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Power consumers to pay security cost of CPEC projects

Updated August 04, 2017
A navy official stands guard in front of the Cosco Wellington ship.— AFP/File
A navy official stands guard in front of the Cosco Wellington ship.— AFP/File

ISLAMABAD: The National Electric Power Regulatory Authority (Nepra) on Thursday allowed power producers to charge consumers through tariff one per cent cost of 19 power projects worth $15.56 billion under the China-Pakistan Economic Corridor (CPEC) for 20-30 years on account of security cost.

In an order, the power sector regulator said it allowed building in tariff the additional security cost on the orders of the federal government and estimated it at $155.6 million (about Rs17 billion) for all 19 power projects under the CPEC. Nepra worked out the annual cost at about $2.92m (Rs315m).

Editorial: CPEC security cost

The order said the federal government had, through a decision of the Economic Coordination Committee of the cabinet on Sept 22, instructed that CPEC projects having achieved financial close or early harvest projects where financial close was still pending as well as new addition to the CPEC projects under an implementation agreement be allowed one per cent of capital cost net of $150,000 on account of security to be distributed annually starting from the construction period till the term of the project.

Nepra rejects stakeholders’ contention that security is state’s responsibility

“The authority (Nepra) has decided to allow 1pc capital cost of the project reduced by $150,000/annum (subject to 3pc indexation for each year after the first year from COD) as security cost in respect of each CPEC power project in accordance with the approved payment mechanism and the same shall be treated as pass-through item,” the regulator said in its order.

Nepra did not accept objections from a number of stakeholders, including the sponsors of the power projects and consumer groups, that provision of security was the responsibility of the state and electricity consumers should not be charged for it given the fact that they were already paying huge taxes to the state to meet its expenses, including security cost.

Nepra said Article 10 of the CPEC Agreement provided that “the Pakistani party shall take the necessary measures to ensure the safety of Chinese personnel and projects” and it had established a special security force/division of the armed forces to ensure security of CPEC projects.

Even if the government bears the cost of extra security arrangements, it has to be allocated from the budget which is public money and the development budget has to be cut short to the equivalent amount.

“Since this cost is specific to the CPEC projects, it is more appropriate to charge this cost to the respective project. These preventive security measures shall enable the smooth operation of the CPEC energy projects and shall better protect the interest of the electricity consumers,” Nepra ruled.

The regulator claimed that 10 out of 19 projects would have zero financial impact while three would have a financial impact of less than one paisa per unit and six projects 1-2 paisa per unit.

Nepra also approved a payment mechanism under which IPPs (independent power producers) of CPEC projects would pay $150,000 per annum, subject to 3pc indexation for each year after the first year from COD (commercial operation date) to the relevant government-designated agency or the ministry during the construction and operation period.

During the operation period, CPEC-IPPs will include in the monthly capacity invoice a separate charge on account of security cost. The capacity charge for security cost will be calculated on the basis of determined annual security cost of the respective project reduced by $150,000/annum for the first year from COD and then with 3pc indexation for each succeeding year, divided by net annual output in kilowatt hours assuming reference exchange rate of Rs105 per dollar.

The subject security cost component of capacity charge will be indexed on the basis of exchange rate of the last available day of the preceding quarter. IPPs will seek its approval from Napra quarterly in accordance with other tariff components of the capacity charge.

The Central Power Purchase Agency (CPPA) will pay the invoiced amount in accordance with other components of capacity charge. In case the annual security cost of a project is less than $150,000 subject to applicable indexation, IPPs will not include security cost in the capacity charge invoice and the CPPA will not pay any amount on account of security cost for the respective project.

In future, if the overall security situation improves and the government considers that special security arrangements are no longer needed and the special security force/division is released from this responsibility, no payment will be made by the power purchaser on account of special security arrangement.

The government is already charging at least four special surcharges of about Rs4.7 per unit in consumer tariff to cover low recoveries, high losses, special debt servicing, tariff equalisation across various distribution companies and so on.

The prime minister had originally allowed the Planning Commission to allow one per cent additional cost of all CPEC projects to meet the expenditure of a special security division of the army being raised to protect the corridor. The government had allocated about Rs30bn in the budget to meet initial expenditure and then allow one per cent increase in capital cost of all projects under the Public Sector Development Programme.

Published in Dawn, August 4th, 2017