Route to competition in power market

An analysis of NEPRA Competitive Bidding Tariff (Approval Procedure) Regulations, 2016

In its endeavour to bring competition in the power market, NEPRA introduced Competitive Bidding Tariff (Approval Procedure) Regulations, 2014. After two years, the Regulator has decided to replace the existing Regulations by introducing few amendments for determination of generation and transmission tariff of electricity and has proposed NEPRA Competitive Bidding Tariff (Approval Procedure) Regulations, 2016 (“the Regulations”).

The power market in Pakistan is required to evolve to a new structure. Today’s wholesale power procurement model is based on Single Buyer Model where National Grid Company (NTDC) and Distribution Companies are mandated to procure power from generation companies. Primarily the power is procured through long term contracts by following Cost Plus tariff settings with limited incentives for generators to improve efficiency.

It is the need of the time that desired power market structure of procumbent of power through Multiple Buyer Model e.g. each distribution company procuring for its own requirement, should be evolved. Suitable mix of long, medium and short term contracts should be promoted by allowing market forces in tariff settings and by benefitting the generators who produce electricity at lower rate with higher efficiency.

<p align=”justify”>Under the competitive bidding route, the Regulator should in addition to regulating tariffs, also scrutinise and approve the process to be adopted for competitive bidding, with a view to ensure that competitive conditions do prevail in the power market.

To achieve this, a consensus should be developed among the stakeholders on how to formulate and implement guidelines for competitive bidding process, so that it embodies the spirit of the NEPRA Ac, 1997. This goal can be accomplished by standardisation of the bidding process and documents in order to expedite the process of procurement through competitive bidding. As a result we will be able to reduce inefficiencies in generation plants to enable low cost power production and encourage private investment in generation to keep pace with growing demand. It is inevitable that the Regulator should develop a fast, efficient and transparent bidding process that expedites procurement.

The proposed Regulations states that NEPRA will be responsible for approval of Request for Proposal (“RFP”) and any amendment made in the RFP during bidding process. It also envisages that Final Evaluation of Bids shall also be submitted for approval of NEPRA. In my view, by doing so NEPRA would assume the role of Procuring Agency within the meaning Public Procurement laws of Pakistan be it a federal or provincial legislation. The very purpose of having oversight on the bidding process can best be achieved through regulations and by providing standard bidding documents for procuring/relevant agency. However, in case the procuring agency wants to deviate or doesn’t wish to use standard bidding document for any reason, only then relevant agency should seek approval of the RFP from NEPRA. By providing standard bidding documents including RFQs/RFPs, it would be convenient for both, the relevant agency as well as Regulator to oversight the bidding process without compromising expediency and smoothness of process.

It is obvious that the proposed regulations would be subservient to primary legislation of federal and provincial PPRA Acts, so these regulations should be formulated in conformity to the primary legislation. Under Punjab PPRARules, 2014 procurement involves the following steps:

  • Initiate RFQ/Pre-Qualification of Bidders
  • Shortlist bidders
  • Issuance of RFP
  • Pre-Bid Conference and clarification in the RFP
  • Submission of Bids
  • Evaluation of bids
  • Award of bid(s)
  • Post bid negotiations
  • Award of Contract

During the bidding process, at least at three different stages the RFQs/RFPs are modified, firstly in case procuring agency may make additions through issuing corrigendum, secondly upon queries of bidders after pre-bid conference and lastly while negotiation with the successful bidders before award of contract. So if NEPRA shall assume that at all these stages, the bidding documents will be approved by the regulator, it will result not only in inordinate delay but also entails procedural issues as per procurement laws. Furthermore, in case NEPRA will become the custodian of RFP, it is incumbent upon NEPRA to solely evaluate the bidders as upon rejection of certain bidders, a legal issue would arise that against whom the aggrieved bidders shall file the grievance after completion of bidding process, against procuring agency (as required under PPRA Rules) or the NEPRA.

To run the process of competitive bidding smoothly, it is appropriate that standard bidding documents are approved by NEPRA beforehand along with these regulations. The relevant/procuring agency should be made responsible to conduct the bidding as per standard documents and Regulations and then submit the final tariff proposed by successful bidder for approval of NEPRA.

Regulations also provide for declaring a “Benchmark Tariff” by NEPRA. However the regulations do not prescribe any procedure for arriving at benchmark tariff. By providing a benchmark tariff, the regulator shall have to determine the tariff twice, one while giving benchmark tariff and secondly at the time of final approval of tariff upon completion of bidding process. By giving benchmark tariff, there is the likelihood of receiving substantially lower bids as it was observed in government LNG plants which ended up with regulator’s withdrawal of upfront tariff for LNG power plants. Benchmark tariff therefore would not serve any useful purpose and should be removed from the regulations and bids should be evaluated on the basis of competition among the bidders and subsequently approved by NEPRA.It is also imperative that before commencement of bidding process for a specific technology or fuel, the regulator should conduct diligence regarding demand forecast of electricity and upon its satisfaction should allow the relevant agency to proceed with the competitive bidding process.