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RR RUEHLH RUEHPW
DE RUEHIL #2878/01 2450717
ZNR UUUUU ZZH
R 010717Z SEP 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 8577
INFO RUEHRC/DEPT OF AGRICULTURE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUEHRC/USDA FAS WASHDC 4261
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/SECDEF WASHINGTON DC
RUEHKP/AMCONSUL KARACHI 0246
RUEHLH/AMCONSUL LAHORE 5986
RUEHPW/AMCONSUL PESHAWAR 4793
RUEHNE/AMEMBASSY NEW DELHI 3708
RUEHBUL/AMEMBASSY KABUL 9069
RUEHIL/ODRP ISLAMABAD PK

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 
---------------------------- 
 
¶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. 
 
-------------------------------- 
STEPS TOWARD REMOVING SUBSIDIES 
-------------------------------- 
 
¶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 
------------------------- 
 
¶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