KE open to adjusting its multi-year tariff structure: CEO

ISLAMABAD: K-Electric (KE)’s CEO Moonis Alvi on Friday expressed openness to adjusting the company’s multi-year tariff structure during ongoing discussions with regulator, but emphasised the importance of ensuring a sustainable tariff that supports future investments in Pakistan’s power infrastructure.

Moonis stated that he has no issue explaining any comments or concerns raised [by the government] regarding the tariff. “We are prepared for a healthy debate,” he said, adding: “If there’s anything in our tariff that could be considered abnormal, we would be happy to reduce it. But we need a sustainable tariff that allows us to continue investing in the system.”

“Filing a tariff of Rs44 does not mean it is set in stone, especially since it was filed two years ago. We must also consider that the interest rate has decreased since then. Without even looking into the details, I can say that when the tariff was filed, the interest rate was 22 percent. The reduction in interest rates will have an impact, which will likely bring the tariff down.”

The KE CEO emphasised the need to expedite privatisation but cautioned that if the cost of doing business is not favorable for private investors, it might become challenging for them to operate the company, especially if the costs are significantly higher than the operational expenses.

Alvi’s comments came during the Geo Television programme “Aaj Shahzeb Khanzada Kay Sath”, as the company seeks to secure approval from National Electric Power Regulatory Authority (Nepra) for an upward multi-year tariff adjustment to Rs44.69/unit for year 2024 to 2030. In this programme, the KE CEO and Minister for Power Awais Ahmad Khan Leghari were the guests.

It is to be noted that the federal government has strongly opposed KE’s proposed multi-year tariff, calling it an unjustified burden on Karachi’s power consumers. The government sent an advisory to Nepra to reduce the proposed base tariff from Rs44.69 per unit to Rs34.87 per unit through targeted cost adjustments. The Power Division criticised the KE for inflating its costs, basing its calculations on outdated financial assumptions, and making unrealistic investment projections. The government’s advisory also highlights various areas where cost reductions could be made, including recalculating debt costs, adjusting depreciation rates, and sourcing more power from the national grid to reduce reliance on expensive KE generation. The government has also urged a shift to a “take-and-pay” model for 20 percent of KE’s generation contracts and a reduction in KE’s recovery loss allowances. KE’s current tariff petition, which includes a request for a Rs10.69 per unit hike, is under review by Nepra.

During the Geo TV programme, the CEO explained that the tariff, originally set at Rs44 per unit, was based on projected growth of 2.7 percent. However, with the decrease in interest rates and the stabilisation of dollar, Moonis believes that growth could increase, potentially necessitating additional investment in the power network. “If growth increases, we may need to make more investments to expand the network and provide new connections,” he said, adding: “But if we make more expenditures, they should be accounted for in our tariff.”

He also reiterated that KE operates under a “cost-plus” tariff structure, meaning the company is permitted to recover costs plus a reasonable margin. He stressed that without appropriate cost allowances, the company would face challenges in borrowing, investing and managing the power system. “If we are not sustainable, we will not be able to borrow or invest in the system,” he said. “This could lead to the deterioration of the system itself.”

Regarding foreign equity, Moonis defended the legality of investments from KE’s Middle Eastern shareholders, pointing out that funds were transferred to Pakistan through banking channels and registered with the State Bank of Pakistan as foreign equity. “Shareholders can decide to convert their returns into rupees, but as a company, we cannot commit to a rupee-based return,” he said. “We should have a level playing field, similar to Chinese investors who are allowed to earn in dollars.”

Moonis’ comments came as the KE continues to push for tariff adjustments that reflect the actual costs of operation, including the procurement of gas and the operation of plants under economic merit order. He emphasised that the company would not accept a tariff that leads to “abnormal profits” for shareholders at the expense of consumers, nor one that results in unreasonably low tariffs for consumers that could jeopardise service quality.

Minister for Power Awais Leghari echoed Moonis’ concerns, stating that the tariff determination would have significant implications not only for the KE but also for the broader distribution company (Disco) sector. “If a tariff is set in a way that does not allow a good company like K-Electric to sustain itself and make a profit, that would be wrong,” Leghari said.

