PAKISTAN'S ELECTRICITY PRICING ISSUES
By MUHAMMAD BASHIR CHAUDHRY
Oct 28 - Nov 03, 2002
The World Bank President, responding to a question in the course of annual meetings of the WB/IMF, at Washington DC, reportedly said that Pakistan is 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 that the government would introduce a more market-based pricing system and to get rid of subsidy and that the WB would not interfere in the timing and the method of implementation. The person asking the question had reportedly observed that the increases in electricity and gas prices would create problems for the manufacturing industry, the flourishing of which is so essential for economic development, prosperity and servicing of country debts.
Power tariff is the key to the sustainability of the power utilities, competitiveness of the Pakistani made-up goods, fruitful commercial activities and welfare of the general public. Determination of appropriate tariff appears to be a simple matter of demand and supply, which could be easily resolved. However, the peculiar nature of the 'product', i.e. the electricity, ownership and control of utilities, technology, fuel used for power generation, government taxes on different fuels and on electricity, etc. have turned it into a complex issue. This paper is an attempt to offer an overview of the factors contributing to the tariff complexities. Appropriate policy decisions and concerted actions by the government in these areas would help improve the tariff imbalances and resolve the implicit subsidy issue, for benefit of most of the stakeholders including the customers.
POWER UTILITY OWNERSHIP AND FUEL BASE
Total nominal power generation capacity of the country at present is 18,062 MW: the IPPs control 5,914 MW in the private sector; while Wapda owns and controls 9,930 MW, Kesc 1,756 MW, and PAEC 462 MW in the public sector. Of the total nominal capacity, 5,009 MW (about 28 %) is hydel while the rest 13,053 MW is thermal. Wapda and Kesc are engaged in transmission and distribution of electricity, within their respective license areas in the country. PAEC and the IPPs sell power in bulk to Wapda or Kesc. There are serious technical shortcomings in the Wapda / Kesc systems, from generation, dispatch, transmission and in distribution. Most of the equipments and lines are old, are overloaded but poorly maintained and are in need of urgent replacement or major revamp. Due to this there are more breakdowns / interruptions. T&D losses are abnormally high and the utility operations are in the red. Losses in the Wapda system have been reduced to 24.3 %, however, despite efforts by the Kesc management, the losses are still abnormally high.
The government has lately extended significant financial support to Wapda and Kesc. There is need to rationalize input costs including fuel cost, plant efficiencies, line-losses, arrangements for bulk sale and purchases and the net power tariff realized by the utilities.
Without removing the inefficiencies in the power system, it might not be advisable to keep on increasing the electricity tariff and over-burdening the consumers, with a view to sustain the public sector utilities.
CONSUMER BASE AND 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 of electricity by the economic groups at present is: Domestic 46 %, Industry 28 %, Agriculture 12 %, Bulk Supply 9 %, Commercial 5 %, and Railways 0.02 %. Due to high power tariff by Wapda / Kesc and frequent power breakdowns, a large number of industries have installed captive power plants. This has adversely affected the utilities. The service quality of the public utilities leaves much to be desired and the customers are mostly complaining. In such situations and without improving reliability of power supply, any further increase of tariff might prove counter-productive.
PLANNING AND FINANCING GENERATION CAPACITY EXPANSION
The demand/supply projections reportedly prepared by Wapda portray a supply deficit of 17,300 MW by the year 2015-2016. In order to propose suitable strategy to meet power demand; Wapda has prepared a 'Hydropower Development Plan' (Vision 2025). A number of hydel projects have been selected for completion by 2006. The Sindh Government 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 currently facilitating implementation of four hydel 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 of the existing and additional generation capacity, power tariff has to be rationalized with a view to attract additional investment for financing the revamp of the existing system and the addition of new generation capacity.
