MYT impact estimated at over Rs300b

The Power Division has challenged the regulator's decision on granting a multiyear tariff (MYT) to K-Electric (KE), alleging that it will allow the company to collect over Rs300 billion from consumers.

"The total financial impact is in excess of Rs300 billion of the interventions identified for review by the government of Pakistan in the KE MYT," the division said in a review petition submitted to the National Electric Power Regulatory Authority (Nepra).

It has asked Nepra to revisit its recent approval of electricity rates for KE, Karachi's main power supplier. KE's new tariffs come into effect from financial year 2024-25 and will run through FY30.

The government believes that Nepra has allowed several cost items and profit margins to KE that are higher or more favourable than for any other utility in Pakistan, resulting in unnecessarily high bills for consumers and extra pressure on public finances.

The Power Division has raised serious concerns over the preferential treatment granted to KE. Nepra set KE's fuel cost benchmark at Rs15.99 per kilowatt-hour (kWh), significantly higher than the rates paid by other utilities purchasing power from the national grid. This discrepancy adds Rs28 billion in FY24 and Rs13 billion in FY25 to the federal budget, shielding KE customers from these costs.

KE also received a "recovery loss allowance," despite its actual recoveries exceeding the threshold set by Nepra. No other utility enjoys this privilege, which has generated Rs36 billion in FY24 and Rs35 billion in FY25 for KE, amounting to over Rs200 billion in seven years.

Furthermore, Nepra allowed KE a 24% markup on working capital – higher than any other utility – boosting revenue by Rs2.4 billion in FY24 and Rs15 billion over seven years. Additionally, a higher distribution loss target of 13.90% (vs KE's own 13.46%) was set, passing Rs3.1 billion in FY24 and Rs21 billion over the seven-year period on to consumers. A unique 2% "law and order" margin was granted to KE, despite an improved security situation. This adds Rs14 billion in FY24 and Rs99 billion over seven years. KE was also allowed to retain "other income" from fines and investments, which should have offset customer costs.

Transmission losses were overestimated at 1.30% (vs actual around 0.75%), and KE keeps 75% of savings, creating inefficiency and costing Rs4 billion in FY24 and Rs28 billion over the seven-year period.

Excessive returns were also permitted. KE enjoys a 12% return on equity (RoE) in US dollar (around 24.46% in Pakistani rupee) on generation, compared to National Transmission and Despatch Company's (NTDC) 15% in rupees, and 14% RoE in US dollar (around 29.68% in PKR) on distribution, far exceeding the 14.47% RoE in rupees for others like the Faisalabad Electric Supply Company (Fesco).

Idle KE power plants still receive capacity payments, costing Rs12.7 billion in FY25 and Rs82.5 billion overall. Generous inflation indexation and a 17% RoE for these plants further strain finances.

The Power Division urged Nepra to align KE's tariff structure with national standards to ensure fairness, transparency and affordability, stressing the need to eliminate unjustified allowances and ensure equal treatment for all utilities.

KE eyes DISCO acquisitions

K-Electric held a corporate analyst briefing on Monday to provide insights into its recently approved tariffs and operational updates. The company expressed openness to acquiring other DISCOs (distribution companies), should the privatisation process move forward, according to Arif Habib Limited.

Its management highlighted that KE's total generation capacity currently stands at 2,397 megawatts (MW) from internal sources, while it procures over 1,600 MW externally. With the anticipated completion of NTDC interconnection projects, an additional 400 MW is expected to be integrated into its grid.

The utility's robust transmission network now comprises 7,095 MVAs capacity, 74 grid stations and 1,394 km of lines, while its distribution infrastructure includes 8,964 MVAs capacity, 2,112 feeders and over 31,000 pole-mounted transformers (PMTs).

Since its privatisation in 2005, KE has added 1,957 MW to its generation capacity, improved efficiency from 30% to nearly 46%, doubled transmission capacity and cut transmission and distribution (T&D) losses from 34.2% to 16%.

The utility estimates a cumulative saving of Rs900 billion for the government and consumers, alongside annual fiscal savings of Rs164 billion due to lower aggregate technical and commercial (AT&C) losses. Nepra has approved a multi-year tariff (MYT) structure of Rs39.98/kWh for KE, lower than the utility's request for Rs44/kWh. Return on equity (RoE) has been set at 14% for generation/distribution and 12% for transmission, with a 70:30 D/E ratio. The cost of local and foreign debt has been capped at Karachi Interbank Offered Rate (Kibor) + 2% and Secured Overnight Financing Rate (SOFR) + 4.5%, respectively.