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    Additional incentive of 2pc IRR: CPHGC censures Nepra for being extra kind to EPTPL


    June 22, 2022 - MUSHTAQ GHUMMAN

     

      China Power Hub Generation Company (Private) Limited (CPHGC) has reportedly censured National Electric Power Regulatory Authority (Nepra) for being extra kind to M/s Engro Powergen Thar (Private) Limited (EPTPL) for approving incentives compared to similar projects.

      The company s CEO, Ren Li Hui, in a letter to Secretary Power Division, Rashid Mahmood Langrial, apprised the Secretary Power on the one-time tariff adjustment decision issued by the regulator on the application submitted by a peer power plant, ie, Engro Powergen Thar (Private) Limited (EPTPL) on June 15, 2022.

      Nepra Chairman Tauseef H Farooqi wrote on the authority s decision: I understand that the Authority gave 02% additional IRR on top of 18% so making it 20% (overall) as a special incentive to Engro Powergen Thar Pvt. Ltd being the first mover in the Thar area capitalizing on Thar s indigenous coal resources. So I believe this additional incentive of 02 % IRR will not apply on other projects falling in Thar same upfront tariff regime.

      We expressed our reservations regarding NEPRA s approach and requested your support to avoid any interpretation in the decision which is against the spirit of upfront tariff, the CEO CPHGC said.

      According to the company, Nepra s decision includes the following adjustments which it understands are against the provisions of upfront tariff which was unconditionally accepted by CPHGC: (i) construction period has been reduced from upfront allowed period of 40 months to 38 months based on a presumptive treatment on date of signing of PPA. This treatment is also not in line with tariff adjustments decisions issued earlier by the authority. In its previous decisions it did not make any adjustments to construction period which has been clearly defined as locked in period in the upfront tariff. Such unilateral measures in reduction of construction period does not account for the additional costs incurred by the company in ensuring timely completion of the project, and instead results in reduction of the overall project cost and consequential adjustments indebt the component of the lenders and related financing fee and charges; (ii) although the installation and cost of European boiler has been provisionally allowed for 3 months, an impractical additional requirement to submit the incremental cost of European boiler has been imposed. It is emphasized that installation of European boiler was part and parcel of the overall EPC contract. Furthermore, the criteria set out by Nepra in its decision no. NEPRA/TRF-UTC/2013/15274 of November 21, 2014 have been satisfactorily met by the power plants. Nepra is now additionally seeking information relating to arrangements which are neither previously established nor the company is legally able to procure under the arrangements for which sufficient explanations have been made available to the authority; and (iii) Sinosure fee was allowed in the tariff at maximum cap of 7% of the total debt servicing and had been allowed on upfront basis previously. However, deviating from previously adopted approach, Nepra instead of appreciating the cost saving and allowing 7% upfront cost to EPTL, reduced it to the Sinosure premium rate of 6.9% negotiated by the Company. Furthermore, this cost has also been reduced based on assumed debt component instead of actual without regard to the actual cost incurred by the applicant.

      According to CEO CPHGC, the most worrisome adjustment has been done to the Return on Equity (RoE) component whereby the upfront tariff allowed 30.65% to local coal power plant, adding that Authority in its previous decision had adhered to the upfront nature of Return on Equity. Moreover, while determining the upfront tariff back in 2014 Nepra itself deviated from historically adopted IRR-based RoE computation in upfront tariff to avoid micromanagement and analyst bias (noted in para 32 of NEPRA s decision NEPRA/TRF-UTC/2013/15274 of November 21, 2014). Now, again a deviation from previous practice to revise its approach in determining the Return on Equity has been adopted while issuing the most recent decision by the Authority.

      All the highlighted deductions/deviations from upfront tariff have long-term consequences on the tariffs allowed to the affected IPP. This would reflect negatively on the regulatory framework of the country. To clarify our understanding of the adjustments, we sought a legal opinion which confirms that all such adjustments are against the upfront tariff (Approval and Procedure) Regulations 2011. This opinion is in addition to legal positions already sought by the foreign lenders and Sinosure prior to allowing financing and the assumptions were pivotal in finalizing the financial feasibility which had been verified by local and foreign financial experts, CEO CPHGC said in his letter.

      He has requested Secretary Power Division to coordinate with NEPRA to perform legal due diligence in the matter before issuance of any decision that may have serious consequences to the future investment prospects under the CPEC.

      We further are willing to engage with regulators and engage legal experts to settle the matter prior to the issuance of the tariff decision, continued.

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