“If these companies survive only on government subsidies, it could lead to a major disaster in the Disco sector, similar to what we have seen with IPPs,” he added.

Leghari said that over the past nine months, the Power Division has undergone a transformation. “We will not only renew agreements with the IPPs, but will also implement reforms across the entire sector,” he added, noting that the privatisation process has begun, the boards of Discos have been changed, and the companies’ losses have been reduced in the last five months. He also highlighted efforts to reduce circular debt and lower the industrial tariff by Rs11 per unit since June, with an average cut of Rs4 per unit.

The minister said that if Nepra does not approve a tariff that allows a company like the KE to sustain itself and earn a profit, it would be unfair. However, approving a tariff that forces the KE—or entities under the process of privatisation like Iesco, Fesco, Gepco, and Lesco—to survive solely on government subsidies would be equally problematic.

That’s why we need to consider not only the interests of consumers but also the interests of the KE, which represents our valued investors. “While keeping their interests in mind, we made these calculations in a neutral manner, grounded in proper research and based on numbers and facts,” the minister said.

“Instead of contesting this issue today, we believe that under the regulatory mechanism, there will be a healthy debate and hearing in the coming weeks. Through this process, we hope that the regulator will act impartially—not only in the context of future privatisations but also in safeguarding the interests of Karachi’s residents, whose mandate supports our government, as well as ensuring fairness for K-Electric.

“The comments what we have sent to Nepra officially, we think and we will prove, and even the consumer’s advocates may also try to prove it, that return on equity (RoE) to K-Electric, which is always assets based.

“We have taken our responsibilities seriously, something that was not done in the past when people failed to exercise such caution. Today, as we are reviewing the IPPs, we want to avoid creating another crisis in the Disco sector that could burden our country for the next 20 years,” Leghari added.

In the interest of the public, the KE and the upcoming privatisations scheduled in the next few months, the government, for the first time, is addressing these matters with great seriousness and principle, Leghari opined.

The KE CEO said that he thinks any comments or suggestions will undergo a healthy debate. It’s not about being stubborn and insisting that only one approach is correct. “Look, for matters within our control, there must certainly be checks in place. However, for market-driven elements, which are beyond our control, those should also be factored into the tariff structure.

“As far as stakeholders and their returns are concerned, I will not act as a roadblock. If shareholders are willing to accept rupee-based returns, we have no objection. However, we do not support a tariff that results in abnormal profits for shareholders at the expense of consumers. Similarly, if consumers are given an unusually low tariff at the cost of investors, the risk arises that service levels may deteriorate. I am confident that we will establish and agree upon a fair and reasonable solution.”

Leghari clarified that he is not just looking out for the interests of consumers but, as the minister of power, he is also striving to provide a healthy environment for investors in the power sector—one that does not come at the cost of consumers. Unfortunately, the regulatory system in the past has not been satisfactory. The way petitions were handled by the regulator in the past was unacceptable and created an environment that is concerning today.

He emphasised that the ministry should have had the capacity earlier, as it does now, to provide comments on such petitions, challenge them when necessary, or draw the regulator’s attention to critical issues. This would have ensured a win-win situation for both the KE and consumers.

In the past, such issues were not addressed with the IPPs or distribution companies. Historically, some companies—perhaps including the KE—received interest on working capital at rates half a percent or one percent above KIBOR as per their audited accounts. Meanwhile, consumers ended up paying 2 to 2.5 percent more. The regulator should have scrutinised such practices to ensure fairness.

Additionally, the regulator should have ensured that asset depreciation for the KE or any other distribution company was only charged on the invested assets they actually owned, minister said.

“I assure you that this sector will now move forward with seriousness and on a sustainable basis, creating a better investment climate for the private sector. In this process, the interests of consumers will also be safeguarded. The regulator will need to make decisions on these matters with full dedication and efficiency. Without this, we absolutely cannot survive,” the minister said.