• Nepra allowed Rs215m burden caused by coal supplier’s default to be passed to consumers
• Supplier continued delivery to other industries, made ‘dubious’ force majeure claims to escape accountability
ISLAMABAD: Electricity consumers in Pakistan are having to shoulder a financial burden of nearly Rs215 million, mainly due to regulatory weaknesses, it has emerged.
While the capacity trap, currency devaluation and exchange-rate volatility are touted as the main factors behind expensive electricity, similar attention is not paid to issues of weak contract enforcement and inadequate regulatory oversight, which are actually forcing consumers to foot the bill for contractual default by private companies.
In the latest episode that has come to light, a Punjab-based coal power plant faced a significant contractual default by its long-term supplier.
Subsequent decisions by regulators such as the National Electric Power Regulatory Authority (Nepra) and the Central Power Purchasing Agency (Guarantee) Limited (CPPA-G) allowed the resulting financial burden to be passed directly on to consumers in the form of higher tariffs.
This is just one example of persistent weaknesses in the coal procurement process, which previously made headlines earlier this year, sparking inquiries and leading to partial improvements. However, the issue is far from resolved and continues to add to the public’s financial strain.
Dawn reached out to Nepra with a set of questions on Sept 22. Over the following weeks, the regulator repeatedly promised a written response, but failed to provide one until going to press.
Default on coal supply
The issue at hand stems from the breach of a long-term coal supply agreement between the power plant and its coal supplier in December last year. The contract, awarded through a competitive process, secured a substantial discount of $2.51 per tonne on API-4 specification coal.
This was seen as an improvement over a previously-challenged contract, which only offered a discount of $0.50 per tonne.
However, the supplier defaulted on its obligation to deliver coal against issued purchase orders, citing an alleged ‘force majeure’ as the basis for its non-performance, referencing factors such as congestion at the Richards Bay Coal Terminal in South Africa and, notably, the India-Pakistan conflagration in May.
The claim regarding terminal congestion is noteworthy, as industry experts routinely consider this risk as a foreseeable trade challenge in the international coal market.
However, the use of the India-Pakistan flare-up as an excuse does not hold up, as documentation indicates that other suppliers successfully fulfilled their contractual obligations during the same timeframe.
Additionally, other industries in Pakistan continued to import coal without interruption, raising questions over the enormity of the supplier’s ‘force majeure’ claims.
Interestingly, while it defaulted on the long-term contract with the power plant, the company continued to supply coal to other industries, suggesting the decision was linked to the high discount offered rather than the self-proclaimed ‘force majeure’.
