ISLAMABAD, Feb 10: The government has decided to introduce a new mechanism for all power distribution companies (DISCOs) of Wapda under which tariff would be fixed for five years on the basis of cost projections but inflation and fuel price would be passed on to the consumers on a quarterly basis.
Besides, the government also plans to ensure that the new buyers of these companies sold at least 5 per cent out of the total 56 per cent shares to the employees at a discounted rate under an Employee Stock Ownership Programme (ESOP), a senior government official told Dawn. Specific guidelines for the ESOP would be made part of the transaction documents.
In this way, all the power companies would have their separate tariffs instead of a uniform one for an integrated Wapda that currently applies throughout the country except in Karachi.
The new mechanism is being put in place to lure foreign investors to purchase the distribution companies which are now lined up for privatization, starting with Faisalabad Electric Supply Company by June this year, the sources said.
The government believes that a more sustainable and transparent tariff methodology was needed for the independent distribution companies to sufficiently cover their legitimate operating costs and provide adequate revenue, including a reasonable return on investment on assets (ROA) to pay for the necessary maintenance of the existing system and invest in new facilities to meet demand growth.
Consultations were already in progress among the ministries of water and power, finance and the Privatization Commission to present formal tariff petitions to National Electric Power Regulatory Authority (Nepra) which has already approved a six-year tariff formula for the Karachi Electric Supply Corporation, the sources said.
Under the proposed tariff-setting methodology, the retail tariff would comprise power purchase price (PPP) and distribution margin. The PPP would be passed on to the end-users in retail tariffs.
The average distribution margin would be set based on a multi-year, formula-based methodology which would then be translated into a tariff margin for each customer category. This would be calculated through a formula that determined DISCOs’ expected revenue requirement based on certain variables like units sales, operating expenses, depreciation, investment programme and return on investment.
Once the distribution margins are established, Nepra would not conduct a thorough review of DISCOs’ sales and costs during the five-year rebase period. Thus, except for events that call for an extraordinary tariff adjustment (EXTA), the average distribution margins would only change in accordance with the formula — adjustments for inflation within the rebase period.
The profits or losses that would arise from changes in efficiency or demand would therefore be retained by the DISCOs for the duration of the rebase period. At the end of the five-year period, the formula would then be reapplied to determine the margins for the subsequent period.
The operating cost component of the distribution margin for each year within the rebase period would only be increased by inflation minus an efficiency factor. At the beginning of each rebase period, however, the operating expenses included in the revenue requirements would be updated to properly reflect the level of demand and efficiency for the upcoming years.
When estimating the revenue requirement, it would also account for DISCOs’ capital expenditures including an annual return on both the assets acquired by the investor and new investments in accordance with the investment programme approved by Nepra at the beginning of every rebase period.
The DISCOs would pay a PPP for supply of electricity by National Transmission and Dispatch Company (NTDC). This PPP, adjusted for DISCO’s distribution losses, would then be simply added to its overall distribution margin to yield the retail tariff. The cost of the purchased electricity would be “passed through” to consumers through the retail tariff without affecting DISCO’s distribution margin.f
