Nepra tariff row: KE Board may opt for global arbitration

ISLAMABAD: The power corridors of federal capital are abuzz with speculation that the Board of K-Electric may allow it to opt for international arbitration, after recent supply tariff determination by Nepra, which is expected to have financial impact of Rs 200 billion per annum on the power utility company.

Well-informed sources told Business Recorder that KE Chief Executive Officer Syed Moonis Abdullah Alvi has already cautioned the government’s top team in this regard including Deputy Prime Minister/Foreign Minister, Ishaq Dar, who had been assigned to resolve the issue of Al-Jomaih in KE.

This issue is also expected to come under discussion during the forthcoming visit of Prime Minister Shehbaz Sharif to Saudi Arabia with his team that will include Power Minister Sardar Awais Ahmed Khan Leghari.

Decisions on KE: Nepra issues determinations on review motions

On October 15, 2025, the CEO KE in his letter reiterated the submissions made in an earlier letter notably that the recommendations made by the Ministry of Energy (Power Division) to Nepra in the review of KE’s Multi-Year Tariff (MYT) FY 2024-2030, if implemented, will have grave consequences for the company’s cash flow position, rendering KE unsustainable. The adverse ripple effects of such a development would not be limited to KE’s financial position and cash flows but would extend to KE’s operations and ability to reliably service Karachi - the economic hub of Pakistan.

Nepra reduced KE’s supply tariff by Rs 7.60/kWh from Rs 39.97/kWh to Rs 32.37/kWh, sending a shock wave to the KE’s top management and the Board.

“Considering the gravity of the matter, it is imperative to apprise your good office of the potential implications and far-reaching effects arising from the Power Division proposed downward revision in the approved MYT,” Alvi wrote just five days before the announcement of tariff determinations.

Talking about the sensitivity of atariff reduction, the CEO KE stated that KE’s financial viability and cash flows are premised on a sustainable tariff. He clarified that as per estimates: (i) every Rs 1/kWh reduction in the allowed tariff results in a cash flow impact of around Rs 15 billion. For FY 2024, KE reported a net profit of only Rs 4 billion, indicating that a reduction in tariff would push KE into losses; and (ii) recommendations made by the Power Division, if implemented in full, could impose a potential financial impact of Rs 100 billion.

This would result in breach of debt covenants which will trigger Material Adverse Event clauses and lenders will start trapping the cash collection under the security arrangement, thus resulting in severe cash flow crunch. This would render KE unsustainable both operationally and financially, having a material impact on its ability to service the debt commitments and raise any future debt needed to operate reliably.

Reduction in KE’s approved tariff has catastrophic system-wide implications including but not limited to the following: (i) as of September 30, 2025, KE’s total outstanding loans stand at approximately Rs 253 billion, comprising Rs 164 billion local and Rs 89 billion (around USD 300 million) foreign borrowings.

A tariff cut would jeopardize the company’s capacity to meet the scheduled debt servicing obligations; (ii) Material Adverse Event under multiple financing arrangements including the Sinosure supported facility and the Hermes Supported Financing Agreement would trigger, calling for accelerated repayment obligations, including foreign currency obligations, and trapping cash flows through collection accounts that are securitized under the financing arrangements, thus potentially precipitating a systemic liquidity crisis in Pakistan’s energy and financial markets.

Potential event of default may arise in respect of repayment obligations to capital market instruments such as Sukuks amounting to Rs 42 billion (outstanding as of September 30, 2025); (iii) KE will not have sufficient cash flows to sustain operations and honor its payment obligations to fuel suppliers and power producers including CPPA-G, SSGC and PLL, which would impact their liquidity as well;(iv) non-payment by KE/default could result in fuel and power supply disruptions, hampering the powersupply situation in the city, including the industrial consumers who are vital to national economic productivity.

Hence, the proposed tariff reduction will have cascading implications; (v) KE’s investment plan till FY 2030 includes infrastructure investments of USD 2 billion, primarily to integrate new generation capacity and enhance transmission and distribution reliability. A significant portion of this investment is to be financed through bank borrowings, both domestic and foreign.

However, with KE in losses, KE would be unable to secure any new financing from domestic or foreign financial institutions - this would stall infrastructure investment, delay critical projects and reduce service reliability, thus significantly compromising consumer interest. Lack of infrastructure investments would result in a decline in power supply reliability including increased load-shedding which could exacerbate social unrest in Karachi.

The power utility company further warned that the repercussions of a downward revision in KE approved tariff would have wide-spread implications at macro-level: (i) undermine the confidence in Pakistan’s regulatory predictability; (ii) strain the sovereign’s standing with international insurers and lenders;(iii) raise the cost of capital for the power sector;(iv) deteriorate service levels impacting industrial productivity; and (v) discourage future privatization of state-owned DISCOs.

After sharing the gravity of the situation and the possible implications for the service levels, CEO KE sought top level intervention and welcomed an independent assessment into these implications by any big four audit firms or by local and/or foreign lenders, and pledged to remain available to provide a detailed, data-backed presentation on the matter.

Copyright Business Recorder, 2025