The World Bank President, responding to a question in the course of annual meetings of the WB/IMF, reportedly said that Pakistan was suffering from imbalances in terms of power pricing, as a result of Wapda’s ‘line losses’ and some implicit subsidies to richer people who might be able to afford it.

In order to cover the losses, he hoped, the government would introduce a more market-based system and to get rid of subsidy and that the WB would not interfere in the timing and the method of its implementation. The questioner had observed that the increases in electricity and gas prices would create problems for the manufacturing industry, flourishing of which is essential for economic development.

Power tariff is the key to the sustainability of the utilities, competitiveness of the made-up goods, fruitful commercial activities and welfare of the public. Determination of appropriate tariff appears to be a simple matter of demand and supply. But, the peculiar nature of the ‘product’, i.e. the electricity, ownership and control of utilities, technology, fuel used for power generation, taxes on different fuels and electricity, etc. have turned it into a complex issue.

An attempt to offer an overview of factors contributing to the tariff complexities is being made here. Policy decisions and official actions in these areas would help improve the tariff imbalances and resolve the implicit subsidy issue, for the benefit of stakeholders including customers.

Ownership and fuel base: The total nominal power generation capacity of the country at present is 18,062 mw: the IPPs control 5,914 mw, while Wapda owns 9,930 mw, the KESC 1,756 mw, and the PAEC 462 mw, in the public sector. Of the total capacity, 5,009 mw (about 28 per cent) is hydro-power while the rest 13,053 mw is thermal. Wapda and the KESC are engaged in transmission and distribution, within respective license areas. The PAEC and the IPPs sell power in bulk to Wapda or the KESC. There are serious technical shortcomings in the Wapda/ KESC generation, dispatch, transmission and distribution systems. Most of the equipment and lines are old, overloaded and poorly maintained and in need of replacement or major revamp.

Because of these factors, there are more breakdowns/ interruptions. T&D losses are abnormally high and utility operations are in the red. Losses in the Wapda system have been reduced to 24.3 per cent, but despite efforts by the KESC, the losses are abnormally high. The government has lately extended significant financial support to Wapda and the KESC. There is need to rationalize input costs including that of fuel, plant efficiencies, line losses, arrangements for bulk sale and purchases and the net power tariff realized by the utilities. Without removing these inefficiencies, it might not be advisable to keep on increasing the electricity tariff and over-burdening consumers.

Consumption: With the rapid urbanization, extension of electricity grid supply and village electrification, the number of consumers has increased to 12.5 million. Composition of consumption by the economic groups at present is: domestic, 46 per cent, industry, 28 per cent, agriculture, 12 per cent, bulk supply, 9 per cent, commercial 5 per cent, and railways 0.02 per cent. Due to Wapda/KESC high power tariff and frequent breakdowns, a large number of industries have installed captive plants. This has adversely affected the utilities. The service quality of the public utilities leaves much to be desired and customers keep on complaining. In such situations, any further increase of tariff might prove counter-productive.

Capacity expansion: The demand/supply projections reportedly prepared by Wapda portray a deficit of 17,300 mw by the year 2015-16. In order to propose a suitable strategy to meet power demand, Wapda has prepared a ‘hydropower development plan’ (Vision 2025). A number of projects have been selected for completion by 2006. The Sindh government’s efforts are continuing for a 1000 mw mine-mouth coal-fired power plant based on Thar coal with technical and financial assistance of China.

The PPIB is facilitating implementation of four projects of 844 mw to which the provinces and the AJK under the Hydel Policy, 1995, issued LOI/LOS. Subject to strict cost controls and efficiencies and additional generation capacity, tariff has to be rationalized with a view to attract investment for financing the revamping of the system.

Originally about 70 per cent of the electricity generated was hydel. However, for different reasons more of the thermal generation was added and the share of hydel was reduced, which is a cheaper source of electricity. Shortage of river water has aggravated this balance. More reliance on thermal has increased the utilities’ financial burden, particularly in terms of foreign exchange. Now there are efforts to promote more of hydel generation. Due to the proposed privatization of the KESC, Wapda-Gencos, the share of private sector will increase sharply. There are fears that the private sector, if not monitored properly, would manipulate to increase electricity prices. Nepra shall have to be extra-careful to protect the public from undue exploitation. Power sector reforms: Wapda’s power wing has been restructured into nine independent distribution companies (Discos), four power generation (Gencos) and the National Transmission and Distribution Company (NTDC) to transmit power in bulk to the Discos for distribution. The Pakistan Electronic Power Company (Pepco), the holding company substituting Wapda, may oversee all these corporatized entities. The capitalization of the over a dozen new companies is understood to be in process. Each company has to be so capitalized that it can sustain itself without being a drain on Wapda/Pepco or the government.

