The government might include independent professionals with diversified qualifications

By Muhammad Bashir Chaudhry
June 23 - 29, 2003



The Federal Minister for Water and Power, while presiding over a meeting recently, reportedly directed to constitute a task force of all the stakeholders to suggest measures for reduction in power tariff on long-term basis. The meeting was in compliance of the directive from the Prime Minister to the Ministry of Water & Power, Wapda and Ministry of Finance, to come up with proposals for reduction in electricity tariff for the benefit of common man. Acting Chairman, Nepra; Chairman, Wapda; Managing Director, PPIB and representatives of Ministry of Finance and senior officials of other stakeholders attended the meeting.

The Chairman Wapda presented to the meeting a paper on steps, the utility thinks, were necessary for reduction in tariff. The Minister directed that other stakeholders including Water & Power, Finance, Nepra and PPIB to also come up with such papers/suggestions for a consolidated tariff reduction effort. The Minister also said that joint efforts are needed to manage potential savings in the input costs of fuel for electricity and that reduction in tariff would be possible, if major players in power sector are going in the same direction. The task force shall carry out a study within two months. After the meeting, the minister reportedly said that the task force would be headed by a private sector expert who could analyze various aspects with an independent mind.

The package presented by the Chairman, Wapda in the meeting for reduction in tariff comprised the proposals: (i) allowing the IPPs to import furnace oil directly that would reduce tariff in the range of two to six paisa per unit; (ii) converting Rs17.5 billion debt liability payable by Wapda to GoP into equity and lowering of interest on both the re-lent and new loans, entailing a relief of around 17 paisa per unit; (iii) increasing the gas quota by 150 MMCFD to the existing allocation of 400 MMCFD, reducing fuel cost with tariff relief of 11 paisa per unit; (iv) rationalizing levies on fuel oil and gas resulting relief of paisa 42 per unit; (v) removing sales tax, withholding tax and electricity duty to bring down the tariff by a further 41 paisa per unit; and (vi) capping Wapda's O&M cost at the current level, cost escalation to be met through efficiencies.



Except for the capping of the Wapda's O&M costs, all other proposals submitted by Wapda pertain to other stakeholder such as the IPPs/PSO, Ministry of Finance, Central Board of Revenue, gas companies and the Ministry of Petroleum and Natural Resources and logically would require further consideration before a final decision is reached. Moreover, the major reduction in tariff as per Wapda's proposal is from the reduction of taxes on electricity as well as the fuel oil/gas and the reduction of interest on loans to Wapda. There is relatively little reduction in tariff seen from the projected improvement in the actual operations of Wapda.

In due course of time, other stakeholders would also be, as desired by the Minister for Water & Power, submitting their papers/recommendations as to how to reduce the power tariff on long-term basis. They might have different perspectives in the matter.

There is other aspect of the tariff and the operations of Wapda and KESC. These utilities have been facing loss situation and cash shortages at the existing level of power tariffs, which are recognized as excessive and detrimental to the economic progress and the competitiveness of the Pakistani products. The government injected large amounts of cash to keep these utilities operational. Arbitrary reduction in tariff has the potential to further damage the financial health of these utilities and therefore has to be avoided. Realistically, the aim of the Task Force might be to reduce power tariff on long-term basis in such a way that the financial health of these utilities is restored and these utilities become self-sustaining for future operations on commercial basis. This might not be an easy task and it may possibly require substantial initial cash outlays to revamp the power system and/or the capitalization structure of the utilities including the transmission, distribution and generation companies carved out of the Power Wing of Wapda as a result of the power sector reforms. For such a 'miracle' to take place, the Task Force and the stakeholders might have to give extra attention in understanding the problems confronting these utilities and then devising pragmatic solutions.

For the consumers, the electricity tariff is what they pay for the actual electricity used. For the utility receiving the payment from the consumers, the tariff is what is left with it after remitting to the government's various taxes and royalty collected as part of the electricity bills. To be profitable, the utility must be left with some amount after meeting administration expenses, cost of electricity purchased or generated, losses in transmission and distribution, depreciation on the power system and the financing cost payable to the creditors. Technical or administrative inefficiencies in any part of the power system and/or the capitalization structure of the companies and their operational/contractual arrangements with counter parties might further increase the cost and consequently reduce the profits or result into losses. Heavy line losses may be due to system deficiencies or pilferage or both. For a lasting solution of power tariff, all these aspects of the utilities might have to be carefully studied/analyzed for arriving at appropriate remedial measures. It may be appreciated that the stakes are very high and half-hearted measure in the present situation would not solve the problems. With this in mind, full scale review of different aspects of the utilities might have to be attempted. The main areas of study include the following:



1. Technical conditions and actual performance, compared to standard, of each generating plant, the transmission grid and the distribution system; and the need for revamp of each facility with estimates of capital expenditure and the time frame. Efficiencies, costs and wastages/losses at each stage to be also examined.

