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Power sector's circular debt causes & impact.

The energy crisis is widely considered as the highest priority, most stern and immediate challenge faced by the new government and this crisis cannot be solved without finding a sustainable solution to the vicious cycle of Circular Debt. At this time when "the whole world" is going to discuss, debate, present and challenge any proposed solutions (which will not come easy or provide immediate results), the recently released Circular Debt Report, prepared by the Planning Commission of Pakistan and funded by the United States Agency for International Development (USAID), provides great insight into the issue.

According to the report, circular debt is defined as the amount of cash shortfall within the Central Power Purchasing Agency (CPPA) that it cannot pay to power supply companies. This shortfall is the result of two main factors:

1. The difference between the actual cost of providing electricity in relation to revenues realized by the power distribution companies (DISCOs) from sales to customers plus subsidies

2. Insufficient payments by the DISCOs to CPPA out of realized revenue as they give priority to their own cash flow needs

This revenue shortfall cascades through the entire energy supply chain, from electricity generators to fuel suppliers, refiners, and producers; resulting in a shortage of fuel supply to the public sector thermal generating companies (GENC0s), a reduction in power generated by Independent Power Producers (IPPs), and an increases in load shedding. As per the document, circular debt at the end of Fiscal Year (FY) 2011 was estimated to be Rs.537 bn. At the end of FY 2012 it was estimated to be Rs.872 bn representing approximately 4% of the national nominal GDP.

Primary Causes

The report highlights the following primary causes of circular debt:

* Poor governance by government authorities

* Delays in tariff determination by an inadequately empowered regulator compounded by interference and delay in notification by the Government of Pakistan (GOP)

* A fuel price methodology that delays infusion of cash to the power sector

* Poor revenue collection by the DISCOs

* Delayed and incomplete payment by the Ministry of Finance (MOF) on Tariff Differential Subsidy (TDS) and Karachi Electric Supply Company (KESC) contract payments

* Prolonged stays on fuel price adjustments (FPAs) granted by the courts

* Transmission and distribution (T&D) losses and theft

Secondary Causes

There are several secondary causes to circular debt, in-chiding:

* GENCO tariffs are derived from heat rates of generating units. As generating efficiencies deteriorate, heat rates increase, thereby consuming greater amount of fuel for electricity generation. NEPRA uses lower heat rates compared to the actual GENCO heat rates thereby accounting for a lower price of power generation by the GENCOs. This results in a reduced income for the GENCOs and cash flow difficulties affecting payments to fuel suppliers

* Inadequate budgeting of the TDS, which delays payment and increases financing costs

* Unfavorable generation mix of the GENC0s, due largely to the GOP's fuel allocation policy that diverts natural gas to other non-economic uses

* Non-commercial/non-professional approach to load shedding; non-improvement in tariff terms and conditions; impact of court decisions that have delayed payments to the DISCOs

* Late payment surcharges (LPS) paid by CPPA to the IPPs resulting from the inability of the DISCOs to fully pay CPPA; the GOP's neglect in promoting demand-side management, energy efficiency and renewable energy resources

* The need to settle payment arrears (both disputed and undisputed) in a comprehensive manner; and the need for expanded authority of CPPA to collect payments from the DISCOs through formal and enforceable Power Purchase Agreements (PPAs).

The report explains the negative impact of circular debt on sector entities, as it prevents them from obtaining funding to support improvement in management and system operations and from attracting investment needed to support sector expansion and improved services.

The report also points to load shedding's adverse impact on the economy and disruption to social life in the country. It is estimated that in 2008, load shedding in the industrial sector cost the country over Rs.210 billion, over $1 billion from export earnings and a potential displacement of 400,000 workers. The adverse impact of load shedding is estimated to be much higher if the impact on the agriculture and services sectors is included.

Conclusion and Recommendations

Conclusion

The report emphasizes poor governance as the crux of the circular debt problem. There is a failure of governance at all levels--federal and provincial government, corporate entities and the regulator. The federal government has failed to resolve the issues that would resolve the current circular debt problem and stop future accumulation of the debt. The government has been reluctant to initiate improvements in the legal framework to curb theft of electricity, limit the recourse to courts for debtors, and stop political interference in sector governance. Development of domestic energy resources, including renewables, demand-side management and conservation continues to be neglected.

Recommendations

The current level of debt prevents sector entities from obtaining funding to support improvement in management and system operations, and from attracting investment needed to support sector expansion and improved services. Sector reform is needed to prevent its recurrence.

