ISLAMABAD, Jan 11: In a divided decision, the National Electric Power Regulatory Authority (Nepra) has given a one-year extension to the independent power producers (IPPs) to bring in investments under an upfront tariff, which is significantly higher than the much-criticised 1994 policy rates to cope with the long-term power shortages.

"This is in line with the directives of the government of Pakistan," wrote chairman of the Nepra Lt-Gen (retd) Saeeduz Zafar in what appeared to be a decision under pressure as the senior most Nepra member Abdul Rahim Khan questioned the decision in writing.

The upfront tariff was originally announced after a serious and long battle between the ministry of water and power and Nepra in March last year for up to December 31, 2006 to attract maximum investors to set up IPPs on emergency basis.

A couple of investors came up with their proposals but finding out that the government was too desperate to add new capacity, they demanded even higher than upfront tariff that already went up to 13.8 cents per unit and in some cases to even 17.56 cents per unit.

In his dissenting judgment, Mr Rahim questioned the upfront tariff, the government’s future planning capabilities and called for honest implementation of 2002 Power Policy announced by the government envisaging international competitive bidding (ICB) for tariff setting.

"In my opinion, the upfront tariff for IPPs has not served any useful purpose. The upfront tariff does not carry the involvement of all stakeholders for meaningful participation as provided in the tariff standards and procedures," wrote Mr Rahim.

"The process of allowing upfront tariff should, therefore, be abandoned and we should revert back to the process of determination under the tariff rules by reducing determination time.”

He said the opportunity of meaningful participation by all stakeholders in accordance with the (Nepra) Act would thus be ensured, adding the time lost in arranging for adequate generation capacity to meet peak demand in the years 2007 and 2008 can be compensated by acquiring the deficit through ICB as envisaged in the Power Policy of 2002 and Tariff Guidelines 2005."

Since the response to the upfront tariff was not that encouraging as the government expected, it issued a fresh directive to the Nepra to extend the deadline for another year despite the fact that the power policy entailed international competitive bidding instead of upfront tariffs.

The average power tariff for gas-based projects has now increased to eight cents, fuel oil to 10 cents and diesel projects to 13 cents against 4.7 cents of hydro power. The 1994 power policy that had been under criticism for offering higher tariffs had fixed upfront tariffs at 5.7 cents per unit.

Mr Rahim in his dissenting determination said the upfront tariff mechanism was eventually evolved into allowing a cost plus arrangement, "mainly based on information provided by the applicant IPPs." This in fact violated even the upfront tariff mechanism.

He said the upfront tariff has been used by the intending investors to establish a minimum floor on which higher rates are built up and demanded for specific cases.

"The situation of expected shortages in generating capacity is being made the basis of demanding returns at their own terms to such an extent that the Authority revised or modified its own determination with respect to reciprocating engines and wind power technology before the termination of one year validity for which the tariffs were initially specified," he added.

"Had the ICB process been finalised even in 2004, we would have adequate capacity acquired by 2006, the first year since 1997, in which shortage was experienced."

To avoid further delay in the matter to prevent peak load shortages in the coming years the deficit in capacity expected in the year 2008-10, calculated by NTDC on the basis of demand of Discos should be put to ICB by the NTDC or central power purchasing authority (CPPA) within the year 2007 for power stations to be installed in the area of Lesco, Fesco and Gepco, he added."In the above manner, the fast track initiative of the government can be efficiently implemented instead of relying on upfront tariffs," concluded Mr Rahim, who is serving Nepra as member since 1998.

Instead of promoting hydro power projects in a planned and phased manner, the government waited and waited until power shut downs and load shedding re-emerged after about a decade. Now, once again, it has been forced to develop additional power generation capacity in an emergency situation through costly oil based projects.

Wapda has stopped setting up hydro projects on its own due to lack of finances and there has been no hydro project in the last 10 years. The government has now partially revived the 1994 power policy, with an upfront tariff for new thermal independent power producers (IPPs) ranging between 5.9 and 13.8 cents per unit to develop up to 1,400MW electricity on emergent basis.

The 1994 power policy remained under criticism for over a decade mainly because of an upfront tariff that led to installation of thermal power projects in excess of required capacity and higher consumer tariffs. The 1994 policy was based on 7-8 per cent economic growth rate which could not be sustained in the subsequent years. The upfront tariff now is based again on 7-8 per cent GDP growth.

The 1994 power policy had brought in over 3,000MW of additional electricity generation capacity. Not a single power project could be materialised since then despite announcement of three different power policies in 1998, 2000 and 2002.