New tariff could hinder Pakistan utility sale
A change by Pakistan's energy regulator to the multi-year energy tariff has thrown a proposed multi-billion dollar electric company takeover into doubt. Shanghai Electric Power (SE) signed a deal last year to buy a 66.4% stake in Pakistan's K Electric from the UAE's Abraaj Group for $1.77bn. This was based on a tariff rate of PKR15.57 per unit, which has now been cut by the regulator, Nepra, to PKR12.07 per unit. SE's chairman has written to Nepra warning that the cut endangers the deal and the $9bn of investment in infrastructure that would accompany it.
ISLAMABAD: The top man of an eminent Chinese company came forward to save the biggest ever private sector deal of $1.77 billion against sale of Abraaj group’s 66.4% stake in K Electric to the Shanghai Electric Power Company inked in August last year and told the Nepra that the current multiyear determined tariff at Rs12.07 per unit will cause termination of the transaction.

The current determined tariff was reduced by Rs3.50 power unit by Nepra on March 20, 2017 from the existing Multi Year Tariff of Rs15.57 per unit.

The petitioner (KE) had sought the tariff at Rs16.23 per unit. K. Electric has filed the review petition seeking viable tariff to make the $1.77 billion transaction materialised. However, Nepra is unmoved to extend any relief in tariff.

The previous tariff based on efficiency helped the KE to scale down its transmission and distribution (T&D) losses from 35pc to about 22.1 percent over the years, but most of the efficiency gain was allowed to the KE to let it invest and become profitable from being a loss-making entity. In the new tariff, the efficiency gains would now go to the consumers and the system operator would get its return on all assets.

In the latest scenario, Wang Yandan, Chairman of Shanghai Electric Power (SEP), in a letter to Nepra chief written on September 26, 2017 has sought the efficiency based Multi-Year Tariff to materialise its business plan under which a mammoth amount of $9 billion will be invested in 10 years’ time in improving the electricity supply as well as strengthening the transmission and distribution system of the entity. And to cater to the immediate energy needs of the city, SEP plans to build the 900MW power plant.

The copy of the letter exclusively available with The News clearly mentions: “The current determined tariff which is still under review makes the company’s operations completely unviable and non-bankable (both in terms of base tariff and structure) and will unfortunately cause the termination of the acquisition of controlling stake in K. Electric and subsequently the business plan which was aimed at improving the power generation outlook and the lives of the Karachiites.”

The letter further argues: “Our investment decision and business plan is carved out on a base tariff and performance based structure level same as the previous Multi Year Tariff which was based on efficiency regime.” It also pinpointed that the Chinese government and regulatory regime has extended the approvals to SEP on the basis of previous Mutli Year Tariff mode. Now the regulator has changed the efficiency based tariff regime which is why the determined tariff is no more viable for the SEP.

The letter also says by quoting SEP chairman: “We are seriously committed to the development of K. Electric and Karachi’s power infrastructure and for us to proceed further with the acquisition of controlling stakes in K. Electric and implement of our business plan, it is imperative that K.E’s new Multi Year Tariff is at a level same to the previous Multi Year Tariff of the entity.”

It said, “We have built up our entire business plan on the basis of previous Multi Year Tariff.” The official sources also disclosed that minority shareholder has also written the letters to NEPRA asking for increase in tariff to make the business plan of SEP and its investment sustainable.

To a question the official in Power Division said that the Ministries of Defense and Interior have, however, extended the NOC (no Objection Certificate) for the sale of Abraaj Group’s 66.4% stake in K-Electric to Shanghai Electric Power. However, the new buyer of K-Electric will be bound to ensure power supplies to vital defense installations at all times.

However, settlement of the outstanding dues which the seller (Abraaj management) is still an issue and dues are to be settled by the seller before the deal is finalized. The Sui Southern Gas Company (SSGC) and National Transmission and Dispatch Company (NTDC) have made claims worth around $1.24 billion on account of cost of electricity, gas and late payment surcharges (LPS). Abraaj Group does not want to pay the interest and is seeking settlement of payment of principal amount. Abraaj Group is of the view that since the matter of payment of mark-up is pending in the court this issue should not be linked with the deal. The Power Division and SSGC do not agree with this stance.