Nepra grants KE 14pc return in divided decision

ISLAMABAD: In a majority vote, the National Electric Power Regulatory Authority (Nepra) has granted K-Electric a 14 per cent dollar-indexed return on equity (ROE) for all its generation plants under a multi-year tariff spanning seven years, ending in 2030. The decision has faced strong opposition from the regulator’s member tariff who labeled it unfair to consumers.
In its determination released on Tuesday regarding K-Electric’s petition filed two years ago, Nepra approved the tariff on a ‘take-or-pay’ basis for KE power plants using various fuels, including high-speed diesel (HSD), for the control period of seven years or the remaining useful life of the plants, whichever is shorter — except for the latest BQPS-III, which will have an 11-year period. Notably, the useful life of Unit-I and Unit-II of BQPS has already expired, while Unit-III has two years remaining.
On whether to classify KE plants as must-run for economic merit order under ‘take-or-pay’ agreements, the regulator decided against allowing ‘take-or-pay’ for RLNG under current arrangements, but permitted it for other plants.
It approved a fuel cost component ranging from Rs43.3356 to Rs50.7461 per unit for HSD in combined cycle operations, Rs20.6731 to Rs41.7506 per unit for RLNG-based plants, Rs33.3197 to Rs34.6414 per unit for RFO-based plants, and Rs6.8385 to Rs9.6249 per unit for gas-based plants.
The regulator also accepted KE’s demand for a debt-to-equity ratio of 70:30 for all plants. The majority members allowed a 14pc dollar-based ROE, which was lower than KE’s request for 15pc on a quarterly basis. However, it was noted that the government was revising dollar-indexed ROEs for independent power producers (IPPs). The regulator acknowledged KE’s claim that there had been no unilateral reduction in the ROE for IPPs.
Majority decision opposed
Nepra’s member tariff Mathar Niaz Rana opposed the majority decision, pointing out that the dispatch factor of KE’s BQPS-I (units 1-6), KCCPP, KTGEPS, and SGEPS had been decreasing since 2019, with a significant drop in FY23 following the induction of BQPS-III.
Some plants might not operate due to gas shortages, given the current status of the RLNG agreement. Moreover, KE’s share from the national grid is expected to increase to 2,600MW from 1,000MW once interconnectivity is established, and the induction of renewables remains an active agenda for KE.
Mr Rana highlighted that these plants would receive payments significantly higher than their actual asset base (RAB) under the proposed tariff structure for the remaining period without supplying substantial energy to the system.
He expressed concern that the high operational and maintenance (O&M) costs of these power plants warranted a ‘take-or-pay’ tariff for the control period, suggesting KE should consider decommissioning them in light of cheaper alternatives. He asserted that HSD, being an expensive fuel, should not be allowed under the ‘take-or-pay’ agreement.
Opposing the 14pc dollar-based ROE as excessive and unfair, Mr Rana noted that most of KE’s generating units are Brownfield projects utilising old existing assets. The rationale for high returns for new IPPs typically stems from compensating for higher risks and uncertainties associated with new projects, which he argued do not apply to KE.
He added that aside from BQPS-III, many of KE’s plants have substantially repaid their debts and face fewer risks compared to new investments, warranting a reconsideration of the return rate. He expressed concerns that granting KE a 14pc dollar-based ROE could set a significant precedent for other IPPs seeking similar terms.
Regarding the O&M component, Mr Rana noted that KE’s O&M costs have both local and foreign portions. The foreign O&M component is now indexed to both the US CPI and the dollar exchange rate, while the local portion is tied to the local CPI. He argued that since KE manages its O&M in-house, it would be fair to continue with the previous practice of indexing O&M costs solely to the local CPI in the current multi-year tariff, to protect consumers from exchange rate fluctuations and US CPI inflation impacts.
KE welcomes decision
On the other hand, KE welcomed the decision, stating that it would not affect electricity rates charged to consumers due to the government’s uniform tariff policy implemented across Pakistan. It described the decision as a significant milestone towards realising their comprehensive investment plan for 2030, aimed at reducing losses in transmission and distribution, growing their customer base, and strengthening infrastructure to meet current and future demands.
K-Electric said it is evaluating the extensive determination issued by Nepra and recognised that the approved tariff structure includes some reductions, particularly related to O&M costs, ROE, and a redefined control period, and expressed intent to remain engaged with the regulator.
Published in Dawn, October 23th, 2024