Govt opposes K-Electric’s tariff hike plea

ISLAMABAD: The federal government has firmly opposed K-Electric’s (KE) multi-year tariff proposal, describing it as an inflated and unjustified burden on Karachi’s power consumers.

Instead, the government has advised the National Electric Power Regulatory Authority (Nepra) to reduce KE’s proposed multi-year base tariff from Rs44.69 per unit to Rs34.87 per unit through a series of targeted cost adjustments.

In an advisory to Nepra, the Power Division accused KE of exaggerating its costs, projecting unrealistic investments, and basing its calculations on outdated financial assumptions. The document, available with The News, suggests that KE’s petition could be trimmed significantly without compromising its operational capabilities.

“The inflated costs presented by KE indicate a lack of consumer-focused planning,” an official in the Power Division said. “Our recommendations aim to introduce fairness and operational efficiency in KE’s practices while providing much-needed relief to consumers.” This will also reduce burden on the federal government as each year, it pays hundreds of billions of rupees to subsidize the Karachiites and maintain a unified tariff, as the K-Es power generation from its plants is much more expensive than the rest of the country’s generation.

KE’s tariff petition hinges on projections that the government claims are detached from ground realities. For instance, the utility assumes a compound annual growth rate (CAGR) of 2.9 per cent in peak demand, despite reporting a 7.2 per cent decline in electricity consumption during FY2023. “Aligning capital expenditures (CAPEX) with realistic growth projections alone could save Rs0.30 per unit,” the Power Division argued.

The government also took aim at KE’s methodology for calculating its return on equity (RoE). KE currently uses U.S. Dollar-based indexation, which exposes consumers to currency volatility. By linking RoE to Pakistani Rupees, the government estimates savings of Rs1.20 per unit.

Debt costs in KE’s tariff were also flagged as overstated. The government says that it is not aligned with current market conditions. By recalculating the debt spread to reflect actual borrowing rates, the Power Division estimates a Rs0.50 per unit reduction in the tariff.

Further reductions were proposed by adjusting KE’s depreciation rates for its assets. A more accurate depreciation schedule, reflecting the actual wear and tear of assets, would reduce the financial burden passed on to consumers. This measure could lower the tariff by Rs0.20 per unit.

Similarly, KE’s tariff proposal uses outdated interest rate assumptions, leading to inflated costs. The government has proposed that the utility use current market interest rates instead. By actualizing interest rates, the tariff could be reduced by Rs0.95 per unit.

The government has also objected on KE’s working capital saying this component in its tariff is inflated. By optimizing these requirements and basing them on actual financial needs, the government suggests that the tariff could be reduced by Rs1.83 per unit.

One of the most significant interventions recommended by the Power Division involves sourcing up to 50 per cent of KE’s power from the Central Power Purchasing Agency-Guaranteed (CPPA-G) or the National Grid. Currently, KE procures only 1,000 MW out of its 3,800 MW demand from CPPA-G.

“With recent transmission interconnections, KE can draw more power from the national grid at a lower cost than its own generation,” an official said. This shift could reduce the tariff by Rs0.28 per unit, easing the financial burden on Karachi consumers.

Karachi-based industrialists and businesses have long advocated for increased reliance on CPPA-G to reduce costs, frequently raising this demand in NEPRA hearings.

The government also proposed transitioning 20 per cent of KE’s generation contracts to a “take-and-pay” model. Currently, KE operates on fixed-cost contracts, which require payments regardless of consumption. This transition could save Rs2.51 per unit, the power division suggests.

In addition, KE’s recovery loss allowances were criticized as overly generous. The government urged NEPRA to benchmark recovery losses against KE’s best performance—96.7 per cent achieved in FY2023—rather than its current higher assumptions. This adjustment could save Rs1.47 per unit.

Another key contention is KE’s retail margin, which the government says is excessive at 1.5 percent of total revenue. Basing this margin on cost recovery instead of total revenue could reduce the tariff by Rs0.59 per unit.

Consumer advocates and energy analysts have praised the government’s proactive approach. “KE has enjoyed far too much autonomy in passing inefficiencies onto consumers. These recommendations are a long-overdue step toward accountability,” said an energy expert.

It is to be noted that the K-Electric petition is currently under review by NEPRA, where the company has sought a massive Rs10.69 per unit hike in the base tariff to Rs44.69/unit. Citing a multi-year tariff spanning seven years, the utility aims to establish a multi-year tariff from 2024 to 2030 and has requested the power regulator to validate the cost of power EPP (energy purchase price) components at Rs18.88 per kWh — subjected to monthly and quarterly adjustments based on power costs.

The K-E’s request for an increase in tariff includes various cost components such as the cost of power CPP (capacity purchase price) component which amounts to Rs12.54 per kWh which will be revised quarterly.

Meanwhile, the Transmission Charge is sought at Rs3.48 per kWh, while the Distribution Charge is calculated at Rs3.84 per kWh. The Operation and Maintenance (O&M) charges are sought at Rs0.42 per kWh, indexed annually to the Pakistan Consumer Price Index (CPI), and the Retail Margin is estimated at Rs0.59 per kWh, adjusted yearly based on revenue recovery.

Furthermore, the Recovery Loss Allowance, including a cap and floor mechanism for under/over recovery, is calculated at Rs2.88 per kWh. The Working Capital is set at Rs2.07 per kWh, annually adjusted for over/under recovery scenarios.

In pursuit of its perspective, The News sent KE a detailed list of questions about the government’s recommendations. These included queries about its inflated CAPEX, USD-based RoE, outdated debt assumptions, and reluctance to increase reliance on CPPA-G. Despite multiple assurances of a response, KE declined to provide answers, citing the need to review the government’s document.

Each question was framed based on specific figures from the government’s advisory, yet KE continued to deflect, raising questions about its accountability and transparency, said a source familiar with the correspondence.

However, sources close to the investors of KE told The News they are only asking for a fair price of their efforts, adding the investors should not be discouraged that they start thinking of getting out of Pakistan’s energy sector.