Managing Circular Debt The report suggests the GOP needs to achieve two tasks in order to resolve this issue:

(1) Remove the circular debt from the books of energy sector entities (DISCOs, CPPA) and take responsibility for the mismanagement of the power sector reform process. Move the circular debt amount to the government's debt, reallocate in consumer tariff or place a tax on the consumer to recover over time.

(2) Undertake specific policies and programs to improve the governance and performance of energy sector entities to decrease costs, increase cash flow, and ensure operational/financial integrity of the sector.

The report recommends a number of practices at governmental level, regulatory level, and corporate level.

Role of Government

The GOP needs to redefine its role in the power sector to one as a policy builder on a national energy level and work through the BODs and allow international best practices for improved corporate governance for each of its owned entities. Tariff and subsidy disputes between the provincial governments and CPPA and the DISCOs need to be resolved, either by negotiation or arbitration. Electricity theft should be declared a punishable crime with penalties ranging from fines to imprisonment.

The selection criteria and methodology for appointment of DISCOs' BODs need to be improved. Eliminate the uniform tariff and gradually move toward the regulator's differential tariffs based on true costs. Improve the fuel allocation policy in the short-term to allocate fuel to the highest value uses (e.g., assign a high priority to power sector in the allocation of natural gas), and in the long term eliminate fuel allocation so that fuel use is based on competitive market forces.

Formulate policies and plans to promote hydro power and other domestic sources of energy that will assist in balancing the electricity supply portfolio.

Regulatory Level

The report recommends that system of annual tariff determination for all companies (DISCOs, National Transmission and Dispatch Company (NTDC), and GENCOs), needs to be reformed. NEPRA should institute a system of multi-year tariffs, which will allow time to focus on other regulatory functions.

Along with that NEPRA should adopt a system of prospective fuel prices in tariff determination and make corrective adjustments on a timelier basis. The report recommends aggressive monitoring of the performance of power companies to enforce compliance with their license conditions. It also suggests that the tariff structure and the conditions of supply (terms and conditions of tariff) need to be revised in light of the present market practices.

Corporate Level

The circular debt report states that the DISCOs should be corporatized and the process managed by a reputable international consulting firm. There should be a system of fuel testing and prevention of fuel theft for each GENCO. Design and implement programs focused on energy efficiency and demand-side management.

The report suggests implementing a comprehensive revenue collection and theft prevention program in each DISCO, with elements including, but not limited to: replacing electromechanical meters with modern metering technology and digital Automated Meter Reading (AMR) systems and reform business processes to improve management control and customer service. The report also proposes enforcing electricity supply contracts, disconnecting defaulting customers without discrimination.

Recommendations also include that the Time of Use (TOU) tariff should be aggressively pursued with clear marked difference between the peak and off-peak rates based on the nature of use (peak and off-peaks be defined on the basis of optimal usage in addition to the system peak hours).

DISCOs       2008-09   2009-10   2010-11   2011-12

PESCO *       26,809    32,902    41,282    51,360

HFSCO         18,856    25,454    33,344    44,237

QESCO          4,297     5,238    24,780    48,193

LESCO         10,957    15,968    17,081    23,080

GEPCO          3,585     5,322     5,631     5,912

FESCO          3,719     5,676     5,866     7,068

IESCO          2,287     2,286     2,762     2,703

MEPCO          7,252    10,505    11,900    14,638

All DISCOs    77,762   103,351   142,646   197,191

* PESCO includes TESCO and HESCO includes SEPCO

Transmission and Distribution (T&D) Energy Losses

Serial  DISCOs             2009   2010   2011   2012

1       LESCO    Actual   13.3%  13.8%  13.3%  13.5%
                 NEPRA    12.3%  12.0%  12.0%  12.0%
                 Allowed

2       GEPCO    Actual   11.0%  11.0%  12.0%  11.2%
                 NEPRA    10.7%  11.0%  10.5%  10.5%
                 Allowed

3       FESCO    Actual   10.7%  10.8%  11.2%  10.9%
                 Allowed   9.0%  11.0%  10.8%  10.8%
                 NEPRA

4       IESCO    Actual   10.8%   9.8%   9.8%   9.5%
                 NEPRA    11.0%  10.0%   9.5%   9.5%
                 Allowed

5       MEPCO    Actual   18.4%  19.0%  18.3%  17.9%
                 NEPRA    17.5%  15.0%  15,0%  15.0%
                 Allowed

