- The government suggests lowering the base tariff of KE to Rs 34.87 per unit.
- Proposes to adjust the depreciation rates of the supplier’s assets.
- Objections raised on electricity supplier’s working capital.
ISLAMABAD: The government has opposed K-Electric’s (KE) demand for multi-year tariff increase while advising the National Electric Power Regulatory Authority (Nepra) to reduce the utility’s tariffs to the place, News reported Thursday.
“The inflated costs presented by the KE indicate a lack of consumer-oriented planning,” said a Power division official.
Terming the KE’s multi-year tariff proposal as an inflated and unjustified burden on Karachi’s electricity consumers, the government suggested that the utility provider’s base tariff be reduced from Rs 44.69 per unit to Rs 34.87 per unit. unity through a series of targeted cost adjustments.
“Our recommendations aim to introduce fairness and operational efficiency into KE practices while providing much-needed relief to consumers,” the official added.
The move will reduce the burden on the federal government as every year it pays hundreds of billions of rupees to subsidize Karachiites and maintain a unified tariff as KE’s power generation from its power plants is much more expensive than that from the rest of the country. .
The KE tariff petition is based on projections which the government says are detached from ground realities. For example, the utility assumes a compound annual growth rate (CAGR) of 2.9% for peak demand, despite a 7.2% decline in electricity consumption in fiscal 2023.
“Aligning capital expenditure (CAPEX) with realistic growth projections alone could save Rs 0.30 per unit,” the Power division argued.
The government also attacked the methodology used by KE to calculate its return on equity (RoE). KE currently uses US dollar-based indexing, which exposes consumers to currency volatility. By linking RoE to PKR, the government estimates the savings at Rs 1.20 per unit.
Debt costs in the KE tariff have also been reported to be overestimated. The government says it is not aligned with current market conditions. By recalculating the debt gap to reflect actual borrowing rates, the Power Division estimates a reduction of Rs 0.50 per unit 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 reduce 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 instead use current market interest rates. By updating the interest rates, the tariff could be reduced by Rs0.95 per unit.
The government also objected to KE’s working capital, saying this component of its tariff was inflated. By optimizing these requirements and basing them on actual financial needs, the government suggests that the tariff could be reduced by Rs 1.83 per unit.
One of the most important interventions recommended by the Power Division is to procure up to 50% of KE’s electricity from the Central Power Purchasing Agency-Guaranteed (CPPA-G) or the National Grid. Currently, KE is purchasing only 1,000 megawatts of its 3,800 megawatt request from CPPA-G.
“With recent transmission interconnections, KE can draw more electricity from the national grid at a lower cost than its own generation,” an official said.
This change could reduce the tariff by Rs0.28 per unit, thereby easing the financial burden on consumers in Karachi.
Karachi-based industrialists and businesses have long advocated for increased use of CPPA-G to reduce costs, frequently raising this demand at NEPRA hearings.
The government has also proposed moving 20% of KE production contracts to a take-and-pay model. Currently, KE operates on the basis of fixed cost contracts, which require payments regardless of consumption. This transition could save Rs 2.51 per unit, suggests the power division.
Additionally, KE’s recovery loss provisions have been criticized as being too generous. The government urged NEPRA to benchmark recovery losses against KE’s best performance – 96.7% achieved in FY2023 – rather than its current higher assumptions. This adjustment could save Rs 1.47 per unit.
Another key argument concerns KE’s retail margin, which the government says is excessive, at 1.5% of total revenue. Basing this margin on cost recovery rather than total revenue could reduce the tariff by Rs 0.59 per unit.
Consumer advocates and energy sector analysts have praised the government’s proactive approach.
“KE has been given too much autonomy by passing on inefficiencies to consumers. These recommendations are a long-overdue step towards accountability,” said an energy expert.
It is worth noting that KE’s petition is currently under consideration by NEPRA, where the company has sought a massive increase of Rs 10.69 per unit from the base tariff to Rs 44.69 per unit.
Citing a multi-year tariff spanning seven years, the utility aims to establish a multi-year tariff from 2024 to 2030 and has asked the electricity regulator to validate the cost of electrical components EPP (power purchase price ) at Rs 18.88 per kWh — subject to monthly and quarterly adjustments based on electricity costs.
The demand for increase in KE tariff includes various cost components such as the electricity cost component CPP (capacity purchase price) which amounts to Rs12.54 per kWh which will be revised quarterly.
Meanwhile, transmission charges are sought at Rs 3.48 per kWh, while distribution charges are calculated at Rs 3.84 per kWh. Operation and maintenance (O&M) charges are sought at Rs 0.42 per kWh, indexed annually to the Consumer Price Index (CPI) of Pakistan, and retail margin is estimated at 0. Rs 59 per kWh, adjusted annually based on revenue recovery.
Further, the recovery loss allowance, including a cap and floor mechanism for under/excess recovery, is calculated at Rs 2.88 per kWh. The working capital is set at Rs2.07 per kWh, adjusted annually based on over/under recovery scenarios.
In pursuit of its views, the publication sent the KE a detailed list of questions about the government’s recommendations. These included questions about its inflated CAPEX, US dollar-based RoE, outdated debt assumptions and reluctance to rely more on CPPA-G.
Despite multiple assurances of a response, the KE refused to provide answers, citing the need to review the government document.
Each question was framed based on specific figures from the government’s advice, but the KE continued to deviate, raising questions about its accountability and transparency, a source familiar with the correspondence said.
However, sources close to KE investors told the publication that they were only asking for a fair price for their efforts, adding that investors should not get discouraged if they start thinking about exiting Pakistan’s energy sector.