Nepra law can be amended, IMF assured

TAHIR AMIN & ZAHEER ABBASI

ISLAMABAD: Pakistan is committed to the International Monetary Fund (IMF) that it would take mitigating measures including tariff adjustments, and, if required, suitable amendments to the National Electric Power Regulatory Authority (NEPRA) Act in case of a ‘potential adverse outcome’ from a court verdict on energy surcharges.

The IMF staff level report on seventh review under the Extended Arrangement and Modification of Performance stated that one key risk relates to a recent court judgment, unfavorable to the authorities, on energy surcharges, which could see surcharges canceled and refunded. The Supreme Court suspended the judgment and is expected to decide on this issue in due course. In case of a potential negative outcome, the authorities are committed to taking mitigating measures including tariff adjustments, and, if required, suitable amendments to the National Electric Power Regulatory Authority (NEPRA) Act that are in line with international best practices and preserve NEPRA’s independence.

The power sector remains a key bottleneck for growth and a drain on public resources despite significant efforts over the first half of the Extended Fund Facility (EFF), according to the IMF.

The IMF in staff report of seventh review under the extended arrangements and modification of performance criteria revealed that stock of power sector payables reached Rs 615 billion at end-March 2015. Payables comprise the circular debt (Rs 280 billion payable toward power sector entities) and the stock of arrears covered by the Power Sector Holding Company Limited (PHCL Rs 335 billion).

The build-up of arrears is due to; (i) significant non-recoveries related to government and private consumers; (ii) accrued interest on PHCL debt; (iii) line losses that are not recognized in the tariff; (iv) delays in the refund of excess GST collected by the FBR; (v) late payment surcharges; and (vi) delays in tariff determinations. The authorities plan to reduce the accumulation of payables.

The plan includes steps to improve collections and reduce operating costs and losses. According to the plan, the accumulation of payables will be reduced from an estimated Rs 175 billion in fiscal year 2014/15 to Rs 113 billion in fiscal year 2015/16, with a view toward further halving new arrears accumulation by fiscal year 2018/19.

Key elements of the plans comprise: Capital expenditures and revenue-based load management will reduce losses and improve collections. Overall losses are expected to decline by 0.5 percent and collections are expected to improve by 2 percent per year. Taking advantage of the room created by low oil prices, late payment surcharges and higher system losses were incorporated into the fiscal year 2014/15 determined tariffs.

This is expected to arrest a portion of the build-up of the circular debt and improve the cash-flow of the system. The government will continue to work with some regional and local governments to prevent further accumulation of arrears. In addition, the stock of arrears is expected to be significantly reduced over the next three years, supported by privatization and limited budgetary support.

The stock of PHCL debt will be transferred back to distribution companies (DISCOs), which will be privatized. This will help reduce the stock and ease the servicing of PHCL debt. In the meantime, a surcharge will be levied to service the PHCL debt. The authorities have allocated about 0.1 percent of GDP of budgetary resources to clear part of the stock of arrears that accrued with respect to some regional and local governments. There are significant downside risks to the plan. In particular, delays in the privatization programme and judicial challenges to the surcharges would increase the flow of payables. On the upside, the government can step up its efforts to further reduce transmission and distribution losses and increase collections.

Power outages of nearly six hours per day on average remain unacceptably high. The system still does not operate at cost recovery levels, leading to underutilization of existing capacity and the build-up of arrears (so-called circular debt). Despite large drop in oil prices, budgetary subsidies also remain significant. Performance of distribution companies (Discos) has been mixed. So far in this fiscal year, collections remained at around 89 percent, while technical losses were reduced to 17.6 percent (from 18.5 percent last year), despite increased electricity supply. To strengthen the management of Discos, the authorities replaced some chief executives of poorly performing companies.

The tariff adjustment is expected to reduce the electricity subsidies to 0.3 percent of GDP in fiscal year 2015/16 from around 0.8 percent in the current year and will lower power sector arrears by 0.1 percent of GDP. As of March 2015, the stock of arrears in the power sector stood at around 2 percent of GDP and continues to hamper the functioning of the system.

The plan involves improvements in collections and reductions in operating costs and losses, inclusion of additional efficiency costs in the tariff determination, surcharges to service part of the stock of overdue obligations, privatization of power generation and distribution companies, and limited budgetary allocations to address part of the arrears. The plan is supported by a new quarterly IT (starting in June 2015) on the build-up of arrears and is expected to eliminate both the stock and flow of new circular debt over time. The construction of a Liquefied Natural Gas (LNG) terminal has been completed, and LNG imports started in April 2015. The authorities are fully passing through the cost of imported LNG to the end-user purchase price.

The new gas prices will be implemented in July 2015 and two thirds of the conversion of existing domestic gas concessions to higher producer prices (under the 2012 Policy) has been finalized with the remaining eligible ones to be completed by end-June 2015.

The authorities are also planning to award contracts for an additional 10–15 exploration fields by end-December to help tackle gas shortages. Preparations for a multi-year tariff framework are on track. Determinations of multi-year electricity tariffs for three distribution companies will be finalized by November 2015 (new structural benchmark). These determinations will reduce tariff uncertainty for companies in the privatization list.

The authorities continue with their plans to bring electricity tariffs toward cost recovery levels. NEPRA determined fiscal year 2014/15 electricity tariffs in April and subsequently the government implemented the new tariffs including surcharges (prior action). In case of a negative outcome concerning legal challenges to electricity surcharges, the authorities are committed to protecting the level of revenue in the electricity sector by adjusting tariffs accordingly.