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Planning Commission seeks 14pc annual raise in power tariff

The Planning Commission has sought 14 percent per annum increase in the power tariff for three years.

The Planning Commission suggested readjustment of slabs to turnaround the power sector in a paper focusing on the power deficit in the financial year 2013. USAID has prepared the report on the circular debt in collaboration with the Planning Commission.

The Planning Commission has also asked for enforcement of differential power tariff regime in phases or enforcement of revised uniform tariff with the removal of anomalies in the existing uniform tariff regime.

The power sector is likely to face a deficit of Rs592 billion by the end of the financial year 2013, mainly because of three main reasons, which include the electricity cost of Rs277 billion (47 percent) not covered in the tariff determination, tariff differential subsidy (TDS) of Rs215 billion (36 percent) and fuel price adjustment of Rs100 billion (17 percent).

The existing gap between the cost of generating electricity and notified tariff stands at Rs3.08 per unit, which the government picks and the price of this gas is expected to be doubled to Rs6 per unit in the tariff determination for the year FY13. This will burden of Rs200 billion, owing to which the factual power deficit is to stand at a whopping Rs792 billion by the end of this financial year.

The power sector is to sustain the loss of Rs215 billion by the end of June in the head of tariff differential subsidy (TDS).The report reveals that the tariff differential between the determined and notified tariff stands at Rs3.08, which is to further swell to Rs6 per unit. The notified tariff is far below the least determined tariff (LDT), owing to which the sector has so far braved huge losses of Rs98 billion.

The power sector also sustains the loss of Rs115 billion on the account of structural anomalies in the tariff regime, which also aggravate the issue of tariff differential subsidy, it said. The USAID has highlighted the reasons, which contribute huge loss of Rs277 billion in the electricity cost.

The reasons include the loss of Rs6 billion per annum on account of heat rate difference in Gencos (electricity generation companies); damage of Rs60 billion in the wake of delays in the tariff determination and notification, Rs29 billion because of line losses beyond the National Electric Power Regulatory Authority’s (Nepra) limits, Rs107 billion loss because of failure in recovery of bills, and Rs75 billion on account of payment of penalties to the independent power producers (IPPs) and interest on existing loans taken by the state-owned power sector.

In the head of fuel price adjustment, the power sector suffers the loss of Rs100 billion that include Rs80 billion because of stay orders issued by the courts and Rs20 billion in the wake of deferment of T&D losses issue.

Suggesting the recipe to overcome the issue of increasing tariff differential subsidy (TDS), the USAID and the Planning Commission stressed the need to raise the notified tariffs up to the level of minimum determined tariff (MDT) and then gradually moving to differentiated tariffs in some of the Discos, if not all.

The minimum determined tariff can be achieved in a phased manner, considering socio-political conditions.Initially the tariffs for commercial, industrial, higher residential slabs and others where difference is marginal could be raised to the level of the minimum determined tariff.

It was also suggested that lower residential slabs and agriculture tariffs can be increased at a rate of four percent in each quarter (or whatever is feasible) till it reaches the minimum determined tariff level.

At four percent increase per quarter the lifeline and 1 to 100 units tariffs would reach the minimum determined tariff level in about three years, 101 to 300 units slab 1.5 years and agriculture tube-wells is 1.25 years.

The tariffs for the Azad Jammu and Kashmir (AJK), however, cannot be raised to the minimum determined tariff level because of an agreement between the AJK and the federal government, which limits the rate at which the AJK procures electricity from the respective Discos.

Any increase in the AJK tariff would need an approval from the Council of Common Interests (CCI) and an amendment to the agreement. Perhaps it will be better to either have the AJK determined and notified tariff as per the contract / agreement, or the government could continue to provide subsidy to the AJK to cover this differential, it said.

Raising tariffs for all consumers except the AJK will reduce the TDS based on existing determined and notified rates by 43 percent.

In order to further reduce the TDS once the tariffs are at the minimum determined tariff level, the notified tariffs have to be on a differentiated basis.

Another approach is to impose an equalisation surcharge, if the government cannot forego the uniform tariff policy. However, equalisation surcharge mechanism was tried in FY2012 but was not successful because of the stay orders issued by the courts, leaving the surcharge uncollected.

The report also said that notifying differentiated tariffs as determined by Nepra can also be done in a phased manner, starting with the Lahore Electricity Supply Company (Lesco), Faisalabad Electricity Supply Company (Fesco), Gujranwala Electricity Power Company (Gepco) and Islamabad Electricity Supply Company (Iesco) as their determined tariffs are in proximity to each other and allows required increase in phases.

Less than 300 units of residential slabs can be ignored till it first reaches the MDT. Introducing differentiated notified tariffs in four Discos and raising the tariffs for other five to the maximum of these four (except for less than 300 units of residential slabs) will reduce the TDS gap by around 14 percent.

The next step would be to bring these five distribution companies to a minimum tariff. This implies differentiated tariff for Mepco as well and for the other four (Hesco, Sepco, Pesco and Qesco) at the maximum of the five distribution companies that now have differentiated tariffs. This would potentially save another nine percent for a total of 23 percent.

Raising the tariff to MDT and introducing differentiated notified rates in five distribution companies would cover 66 percent of the tariff differential. Break-up of the remaining 34 percent is AJK (two percent), TDS for four distribution companies except 300 units (10 percent) and less than 300 units of residential slabs (22 percent).

The higher residential consumer, however, would still be getting the benefit of lower slabs. This can be avoided if only one previous slab benefit is allowed in the tariff determinations and notifications. This could reduce the gap by five percent. In three years, the losses in the four distribution companies that have higher service cost can be brought down to reduce the level of determined tariffs, which will in turn reduce the TDS.

Introducing differentiated tariffs in lower residential slabs after tariffs have reached MDT level would eliminate TDS due to residential category, it added. —Khalid Mustafa

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