Making sense of NEPRA's K-Electric decision

Pakistan’s power regulator, the National Electric Power Regulatory Authority (NEPRA), has revised its earlier determination for K-Electric’s generation, transmission, and distribution tariffs under the FY24-FY30 Multi-Year Tariff (MYT) framework, introducing significant adjustments to the company’s return on equity (ROE), loss benchmarks, and recovery assumptions.

According to a research note by AKD Securities, the revised tariff determination marks a material departure from previous benchmarks, with NEPRA tightening performance parameters and linking returns more closely to industry norms.

Generation adjustments

For its generation function, NEPRA upheld K-Electric’s 14 percent U.S. dollar-linked ROE, citing the company’s foreign equity base and consistency with independent power producers (IPPs). However, the regulator said the minimum guaranteed ROE of 35% dispatch will apply on a hybrid take-and-pay basis for its BQPS-II and BQPS-III plants, effective November.

NEPRA rejected K-Electric’s request to extend tariff tenures to the full plant life of 30 years and discontinued tariffs for four aging gas-based units—BQPS-I, KCCPP, SGEPS, and KTGEPS—citing redundancy due to new grid interconnections and consumer protection considerations.

The regulator also disallowed recovery of fixed take-or-pay costs for RLNG supply contracts, noting that no such contracts will be permitted after the expiry of the current gas supply agreement in December.

Transmission and distribution overhaul

For the transmission segment, NEPRA revised K-Electric’s ROE to 15% on a PKR basis, replacing the previous 14% U.S. dollar-based rate to align with the National Transmission and Despatch Company (NTDC) and other transmission operators.

The distribution segment’s ROE has been adjusted to a PKR-based 14.47% from a dollar-based 14% to ensure parity with other power distribution companies (DISCOs). Distribution loss targets have been significantly lowered to 9% from 13.9%, including 8% technical losses and a 1% law and order margin. Over the MYT period, NEPRA expects a cumulative reduction of 0.97% in technical losses.

Transmission losses have also been revised down to 0.75% from 1.3%. The law and order margin was cut to 1% from 3.39%, with NEPRA citing efficiency gains from K-Electric’s modernization efforts, including grid automation and smart metering systems.

Additionally, NEPRA reduced markup caps for future loans to 2.25% for foreign financing and 1.5% for local financing to encourage lower borrowing costs, though existing debt spreads of 4.5% (foreign) and 2.5% (local) will remain unchanged.

Supply and recovery changes

For the supply function, NEPRA has set tariffs on a 100% recovery basis, compared to the previously allowed 93.25-96.5%. The authority disallowed upfront recovery losses to prevent additional fiscal burdens under the uniform tariff regime.

AKD Securities noted that K-Electric’s reported recovery ratios stood at 91.5% in FY24 and 90.6% for the first nine months of FY25. The company, however, will be allowed to claim write-offs up to a maximum cap of 3.5% for FY24-25, gradually declining to 1% by FY30.

The regulator also revised K-Electric’s FY24 reference fuel cost component from PKR 15.99 per kWh to PKR 14.50 per kWh, which, according to NEPRA, had previously caused a PKR 28 billion fiscal shortfall. The adjustment will apply retrospectively, requiring the company to refile monthly fuel cost adjustment (FCA) claims.

NEPRA further reduced the utility’s net working capital requirement to a negative PKR 10.5 billion, from the earlier negative PKR 1.2 billion, following corrections for double-counted liabilities and a cut in current asset days to 25 from 30.

According to AKD Securities, the revised determination reflects a more stringent regulatory stance aimed at improving efficiency and reducing consumer costs. “Our estimate assumes revisions in ROE payments, transmission and distribution (T&D) losses at 16%, and a recovery ratio of 91.5%, compared to NEPRA’s benchmarks of 9.71% and 100%, respectively, for FY24,” the firm said.

AKD added that K-Electric is expected to restate its FY24 financials to reflect the new tariff parameters. “While these changes could lower returns in the short term, improved operational efficiency and reduced financing costs may partially offset the impact,” the brokerage noted.