ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) has recently announced a new tariff for K-Electric, which will be valid for the next seven years.
Following are basic parameters of the new tariff:
Nepra has issued a base tariff of Rs12.07 per kilowatt-hour (kWh). K-Electric had asked for a tariff of Rs16.23 against the existing Rs15.57. Effectively, there is a reduction of Rs3.50 against the existing tariff and Rs4.153 against the demand of K-Electric.
The approved tariff includes all the three components – generation, transmission and distribution. K-Electric is organised as an integrated utility whose model is getting out of fashion due to market reforms that have been done in most market economies.
Loss target for the year 2022 is 12.53%, quite a good target, if it is achieved. This means that over a period of seven years, transmission and distribution losses will be reduced by 9.57%.
The rate of return (RoR) is set at 13.27%, which in the case of DISCOs is 15%.
The claw-back provision (sharing of profits with consumers if the company profitability crosses the threshold provided) is maintained. To be fair, the tariff should be non-discriminatory and it should be fairly balanced against opposite risks.
For example, if there is a claw-back mechanism guarding against extra profit (which as indicated earlier may not be relevant in the present determination), there should be protection against loss.
Write-off of bad debts (receivables) has been allowed on actuals, but limited to 1.83%. Provisioning has not been allowed, although it would have promoted efficiency. Provisioning could have been limited to be adjusted against the proof of write-off.
Efficiency improvements are as per the business plan and tariff accordingly adjustable. There are no unknowns.
K-Electric had asked for continuing the multi-year tariff (MYT) of 2009, with some additional proposals such as allowing returns on revaluated assets, which is extraordinary.
Power trip: K-Electric to submit agreement signed with Chinese firm
It could have been allowed by Nepra as a general incentive to all, and may do so in future. It could not have been permitted to K-Electric alone.
I am not sure why the company lobbied for continuation, for there have not been outstanding profits under the 2009 tariff. Profitability is still much under the norm of 15-17%.
Cost-plus
My assessment is that this tariff determination is no longer a performance-based constant price tariff, as opposed to the MYT of 2005 and 2009, which provided for a constant tariff of around Rs4.50 per kWh, (inflation such as in fuel price and others adjustable), while the benefits of loss reduction and thermal efficiency gains were to be pocketed by the company.
It had no separate provision of RoR, but was built in implicitly in the constant price tariff. Thus, this tariff determination is cost-plus on the lines of existing DISCOs and generation companies (GENCOs).
Annual revenue requirements and investment plan have been projected by the petitioners which Nepra has scrutinised and accepted with adjustments as is usual with cost-plus. Thus, everything is known. There is no risk except for the attainability of loss reduction as opposed to the MYT of 2005 and 2009, in which many things could have gone wrong or right.
Rate of return
So, why consumer representatives or K-Electric should worry about the claw-back mechanism and the rates and sharing formula?
The RoR (rate of return on investment) has been fixed at 13.27%, which, it can be argued, is discriminatory. It should be comparable with DISCOs’ RoR of 15% and based on 17% rate on equity (RoE) for generation components ala independent power producers (IPPs).
I have a different approach in this respect, as has been indicated above. I stand for a higher (2% more than the norm) RoR on loss reduction projects vis-à-vis routine or growth-related investments.
In the investment plan proposed by K-Electric, there will be a loss reduction investment of Rs93 billion out of a total investment provision or undertaking of Rs287 billion. If higher return to loss reduction projects is accepted, the average RoR may come out to be 15%, compatible with other DISCOs.
Separation of components
I am not sure why K-Electric management is so fond of keeping the generation component, which is a liability for the company and a major irritant for public policy.
Everybody is demanding for separation of the three components. Transmission can be clubbed with distribution as it is a very small component. The residual issue is of generation. K-Electric can ask for a provision in tariff for its existing assets and wriggle out of new generation responsibilities.
K-Electric says tariff cut will not benefit consumers
K-Electric can always launch an independent IPP should it find it attractive . I am not sure, if its argument of difficulties in cross-mortgaging assets in case of disintegrated operations is valid. Overall, Nepra determination appears to be all right, provided there are no issues in data and calculations. The company also thinks that required investment may not be attracted under the instant determination.
Consumer groups are not happy either, but it is not clear why? Both parties are preparing to request for a review. When both parties cry, the axiom goes, the arbitration or decision is correct and balanced.
The writer is a former member energy of the Planning Commission
Published in The Express Tribune, April 3rd, 2017.
