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Unfair fuel price adjustment

Unfair fuel price adjustment

The power tariff’s monthly fuel price adjustment regime introduced in 2009 to pass through the impact of variation in generation mix and international oil prices to consumers is turning out to be a golden goose — one of the largest cash flow sources for the power companies and the government.

At disadvantage are the unsuspecting consumers, notwithstanding their categories, but bigger the size, higher the loss. In fact, its opaqueness is a key challenge on the sustainability of the power sector, national industry and businesses going forward. This, nevertheless, is raising question marks on the seriousness, depth and expertise of the power sector management to put an ailing sector of economy on its feet and exposes significant weaknesses in the regulatory arrangement.

The low oil price bonanza is not going to last forever that is currently camouflaging the weaknesses running through the power sector, from management to regulation and from government policy to reform. Sooner or later, the oil price would stage comeback and the political cost may not remain manageable as it is at present.
The significantly higher fuel costs were charged to raise funds from consumers and then the excess amounts refunded with a substantial time-lag

In the initial few years of its implementation, the fuel price adjustment ( FPA) changed actual fuel cost of power generation in a narrow band of 3-6pc, mostly going up and sometimes down. The alarm bells, however, started ringing recently when the fuel impacted tariff by as much as 45pc.

For January 2016, for example, the National Electric Power Regulatory Authority (Nepra) approved a Rs4.04 per unit cut in pre-fixed reference fuel price of Rs9.80 per unit, down by almost 42pc.That meant the power companies had collected around Rs20bn higher from consumers than actual spending on fuel cost. A month earlier, the cut was 41pc or Rs3.83 per unit.

These are enormous amounts and translate into Rs250bn or so over the period of one year. These are collected as a routine from consumers as trust and returned with a gap of few months on the basis of actual invoices. What are the standards of these estimations, calculations and approvals? If that is the quality of regulatory due diligence, it may be advisable to hire some accountants, instead of a large workforce at Nepra, to set a reference price and then refund or adjust on the basis of actual bills.

But that is not all. The bigger problem is that a major part of FPA is kept by the Discos instead of its transfer to the consumer. This is because the government changed rules of the game as the fuel prices started to come down and decided that 70pc consumers falling under 300 unit per month consumption would no more be entitled to FPA refund. As a result, about Rs180vbn on account of these consumers are earned as windfall by the companies and proportionate GST by the government.

Fuel cost also has a direct bearing on other elements of consumer tariff – transmission, distribution and maintenance cost normally known as base tariff. The combination of fuel cost and base tariff is then charged to the consumers. Based on these higher charges, the Federal Board of Revenue (FBR) collected 17pc general sales tax.

This is mainly because the FPAs are calculated on the basis of reference tariff set in 2014-15 when the price of furnace oil was Rs66,000 per tonne, which now stands at Rs23,000 per tonne, down 65pc This means the significantly higher fuel costs were charged to raise funds from consumers and then the excess amount refunded with a substantial time-lag.

The problem does not end here. Even for 2015-16 the base tariff determined a few weeks ago, instead of Rs23,000 per tonne prevailing now the reference furnace oil price has been kept at Rs47,981 per tonne which was never actually reported in entire year of 2015. What is the justification? This would mean that power rates are artificially being kept on the higher side that would continue the practice of delayed refunds for another year. This apparently is a serious injustice.

Dichotomy of the situation is that reference furnace oil price was approved at Rs38,000 per tonne Nandipur Power Project to show its lower tariff. Simply put, the 2014-15 tariff was based on Rs65,900 per tonne, the tariff for 2015-16 has been kept at Rs47,900 per tonne, the tariff for Nandipur has been kept at Rs38,000 per tonne while actual furnace oil price stood at Rs23,000 per tonne.

This is a big dichotomy that is resulting in FPA adjustments of Rs3.83 and Rs4.04 per unit every month. Such kind of poor estimation is unheard of in the history of power regulators. Financial estimation should be so accurate that variation should not go beyond 2-5pc to avoid price shocks to consumers.

No wonder then, the FBR is holding back Rs70bn of distribution companies as GST refunds. This FBR collects GST soon after distribution companies issue bills to consumers instead of actual collections. Given 10-20pc short recoveries by Discos, a substantial amount of GST always remains in the pipeline waiting for reconciliation.

Moreover, Discos are bound to readjust in consumer bills the impact of GST on lower FPA with a time lag but GST refunds are not made by the FBR. The FBR is holding back Rs70bn of distribution companies as GST refunds.

Courtesy : Dawn News



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