REFORMING POWER SECTOR

By MUHAMMAD BASHIR CHAUDHRY
July 15 - 21, 2002

The World Bank news release, announcing approval of $500 million IDA credit on 11th June 2002 in support of Pakistan's ongoing PRSP, emphasized the acceleration of power sector reforms by restoring the sector's financial viability and facilitating its expansion. Reliable power at affordable rates is the key to industrial growth, employment generation and poverty reduction. This paper reviews ongoing power sector reforms and related critical issues.

WAPDA and KESC, besides generation, are engaged in transmission and distribution of electricity throughout the country. PAEC and IPPs also generate power but sell it in bulk to WAPDA or KESC. Total nominal generation capacity at present is 18,062 MW (Wapda 9, 930MW, KESC 1, 756 MW, PAEC 462 MW and IPPs 5, 914 MW). Public sector owns two-third of the generation capacity. The share of hydel is 28% whereas the rest of the capacity is thermal. Originally about 70% of total electricity generated in the country was hydel. However, due to different reasons more of thermal generation was added and thus reduced share of hydel, a cheaper source of electricity. Now there are efforts to promote more of hydel generation.

Number of electricity consumers in Pakistan has increased to 12.5 million: household 46%, industry 28%, agriculture 12%, bulk supply 9% and commercial 5%. For faster economic growth, Pakistan needs more generation capacity (of high reliability), particularly for Information Technology and for producing quality value-added products, of critical importance for earning foreign exchange for the country.

POWER SECTOR REFORMS IN PROGRESS:

Power Wing of Wapda has been restructured into independent companies, i.e. eight distribution companies (DISCOs), three power generation companies (GENCOs) and the National Transmission and Dispatch Company (NTDC). The Pakistan Electronic Power Company (PEPCO) may oversee all these corporatised entities. Ultimately, the DISCOs and GENCOs will be privatised. As regards KESC, its privatisation is underway. KESC balance sheet is being cleaned with a view to make it more attractive to the prospective private bidders.

The government has extended significant financial support to WAPDA and KESC. The government picked up KESC accumulated losses and injected Rs 15 billion to keep it going. In case of Wapda, the government converted Rs 30 billion of its debt into equity. The government may consider tackling the following critical issues in order to have better success with the power sector reforms.

CRITICAL ISSUES INHIBITING POWER SECTOR REFORMS:

PREVAILING CONDITIONS IN WAPDA AND KESC:

As against nominal thermal capacity of Wapda and KESC at 5009 MW and 1756 MW respectively, available capacity is less, as some of the plants are old. Due to this, there are more breakdowns / interruptions. T&D losses are abnormally high and the utility operations are in the red. Wapda and KESC are said to have invoked vigorous measures to improve operational and management efficiency to reduce power loss and theft.

Actual demand for electricity is more but the consumers are not getting connections. Recently the industrial and irrigation tube-well applicants brought this position to the attention of Wapda authorities. Complaints of billing and breakdowns are not uncommon. Attitude of employees of Wapda / KESC towards customers is bureaucratic. The Chairman Wapda, while inaugurating a Service Centre urged the staff to be pro-active in service matters. Training and motivation of the personnel, with transparent procedures and quick accountability may help improve the situation.

WAPDA RESTRUCTURING CHALLENGES AND COMPLEXITIES:

Proper restructuring of Wapda, to my understanding, will involve careful decisions in the following:

ARRANGEMENTS FOR PURCHASE / SALE OF POWER IN BULK:

a. Wapda will be selling hydel power to NTDC. GENCOs and the IPPs will sell power to NTDC. The NTDC is expected to substitute Wapda in the earlier arrangements with the IPPs and the PAEC. The GOP / NEPRA has to ensure that the purchase and sale are at-arms-length. Wapda or PEPCO or any other entity should not be making undue profit.

b. NTDC will be selling power in bulk to the DISCOs as well as to KESC. NTDC may expect some profit in addition to recovery of transmission charges and the adjustment for the transmission losses. The sale price to be cleared by NEPRA.

c. The DISCOs, within their respective areas, should recover the purchase price, distribution cost, adjustment for reasonable transmission and distribution losses, and some profit margin for growth. NEPRA to have reliable data on all aspects of the transaction, to be used as basis for future tariff determinations.

Distribution of Wapda assets to new companies:

a. Distribution of assets among PEPCO, NTDC, GENCOs and DISCOs has to be fair and transparent. Matters may be discussed among the Government / MW&P / MOF/ Wapda / NEPRA, possibly with the help from technical and financial experts.

CAPITAL STRUCTURE OF THE NEW ENTITIES:

a. Fair and transparent basis may be used for valuation of assets being transferred to each new company. Matching liabilities will also come. Each company has to be so capitalized that it can sustain itself in future without being a drain on Wapda / PEPCO or the government.

