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PC blames govt for circular debt crisis

March 27, 2013

– File Photo

ISLAMABAD: For resolving the circular debt crisis, the Planning Commission has proposed that the government should remove the circular debt from the books of energy sector entities (DISCOs and CPPA) and take responsibility for the mismanagement of the power sector reforms.

The commission in its report on ‘Circular Debt’, released on Tuesday, identified poor governance, delays in tariff determination, fuel price methodology, poor revenue collection and delayed and incomplete payment by finance ministry as major causes of piling up of circular debt, which rose to Rs872 billion at the end of the last fiscal year.

This amount represents about four per cent of GDP, and if circular debt continued unabated, will increasingly constrain the availability of electricity and slow down economic growth.

The report, based on an independent analysis funded by USAID, proposed that move the circular debt amount to the government’s debt, reallocate in consumer tariff or place a tax on the consumer.

Another option for resolving the circular debt crisis, the report suggests the government should undertake specific policies and programmes to improve the governance and performance of energy sector entities to decrease costs, increase cash flow, and ensure operational and financial integrity of the sector.

Among the causes of circular debt, the report points out the delays in tariff determination by an inadequately empowered regulator compounded by interference and delay in notification by the government. The report also referred delay in contract payments to the KESC.

There is a failure of governance at all levels federal and provincial government, corporate entities and the regular. The federal government has failed to resolve the issue that resolve the current circular debt problem and stop future accumulation of the debt. The government has been reluctant to initiate improvements in the legal framework to curb theft of electricity, limit the recourse to courts for debtors, and stop political interference in sector governance.

The report recommended that the current fuel cost reference and adjustment mechanisms need to be revamped to include a forward vision approach for fuel cost recovery.

Although the DISCOs’ revenue collection will not improve overnight, Nepra needs to give those DISCOs that have a programme in place to improve collections an “allowance for doubtful accounts” in their tariff determination.

Dr Nadeemul Haque, Deputy Chairman of Planning Commission, blamed the ministry of water and power for the crisis, saying that the ministry which is the main policymaker of the sector, has no roadmap set out for itself and is more reactive than proactive to power sector reforms coupled with lack of political will to help improve the system.

Listing the major shortcomings at all levels of the reform spectrum, the deputy chairman stated that there is an authoritarian attitude towards all entities involved at the regulatory level. The regular has failed to address or acknowledge problems of the power sector and is working in isolation.

At the entities level there is a complete breakdown of governance. Though they are being micro-managed by both the policymakers and the regulator, the entities themselves have no aspirations of moving ahead reforms and are happy to maintain status quo, said Dr Haq.

The planning commission report has come up at a time when the caretaker set up at federal and provincial levels is taking the ground after the departure of five-year tenure of the PPPP government during which power crisis has touched new heights.

Pointing out several secondary causes to circular debt, the report underlined the need to improve the thermal efficiency of the GENCOs and for Nepra to set tariffs based on actual versus estimated heat rates.

There is inadequate budgeting of the TDS, which delays payment and increases financing costs.

There is an unfavourable generation mix of the GENCOs, due largely to the government’s fuel allocation policy that diverts natural gas to other non-economic uses.

The circular debt also caused by non-commercial and non-professional approach to load-shedding, non-improvement in tariff terms and conditions, and impact of courts decisions that have delayed payments to the DISCOs.

Also causing circular debt is late payment surcharges paid by CPPA to the IPPs resulting from the inability of the DISCOs to fully pay Central Power Purchasing Agency (CPPA), the government’s neglect in promoting demand-side management, energy efficiency and renewable energy resources.

There is a need to settle payment arrears both disputed and undisputed in a comprehensive manner and for expanded authority of CPPA to collect payments from the DISCOs through formal and enforceable power purchase agreements, the report points out.

Recommending re-evaluating the role of Nepra, the report says that the annual determination of tariffs for the DISCOs and subsequent adjustments for fuel cost are lengthy and ineffective, resulting in revenue shortfalls and cash flow problems and obscuring the true cost of electricity to consumers.

Nepra also needs to improve its enforcement powers over the DISCOs with regard to cases of consumer over-billing and requires additional authority to move ahead with implementation, it says.

The federal government retains the authority for approving customer tariffs, but is influenced by a legacy system that supported a single postage stamp rate for all consumers in each category across all DISCOs, report says.

According to the report, the government is not implementing the differential tariffs determined by the regulator for each DISCO, which often overshadows commercial decision-making. This results in conditions that contribute to circular debt, including a reluctance to pass on the full cost of electricity to consumers; uniform tariffs do not take into consideration the actual cost of service.

Establishment of a Tariff Differential Subsidy (TDS) that is often not paid on time or in full and is allocated primarily on the basis of “just-in-time” response to the power sector, overstaffing and compromised decision making at the DISCOs, and the subsidies provided to tube well customers often result in lengthy disputes over payment between the DISCOs and provincial governments, report says.

The report further stated that the federal government also has been lax in passing appropriate legislation to curb electricity thefts, promote energy conservation, increase commercial transparency, strengthen regulatory entities, and promote an open and competitive energy market. The government also appoints the board of directors of the DISCOs, political and bureaucratic influences continue to limit the board of director’s independence and technical and management capacity. At the corporate level, the board’s authority and efficacy in monitoring and enforcing the performance of DISCO management is limited or non-existent, it went on to say.