The subsidies for the power sector on account of tariff differential are expected to cross Rs 350 billion against budgetary projection of Rs 50 billion for current fiscal year due to failure by the Economic Reforms Unit of Ministry of Finance, Planning Commission and Ministry of Water and Power to undertake necessary reforms in power sector, it is learnt.

Sources told Business Recorder on Wednesday that total amount of tariff differential subsidy that would be payable for FY11/12 is approximately Rs 350 billion and now the country's economic managers have been pressing National Electric Power Regulator Authority (Nepra) to allow 100 percent losses in tariff determination to the distribution companies.

Allowing 100 percent losses in the tariff would imply that distribution companies would be absolved of the responsibility of taking measures to minimise their losses, regarded as one of the major reasons for subsidies and circular debt.

The difference between cost and recovery of electricity was also increasing.

Subsidy of Rs 114 billion was given to the power sector in the fiscal year 2007-08 on account of tariff differential and line losses including the non-recovery of electricity bills by distribution companies, which jumped to Rs 391 billion in 2008-09.

However, subsidy to power sector decreased to Rs 147 billion in 2009-10 largely due to increasing power tariff primarily owing to pressure by the International Monetary Fund (IMF).

The subsidy for the power sector escalated to Rs 346 billion in 2010-11 and is estimated to cross Rs 350 billion for the current fiscal year.

Sources said there is a difference of about 3 percent in actual losses compared to what Nepra allows with a revenue impact of Rs 25 billion besides collection shortfall by the distribution companies.

The collection of 88 percent of its billing means nearly 12 rupees out of every 100 billed is not received.

This adds up to Rs 65 billion annually.

Officials said that Nepra allows only 80 percent of fuel recovery on monthly basis and adjusts all others with quarterly tariff adjustment.

This is costing some Rs 25 billion to the system.

At present, FBR collects GST on billing basis and not on actual collection.

Since collections are short by 12 percent, GST is paid on this uncollected amount as well.

This is costing Rs 10 billion annually to Pepco.

When debts are not paid on time to IPPs, punitive interest charges of as much as 18 percent are borne by Pepco.

This year, this amount is estimated at around Rs 26 billion.

Additionally, officials said, this quantum of untargeted subsidy is not only undesirable but also unsustainable and would continue to widen the budget deficit.

The government has failed to reduce transmission and distribution losses of generation companies and is trying to persuade the regulator to allow them actual line losses in the tariff.