Going in circles

Nepra, Power Division on collision course over circular debt

Like its predecessors the PTI government is facing an enormous challenge to curtail the so-called circular debt in the energy sector. Despite regular raises in the basic electricity tariff the debt has continued to pile up and has now reached over Rs1.9 trillion.

Sources in the government say in its second quarterly review last month the IMF expressed its concern over the high transmission and distribution losses of the power sector. Minister for Power, Omar Ayub Khan, has claimed on a number of occasions that growth rate of circular debt has declined from Rs35 billion to Rs15 billion per month. However, the claims have not been corroborated by independent sources.

Under its Circular Debt Plan, the government had to bring down the gap between payables and receivables from Rs465 billion in 2018 to Rs75 billion by 2023.

Realising the gravity of the situation Prime Minister Imran Khan called a confidential meeting attended by leaders of the National Electric Power Regula­tory Authority, the Power Division and some World Bank officials.

Nepra Chairman, Tauseef H Siddiqui, urged the prime minister to declare a national power emergency and take drastic steps for scaling down the Rs1.93 trillion circular debt which, he pointed out, was significantly higher than reported by the Power Division. He said that circular debt had increased by about Rs492bn during the fiscal year 2018-19 at a monthly average of about Rs41-42bn, rather than Rs10-12bn per month being reported by the Power Division.

The Power Division put the overall circular debt, including fresh payables and old stock parked in the PHPL (Power Holding Company Limited) at Rs1.882tr as of January 31, 2020, including PHPL debts of Rs807bn.

In the presence of top Power Division leader and representatives of the World Bank, the Nepra chairman disagreed with the Power Division’s reports of circular debt reduction, bill collections and improvements in the system. The regulator reported that Rs492bn circular build-up included Rs325bn resulting from inefficiencies in the power companies. This comprised Rs132bn under recoveries (90 per cent), Rs150bn mark-up on delayed payments, Rs33bn because of inability of the power companies to meet the 15.7pc target for losses actual losses stand at 17.7pc and Rs10bn due to inefficient generation.

The regulator also reported that monthly circular debt addition had touched the lowest level of Rs3.25bn in June 2016. The average build-up amounted to Rs10.8bn by June 2017, followed by Rs25.58bn by June 2018 and then Rs41bn a month by June 2019. It had declined slightly to Rs39.67bn by December 2019 and then gone up to Rs42.4bn in January 2020.

The power regulator advised the government to declare a power emergency. It has proposed a ban on labour unions to ensure an enhancement of recoveries for and from distribution companies and on imported fuel-based power projects.

The Nepra also wants all power companies to be in total regulatory compliance. It says their managements and boards of directors should be fixed on war footing to improve governance.

It has advised Rs53bn per year loan restructuring for eight thermal power plants, including three LNG-based, three coal- based and two nuclear power plants.

The regulator has also advised fast tracking of the implementation of renewable energy policy and renegotiation of LNG contracts for price opening in 2025 and quantity commitments by 2030. The power companies should be made to follow 100pc merit without any system constraints excuse.

Moreover, it has advised that there should be no “take or pay” contracts. The regulator has also suggested that Thar coal price determination should be made by the federal government and not by the Sindh government.

Over the long term, the regulator has advised promotion of lager as well as mirco hydropower projects in Khyber Pakhtunkhwa, the Punjab and Azad Jammu and Kashmir besides facilitation of off-grid solutions for rural electrification and net metering. It has also recommended early privatisation of loss making distribution companies and installation of pre-paid meters and outsourcing of meter reading and bill collection.

The Nepra has also suggested that industry should be asked to operate at night to reduce peak loads and special economic zones should be developed on a priority basis to increase power demand.

Likewise, it’s says the retail and wire businesses of distribution companies should be bifurcated and loss-making feeders should be outsourced.

Zafaryab Khan a spokesman for Power Division refused to comment on the issue. Sources in the Power Division said that the minister and the secretary had conveyed their displeasure to the prime minister over the presentation. A highly placed source said the Division had asked the prime minister to order a third party evaluation regarding the claims.

Journalist Mushtaq Ghumman, who has covered power sector for over two decades, endorsed some of the reservations echoed by the Power Division. He said that the raise in power tariff was the major factor in improvement in recoveries. He says outsourcing of loss-making feeders and recovery of bills can lead to a law and order situation and political unrest. All Pakistan Wapda Hydel Electric Workers Union General Secretary Khurshid Ahmed says the wrong policies of the present and previous governments have messed up the power sector and bought it to the verge of collapse.

He says a ban on labour unions is totally uncalled for and would be a violation of Article 17 of the constitution. He said under the charter of International Labour Organisation the government cannot ban the activities of labour unions. He cautions the government that outsourcing of recovery department can be disastrous. “Outsourcing of recovery departments may look good on paper but in reality it is impractical especially in rural areas,” he says.

The Power Division used a report by Pakistan Electric Power Company (Pepco) — a defunct holding company of the Power Divisionto claim that even if all the receivables of the power companies were recovered, there would still be gap of Rs704bn to be funded by the government through borrowing or a raise in consumer tariffs.

The report said delayed and inadequate tariff determinations by the National Electric Power Regulatory Authority (Nepra), delayed tariff notifications by the federal government, excess losses and low recovery by the distribution companies (Discos), nonpayment of subsidies by the federal government in a timely manner, non-payment of dues by AJK, FATA, Balochistan, Tubewell and KE and funds held by the Federal Board of Revenue on account of tax paid on billing.

The Pepco also reported that average electricity sale rate to consumers had risen by Rs3 per unit — about 23.4 per cent in six months — between August 2019 and January. The report said the average sale rate which stood at Rs12.77 per unit in August had been hiked to Rs14.88 per unit in November and Rs15.76 per unit in January.

Informed sources said the power companies have already sought a fixed fuel price increase of about Rs1.50 per unit for all discos for three months (November-January) based on an actual requirement of about 90 paisa adjustment for one month, Rs1.2 for one month and about Rs1.50per unit for one month.

This could create a revenue cushion for the power companies. 

The writer is a freelance  journalist. He is based in  Islamabad and can be reached at hamzafarooq71@gmail.com

Going in circles: Nepra, Power Division on collision course over circular debt