ISLAMABAD: The federal government has sought two weeks’ time from Supreme Court of Pakistan to present a viable solution to Karachi Electric’s (KE) issues including exclusivity after 2023. A government team comprising Minister for Planning, Development and Special Initiatives, Asad Umar, Minister for Energy, Omar Ayub, SAPM on Petroleum, Nadeem Babar and Nepra’s team headed by its Chairman Tauseef H. Farooqi have already held a meeting with Chief Justice Supreme Court, Justice Gulzar Ahmed and Justice Ijaz-ul-Ahsan in the chamber of Chief Justices on November 12, 2020 and briefed them about the issues related to KE.
Attorney General of Pakistan has also convened a meeting of all concerned stakeholders on Monday (today) to evolve consensus on an out of box solution of KE issues, to be presented to the SC.
The sources said, Shanghai Electric is seeking to acquire KE subject to the following four conditions: (i) settlement and resolution of the payment of dues to SSGC and NTDC / CPPA and receipt of dues from KWSB and the Federal Government on the basis of reciprocity for any interest payments; (ii) determination of the mid-term review of the Multi Year Tariff (MYT) by NEPRA; (iii) determination of claims under various components of the KE tariff by NEPRA and; (iv) exclusivity right afforded to KE is maintained, as per the licence.
“KE needs to be made viable to provide electricity to Karachi as required and to be sold to Shanghai Electric,” the sources said, adding that Shanghai Electric’s acquisition of KE remains on the table, but with new management in China, progress has to involve KE shareholders and GoP agreeing to Shanghai Electric’s clear preconditions to complete the transaction so that Shanghai Electric can make investments in KE that they committed over four years ago.
KE claims that the presence of Shanghai Electric represents a current opportunity of ensuring that KE achieves the required 100 percent growth in power supply in the next 15 years.
KE is involved in the generation, transmission and distribution of electricity in Karachi, Dhabeji, Gharo (Sindh) and Utthal, Vinder and Bela (Balochistan), including all government & public departments. In the next 15 years just Karachi’s energy requirements are expected to increase by 100 percent. The GDP of just Karachi represents 25 percent of the GDP of Pakistan, therefore, more than 25 percent of Pakistan’s GDP depends on power supplied by KE.
KE claims that it also services loss-making areas, where consumers do not pay bills. These are Katchi Abadis, slums, and some of the poorest localities in Karachi, Sindh and Balochistan. The losses caused to KE by servicing of loss-making areas are almost Rs17 billion annually, but working with the community, KE has improved theft and recovery losses by 17 percent in 10 years.
In a presentation, the power utility has claimed that recovery ratio improved by 3.5 percent points, distribution capacity increased by 25.6 percent in last 5 years, whereas power sector owned by the government’s recovery ratio improved by 2.2 percent points and distribution capacity increased by 12.3 percent in last 5 years. Feeder overloading was 22.9 percent (2020).
KE’s expected milestones as per approved business plan till 2023 will be as follows: (i) move to power surplus position through addition of 900 MW RLNG plan, off-take of additional supply of 1,400 MW from national grid. For elimination of load-shedding, conversion of all high and very high loss PMTs to Aerial Bundled Cable (ABC).
The power utility argued that Nepra’s approval of investment and regulatory certainty are the pre-conditions to achieve the targets.
“Nepra’s approval of claims filed under MYT to ensure viability and sustainability is critical for KE to raise financing of Rs170 billion to be financed through debt or planned projects in three years,” the sources added. Resolution/ settlement of dues including mark-up is necessary. KE cannot ensure the uninterrupted supply of energy without the cooperation of NEPRA, NTDC, SSGC/PSO etc. and the Federal Government.
KE has further claimed that it owes a principal amount of Rs13.7 billion to SSGC against payment of gas supply. Similarly, KWSB, which is defined as a strategic consumer under the Implementation Agreement (IA), owes a principal amount of PKR 28.3 billion to KE, which is not disputed by the Federal Government. KE has been unable to make such payment because it has failed to receive Rs28.3 billion from KWSB.
Under the Implementation Agreement, the Federal Government was responsible for paying KWSB’s dues to KE. It was proposed that an adjustment be made between KE, KWSB and SSGC by the Federal Government. Despite negotiating an adjustment, the Federal Government has repeatedly failed to implement such adjustment mechanism. Thus, the principal amounts due from KWSB and KE remain outstanding.
