Tariffs currently charged to consumers include some of the costs of production of the electricity, minus the subsidy the government pays to keep electricity prices artificially low. However, there are at least four other costs that are currently not being paid for, which cause the receivables of power companies to rise, leading to the vicious cycle of inter-corporate circular debt in the energy that financially cripples power companies, causing them to cut power supply and shutting down electricity supply to most of the country.
The biggest cost unaccounted for is that of theft. Current tariffs only allow for 12.82% in transmission and distribution losses, as opposed to actual losses of 18.76%, resulting in significant losses for power companies. It is not clear how much of these losses are due to theft and how much due to poor infrastructure. Even in developed countries like the United States, transmission and distribution losses tend to be around at least 7%.
Nepra officials insist that raising the allowance for losses would be in violation of the Nepra Act, and refused to implement a guideline for higher distribution losses when asked to do so by the water and power ministry last year. “If Nepra does not consider the losses suffered by each of the [state-owned] distribution companies, it would lead to a further build-up of circular debt,” said a water and power ministry official.
Another source of problems is consumers who receive bills but refuse to pay them, and yet somehow do not have their electricity connection discontinued. The current tariff structure assumes that 100% of all bills issued by state-owned electricity distribution companies will be paid. The true rate is between 85% and 89%, lower even than it was during the Zardari Administration.
The government has also not been paying for the interest accrued on the debts that power companies have taken on to manage their finances after the government fails to pay them on time. The debt currently stands at just over Rs295 billion, with another Rs40 billion in debt taken on by the water and power ministry to clear the financial crunch at PSO. The interest on this debt comes to Rs37 billion, the cost of which the Economic Coordination Committee (ECC) of the cabinet in its meeting on January 23 directed Nepra to include in the tariff.
Another cost not included in the tariff is the late payment interest the government owes the power companies for not paying them on time, which is set at the Karachi Interbank Offer Rate (Kibor) plus 4% in the power purchase agreements (PPA) the government signed with the power companies. The interest payment owed stood at Rs63 billion as of December 31, 2014.
Participants in the most recent ECC meeting pointed out that the government had included a debt service surcharge of Rs0.30 per kilowatt-hour (kWh) on October 1, 2014. “In addition to this, tariff increases of Rs0.38 per unit and Rs0.60 per unit have been added under the title of ‘Universal Obligation Fund’ to pay the liabilities of power producers,” a representative of the Ministry of Water and Power told the ECC.