1. Ian Alexander Wednesday, August 13th 2003 SAFIR MYT Workshop, Delhi
Session 3: The South Asian Experience – Case Studies NEPRA’s 2002 KESC MYT Determination
Ian Alexander
Wednesday, August 13th 2003
SAFIR MYT Workshop, Delhi

2. Outline Background on KESC The 2002 determination Some observations
Conclusions

3. KESC
Effectively state-owned company (small %age listed on Pakistan’s three exchanges)
Vertically integrated company, including generation
Also purchases from IPPs and WAPDA
Peak-load is evening: 1,860MW
Service area: 6,000 km2
1999: 12,500 employees

4. Total Losses

5. Balance Sheet Restructuring of KESC
Billion PkRs
Share Capital vs. Debt vs. Accumulated Loss

6. Price Determination
To support the privatization plans, Government of Pakistan requested NEPRA to consider an MYT
NEPRA considered and made a proposal in September 2002
Consider the key building blocks:
Losses
Efficiency savings
Return on assets
Other elements of the regime:
Length
Profit-sharing
Determination linked to change in ownership

7. Losses Clearly dominate all calculations Increasing since the 1980s
Some brief successes in reducing losses but not sustained
“Commercial” losses are important
Law and order situation not easy
Improvements here will drive success
Significant reduction mandated in years 1 and 2 (5% per annum)

8. Efficiency Savings
KESC proposed a sliding scale with the X value depending on the inflation rate
KESC asked for a 0 value for years 1 to 3
NEPRA considered:
Potential impact on quality of service
Industry efficiency levels rather than company specific
Clear dominance of T&D losses
Incentives for investment to promote capacity expansion

9. Importance of O&M Costs
Paise per kWh
Total
O&M
O&M as % of total
Own Generation
243 10
4.1
PPA
148
0.0
Transmission 30 4
13.3
Distribution 53 32
60.4
474 46
9.7

10. Forecast Efficiency Savings
Segment FY
2003
2004
2005
2006
2007
2008
2009
Generation 2
Transmission
Distribution 3
Total O&M
2.70
2.69

11. Evolution of O&M Costs

12. Return on Assets Two elements: Asset base: historical cost of assets
Allowed rate of return
Asset base: historical cost of assets
WACC
No direct evidence provided
12% figure proposed (8% risk free rate plus 4% risk premium)
Subsequent information provided by the Commission

13. WACC Calculation Market return: 11% Risk-free rate: 8%
Risk premium: 3%
Equity beta: 0.66
(based on US data)
Country risk: 2%
Cost of equity: 12%
[8% + (3% x 0.66) + 2%]
Av’ge cost of debt: 12.4%
Capital structure:
Debt 55%
Equity 45%
WACC 12.2%
Source: Presentation on August 9th 2003 at SAFIR Core Course by A. R. Khan

14. Regime Issues: Length of Control Period
Normal control period is 3 to 5 years
KESC requested 10 years
NEPRA considered:
Extent of immediate price increase
Impact of profiling
Ability to earn a commensurate rate of return
Proposed a 7 year control

15. Regime Issues: Profit Sharing
Concern about possibility of abnormal profits
Would be driven by ability to reduce losses at faster than anticipated rates
Social and political acceptability of big profits – real concern
Introduce a profit-sharing system to accommodate this

16. Profit-Sharing Mechanism
%age Share to:
<12%
12% - 15%
15% - 18%
>18%
Consumers 25 50 75
Company
100

17. Observations
What happens at end of period? No clear indication of whether another MYT would be considered
The 12% figure needs careful review
Possible incentive impacts of mixing a strongly profiled profit stream (early years there are losses, then profits with a very significant profit in the final year) with profit-sharing
Ability to deliver the loss reductions
Treatment of investment

18. Conclusions First real MYT system adopted in electricity in South Asia
Has been implemented even though privatization has been delayed
Some very good features and practical solutions to problems
Some aspects could be improved on – the WAPDA successor companies are now petitioning for determinations and at least one, FESCO, has requested a MYT linked to its planned privatization…..