2. Financial condition, profitability and liquidity of each entity as at present along with the suitability/appropriateness of the capitalization structure of each such unit and the level of liabilities as compared to assets allocated by Wapda.

3. Contractual/commercial arrangements with the IPPs, other suppliers of electricity in bulk, fuel suppliers, buyers of bulk electricity and local and foreign creditors. For purchase/sale of bulk power, the unit price at present and how it has been determined, also separately mentioning the amount of subsidy involved with each counter party.

4. Organizational structure at present, proposed changes under on-going restructuring, board of directors of each distribution or generation company, delegation of powers, allocation of assets, loans and other liabilities to such new companies and the basis used for the purpose. Adequacy of staffing and the need for rationalization of employees and their perquisites to be also discussed.

5. Procurement procedures and practices for power plants, other large equipments, the roles of the committees in the award of contracts and the release of payments for the work done. The items for which procurement is centralized at Wapda and items for each, which each new company is authorized for procurement with rationale for such division.

6. Existing large litigation/disputes with the plant suppliers, IPPs and the contractors. Reasons, status and likely adverse impact including cost over-runs, delays in bringing the capacity on line, etc. to be also looked into.

7. Projected demand and supply of electricity for the country under different scenarios along with description of plants to be retired and the new capacity being added now under various plans. Details of steps being taken by the public and private sectors to meet the supply gap in time. The electricity supply mix for the next year to be broken down on monthly basis and demonstrated how the average unit cost changes with the change in the mix of electricity pooled from different suppliers.



8. Strategy for asking the IPPs to come on line for supplying electricity vis-a-vis other power suppliers including Wapda's own generation plants. Past three years' data to be used to demonstrate the relevance and suitability of the strategy. Existing and proposed role of Wapda vis-a-vis NTDC in the buying of electricity and the dispatch of power plants to be also elaborated.

9. Existing taxes and royalties at generation, transmission and distribution stages of electricity as well as on the fuel oil or gas used in power generation. The institution or agency collecting the levy and the amounts actually paid in the past three years to be also studied.

10. Comparison of existing metering and billing operations and practices with the practices followed in the developed countries. Rationale with supporting figures why Pakistan is not adopting the modern practices to be also provided. The power supplied to the customers in areas where meters are not yet installed and the arrangements for recovery of dues. Areas/persons provided with free electricity and who bears the cost.

11. Past three years audited accounts of Wapda as well as the generation, transmission and distribution companies including KESC. Past audited accounts of the IPPs and other power and fuel suppliers would also be useful. The terms of fresh cash contribution by the government in these years, government loans already provided as well the financial impact of such funds to be provided.

12. Existing large load centres in different areas of the country and how these are fed during different seasons. Line losses for transmission and distribution to each area to be provided and suggestions made as to how these losses could be reduced or eliminated.

13. Existing tariff structure for different classes of customers, cross subsidies if any, and the rationale for not simplifying the tariffs by merging different surcharges and additional surcharges. Pros and cons of unified tariff structure throughout the country vis-a-vis separate tariff for customers in area of each distribution entity.

14. Captive power plants currently operating in Pakistan; comments about their performance as to cost of generation, reliability, and efforts to sell extra power to Wapda or other adjoining industries/areas. Policy for purchase of bulk power by Wapda and the per unit rate offered for the purchase from such power producers.

15. Role at present in electricity matters of Nepra, PPIB, Energy Wing in the Planning Division, LTCF with the National Bank, Ministry of Water and Power, Ministry of Finance, Ministry of Petroleum and Natural Resources, SECP, IPPs, PSO, gas distribution companies, the provincial governments and the State Bank of Pakistan. Comments on existence, if any, of inter-agency rivalries to the detriment of the energy sector as a whole. Suggestions for improving inter-agency relations, including suggestions for strengthening of particular agencies for achieving overall improvement in power/energy sector.

The Task Force may study the reports/information provided by the utilities and other stakeholders which have been asked to submit papers like Wapda did in the past. The information listed above would give the Task Force full picture of the operations of the existing utilities and enable the members to identify potential areas for possible reduction in tariff. In carrying out its task, the Task Force might be encouraged, if need be, to hire experts/independent consultants for special studies or physical inspection of the plant and other facilities or to seek other details from whatever sources considered appropriate. After the study is completed the Task Force should be able to suggest remedial measures including one-time additional funding for revamping the utilities and bring improvement in areas that are discovered as weak or inefficient or otherwise badly managed.



The government, to enable the Task Force to do a better job in a relatively shorter time, might include independent professionals with diversified qualifications and experienced in the Task Force together with the senior officials presently serving in the Ministries of Water and Power, Finance, Petroleum and Natural Resources, Planning, Nepra, PPIB, LTCF, Wapda, KESC, Provincial governments and FPCCI. The task is gigantic with huge financial and economic implications and therefore the government is urged to let the Task Force be constituted appropriately and might also facilitate it to discharge its duties well by proving necessary assistance including authority for seeking information as well as adequate financial resources to meet the expenses.