Government commits to IMF to levy 2.9pc surcharge on power tariff

ISLAMABAD: The government has made commitment with the International Monetary Funds (IMF) to levy additional surcharge of 2.9 percent on electricity tariff in the wake of reduced oil prices in international market.
According to IMF’s review report released on Tuesday, stating that on January 1, 2015 an additional surcharge of PRs 0.6/kWh has been levied to increase weighted average tariffs by 4 percent. The current average Nepra determined tariff is Rs13.81/kWh.
The current effective notified tariff is Rs12.42/kWh. The difference between the determined and effective notified tariff represents the average Tariff Differential Subsidy (TDS).” Going forward, the effective notified tariff will be further adjusted taking advantage of the negative Fuel Price Adjustments (FPA) expected in the coming months,” the IMF’s technical memorandum explains.
Going forward, the IMF report states that they are taking advantage of lower world oil prices to bring additional costs into the tariff base set by Nepra to strengthen cost recovery in the sector while allowing consumer prices to continue to fall.
“To that end, Nepra will determine the FY2014/15 tariffs by February 2015. We will also ensure that technical loss diagnostic studies for all DISCOs will be finalized by June 2015 so that more realistic loss rates can be considered by NEPRA in its FY2015/16 tariff determination,” said the IMF.
Pakistan is committed with the IMF to gradually reducing the effect that untargeted subsidies have on budget while continuing to protect the most vulnerable consumers. To that end, Pakistan will notify the FY2014/15 tariffs by end-March 2015 consistent with our objective of reducing electricity subsidies further to 0.3 percent of GDP for FY2015/16 and of addressing the circular debt.
Pakistani authorities, according to the IMF, are moving forward with their plans to deal with the accumulation of arrears in the electricity sector. As of January 2015, arrears in the power sector stood at nearly 2 percent of GDP.7. To stem further accumulation of arrears in the system, the authorities issued policy guidelines requiring the electricity regulator Nepra to reflect additional efficiency costs in the next tariff determination. With the latest increase in the electricity tariffs, distribution companies (DISCOs) began to recover part of the costs stemming from technical losses and under-collections.
Over time, the flow of new circular debt is expected to be eliminated. The stock would likely be dealt with via some form of conditional transfers, although this remains under discussion.
The technical and financial audit of the system which was finalised in early-May 2014 identified the stock and flow of payables at all levels of the energy sector (including Power Sector Holding Company Limited, PHCL).
The IMF report states that Pakistan developed a monitoring mechanism to track the stock and flow of payables as defined in the TMU (Technical Memorandum of understanding). There are two main components of this circular debt: a. The payables in the power sector, which climbed to Rs298 billion at end-December 2014, of which around Rs80 billion constitute current payables. The remainder comprises: (i) a residual leftover from payables clearance of June and July 2013; (ii) A disputed amount with the Independent Power Producers (IPPs); (iii) Distribution Companies (DISCOs) non-recovery and penalties levied on past nonpayment (as defined in the TMU); and (iv) transmission and distribution losses that are not recognized by the regulator.
Building on this audit, we are moving forward with the roadmap to limit the accumulation of payables arrears and to gradually reduce the stock. This plan includes steps to improve collections, reduce operating costs and losses, and to reduce price distortions in tariff structure.
We will continue to reduce losses and improve collections through capital expenditures and revenue-based load management. Overall losses fell by 0.3 percentage points in the first quarter of FY2014/15; however, they rebounded in the second quarter (to 18.9 percent).
On the collections side, revenue from private consumers and agriculture improved, but collections from public sector went down due to payments delays particularly from one of the provincial government. To address increased losses in some DISCOs, the chief executives of the poorly performing ones have been replaced and we are working with the provincial government to address its payment problem. We will work on improving the average performance of the sector further in FY2014/15. b. Taking advantage of the room created due to falling oil prices. We issued policy guidelines for incorporating the out of system costs and actual system technical losses into the FY2014/15 tariff. This has resulted in arresting a major portion of the build-up of the circular debt and improved cash-flow of the system, the IMF report concluded.