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Monday June 17, 2024

FPCCI alarmed at CPPA plea for tariff hike

FPCCI on Monday wrote a letter to the Nepra registrar about the ongoing proceedings

By Khalid Mustafa
May 21, 2024
A general view of the high voltage lines during a nationwide power outage in Rawalpindi on January 23, 2023. — AFP
A general view of the high voltage lines during a nationwide power outage in Rawalpindi on January 23, 2023. — AFP

ISLAMABAD: The Federation of Pakistan Chambers of Commerce and Industry (FPCCI) -- country’s one of the highest forums of the business community -- has raised the red flag on the Central Power Purchasing Agency (CPPA)’s petition submitted with the National Electric Power Regulatory Authority (Nepra) seeking an increase of Rs5 to 6.71 per unit in power purchase price (PPP) or power, saying that the assumptions on which the petition has been prepared are highly questionable. The FPCCI on Monday wrote a letter to the Nepra registrar about the ongoing proceedings related to the projection of the PPP and determination of consumer-end tariffs for FY 2024-25 identifying the process, “characterised by flawed assumptions and incomplete data provided to stakeholders”.

“The forthcoming hike in power tariffs due to tariff rebasing will further threaten the sustainability of manufacturing in Pakistan. While the FPCCI acknowledges the need for tariff rebasing in light of the current economic conditions and engagements with external creditors, the assumptions underlying the projected power purchase prices for FY 2024-25 are highly unrealistic, lack transparency, and are completely unacceptable to the industry.”

For instance, the letter mentions, CPPA’s projections in its petition include three scenarios finalised after consultation with relevant entities. The petition filed with Nepra is based on normal demand (3pc increase against Mar 23 – Feb 24), high demand (5pc increase against Mar 23 – Feb 24) and XW-discos’ demand.

The FPCCI said that the industry was not considered a relevant entity in the development of these demand scenarios. Moreover, the CPPA has not clarified the basis for assuming a three percent or five percent demand growth, especially given that the demand has decreased year-on-year basis by 8-10 percent monthly from Oct 23 through Mar 24 according to NTDC data.

“Industrial contribution to GDP has been contracting since FY23, and marginal growth is projected only on account of agriculture. Additionally, there is a lack of clarity on whether price elasticities and the impact of tariff rebasing on demand have been taken into account. Consequently, the demand growth scenarios are entirely unrealistic,” the letter said.

“The assumed exchange rate of 275 is also unrealistic, considering that the USD to PKR exchange rate has been consistently above this for over a year, with further devaluation expected in coming months.”

According to media reports, the IMF anticipates the rupee to devalue to as much as Rs327 per USD. Furthermore, the current economic situation, characterised by suppressed imports, stagnant exports and remittances, minimal FDI, and the potential for reduced interest rates, suggests an impending devaluation that invalidates the exchange rates of Rs275 and Rs300 assumed in the projections, it added.

Similarly, the assumed inflation rate of 12.20 percent is weak and requires further sensitivity analysis; inflation is likely to increase again if the exchange rate experiences a very likely devaluation and energy prices are increased following tariff rebasing and exchange rate devaluation.

There is also a critical need for clarity on how MDI-based fixed charges will be factored into the rebased tariffs. These charges have significant implications for operational costs, and a lack of transparency in this area hinders our ability to plan and manage resources effectively.

Finally, it is essential that the petitions outline the impact of the various PPP scenarios on the end-consumer tariff and the resulting increase in cross-subsidies imposed on various consumers. Without this information, it is practically impossible for relevant consumers and stakeholders to assess the impact of the PPP and provide meaningful feedback.

Proceeding with these hearings without providing all relevant stakeholders with comprehensive information would be both unjust and detrimental. Specifically, the FCCPI requires i) detailed methodologies and underlying assumptions for demand forecasts under each scenario; ii) clear justifications for the assumptions regarding exchange rates, inflation, fuel prices, and hydrology; iii) the specific details of how the MDI-based fixed charge will factor into the rebased power tariffs; iv) He specific impact of the scenario-wise projected power purchase prices on consumer-end tariffs and the increase in cross-subsidies.

“Given the gravity of the situation and the potential repercussions on the industrial sector, we formally request the hearing scheduled for May 23, 2024, be postponed until all stakeholders have been provided with the information above and have been given sufficient time to study it. This postponement will allow stakeholders to receive and analyse the necessary data, engage in informed consultations, and prepare detailed feedback for the hearing. A well-considered and equitable tariff determination process is crucial for the sustainability of our industries and the broader economy,” the letter said.

It said that without swift and thoughtful intervention to control escalating power tariffs, Pakistan risks further deindustrialisation, a substantial reduction in output and exports, and severe economic instability. The FPCCI urged Nepra to take immediate action to address these concerns and ensure a fair, transparent, and inclusive process of end-consumer tariff determination for all stakeholders.