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Rs1.39/unit hike in base tariff imminent - Inside Financial Markets

Rs1.39/unit hike in base tariff imminent

– Business Recorder

Following understanding with International Monetary Fund (IMF), Power Division has prepared a summary for the Federal Cabinet to seek final nod for further raise in base tariff by Rs 1.39 per unit from November 1, 2021, official sources told Business Recorder.

This in principle is the agreement reached between the Fund and Pakistani authorities last week. IMF team held separate detailed meetings with top officials of Ministry of Energy at the Power Division. However, the final round was held in Finance Division, which was also attended by IMF officials from Washington by video link, the sources added.

The government is expected to generate Rs139 billion per annum with hike of Rs1.39 per unit in base tariff due to which the amount of subsidy will be slashed. The government has allocated Rs 330 billion subsidy in budget 2021-22 against the demand of Rs 501 billion.

The base tariff has already been increased by 40 per cent to Rs 16.44 per unit in 2021 from Rs 11.72 per unit in 2018. With new increase of Rs 1.39 per unit, the base tariff will jump to Rs 17.83 per unit and after including taxes, surcharges and PTV fee, average price of one unit will be over Rs 20.

Another increase in tariff is also looming under Discos’ annual tariff petitions. Nepra has already held hearing on Discos’ petitions except one Disco whereas monthly increase in tariff under Fuel Cost Component (FCA) will also continue in the months to come due to high prices of furnace oil and LNG.

The sources said the draft of new three years Circular Debt Management Plan (CDMP) has also been agreed with the lenders. However, it will be finalized after formal approval of Federal Cabinet.

According to understanding with the IMF, the government would reduce power Distribution Companies’ (Discos) losses by 1.5 per cent in three years, i.e., 0.5 per cent each year; whereas, Discos’ recovery will be improved by 4 four per cent in three years.

The increasing circular debt is not only a big financial stress for the power sector and national exchequer but it is also impairing the economic outlook of the country, sending negative signals for foreign investment. The permanent solution to the problem of circular debt lies as per the regulator in developing an efficiency driven and financially viable distribution sub-sector being responsible to provide electricity to the end consumer and recovering bills thereof to pay for the transmission and generation services. High T&D losses and low recoveries of Discos hamper payments to transmission and generation companies which is a major cause for accumulation of circular debt. The indiscriminate load-shedding by Discs on feeder level reflects their failure to take action against the individuals involved in electricity theft and also consumers who default in making due payments.

According to Nepra’s State of Industry Report, during FY 2020-21, HESCO, PESCO, SEPCO and QESCO reported highest losses with 38.55%, 38.18%, 35.27% and 27.9% losses, respectively. While the losses of TESCO, GEPCO, FESCO, MEPCO, LESCO and IESCO remained at 9.58%, 9.23%, 9.28%, 14.93%, 11.96% and 8.54%, respectively. The actual losses of most of the Discos for FY 2020-21 remained higher than the given targets of even FY 2019-20.

Over the period, the Regulator has been stressing the need for the Discos to reduce their losses which are causing burden to the exchequer. However, no significant improvement could be seen on the part of Discos in this regard.

During FY 2020-21, IESCO, GEPCO, MEPCO and PESCO reported close to 100% recoveries. The worst performers were QESCO, SEPCO, HESCO and TESCO with 39.80%, 64.48%, 75.63% and 83.27% recoveries respectively. LESCO and FESCO reported 98.72% and 97.30% recoveries during the year, respectively.

The T&D losses beyond allowed limit and recoveries less than 100% hamper the payment to transmission and generation companies. The widening of gap between the payable and the actual payments to the transmission and generation companies is resulting in increase in the circulate debt.

Huge circular debt is alarming not only for the power sector but for the whole economy. As on June 30, 2021, the circular debt stood at Rs.2.280 trillion against Rs.2.150 trillion on June 30, 2020, showing an increase of Rs.130 billion during the year.

The inefficiencies in the power generation, transmission and distribution and non-payment of subsidies in timely manner are the main causes of the increase in circular debt.

Syed Zaki Hussain

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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)