Originally about 70% of total electricity generated in the country was hydel. However, as time passed due to different reasons more of thermal generation was added and thereby reduced share of hydel generation, a cheaper source of electricity. Shortage of river water in the last few years has further aggravated this balance. More reliance on thermal power has increased the utilities' financial burden particularly in foreign exchange. Now there are efforts to promote more of hydel generation. Due to proposed privatization of Wapda-Gencos and Kesc, the share of private sector in power generation will increase sharply. There are apprehensions that the private sector, if not monitored properly, would manipulate to increase electricity prices. Nepra shall have to be extra-careful to protect the general public from undue exploitation.
IMPLEMENTATION OF WAPDA- POWER SECTOR REFORMS
The Power Wing of Wapda has been restructured into independent companies, i.e. nine distribution companies (Discos), four power generation companies (Gencos) and the National Transmission and Dispatch Company (NTDC) has been formed 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 corporatised entities. The capitalization of the over a dozen new companies is understood to be in process. Each company has to be so structured and capitalized so that it can sustain itself in future without being a drain on Wapda / Pepco or the government. The government might have to make cash contribution to bring the equity of each new company to satisfactory level. Ultimately, the Discos and Gencos will be privatized. Under the restructuring eventually bulk power sale / purchase is expected to be on these lines:
a. Wapda will be selling hydel 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 be selling 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 and 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.
STRATEGY FOR THE PRIVATISATION OF KESC
Abnormally high T&D losses at 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. Kesc-Gencos may be incorporated later for subsequent privatization. The Transmission and Dispatch in Kesc area may be merged with NTDC. Like Wapda's Power Wing, the Kesc may be restructured after an objective study. In case of Kesc privatization, as per press reports 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 EXISTING POWER POLICIES
PPIB, under overall direction of the government, prepared Power Policy-1998 (Thermal) and Hydel Policy-1995, which are currently operative. These policies are now to some extent out-dated and may preferably revised. Additional matters to be considered at the time of revision are mainly as under:
a. The tariff to the IPPs did not reflect fiscal and other incentives allowed to the IPPs, so the real tariff would be 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. The new Policy should reflect the lessons learnt from relationship with the IPPs as well other areas for induction of private sector.
b. The matter of uniform tariff to all 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 is urged to accord due attention to these matters.
c. Main players in the power sector today 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 power policy including the rationalization of basis for tariff determination.
STRENGTHENING OF NEPRA AS REGULATOR
Nepra has been set up under an Act of Parliament, called the Regulation of Generation, Transmission and Distribution of Electric Power Act, No XL of 1997. The object of Nepra Act was to create an independent body to regulate electric power services in the country. Nepra has since issued generation and distribution licenses to a number distribution and generation companies, the IPPs and captive or small power plants. Nepra has also made a number of determinations for increase in tariff per kwh. Nepra is committed to provide a fair return to the investor while ensuring safe and reliable service at competitive rates to the consumers. Wapda and Kesc have not been happy with Nepra in respect of tariff determinations. A special seven-member committee headed by the Secretary Cabinet Division has been formed to look into the matter. The committee is still working. The government and the other stakeholders are urged to look this matter objectively and help the regulatory system to evolve on sound lines. Technical support coupled with financial resource allocation might help.
PRUDENT POWER PURCHASES AND TRANSPARENCY
The strategy should be that the power 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. Wapda has to be careful in comparing the generation cost with the cost of IPPs, in all respects.
RELIABLE DATABASE FOR BULK AND RETAIL TARIFFS
The tariff determination has not been worked out for each plant based on its capital structure, cost and the cost of generation. Rather, 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. Now 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 OF GOVERNMENT TAXES ON FUELS AND POWER
Tariff includes government 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 the taxes to maintain the power tariff at reasonable level with a view to promote industrial and economic development.
RECONSIDERATION OF DIFFERENT TARIFF SLABS FOR CUSTOMERS
At present there are too many slabs in some of the tariff categories. There is need to reduce the number of tariff categories and also 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.
Wapda, the IPPs, 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 general 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 in the country. Adoption of an equitable approach in determining the fuel prices and applicable taxes at different stages of electricity might free the power utilities to concentrate more on tackling the technical and managerial issues of power generation, transmission and distribution.