Nepra was ambivalent in the increase in the losses of distribution companies (Discos) by up to 15.3 percent from 13.03 percent in 2004 in the power tariff.
In effect inflicting a loss of Rs2.1 billion per annum, reveals the government’s official plan of managing the circular debt agreed to with the IMF.
Under the circular debt management plan, the government intends to reduce the circular debt from Rs314 billion (as of end of June 2015) to Rs212 billion by financial year ending June 30, 2018 while keeping within the target of 0.4 percent of GDP for subsidies to the power sector (about Rs128 billion) and 4 percent fiscal deficit.
“At the end of each month, the circular debt will be maintained below the cap of Rs314 billion.
“The circular debt management plan (or capping mechanism) will include reducing the increase of circular debt (flow) as well as the stock (outstanding amount). Policy induced public sector power entity debt including Power Holding Company Limited (PHCL) debt will be reduced from Rs335 billion to Rs220 billion by 2018. Collection from government customers will be rationalized, and subsidies will be on actual basis and paid according to schedule.”
Independent energy experts say the power sector requires just over Rs1 trillion to run itself and if one percent loss appears in the system, it accounts for Rs10 billion.
This means the consumers are currently paying over Rs150 billion in the tariff just under the head of losses. However, Nepra, which is supposed to pressurize Discos to bring down losses, has accommodated the inefficient power sector by increasing the losses to 15.3 percent from 13.03 percent.
Nepra spokesperson admitted that the regulator had increased the losses of Discos by up to 15.3 percent in the tariff from 13.03 percent insisting that it will add the additional burden of Rs2.1 billion, saying one percent loss means damage of just Rs1 billion that will be recovered from the consumers in the tariff.
Nepra had earlier fixed the allowed losses for Discos for 2013-14 at 13.02 percent compared to 18.7 percent.
The 5.6 percent difference between determined loss and actual loss accumulated as circular debt of Rs33.6 billion in financial year 2014. Now the regulator for financial year 2015 allowed 15.3 percent compared with expected losses of 18.70 percent, narrowing the gap between allowed and actual losses, but it will still result in accumulation of circular debt of Rs32 billion due to increase in generation. In the short term, there is little that can be done about the flow because the tariffs have been determined.
Nepra as a condition of its determinations requires Discos to conduct a study on technical losses to justify the need for increase and to set out future loss reduction initiatives, to be conducted by independent consultants but the results are unlikely to show an effect until financial year 2016 determinations.
For the purposes of this circular debt management plan, it is assumed that reductions in losses will reduce the flow of circular debt from Rs32 billion to Rs11 billion.
The privatization programme, according to the document, is also likely to reduce excess line losses to the extent of the companies that will be privatized.
With expected privatization of three Discos in FY 2016, multi-year tariff (MYT) will have been determined instead of annual tariff determinations and this will give incentives to the new owners to improve losses against the Nepra benchmarks; in any event, the costs of any underperformance will be the responsibility of the new owner.
For the Discos not privatized, the surcharge mechanism will still be used to rationalize subsidies dealing with Sector Inefficiencies and recover costs of service.
