Menacing capacity charges: Contract Act offers a way out

Line losses, theft, corruption, old equipment and incompetent management contribute to inflated electricity bills

For over two decades, power consumers have been victims of inflated electricity bills which have now become an unbearable burden. Line losses, theft, corruption, old equipment and incompetent management are contributory factors, warranting urgent redress. One large component of electricity bills which can be reduced quickly is capacity price. Capacity price is part of every IPP agreement. The government is obliged to pay huge amounts every month to every plant, even when no electricity is supplied by them. These payments cannot be avoided as they are covered under Sovereign Guarantees. Attempts have been made by different governments to get rid of capacity price payments, but in vain.

One suggestion has been to cancel capacity price in all contracts of all IPPs. This will, of course, lead to international litigation where we are sure to lose and end up with damages to the tune of several billion dollars, far exceeding the cost related to the notorious Reko Diq judgment. This option is, thus, out.

The second option is to negotiate with each IPP to get relief from capacity price payments. Obviously no one is going to agree to give up their guaranteed highly lucrative earnings. So this option is out as well.

There is a third option, which has never been considered nor tried, because it is not a part of the agreements. All agreements are based on their governing law. In this case, it is The Contract Act (IX of 1872).

The Contract Act very clearly defines conditions in which any clause of an agreement is to be deemed null and void if it is against the interest of the public. Article 23 of the mentioned Act is the governing portion. Under Article 23 there are scores of cases where clauses of agreements — and even complete agreements — have been cancelled under court orders for being against the public interest. It is time to invoke the Contract Act and cancel the capricious clauses covering capacity price payments, separately for the three different kinds of IPPs — 1) those owned by the government, 2) those owned by Pakistani citizens, and 3) those owned by foreigners.

IPPs owned or controlled by government include those owned by the Federal government, the Punjab government, Fauji Foundation, etc. There is no reason why these IPPs cannot mutually agree to cancel the capacity price payments clauses, without causing any repercussions to the government.

The next category of IPPs is owned by Pakistani citizens — mostly politicians and major businessmen. Invariably they put in 20% equity while 80% is bank financing. Their balance sheets will show that they have recovered their investments very many years back and have even earned more than enough to pay back their bank loans. Any court in Pakistan will understand that the capacity price payments are against the public interest and are indeed proving too heavy on the public purse, as evident from the massive demonstrations and expressions of anger by the public, reported suicides and resolutions passed by elected houses. It should not take more than a couple of hearings for any court to cancel the capacity price payments being clearly against the public interest as covered under Section 23 of The Contract Act.

The third category is foreign-owned IPPs. A case filed in an appropriate international court would also lead to a very favourable decision under Section 23 of The Contract Act. It will take a little longer, in any event within months if handled correctly. There is no point in sending Pakistani lawyers to fight the case at such a forum as they are not experienced enough in the intricacies of international courts dealing with the technicalities of power generation, transmission and distribution. Perhaps a better way is to hire a strong international (English) law firm and send a couple of extremely competent engineers from Pakistan to help the law firm with technical issues which are likely to arise.

This three-pronged approach will lead to immediate results (within days) of the first group of IPPs (government control) not receiving any more capacity price payments. The second group (Pakistani owners), which account for almost half the total number of IPPs, can be dealt with through local courts within months. Settling the issue with the third group (foreign owners) will take a little longer; but if handled professionally at the right forum, it can also be resolved within a year or so.

For this approach, invoking The Contract Act, cases concerning all three groups should be initiated immediately and simultaneously. Results are virtually guaranteed, but only if handled expeditiously and professionally, not in the usual incompetent, lethargic, bureaucratic and political way of working.