Karachi-Electric (KE) Chief Executive Officer Moonis Alvi on Thursday said the management is striving to ensure a recent decision of NEPRA on the utility’s multi-year tariff has no direct impact on customers, but warned there may be some “indirect” impacts.
In a video statement, Alvi said the National Electric Power Regulatory Authority (NEPRA)’s decision on KE’s multi-year tariff for FY2024-2030 would significantly impact the company’s financial position, ultimately affecting its operations and performance. He noted that NEPRA’s ruling made several significant changes and reductions to the multi-year tariff approved in May.
“This kind of change after more than two years of detailed consultation and analysis is unusual and could impact the company’s investments, planning and long-term sustainability,” he said.
According to Alvi, KE is closely reviewing the impact of the amended decision to determine how to continue operations effectively and minimize any potential impact on customers. The company’s board of directors has been briefed on the amended decision, and consultations are underway to determine the future course of action, he added.
While the revisions have reduced the average tariff set by NEPRA from Rs. 39.97/kWh to Rs. 32.37/kWh, this would not impact end-consumers due to the uniform tariff regime. In a report, Arif Habib Ltd. said it estimated an annual impact of around Rs. 96 billion on KE’s revenue. “While not all of this will directly impact profitability, a significant portion is expected to weigh on KE’s earnings and overall financial sustainability,” it said, noting it could strain capex plans, create fuel supply challenges, and hinder debt covenant compliance.
The revision also requires KE to restate its earnings per share, earlier set at Rs. 0.15/share for FY24, resulting in a significant loss for the company.
Arif Habib has noted that NEPRA has decommissioned two plants, BQPS I and KCCPP, effective from the date of notification of the determination. This would have financial implications, which could in turn affect KE’s future plans. The return on equity for the remaining two plants, BQPS II and BQPS III will follow a hybrid ToP structure, with 35% guaranteed and the remainder based on actual dispatch, effective November 25. NEPRA has applied the same methodology used for IPPs whose contracts were previously renegotiated.
Regarding the fuel take or pay arrangement, it would not be permitted after the expiry of the current Gas Supply Agreement in December 25. The conditional approval granted under additional supply or central dispatch would also not apply to future GSAs. This poses a challenge for plant operations, as RLNG contracts include a minimum take or pay obligation.
NEPRA has reduced the allowed distribution loss from 13.9% to 9%, comprising 8% technical losses and a 1% allowance for law and order issues. The 4.9% shortfall will have to be absorbed by KE, potentially constraining capex, causing fuel supply challenges and inability to meet debt covenants. Previously, NEPRA allowed dollar-based returns of 12% for transmission and 14% for distribution. These have now been converted to rupee-based returns of 15% for transmission and 14.47% for distribution.
KE’s Transmission and Distribution losses increased by 0.7ppts to 16% in FY24, while the recovery ratio declined by 1.8ppts to 91.5% amid rising power tariffs. However, this determination is expected to further strain KE’s cash flows, limiting its ability to undertake new capex.
In the previous determination, a recovery loss of 6.75% was allowed. However, as per revision, a write-off mechanism capped at 3.5% is permitted only after the MYT period ends in FY30. However, this could impact KE’s cash flows by delaying the recovery of pending amounts. The reduction in the fuel cost reference has led to higher incremental FCA, says Arif Habib, thereby lowering tariff differential claims, but will overall have no impact.
It is important to note that NEPRA had earlier approved a tariff of Rs. 39.98/kWh against KE’s request of around Rs. 44/kWh, with the Energy Purchase Price contributing Rs. 19.20/kWh.