THE hydropower generation is widely considered the cheapest source of energy.

As the average consumer prices go beyond Rs12 per unit despite an average 12 hours of countrywide loadshedding, there is a surge in demand to exploit over 55,000mw potential of this God-gifted resource.

But that may not be the case anymore. While the finance managers are struggling to improve the performance of power companies that are eating up more than Rs350 billion a year in mismanagement, Pakistani engineers are worried about the negative repercussions of the current state of affairs in the power sector in general and hydropower in particular.

The Pakistan Engineering Congress (PEG) — a representative body of public and private engineers has started to argue that hydropower generation may have lost its edge over other competing fuels if the net hydro profit payments are made in line with arrangement with Khyber Pakhtunkhwa.

In its 71st PEG annual session two months ago, a hydropower engineer Azhar Masud Panni exposed the dangers of continuing with the net hydro profit formula under which KP has put up a claim of Rs39 billion for financial year 2009-10. KP has secured Rs110 billion through an arbitration commission on the sidelines of National Finance Commission and demands Rs354 billion as arrears since 1991.

The PEG demanded of its chairman, Mr Riaz Ahmad Khan, who is also advisor to the water and power ministry, to pursue a case for amending the article 161 of the constitution and the Arbitration Commission award to safeguard interests of the country’s consumers and people displaced by dams and hydropower stations while protecting hydropower as the cheapest source of energy.

Mr Azhar Masud Panni argued that on the basis of net hydro profit (NHP) formula to KP, the total payments to three regions — KP, Punjab and Azad Kashmir — would amount to Rs70 billion in 2009-10 and keep on increasing every year. The bottom line of his presentation “The Reality of Net Hydro Profit” is an eye-opener and needs to be taken seriously by the policy markers and parliamentarians in the larger national interest.

He has argued that the constitution valued the sacrifices of the people for realisation of hydropower projects constructed with tax payer’s money by paying NHP to the province. Also, since NHP is a pass through component of hydro tariff, the main stakeholders should be the people affected by the project and common consumers and ultimately the national economy.

Mr Panni argued that both the “NHP determination by the A. G. N. Kazi Committee Methodology”and “award of Arbitral Tribunal” were not in line with the constitutional provisions and pleaded that “Water Use Charge (WUC)” as stipulated in “Policy for Power Generation Projects, 2002” was the most appropriate form of payment of NHP and should be adopted for all hydropower forthwith.

His paper argues that the distribution of NHP should be on the basis of area affected by the entire hydropower project and not merely the location of hydro power station. “As such Article 161(2) needs to be amended, simultaneously ensuring dissemination of the NHP to the affected areas for uplifting livelihood of the affected people by investing in health, education, communications, infrastructure, etc.”

The Arbitral Tribunal-2005 to resolve dispute between Wapda and KP on NHP determination under Kazi Committee Methodology (KCM) also noted that KCM has become redundant as a lot of changes (administrative and jurisdictional) have taken place in the Wapda since its adoption in 1991 making it not possible to compute the NHP for the disputed period (FY 1991-92 to 2004-05).

Not agreeing to the KCM, the Arbitral Tribunal devised its own formula by taking a base figure of Rs6.9 billion as NHP for FY 1991-92 and compounding it by 10 per cent every year. This has increased the NHP payable to KP from Rs0.41 to 2.56/KWh for FY 2009-10 alone, which is more than 17 times the ‘Water Use Charge’ of Rs0.15/KWh.

Presently the share of hydropower is about 1/3rd in the country’s total electricity generation. The real challenge for the nation is to reverse the present hydro-thermal share from 1:2 to 2:1 for reducing electricity tariff, considered imperative for sustainable economic growth.

Article 161(2) of the 1973 constitution provides that “The net profits earned by the federal government or any undertaking established or administered by the federal government for the bulk generation of power at a hydro electric station shall be paid to the province in which the hydro electric station is situated.”

For the purpose of this clause it is further explained in the Article that, ‘Net Profit’ shall be computed by deducting from the revenues accruing from the bulk supply of power from the bus-bars of a hydro electric station at a rate to be determined by the Council of Common Interests (CCI), the operating expenses of the station which shall include any sums payable as taxes, duties, interest or return on investment and depreciations and element of obsolescence, and overheads and provision for reserves.”

This explanation simply means that the rate of net profit for supply of bulk power at bus-bar of hydro electric power station shall be a pre-determined amount fixed by the federal government with the approval of CCI. Since establishment of National Electric Power Regulatory Authority (NEPRA) in 1997, it has the exclusive mandate to determine the tariff for bulk supply of power at bus-bar of hydro power stations in accordance with the provisions of the constitution. As such the net hydro profit has to be generated through a cost plus formula which shall become a part of the hydro tariff to be determined by Nepra.

In line with the constitutional provisions, the government has determined a pre-fixed amount of this net profit as “Water Use Charge” in Para-76 of the “Policy for Power Generation Projects, 2002.” It says the “The Water Use Charge will be paid by the generation company to the provincial / AJK government for use of water by the power project to generate electricity. The Water Use Charges shall be fixed at the rate of Rs0.15/KWh.” Also the policy envisages that WUC shall be adjusted annually for inflation by the Pakistan Wholesale Price Index (WPI) for ‘manufacturing’ as notified by the Federal Bureau of Statistics (FBS).

This is in line with Article 161(2) of the constitution which also speaks of a fixed pre-determined rate of the net hydro profit. The rate of WUC need to be re-fixed and approved by CCI as stipulated in the constitution. While doing so, the CCI has to ensure that both the ends meet, i.e., interest of the beneficiary of NHP (provinces) and endurance of the end consumers by keeping the tariff within affordable limits, as it is going to be imbedded in the electricity tariff, ultimately having a direct influence on the national economy.

AJK is already being paid Rs0.15/KWh as WUC on net electrical output of Mangla hydro power. SHYDO of KP has also included WUC at the rate of Rs0.15/KWh and got it approved from Nepra in the tariff for generation from its hydro power station at Malakand-III. The first two hydro projects of New Bong Escape (84 MW) in AJK and Suki Kinari (840 MW) in Kaghan, Hazara being implemented in the private sector have also been awarded a power tariff by Nepra on the basis of WUC of Rs0.15/KWh.

This appears to be the future course.