— IPP body states query commission’s claims of plants making Rs415 bn earnings under 1994 policy are ‘wrong’

ISLAMABAD: The Independent Power Producers (IPPs) have actually rebutted the query report on power sector and stated the high power tariff for customers is “mainly attributable to higher Transmission and Distribution (T&D) losses and taxation in the country”.

In its consolidated reply to report that has yet to be made public, IPPs Advisory Council (IPPAC) stated that the query report overlooked ‘Time Value of Money’ and ‘Dollar Indexation’ while declaring enormous earnings being minted by the power plant owners.

The IPPAC likewise asserted that returns were not examined versus contracted returns however specified in outright terms, including earnings of IPPs need to be changed to get true returns for investors/shareholders (such as primary payment and late payment interest are deducted while devaluation is added back).

According to the reply: “The report itself states the adjusted profit of 2002 IPPs Policy which is Rs 152 billion against reported profits of Rs 203 billion. Similarly, the adjusted profits of 1994 Policy IPPs will also need to be worked out which would be significantly lower than their reported profits of Rs 415 billion.”

“In a number of cases, the stated amounts in the report do not reconcile with amounts reported in IPP’s records, financial statements,” it declared.

IPPAC likewise kept that returns were used by the federal government based upon dominating rates of returns, considering nation threat. “The returns were offered across the board without discrimination and if government does not want to offer dollar returns, it should change the future power policy,” it added.

“Had a 15 per cent rupee based return been offered, a 7pc devaluation would provide net returns of 8pc in dollar terms, equivalent to the rate offered on Risk-Free Eurobonds,” it stated, including investing in a power project likewise included a variety of extra dangers.

“Even if RoEDC is not offered, investors build it into RoE as no investor would agree to zero returns during the construction period of 2-4 years. For example, if PIB coupon payments start after 2-3 years (synonymous with construction period of IPPs), PIB investors would require a higher yield. The difference between the PIB rate of return of 10% and IPPs rate of 15% represents equity/project risk and not country risk. Alternatively, project/equity risk can be added to the Pakistan Euro Bond Dollarized rate of 7 8% (which includes country risk) to arrive at rate of 15% or so,” it added.

IPPAC even more stated that changing from $ to PKR return can not be done mid-term and it might just be used in the future power policy to be revealed by the federal government.

The reaction specified that stated that IPPs under the power policy 2002 have actually been incorrectly forecasted in the report that they have actually earned a profit of Rs203 billion, as factually their earnings stands at Rs152 billion and added that declares of Rs415 billion earnings under power policy 1994 was likewise incorrect.

It even more stated repayment needs to be computed based upon adjusted earnings or more exactly, dividend net of taxes, rather of accounting earnings.

“The report itself has adjusted accounting profits to arrive at true returns to the shareholders yet when calculating % returns and payback, it uses the accounting profits. The report only asks for “return” or reduction of Rs.64 billion while at the exact same time declaring numerous billions of rupees for excess earnings. This by ramification suggests that other than the Rs 64 billion (on account of heat rate and (O&M) none of the other payments are beyond the agreement.”

“While the few IPPs who have earned these high returns can be analyzed, there is no reason to malign all 80 odd IPP,” it added.

Discussing the Pay or take policy, the IPPs stated that had it been open market operations and presuming plants might cost levels on plant element, then repaired expenses would be earned at this usage element.

IPPs likewise stated that “Take and Pay mode would result in savings of Rs28 billion annually is fundamentally flawed. This applies to Return on Equity as well. If investors were to recover their returns in first 10 years instead of 25-30 years, the rate of return would have been much higher than 15pc and regardless of contractual protections, in a single buyer market, shift cannot be made to Take and Pay basis and then develop an open market”.

On the problem of excess payments, on account of fuel, heat rate and O&M, IPPs reacted that tariff at first figured out at expediency by NEPRA is trued-up based upon real expenses at Business Operation Date (COD) which is repaired for the whole PPA term and no true- up is enabled post COD. Both Heat Rate and O&M are repaired for the whole PPA regard to 25 years. The real rates are much better than tariff criteria in earlier years and even worse in the later years, nevertheless, tariff does not acknowledge such modification in efficiency and offers a uniform tariff for the whole PPA term.

Specific older plants have lower heat rates and higher O&M expense compared to tariff and they bear the loss by taking struck on their returns.

“Similarly, PPA does not provide for a claw-back mechanism for better performance and neither it provides any compensation to IPPs for lower performance against the approved benchmark and any gains/(losses) are also to the account of the IPP. And if the government seeks to actualize heat rate and O&M, it should be on both sides, i.e. plants with heat rates and O&M costs higher than PPA benchmark should be compensated for the loss.”

IPPs likewise pointed out that lots of “older government plants are now only 20pc efficient compared to their original efficiency of 36pc-38pc, whereas IPPs with better management and rigorous maintenance regime are maintaining and exceeding their design efficiencies”.

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