SSGC has been charging an excessive and compounding interest on the principal amount owed by KE, which now amounts to PKR 93 billion, while KE did not charge any interest on its receivables, including from the Federal Government.
Due to SSGC’s insistence on charging excessive and compounding interest and due to KE not charging any interest, KE is at a considerable disadvantage. As previously adjudged by the Federal Government, KE is and has always been willing to pay the principal amount to SSGC upon receipt of the principal amount from KWSB. NTDC / CPPA have a receivable of a principal amount of PKR 143.8 billion from KE. The Federal Government owes KE Rs200.7 billion in Tariff Differential Claims (TDCs).
KE has not charged any interest on the principal amount receivable from the Federal Government. NTDC / CPPA have charged interest of PKR 55 billion on KE’s payables due to the Federal Government’s failure to make timely payments to KE.
A set-off mechanism is already agreed between NTDC / CPPA and KE under which the payables of the Federal Government may be set off directly against the receivables of NTDC / CPPA. The Federal Government has failed to set-off the entire amount in a timely manner. The Federal Government has previously successfully set-off amounts under this mechanism. As a result, KE has been subjected to interest and has been deprived of the ability to invest up to Rs200 billion in its infrastructure.
KE is of the view that in case the payment of interest, compounded or simple, is chargeable to KE in respect of Rs13.7 billion due from KE the latter should similarly be entitled to charge compounded or simple interest on Rs28.3 billion due from KWSB to KE. In such a case, interest will be paid ultimately by the Federal Government on behalf of KWSB to KE. KE will thereafter make interest payments to SSGC. SSGC will further make such interest payments to OGDCL and ultimately to the Federal Government.
In effect, therefore, the payment of any interest on due principal amounts will be made by the Federal Government through KWSB and received by it through SSGC, representing a payment by GoP to GoP.
However, in the case interest is charged, the Federal Government will be required to allocate or borrow precious funds to make interest payments on behalf of KWSB, only to receive the same after a long cycle through SSGC.
The KE further argues that NEPRA is obligated to determine the multi-year tariff, however despite significant delays and over 2 years of finalisation process, NEPRA failed to determine a sustainable tariff. Additional NEPRA approvals for KE’s investment plan for the next 3 years under the tariff Mid-Term Review are also pending for over 30 weeks. Delay in these determinations has adversely impacted KE’s viability including borrowings to finance expansions.
“When utility bills are not paid it is recorded as a loss to KE which is currently at around Rs17 billion per year. NEPRA has allowed KE to claim prudent costs under the NEPRA Act. Despite a continuing lapse of more than a year, these claims remain pending,” the sources maintained.
KE filed its externally audited claims for the losses and costs for the last 3 years of about Rs14 billion out of the Rs50 billion recovery loss suffered by KE. This amount of Rs14 billion was to be incorporated in tariffs and thus not be a loss for KE. Due to the non-determination of these claims by NEPRA, KE will effectively suffer additional losses of upto Rs20 billion annually simply due to NEPRA’s failure to undertake its own claim mechanism.
NEPRA granted KE exclusivity by way of a distribution license dated July 21, 2003 which was to be for 20 years and ends in July, 2023. This was a key pillar of privatisation and incentive to incoming investors to plan their commitments. The power utility has claimed that it made its investments and plans in reliance of the legal representation made by NEPRA in respect of exclusivity in the licence, adding that NEPRA seeks to modify such exclusivity before 2023, it does not provide for any alternative plan or policy for servicing Karachi’s needs, including its loss-making areas.
On exclusivity, KE says that exclusivity is a material consideration for Shanghai Electric in its bid for KE. In the case Shanghai Electric abandons its acquisition of KE, NEPRA will be jeopardising the provision of electricity to Karachi in the future.
KE, in its prayer has requested that the Supreme Court may order to do so on the basis of principal amounts payable and not on the basis of simple or compounding interest as the same has not been charged by KE to KWSB as guaranteed by GoP. Supreme Court may do away with the interest, and its net loss to the Federal Government and direct the Federal Government to set off the claims payable by it to KE against the claims receivable by NTDC / CPPA.
KE has further requested the SC to direct the Federal Government to thereafter finalise an agreement between KE and NTDC / CPPA for additional power to satisfy the requirements of Karachi.
The power utility has also prayed that Supreme Court may require NEPRA to determine multi-year tariff adjustments including investment plans under the mid term review immediately and to allow the same to be viable. SC may require NEPRA to determine KE’s claims under the MYT to ensure the viability of KE and enable execution of required investment.
