THE decision by Nepra, the power-sector regulator, to apply yet another hike in the price of power is a reminder that the pricing regime in the power sector is in dire need of reform, and more importantly, the right kind of reform. The wrong kind of reform would simply allow all accumulated costs of the inefficiency and lack of competence witnessed in public-sector power distribution companies to simply be passed on to the consumers through some sort of automatic price adjustment. The right kind of reform would structure the incentives for all operators in the power sector — from generators to distribution companies — to compete for the best kind of energy and serve up some top-notch products to their customers. At the moment, what we have is a system where the power tariff is notified by the government and the fuel cost is allowed to be passed through directly by Nepra.

In the most recent case, Nepra has allowed an increase of Rs1.56 per unit through the fuel cost adjustment only for the month of October. So far, this is fairly standard fare, though there is no doubt that the impact on people’s bills will be substantial. It is standard fare because the fuel cost is, in the parlance of the power sector, a ‘pass through item’, meaning it is one of those elements in the cost build-up of electricity that is directly passed on to the consumers. Since one quarter of the power that was generated in October was from imported LNG, the higher cost of this fuel compared to that of local gas or hydel power would pass through automatically. The result is that an additional Rs14bn will be raised through bills to be issued next month. This is normal practice in our power system and such monthly fuel cost adjustments happen all the time. But the thing to note is the sheer inefficiency within this system. Electricity is a product that is bought and sold in milliseconds, and monthly fuel cost adjustments or quarterly tariff adjustments, or even line item breakdowns in the cost, sounds like an antiquated system today, as the second decade of the 21st century approaches its end. At this point in time, the government has embarked on a far-reaching power sector reform plan that includes pricing reform as well as potential privatisation. This is also the time to implement the right kind of pricing reform.

Published in Dawn, December 28th, 2019

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