debt and invest. Further, the Authority has provided an in-built protection mechanism to ensure that excess profits over the regulatory benchmarks are shared with consumers. This excessive profit sharing has been ensured through a profit claw back mechanism. Previously excessive profits could not be shared with consumers owing to litigation in courts with respect to claw back mechanism. In this regard a new mechanism has been devised which will ensure excessive profit sharing with the consumers in an effective manner.
The Authority also observed that KE was required to reduce the provision for doubtful debts and achieve 100% recovery target which unfortunately has not been the case. Therefore, allowing any further cushion in the tariff for the inefficiencies of KE in terms of under recoveries would not be fair to the consumers. Thus, the Authority has decided that KE will not be allowed any provision for the doubtful debts and like other DISCOs only actual bad debts written off by KE has been allowed.
The Authority has also turned down the request of KE for allowing force majeure and compensation for late payments by government entities and tariff differential claims by the Federal Government. KE had claimed that these may be allowed to be passed on to the consumers. The Authority while refusing this request has observed that these matters may be settled between GoP and KE rather than being passed on to the consumers in the tariff.
The tariff determination takes into account the interests of the consumers and a deliberate effort has been made by the Authority to resolve all the outstanding issues without compromising the ability of KE to provide service in its territory in accordance with the performance standards in the NEPRA Act, 1997, rules and regulations.
Answering a question, Nepra officials said that the new buyers of KE have already been made aware of the tariff petition and had expressed no objection to it.
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