Supply of fuel: IPPs accuse Pepco of violating contractual obligations

The independent power producers (IPPs) have accused the Pakistan Electric Power Company (Pepco) (reportedly defunct) of violating contractual obligations with regard to supply of fuel for power generation, sources told Business Recorder.
Pepco, which announced that load shedding in winter would not exceed four hours in villages, has yet again reneged on its commitment with 16 hour-long load shedding, which has paralysed life in villages. According to official statistics, power shortfall was 2880 MW on Friday, but insiders in the Ministry of Water and Power claimed that the figures probably were not correct because they did not match with the on-ground power supply situation.
Almost all IPPs have challenged Pepco for not honouring contracts like GSA, PPA, etc. For instance, Liberty Power Limited (LPL) has been asked by the Sui Northern Gas Pipeline Company (SNGPL) to pay additional amount of Rs 993 million towards security deposit, failing which SNGPL would disconnect the gas supply to the power plant.
The company wrote to Pepco on December 28, 2010 that gas bill for November 2010 amounting to Rs 1.4 billion is still payable to SNGPL which the company is unable to pay due to acute cash shortfall. "Unless Pepco pays to Liberty Power overdue amount of Rs 4.2 billion, the company is not in a position to meet the deadline," Razip Yusof, Chief Executive Officer, wrote in the letter to Managing Director, PPIB.
On December 13, 2010, SNGPL intimated to the company that gas tariff has been revised upward to Rs 980 per mmbtu and accordingly the requisite cash security to be maintained by the power company works out as Rs 2.341 billion. Therefore, the shortfall in the security deposit amounts to Rs 993.805 million that is payable by LPL.
"Please be advised that should SNGPL disconnect gas supply to our complex as threatened Liberty Power will hold Pepco entirely responsible for all consequences, costs, liabilities under the GSA, PPA and any other consequences that may arise as a result of such disconnection," said Yusof in a letter to Wapda Chairman.
According to the company, continuous default on the part of Pepco to discharge its financial obligations under the PPA has now seriously undermined Liberty Power's commercial interest, specifically when serious impediments have started to rise in maintaining the commercial operations.
Another IPP ie Pak Gen. Power Limited has also written a letter to Wapda regarding delayed payments by Wapda during recent months that are necessary to ensure availability of fuel oil and uninterrupted operation of Lal Pir/Pak Gen. Pak Gen came out from force majeure on November 6, 2010 and since then the company has ensured uninterrupted operation of the plant. However, things are still unresolved.
"We regret to convey to you that Wapda failed to compliment our efforts to overcome country's power shortage because during period November 6 till to date Pak Gen has consumed approximately 56,000 ton oil which is equal to Rs 3 billion but WPPO paid Rs 1.4 billion only to the company," Tanveer Nazar, Manager, Commercial, in a letter to Managing Director of PPIB said.
The power plant's management says that despite repeated requests, Wapda failed to pay in bulk and as a result fuel supplier is unable to follow fuel delivery schedule as per FSA article 8.1 which states "the company will transfer through deposit into the agreed bank account of the fuel supplier an amount in rupees equal to its 15 days order for fuel at least 7 days prior to the commencement of such 15 days period. Moreover, the fuel supplier shall be under no obligation to deliver fuel unless they have been paid for in the described manner".
PSO on many occasions has stated that due to the unpredictable scenario of fuel payments, the company is not bound to deliver fuel on prompt basis to the company. Presently, PSO depot has zero fuel inventory for onward supplies to Pak Gen plants. On the other hand, Parco refinery which is the major source of fuel supply to Pak Gen has almost Rs 36 billion outstanding on account of PSO. "Due to this, Parco supply position has become erratic and Parco share to supply fuel to PSO has declined significantly," said Manager, Commercial of Pak Gen. The company argues that shutdown would be a direct result of Wapda's payment default under the PPA article 1 clause 1.55(iv), hence would not attract any liquefied damages.