Circular Debt-causes & Remedies Jan 2019.pptx

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Lahore Electric Supply Company Limited BRIEFING ON CIRCULAR DEBT IN POWER SECTOR

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Definition In context of Power Sector, circular debt (CD) is that amount of cash shortfall which is receivable from DISCOs by CPPA-G and payable to IPPs, GENCOs, WAPDA and Oil & Gas companies.

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Click to editOF Master title style FLOW POWER

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WAPDA-Hydel

GENCOS

IPPs

NTDC

D I S C O S

1. LESCO 2. GEPCO 3. MEPCO 4. FESCO 5. HESCO 6. IESCO 7. TESCO 8. QESCO 9. PESCO 10. SEPCO

KESC (Vertically Integrated)

Click to edit Master title style FLOW OF REMITTANCE

WAPDA-Hydel

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NTDC

GENCOS CPPAG

D I S C O S

1. LESCO 2. GEPCO 3. MEPCO 4. FESCO 5. HESCO 6. IESCO 7. TESCO 8. QESCO 9. PESCO 10. SEPCO

IPPs Short Remittance KESC

Click to edit Master title style FLOW OF REMITTANCE Power Plants IPPs, GENCOs & WAPDA

Less money paid by DISCOs to CPPA

IPPs receiveables accumulate

CPPA buys electricity and sells at NEPRA tariffs

Less collection by DISCOs

IPPs unable to pay the Oil companies (OMCs)

DISCOs & KESC

Consumers

CIRCULAR DEBT

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66 Mln. Rs.

Fiscal Years

Payable to Power Producers

Payable by PHPL Total

Energy Payment

Capacity Payments

2013-14

155,787

46,981

40,693

22,063

265,524

265,224

-

530,748

2014-15

160,694

40,460

77,748

34,208

313,110

335,474

-

648,584

2015-16

179,929

19,808

81,844

39,452

321,033

367,961

-

688,994

2016-17

198,589

83,498

79,711

17,228

379,026

438,961

-

817,987

2017-18

289,512

161,444

73,743

19,199

543,898

583,488

UoSC

Others

Total

Principal

Markup

32,747

Circular Debt is swelled to Rs. 1.30 Trln as on Dec-18. (News Reports)

Note: Source of circular debt amount/ data are Different Reports and Websites

1,160,133

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Note: Source of circular debt amount/ data are Different Reports and Websites

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CIRCULAR DEBT IN POWER SECTOR

CAUSES

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MAJOR CAUSES OF CIRCULAR DEBT  Excess T&D Losses than NEPRA Target  Below target Recoveries  Delay in Tariff Determination  Delay in Tariff Notification  Delay in processing and release of Subsidy claims  Others-GENCOs Inefficiencies, Tax Issues etc.

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Unrealistic Targets of T & D Losses 1.

2.

The targets of T & D losses determined by NEPRA usually do not grasp the actual technical losses and are not as such achieved. DISCOs operating in Punjab Province of Punjab are not allowed to recover losses resulting from poor law and order situation in certain hard areas such as border areas.

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Composition of T & D Losses 1. 2.

Technical Losses Administrative losses NEPRA T&D Losses Target

Actual T&D Losses

Financial Impact of Excess T&D Losses -LESCO Rs. Mln

FY 2015-16

11.75%

13.94%

4,937

FY 2016-17

11.75%

13.76%

4,621

FY-2017-18

11.75%

13.83%

5,658

Financial Year

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Delay in Processing and Release of Subsidy Claims 1.

2. 3.

GoP usually picks up substantial portion of service cost of supply of electricity and subsidies like TDS & ISP etc. The resultant subsidy claims lodged by DISCOs are not timely approved for releases GST subsidy allowed by Govt. of the Punjab on agriculture consumers remains payable on their part for longer period

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Below Target Recoveries 1.

In tariff determination, NEPRA does not allow provision for less recovery from defaulter consumers

2.

Govt. departments usually do not timely pay the electricity bills and thus cause accumulation of CD.

Below Target Recoveries & Delay in Processing and Release Click to edit Master title style of Subsidy Claims Rs. Mln

Year

Recovery (%)

Receivables From Consumers

2015-16

99.65

47,626

9,085

2016-17

100.45

52,440

14,381

2017-18

97.8

63,938

19,142

2018-19 (Dec-18)

99.0

76,769

33,431

Spill Over For FY 2015-16 Rs. 14,179 mln FY 2016-17 Rs. 15,821 mln FY 2017-18 Rs. 18,339 mln

Subsidies Receivable

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Delay in Tariff Determination and Notification LESCO’s Payable to CPPA during FY 2015-16 onwards have persistently increased owing to following factors: 1.

The delay in Tariff determination and notification has badly impacted financial health of LESCO. For instance, the Tariff Notification for FY 2015-16 has been issued on Mar 22, 2018.

2.

LESCO’s Quarterly Adjustment claims (Jul-17 to Jun-18) of Rs.31,969 Mln, determined by NEPRA on 31-08-2018.

3.

Excess PYA recovery upto 21st Mar 2018 amounting to Rs. 24,059 Mln is determined by NEPRA on 31-08-2018.

4.

The determined PYA is notified on 01-01-2019.

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Others GENCOs Inefficiencies 1.

2.

Electricity generation from thermal system is contributed by IPPs ( Pvt. Sector) and GENCOs (Public Sector). Generation cost of IPPs is substantially higher than that of GENCOs which operate below rated capacity owing to various inefficiencies. Cheaper generation by GENCOs at low efficiency level leads to higher cost of service to consumers by disturbing energy mix and results in low recovery by DISCOs

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Others

Taxation Issues 1.

FBR levies GST and income tax on the amount of subsidy allowed by GoP which can not be recovered from consumers. This keeps DISCOs unduly engaged in attending the recovery notices at appellate and legal fora

2.

GST has to be paid to FBR as per billing to consumers instead of cash collection. This sticks scarce revenue for unjustified legislation

3.

Refund claims are not decided by FBR

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CIRCULAR DEBT IN POWER SECTOR

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REMEDIES

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To address the causes of Circular Debt (CD) as narrated in previous slides, following are recommended as remedies:

• GoP may direct entities and NEPRA to ensure timely processing of tariff petitions and their determinations while covering all legitimate components of cost of service.

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• Timely notification of the tariff determined by NEPRA to ensure recovery of legitimate cost of service as per matching principle. • To bring about improved corporate governance, GoP needs to redefine its policies on power sector and empower BoDs of the entities to take imperative initiatives for financial autonomy ensuring viability of the sector.

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• To bring about competitive market model, focus needs to be laid on capacity building and training of the man power working in the in the relevant area of sector. • BoDs of the entities should be constituted on high standards of merit, free from political pressures so as to work independently purely in the interest of the respective entities in particular and the sector in general. • Consumer end tariff should be reflective of actual legitimate costs.

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• Uniform tariff policy needs to be gradually eliminated by shifting to performance based tariff, while removing cross subsidy support between efficient and inefficient entities. • In fuel efficiency policy, priority should be assigned to the power sector. • Special focus needs to be laid on enhancing hydel generation capacity & other renewable energy resources while exploring new opportunities. • Effective campaign on energy conservation needs to be launched on national level.

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Thanks

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