Nepra’s non-regulatory operation

Updated 28 Sep 2020

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More than its quasi-judicial muscle, the power-sector regulator has started operating through backchannels to challenge the bureaucracy’s entrenched practices that have resulted in a black hole of more than 30pc in electricity generation through transmission, distribution and cost recovery.

In February this year, a team of the National Electric Power Regulatory Authority (Nepra) led by its top officials reached out to the prime minister, questioning the data sheets presented by his own cabinet colleagues and officials assisting them. The team asked the prime minister to declare a “national power emergency” and take drastic steps for scaling down the circular debt that it put at Rs1.93 trillion as of Dec 31, 2019 as opposed to Rs1.78tr pitched by the Power Division at the exact same time.

In the presence of the top Power Division leadership, officials from the World Bank and economic members of the cabinet, the regulator made a presentation saying the circular debt had increased by about Rs492 billion in 2018-19 at a monthly average of about Rs41-42bn. That was in contrast to Rs10-12bn per month addition being reported by the Power Division.

The regulator also talked about legal limitations to its quasi-judicial functions and how some of the independent power producers (IPPs) had hampered through stay orders the efforts to scrutinise their balance sheets, conduct heat-rate tests and enforce efficiency standards.

The regulator also asked the government to sit down with the IPPs for renegotiations on mark-up on delayed payments as a one per cent reduction would provide a saving of Rs1bn per year for every Rs100bn payable.

The regulator is using backchannels to browbeat the vested interests in the power-sector bureaucracy into submission

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

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

Over the long term, the regulator called for the promotion of big and micro-hydropower projects in Khyber Pakhtunkhwa, Punjab and Azad Jammu and Kashmir besides the facilitation of off-grid solutions for rural electrification and net metering. Also, it has recommended early privatisation of loss-making distribution companies and installation of pre-paid meters and outsourcing of meter-reading and bill collection responsibilities.

In the ensuing negotiations between the government and IPPs over tariff reductions, the regulator dedicated a team to assist the government’s negotiation committee in the background with all the available data. The federal cabinet was also given an hour-long briefing on the power-sector challenges and how the regulator could assist it in the background than through regulatory actions.

“The result is a staggering potential savings” in negotiations with IPPs assisted by intelligence agencies without any apparent witch-hunt, a key regulatory leader claimed recently in a background briefing.

The Prime Minister’s Office plainly reported that the regulator disagreed with the Power Division’s reports of the circular debt reduction, bill collections and system improvements. It said the Rs492bn circular debt build-up included Rs325bn born out of inefficiencies of the power companies. This comprised Rs132bn under recoveries (90pc instead of 100pc), Rs150bn mark-up on delayed payments, Rs33bn because of the inability of power companies to meet 15.7pc target for losses (actual losses remained 17.7pc) and Rs10bn due to inefficient generation companies.

About Rs186bn revenue shortfall within the above-mentioned areas included the impact of currency devaluation.

As part of its suggestion for power emergency, the regulator wants a ban on labour unions for ensuring and enhancing recoveries for and from distribution companies and proposed that there should be no imported fuel-based power projects. Also, it wants top electricity thieves to be punished and made an example of.

It also wanted that all power companies should adopt a total regulatory compliance-based regime and their management and boards of directors be fixed on a war footing to improve governance and focus on optimisation and closure of public-sector generation companies.

It said some low-hanging fruits should be plucked immediately by loan restructuring of Rs53bn per year for eight thermal power plants, including three LNG, three coal and two nuclear power plants.

Also, the government should defer the roughly Rs40 per year dividend and return component of public-sector plants and Rs35bn per annum net hydel profit being collected from consumers for payment to the provinces. The amounts should be shifted to the budget and inefficient generation plants in the public sector should be closed for a Rs10bn saving. The action plan included the abolition of the non-electricity taxation burden of Rs250bn of which Rs175bn was going to the circular debt.

Nepra has also suggested that industry should be asked to operate at night to reduce the peak load and special economic zones should be developed on a priority basis to increase power demand. Likewise, the retail and wire business of distribution companies should be bifurcated and loss-making feeders should be outsourced.

Many of these suggestions are currently in progress. On the side lines, the regulator is now seeking to run two parallel tariff-setting practices — bidding and cost-plus formula tariff to investors — for renewable energy (RE) projects. It expects to help reduce its tariff to 2.7 cents per unit for RE fresh induction compared with 3.4 cents per unit at present and 17 cents about six years ago.

Published in Dawn, The Business and Finance Weekly, September 28th, 2020