6       PESCO    Actual   35.2%  34.7%  35.2%  35.1%
                 NEPRA    33.2%  28.0%  28.0%  28.0%
                 Allowed

7       HESCO    Actual   35.1%  34.8%  33.8%  33.4%
                 NEPRA    34.0%  28.0%  28.0%  24.8%
                 Allowed

8       QESCO    Actual   20.1%  20.7%  20,8%  20.9%
                 NEPRA    20.2%  18.0%  18,0%  18.0%
                 Allowed

        Average  Actual   19.4%  19.6%  19.6%  19.4%
                 NEPRA    18.4%  16.4%  16.4%  16.0%
                 Allowed

Source: Actual: PEPCO Power Distribution DISCOs Performance Statistics.

NEPRA Allowed: NEPRA determination from NEPRA Website

PESCO includes TESCO and HESCO includes SEPCO

Circular Debt Growth from 2006 to 2012 -Billions Rs.

Growth in Circular Debt (Impact of Primary Causes)

Primary Causes             2006    2007    2008    2009    2010    2011

Stock of              1   84.07  111.26  144.99  161.21  235.65  365.66
Debt-Beginning
of the Year

NON-COLLECTION

DISCOs
Receivables
From:

Federal                    0.22    0.35    0.08    0.15    1.79    1.57
Government

FATA                      10.87    6.36    9.43   10.24  -78.34     4.3

Provincial                 2.25    0.75    5.09    7.17   16.72   36.07
Governments

AJK Government             0.54    0.27    0.46    1.18       2     5.5

Agri-Tubewells             0.42    1.28    1.07    3.01    3.46   -3.68

Private                    9.08    7.96    9.64   19.88   25.59   39.29
Consumers

Sub-Total                 23.38   16.97   25.77   41.63  -28.78   83.05

CPPA                       3.81   16.76   26.74  -11.87    4.04   -1.79
Receivables
from KESC

Total Non-            2   27.19   33.73   52.51   29.76  -24.74   81.26
Collections

TARIFF &
SUBSIDY ISSUES

Tariff                      N/A     N/A     N/A     N/A     N/A     N/A
Determination &
Notification
Delay

Fuel Price                  N/A     N/A     N/A     N/A     N/A    20.1
Adjustments

Difference                  N/A     N/A  -36.29   39.66  134.84   48.68
Between DISCOs
TDS claims Vs.
Actual
Disbursed

Difference                  N/A     N/A     N/A    5.02   19.91   21.84
between DISCOs
NEPRA Allowed
Vs. Actual T&D
Losses

Sub-Total             3     N/A     N/A  -36.29   44.68  154.75   90.62
Tariff &
Subsidy Issues

Total Circular        4  111.26  144.99  161.21  235.65  365.66  537.54
Debt (As of      =1+2+3
Year End)

Primary Causes             2012

Stock of              1  537.53
Debt-Beginning
of the Year

NON-COLLECTION

DISCOs
Receivables
From:

Federal                    0.19
Government

FATA                      13.42

Provincial                15.84
Governments

AJK Government             6.05

Agri-Tubewells            -3.12

Private                   54.55
Consumers

Sub-Total                 86.92

CPPA                      13.78
Receivables
from KESC

Total Non-            2  100.69
Collections

TARIFF &
SUBSIDY ISSUES

Tariff                    72.19
Determination &
Notification
Delay

Fuel Price                33.19
Adjustments

Difference               106.02
Between DISCOs
TDS claims Vs.
Actual
Disbursed

Difference                22.78
between DISCOs
NEPRA Allowed
Vs. Actual T&D
Losses

Sub-Total             3  234.18
Tariff &
Subsidy Issues

Total Circular        4   872.4
Debt (As of      =1+2+3
Year End)

Source: Circular Debt Report, Planning Commission
of Pakistan, 2013

Tariff Differential Subsidy Budgeted, Claimed & Disbursed

       TDS Budgeted   Total Claims   Subsidy Released

2008             87             51                 87
2009             82            122                 82
2010                           227                 92
2011             30            287                238
2012             50          156.6                 99

Note: Table made from bar graph.
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Title Annotation:ENERGY CRISIS / CIRCULAR DEBT
Comment:Power sector's circular debt causes & impact.(ENERGY CRISIS / CIRCULAR DEBT)
Publication:Economic Review
Article Type:Statistical data
Geographic Code:9PAKI
Date:Jun 1, 2013
Words:2173
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