The government might have to make cash contribution to bring the equity of each company to a satisfactory level after which the Discos and Gencos will be privatized. Eventually, the bulk sale/purchase is expected to be on these lines:

a. Wapda will be selling hydro power to NTDC. Gencos and the IPPs will sell thermal power to NTDC. NTDC might substitute Wapda in the earlier arrangements with the IPPs and the PAEC.

b. NTDC will sell power in bulk to the Discos as well as to KESC and the AJK. NTDC may expect some profit for its efforts in addition to recovery of transmission charges and the adjustment for the transmission losses.

c. The Discos will distribute electricity to their consumers within their respective areas. They should recover the purchase price, distribution cost, adjustment for reasonable transmission, distribution losses, and some profit margin for growth.

d. Contractual arrangements pertaining to supply of fuel to generation companies, sale of bulk power to the NTDC and/or the distribution companies, etc. should be reasonable, efficient, transparent and fair to all counter parties. This may be essential to keep tariff at reasonable level for industrial and economic development.

KESC privatisation: Abnormally high T&D losses at the KESC can be controlled rather quickly if the distribution function is privatized first. Based on the areas served by different grid stations, four to five private sector KESC-Discos may be inducted to be incorporated later for subsequent privatization. The transmission and distribution in the KESC area may be merged with the NTDC. Like Wapda’s power wing, the KESC may be restructured. In case of privatization of the KESC, Wapda has agreed to supply power to KESC only for about nine months, but will not assure supply during low water months. This might not be adequate to fully cover shortfall in the KESC system.

Revision of policies: The PPIB, under the overall direction of the government, prepared the Power Policy-1998 (Thermal) and Hydel Policy-1995, which are currently operative. These policies are to some extent out-dated and may be revised. Additional matters to be considered at the time of revision are: a.Tariff to the IPPs did not reflect fiscal and other incentives allowed, so the real tariff would be higher, if the impact of these incentives is factored in the nominal tariff. Careful review of the risks assumed by the government will be useful. The new policy should reflect the lessons learnt from the relationship with the IPPs as well as other areas for the induction of the private sector.

b. The matter of uniform tariff to Discos or separate tariff for each Disco needs to be considered thoroughly. This is linked with the tariff for sale of bulk power to the Discos. These are important questions and the government should accord due attention to them.

c. Main players in the power sector are Wapda, Kesc, PPIB under the MW&P, NEPRA, LTCF managed by NBP, the IPPs, the PAEC, fuel supply companies and different economic groups of consumers. These institutions may be associated in the revision of the policy including the rationalization of the basis for tariff.

Nepra as regulator: The Nepra has been set up under an Act of Parliament.Its object was to create an independent body to regulate electric power services. It has since issued generation and distribution licenses to a number of companies, the IPPs and captive or small power plants. It has also made a number of determinations for increase in tariff per kwh. It is committed to provide a fair return to the investor while ensuring safe and reliable service at competitive rates to consumers.

Wapda and the KESC have not been happy with the Nepra in respect of tariff determinations. A special seven-member committee headed by the secretary, cabinet division has been formed to look into the issue. The government and the other stakeholders are urged to look the issue and help the regulatory system to evolve on sound lines. Technical support coupled with financial resource allocation might help.

Purchases and transparency: The strategy should be that the system gets cheapest electricity, from whatever sources, whether Gencos, Wapda, PAEC or the IPPs. Wapda has certain arrangements on tariff with the IPPs. To the IPPs, Wapda pays 100 per cent CPP at a specified load factor, say 60 per cent. If Wapda asks the IPP to supply power below that load factor, Wapda will be paying higher total average price per unit. However, if electricity is purchased more than specified load factor, it will be cheaper for Wapda per unit. Wapda has to be careful in comparing the generation cost with the cost of IPPs, in all respects.

Reliable database: The tariff determination has not been worked out for each plant based on its capital structure, cost and the cost of generation. Rather, the Nepra is believed to have adopted the existing tariff as the base and allowed increases on the basis of increases in the costs of inputs, particularly the fuel oil. There would be different Gencos and Discos and so there are likely to be two or three tariffs— one for the bulk sale by Gencos to Discos or NTDC and the other on sale by NTDC to Discos and finally by Discos to the consumers. The sales of power are likely to be at different locations. Detailed bases and benchmarks need to be developed for deciding on each and every tariff for bulk or retail sale, at whatever location.

Rationalization: Tariff includes taxes as well. The consumers pay higher amounts but the utility is left with smaller amount after passing the taxes on to the government. This is not all. Fuels used for power generation is also taxed. Due to large tax element, the generation cost is high. The final tariff the consumers pay as well as the financial help extended to Wapda and KESC may be looked in this perspective. There might be some justification to rationalize taxes to maintain the tariff at reasonable level with a view to promote industrial and economic development.

Reconsideration: There are too many slabs in some of the tariff categories. There is need to reduce the number of tariff categories and the rationalization of different slabs. For domestic consumers, the first slab up to 50 units is very low and may be raised to 100 units.

Conclusion: Wapda, the IPPs, the KESC or any other entity in any way associated with power generation, transmission or distribution should not be unfairly making money at the cost of other stakeholders or the public. All these institutions have to be managed efficiently and with a tariff that is reasonable and commensurate with the quality and reliability of service. In order to bring about such a change, the government has to take key decisions about introduction of reasonable tariff. Adoption of an equitable approach in determining the fuel prices and applicable taxes at different stages of electricity might free the utilities to concentrate more on tackling the technical and managerial issues of power generation, transmission and distribution.