KE holds the key to Karachi’s solution


We are happy that Karachi Electric (KE) – the sole supplier of electricity to Karachi city of teeming millions has finally agreed to renegotiate the Power Purchase Agreement (PPA) with the Central Power Purchasing Agency (CPPA) for purchase of electricity from the national grid and a Gas Supply Agreement (GSA) with Sui Southern Gas Company (SSGC).

The contentious issues are not only mathematical in nature but also require a mechanism to be put in place not only with regard to future receivables but also payment of past dues which have given rise to circular debt. It is the Sindh government that continuously throws a spanner in the works that are geared towards the resolution of past dues to KE and other two Discos, Sukkur Electric and Hyderabad Electric, in the southern province of the country.

Unfortunately, however, these issues could not be resolved even when the same political party, PPP, was in governments in Sindh and Islamabad. Now, with two different parties in control in Sindh and Islamabad, the issue needs to be resolved amicably at the level of Council of Common Interest (CCI). The Sindh government’s complaint that Discos are over-billing them warrants a thorough probe.

Sindh is not prepared to settle even at 50 percent of the billed amount. This attitude appears to be unreasonable and needs arbitration by a retired higher judiciary member acceptable to both parties.

It is said that the Sindh government and its allied departments alone owe over Rs 100 billion to KE. Karachi has some geographical peculiarities. Being flat – Karachi Water & Sewerage Board (KWSB) needs to pump water as well as sewerage on a daily basis. When KWSB defaults on monthly payments to KE, the default chain commences.

KE in turn is not able to pay to SSGC which in turn is unable to make timely payments for natural gas received from production and exploration companies such as Oil and Gas Development Corporation (OGDC) and Pakistan Petroleum Limited (PPL). Both, being government entities, are forced to pump natural gas by their line ministry.

It is indeed sad that in this day and age reconciliation of receivables and payables cannot be done and Rs 200 billion are now said to be claimable between the stakeholders. Now the stakeholders have agreed to meet on September 7, 2015 with their claims which have choked the entire energy sector of the country.

Not only does the power sector need a significant reduction in generation supply-demand gap, it also requires a complete reorganisation or revision in its Transmission and Distribution (T&D) system. Both require capital expenditure.

It is said that government is establishing three 1200MW plants each near Karachi and in Sahiwal, based on coal and these would generate electricity at a lower tariff, as the interest cost during construction is much lower than in case of private sector-established plants. However, it needs to be remembered that private sector takes much less time in establishing coal-based plants.

Hesitancy on private sector’s part is due to its dependence on Railways for coal transportation – this risk appears to be genuine and lenders do charge a higher risk premium for this. What is really needed is to deregulate the T&D sector as a whole and allow private producers to directly sell their electricity to bulk consumers and end government-managed Discos’ monopoly.

Domestic consumers, especially life-line (poor consumers), would continue to require a subsidy. And, they may need to remain connected to government-owned and managed system in the initial phase. Once T&D is planned and modelled on a network sharing pattern adopted by cellular companies it will lower the tariff and make electricity affordable to consumers. The monthly bill of consumers may rise initially.

Efficiency and competition would come into play if power sector decides to adopt the hub and spoke model and Nepra fixes the carry-on charges for usage of transmission lines and feeders of Discos. The present tariff for coal-based plants is attractive compared to other fossil fuels but not for gas-based generation. For too long we have consumed domestically-produced natural gas on very cheap tariff.

Had we fixed natural gas tariff based on BTU value, ie, equal to other thermal fuels like furnace oil, we would not be in a dismal state as we are now. The fight among consumers is over availability with regulatory of a cheap fuel.

Thus, domestically-produced gas tariff holds the key to the present turmoil which needs to be resolved urgently as energy sector’s woes are terribly hurting country’s economic growth prospects.