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SECP asked to treat IPPs judiciously

Independent power producers have appealed to the Securities and Exchange Commission of Pakistan (SECP) to treat different categories of power producers according to the agreements signed by them with power purchasers and guaranteed by the government of Pakistan.

Asif Ali Shahid, a certified public accountant, said that the SECP without going into details of power purchase agreement issued show cause notices to eight IPPs and asked them to submit their accounts for audit.

This, he added, was a procedural flaw. The SECP first should have scrutinised accounts submitted by these IPPs and then raised objections, providing them opportunity to satisfy the regulator. If the SECP was not satisfied with the replies to the objections, it could have gone for audit.

The eight IPPs established under the 1994 power policy showed higher profits than the annual rate of return guaranteed by the government of Pakistan. These include Sapphire Electric Power Company, Orient Power, Saif Power, Nishat Chunian, Nishat Power, Atlas Power, Liberty Power, and Halmore Power.

These companies called sovereign guarantee of the government after power purchaser defaulted on huge payments. These IPPs were asked by the SECP to get their accounts audited. However, they maintained that they are operating strictly as per the mandate provided to them under their agreements with the government of Pakistan.

Sources said that the basic issue is related to tariff being paid to eight IPPs operating under the 2002 power policy. Under this policy, the tariff is determined on an average operational efficiency of project’s life cycle (25 to 30 years). “The efficiency in initial years is certainly much higher,” said chief financial officer of an affected IPP, adding that efficiency in the middle of life cycle is lower than overall average efficiency.

He said when the agreements were being finalised, IPPs requested the National Electric Power Regulatory Authority (Nepra) to accept the efficiency set by equipment supplier.However, the regulator did not agree on the ground that power producers in connivance with purchasers tinkered with life cycle to run plant for long.

Power sector expert Mohsin Syed said under this tariff formula in the first five years when plant operates at higher than determined average efficiency and tariff is based on that average, producer is bound to earn much higher profit than maximum 18 percent rate of return determined in the agreement.

However, with the passage of time efficiency wanes and in the last decade of its operation, earning is not even half of this percentage. The average earning of all these IPPs, he added, is the same as envisaged in the agreements with the government of Pakistan. He said legally IPPs are fully covered in this regard.

Energy sector player Ghalib Atta said the confusion in the SECP was perhaps due to three different ways adopted for determining tariff. He said for public sector generation companies (Gencos), the Nepra sets cost on an annual basis and approves sales price based on actual cost.

He said the tariff for IPPs established under 1994 policy is based on a fixed upfront uniform tariff for entire life of a project. Nepra, he added, has no role in determining their tariff, as these IPPs were established before the electric power regulator was established. At that time, tariff was based on an estimated cost determined by the Water and Power Development Authority.

Atta said the Nepra determines the tariff for IPPs established under 2002 power policy. He said the authority verifies cost of each and every item of the project through bank statement. It then sets all operational costs evidenced through third party operations and management contract where detailed pricing is provided. He said fuel cost efficiency is determined on the basis of evidence produced by original equipment manufacturers and indexed to actual price movements of fuel in the country. The evidence of sponsor’s equity is confirmed from bank statements, he added.

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