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K-Electric's average tariff cut by Rs3.50 for seven years

Updated March 21, 2017


Nepra has set K-Electric’s tariff at Rs12.07 per unit, although the power company sought a tariff increase to Rs16.23.—AFP/File
Nepra has set K-Electric’s tariff at Rs12.07 per unit, although the power company sought a tariff increase to Rs16.23.—AFP/File

ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) on Monday cut average electricity tariff for K-Electric by Rs3.50 per unit for the next seven years besides legally doing away with its service monopoly.

The new multi-year tariff — which came on the heels of the proposed sale of the privatised entity to Chinese firm Shanghai Electric — is estimated to provide an annual relief of Rs48 billion to Karachi-based consumers and the federal government, according to a team of the regulator.

KE’s previous tariff, announced originally in 2002, became effective in 2009 due to delayed sale of Karachi’s integrated utility and then its resale to Abraaj Group, and expired on June 30, 2016. The new tariff would now become effective from the date of its notification by the federal government, legally required within 15 days unless challenged for review or reconsideration. It will remain effective until 2023.

At a hurriedly called press conference, a Nepra team led by adviser tariff Sajjad Mohammad Qureshi said the determined tariff was structured to be balanced, transparent and in the interest of the consumers as well as KE.

Regulator ends power utility’s service monopoly

Mr Qureshi said the regulator has now set KE tariff at Rs12.07 per unit (kilowatt-hour) against its existing tariff of Rs15.57 per unit determined by the regulator. The KE management sought an increase in tariff to Rs16.23 per unit.

He explained that the government subsidy being paid to KE to keep the power tariff uniform across the country would come down by about 67 paise per unit at the existing applicable tariff of about Rs11.45 per unit.

He said the previous tariff helped the KE to scale down its transmission and distribution (T&D) losses from 35pc to about 22.1 per cent over the years, but most of the efficiency gain was allowed to the KE to let it invest and become profitable from being a loss-making entity.

In the new tariff, the efficiency gains would now go to the consumers and the system operator would get its return on all assets. He said the exclusivity of service area currently available to KE like other power companies has already expired with a recent notification of Nepra regulations. Moreover, it is now mandatory for the KE to “allow open access” to new entrants.

Also, Nepra has made it mandatory on the KE to ensure 100pc time-of-use (TOU) metering to all its existing consumers having sanctioned load of five kilowatts latest by Dec 31, 2017. Out of its 2.24 million consumers, the KE had so far reported TOU facility (cheaper rates for the day and expensive for five peak hours) to only 25,000 consumers, said Sajjad Akram, a director of Nepra.

The KE has also been made bound to invest an amount of Rs237.6bn during the tariff period. This would include Rs48.1bn in generation, followed by distribution Rs69.4bn and transmission Rs115.7bn and others areas Rs4.2bn. The tariff would be subject to a midterm review to ensure that proposed investments have been carried out. T&D target losses have been reduced and fixed at 20.40pc for the current year from existing loss of 22.1pc.

“The consumers have been given immediate benefit of reduction of 9.6pc losses from 30pc already built in the existing tariff,” Nepra said, adding that the consumer-end tariff will now be adjusted with the yearly targeted T&D losses. At the same time the authority has ensured a reasonable return to KE on its existing asset base as well as adequate cash flows to carry out the proposed investments.

The regulator has disallowed KE from collecting bank collection charges from the consumers through monthly billing and has also directed the KE to pay interest on security deposits to the consumers through their bills. Moreover, KE has been restrained from charging meter rent from all the consumers whether existing or new.

The new connection charges shall be determined by the regulator separately and until then the regulator has been ordered to ensure that new connection charges levied to the prospective consumers are comparable with the other power distribution companies.

KE is the only vertically integrated utility in Pakistan and is principally engaged in the generation, transmission and distribution of electrical energy to over 2.4m consumers. The regulator had allowed a multi-year tariff to KE in 2002. After privatisation of KE in 2005, the multi-year tariff was set to expire in 2012, but it was extended in 2009 for another seven years on signing of amended implementation agreement by the power ministry with Abraaj.

Nepra held that the previous multi-year tariff awarded to KE was a performance-based tariff. KE was not allowed a pre-determined fixed return on its existing and future investments unlike the tariff allowed under cost plus regime. KE was required to earn profit by bringing in efficiency through investment from its own resources in its generation, transmission and distribution system.

The regulator noted that KE was given targets for T&D losses based on the premise that KE will make investments in its transmission and distribution business to reduce losses. However, KE focused investment in its generation business; lack of investment in the transmission and distribution resulted in deterioration of the system over the time, consequently increasing the technical losses.

Considering the change in ground realities, the regulator reassessed each generation facility individually in terms of heat rate and auxiliary consumption instead of cumulative assessment of the entire generation fleet.

The regulator said that an in-built protection mechanism has been provided in the new tariff to ensure that excess profits over the regulatory benchmarks were shared with consumers through a profit clawback mechanism. The regulator, however, conceded that excessive profits could not be shared with consumers owing to litigation in courts.

Published in Dawn, March 21st, 2017