01 November 2004	Monday	17 Ramazan 1425

ISLAMABAD, Oct 31: Pakistan's power sector is heading once again to a severe crisis with possible far-reaching consequences for both the economic growth and investor confidence owing mainly to contradictory positions taken by the government and the National Electric Power Regulatory Authority (Nepra) on key power sector reforms, Dawn has learnt.

"This uncertainty and non-adherence to the 2002 (power) policy (by Nepra) could unfortunately result in serious power shortages in the country by 2006-07," noted a Board of Directors meeting of the Private Power and Infrastructure Board (PPIB) presided over by Water and Power Minister Liaqat Ali Jatoi on Oct 28.

The government accuses Nepra of deviating from its policies while Nepra believes various powerful stakeholders are making attempts at its 'regulatory capture' to influence its decisions to their advantage.

Informed sources told Dawn on Sunday there was a wide gap between the perceptions of the government and those of Nepra on at least five fundamental issues of power sector restructuring that was aimed at creating a competitive market structure. This happens at a time when the country is already facing a power shortage of over 1300 mw.

The immediate result of these differences is that the government cannot carry out competitive bidding for two thermal power stations in Faisalabad and Uch of a total capacity of more than 950 mw.

A number of sponsors to whom the government has issued letters of intent (LOI) are pressing the PPIB to provide Standard Security Package Agreements, each involving an Implementation Agreement, a Power Purchase Agreement and a Fuel Supply Agreement.

A senior PPIB official says there are 'major differences' between Nepra's proposed market structure - that envisions certain fundamental aspects concerning new investments in power generation such as a shorter period for multi-year tariff (MYT), term of PPA and GOP guarantees, etc - and the stipulations regarding the same in the 2002 policy.

The government says Nepra is not giving due consideration to the ground realities of the sector. For instance, it is not cognizant of the fact that restructuring of Wapda is not yet complete, its corporatized entities are not yet operating autonomously, rules and procedures of competitive market have not yet been implemented and power acquisition programmes of distribution companies (Discos) remain non-existent. All this along with poor financial position of Discos do not inspire confidence among private investors.

"Moreover, deviation from GOP's approved policy, at a stage when eight LOIs have already been issued and several others are under consideration, could have serious implications for the credibility of the GOP's policies. Such deviation will definitely not send the right signals to the private investors, especially when the country has barely restored its credibility in the aftermath of the 1994 Power Policy," the PPIB has written to the government.

The PPIB, the one-window facility for new power projects, has also objected to current tariff determinations for various entities made by Nepra allowing multi-year tariff (MYT) only up to 2009, instead of MYT over the useful life of the project under the 2002 policy which goes beyond 25 years on an average.

The PPIB is of the opinion that an assurance of MYT concerning the life of the project enables investors to have greater faith in their targeted cash flows and moderate their risk perception regarding their investment.

Furthermore, Nepra's Market Structure provides for short-term PPAs as opposed to long-term ones as under the 2002 policy - in fact, NTDC's transmission license stipulates that until the entity's power acquisition programme is duly approved by Nepra the PPAs between NTDC/Central Power Purchase Authority will be limited to one-year period.

The PPIB is of the opinion that the country would not be able to attract any investment in power generation based on short-term PPAs, as debt financing is usually difficult on short periods and if exceptionally available, this would have unaffordable cost.

Similarly, equity investors will not take the risk to wait for a longer period to recover returns on their investment and a shorter period for the recovery of investment will further increase the risk of default due to higher tariff.

Likewise, GOP guarantees for the performance of power purchase, provinces, Azad Kashmir and fuel supplier are not supported by Nepra. The 2002 policy, on the other hand, explicitly provides for these guarantees that are essential at least in the transitional period of restructuring for decreased risk premium in lower interest rates and lower required return on equity resulting in lower tariff for consumers.

The government strongly feels that it is imperative to provide well-defined upfront tariff determination criteria, explicit and binding parameters for tariff re-opening and assurance of a reasonable return on equity to investors based on net present value.

The Ministry of Water and Power is critical of the compulsion placed by Nepra on the new IPPs, requiring them to construct the transmission lines and interconnection facilities, instead of NTDC and believes that it will "severely hamper the construction of power generation projects".

"It is the considered opinion of PPIB, investors and some other key stakeholders of the power sector that unless all the prerequisites of a competitive market are in place, competition cannot come about. Only after a few years of smooth and consistent working of the new market structure, investors would trust the system to investment without GOP guarantees, long-term PPAs and long-term tariffs," says an official communication.