INDEPENDENCE OF THE BOARD OF DIRECTORS OF THE NEW ENTITIES:

a. The government as majority shareholder will decide composition of the Board of Directors. It is suggested that the Boards may be broad-based. Wapda / PEPCO may have fair representation but not the majority. The government may consider opting more independent directors. The Board should be given powers to independently run the companies on business considerations.

COLLABORATIVE AND FAIR APPROACH:

a. All the stakeholders to realize that the unbundling of Power Wing of Wapda is not an easy task. The division of assets and allocation of liabilities have to be judicious and fair to all parties. 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.

PRIVATISATION OF KESC:

On privatisation, generation, transmission and distribution will remain part of KESC. Presently KESC is experiencing abnormally high T&D losses. In my view, these can be largely controlled if distribution function is privatised first. Based on the areas served by different Grid Stations, four to five private sector distribution companies may be inducted. KESC-Gencos may be incorporated later for subsequent privatisation. The Transmission and Dispatch in KESC area may be merged with NTDC. There is need to compare the privatisation being pursued in respect of Wapda and KESC.

The Managing Director, KESC, in a meeting recently with the PHMA, quoted power demand in Karachi between 1300 MW and 1800 MW, out of which 450 MW was obtained from Wapda while KESC capacity was 1400MW. In case of KESC privatisation, as per press reports Wapda has not agreed to give an assurance that it will continue supplying power to KESC as in the past. The issue needs early resolution for the privatisation of KESC.

POWER POLICY- 2002:

It is suggested that work on up-dating the Power Policy is initiated at the earliest. The government may allow participation by public / industry. The following matters may also be considered:

a. The original tariff to the IPPs did not reflect the fiscal and other incentives allowed to the IPPs. The real tariff paid by the country is much higher, if the impact of these incentives is factored in the nominal tariff. Careful review of the risks earlier assumed by the government will be useful for future.

b. There is need to re-assess roles of different institutions involved with the power sector such as PPIB, LTCF, WAPDA, and NEPRA.

c. The matter of uniform tariff to all DISCOs or separate tariff for each DISCO needs to be considered.

d. There are problems of circular debts among different energy companies. As there are now more GENCOs and DISCOs there is possibility of more such debts and possibly more friction, as each entity will be protecting its own interest. The Policy may provide for amicable Dispute Resolution.

POWER DEMAND / SUPPLY PROJECTIONS:

As against nominal capacity at 18,062 MW, available capacity is less, as some of the public sector thermal plants are old. Also, there has been less water in the rivers for the past few years. Additional thermal capacity (particularly based on imported fuel oil) shall have to be justified on basis of demand-supply projections under different scenarios and using a set of probable annual load growth rates. Additional generation capacity, fuel mix, public-private share and similar other matters may be covered in the New Policy.

ROLE OF LONG TERM CREDIT FUND (LTCF):

The government, with the assistance of the World Bank and other donors had set up the Private Sector Energy Development Fund (PSEDF) in 1988. The IPPs could use loans out of PSEFD for up to 30% capital cost. PSEDF, originally administered by NDFC, was later named as LTCF. On merger of NDFC with the National Bank of Pakistan (NBP), the LTCF is now managed by NBP. It is not clear how far the LTCF financing is now relevant. In the past the LTCF played substantial role in the financing of large IPPs, though similar generation capacity was added by some IPPs without LTCF financing.

WAPDA AND NEPRA RELATIONS:

Nepra is committed to provide a fair return to the investor while ensuring safe and reliable service at competitive rates to the consumers. Nepra has since issued generation and distribution licenses to a number DISCOs, GENCOs, the IPPs and the SPPs. Nepra has made a number of determinations for increase in tariff per kwh. Wapda and KESC have not been happy with Nepra in respect of tariff determinations. A special committee has been formed to look into the matter. It takes lot of time, money and dedicated efforts to establish an independent and fair regulatory authority. The government and the other stakeholders are urged to look this matter objectively and help the regulatory system to evolve on sound lines.

ECONOMIC DISPATCH ORDER AND DEALINGS WITH THE IPPS:

In my view, the strategy should be that the system gets the 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 % CPP at a specified Load Factor, say 60%. 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. An exercise needs to be carried out to see if the cheapest electricity was purchased in the past.

Pakistan has to attract local and foreign investors for additional capacity and for the privatisation of the capacity now in the public sector. Conducive atmosphere with fair, transparent and open procedures can help us meet power needs at reasonable cost.

IFIS' ASSISTANCE:

The restructuring of Wapda and the privatisation of KESC are part of the reforms of the power sector. Technical help and financial resources may be required for successful implementation of reforms. The government may consider continued liaison with the IFIs on financing of additional generation capacity. The IFIs would most probably want the new thermal capacity to be in the private sector or perhaps agree to joint venture between private sector and GENCOs. This may be another step in public-private participation and may be considered.

CONCLUSION:

We wish Wapda, all IPPs, GENCOs, DISCOs, NTDC, KESC, LTCF, NEPRA, fuel suppliers, etc. to be profitable. However, none should be unfairly making money at the cost of others or the general public. New IPPs have also to be attracted for additional power needs.