PAKISTAN'S DETERIORATING ENERGY SITUATION

UNCLAS SECTION 01 OF 02 ISLAMABAD 002878

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON ETRD EAID EFIN ENGY PK
SUBJECT: PAKISTAN'S DETERIORATING ENERGY SITUATION


1. (SBU) Summary. Electricity shortages in Pakistan are reaching
record highs due to shortfalls of over 5500 mega watts (MW). In
most major cities there are planned and unplanned power outages,
sometimes for 18 hours a day. A circular debt problem between the
domestic oil and power sector further threatens capacity of
independent power producers (IPP),which normally contribute 70
percent of overall energy capacity but are currently operating at
about 50 percent capacity. Pakistan State Oil (PSO) suspended the
supply of fuel oil to IPPs on August 27 and has said it will now
only supply furnace oil on a cash basis. The Economic Coordination
Committee (ECC) recently allowed Karachi Electric Supply Company
(KESC) to pass on the total amount of oil price increases to
customers. In Karachi, the industrial hub of the county, businesses
try to run on only a few hours of power per day. Hot, humid weather
contributes to the misery, adversely impacting day-to-day life of
Pakistanis and further paralyzing business activities. End
Summary.

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NO MONEY FOR POWER PRODUCERS
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2. (U) With electricity shortages in the country reaching record
highs due to shortfalls of over 5500 mega watts (MW),planned and
unplanned power outages are occurring in Lahore, Karachi, Quetta,
Peshawar and other cities, disrupting daily life and business
activity. The duration of power cuts has reached 18 hours a day in
many cities. The increased blackouts can be attributed to a
pipeline disruption (reportedly ruptured by unknown individuals) in
Sindh Province that resulted in a 1326 MW shortfall.


3. (U) The Government of Pakistan (GOP) has thus far failed to
tackle the circular debt problem between the domestic oil and power
sectors, further complicating the situation. With Rupees 200
billion (USD 2.6 billion) outstanding, this problem is severely
impacting the overall GOP budget, as well as the investment climate.
This situation is not only threatening a shutdown of IPPs, which
contribute 70 percent of overall capacity to the national grid, but
is also adversely impacting the ability of oil marketing companies
(OMCs) to make timely purchases of imported petroleum products,
particularly furnace oil and diesel.


4. (U) Due to significant and repeated delays in payments, Pakistan
State Oil (PSO),the state-owned and largest oil marketing company
in Pakistan, suspended the supply of fuel oil to the IPPs on August

27. PSO has told IPPs that it will now only supply furnace oil on
cash payments. However, since the GOP fails to pay IPPs for power
produced, IPPs are seeking assistance from the GOP to ensure a
supply of oil from PSO, making threats of further reductions in
power production. The cash-starved IPPs are collectively owed
approximately USD 2.6 billion from Pakistan Electric Power Company
(PEPCO). They are currently operating at about 50 percent capacity
and have indicated that their lack of cash flow may result in even
lower capacity in the coming days. Meanwhile, the public and
business community continue to endure extended blackouts each day,
with some cities, such as Karachi and Peshwar, reporting up to 18
hours per day in some sectors.

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STEPS TOWARD REMOVING SUBSIDIES
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5. (U) In an August 26 meeting chaired by the Finance Minister
Naveed Qamar, the Economic Coordination Committee (ECC) of the
Cabinet made the decision to allow Karachi Electric Supply Company
(KESC) to pass on the entire international oil price hike to
customers. Previously there was a cap on the KESC pricing structure
which allowed only a 5 percent increase. Currently, KESC purchases
750 MW of power from Pakistan's Water and Power Development
Authority (WAPDA) at much higher rates than WAPDA's distribution
company (Rupees 10 per unit for KESC vs. Rupees 3.70 per unit for
WAPDA's distribution company). The ECC also decreed that KESC and
WAPDA should be given the same rates, which should allow KESC to
recover full fuel oil costs from consumers while also allowing it to
cut its power costs by more than 40 percent. On August 28, the KESC
fired five executive directors and appointed Naveed Ismael as CEO.
Ismael was previously CEO of AES, a U.S.-owned IPP.

ISLAMABAD 00002878 002 OF 002



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MISERY ACROSS THE COUNTRY
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6. (U) In Karachi, currently for every hour of power there are two
to three hours without power. Management of Karachi Electric Supply
Corporation (KESC) has failed to develop even temporary remedies for
this situation. Having received strong condemnation for long periods
of unannounced power cuts in Northwest Frontier Province (NWFP),the
NWFP Assembly unanimously adopted a resolution on August 29,
demanding the GOP shift the head office of WAPDA from Lahore to
NWFP, in order that the GOP could know the gravity of the situation.
The Speaker of NWFP Assembly noted the "province has many problems
that it is trying to tackle and long power cuts are increasing the
sense of bereavement among the masses and worsening the law and
order situation".

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COMMENT
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7. (SBU) Energy is only one of many problems currently plaguing
Pakistan. Over the last two weeks, we have seen the power situation
deteriorate. In Karachi, the industrial hub of the county,
businesses are trying to run with sometimes only a few hours of
power per day. Hot, humid weather has added to the misery, not only
adversely impacting day-to-day life of Pakistanis, but also further
paralyzing business activities. As power outages create acute water
shortages, children and the elderly are often among the victims of
this situation. The hope is that cooler, autumn weather will come
soon and that the dire energy situation will not further deteriorate
during one of the most tenuous times in Pakistan's history.

PATTERSON