REDUCING THE ELECTRICITY TARIFF

The objective can only be achieved by making radical changes in the existing policies

By SHABBIR H. KAZMI
Aug 04 - 10, 2003

Pakistan is trapped in a vicious circle of persistently increasing electricity tariff. The state-owned electric utilities have been posting losses over the last decade. Multilateral lending institutions forcing the GoP to reduce their losses by increasing electricity tariff. The hike in tariff further proliferating electricity theft, leading to even higher losses. The vicious circle seems to have no end, without making certain radical changes.

According to Dr. Sharaft Ali Hashmi (late), one of the leading educationist at IBA, "A problem identified is half solved." Keeping this in mind it is necessary to first find out the reasons for ailment of electric utilities and only then any suggestions could be made to bring down electricity tariff. Over the last one and half decade the GoP has been following a bad Power Policy. Poor implementation has made it worse and non-compliance of privatization plan has made it the worst. While the Policy has not helped in controlling electricity theft, persistent increase in tariff has proliferated electricity theft. The rampant corruption, mismanagement and resistance against privatization programme have led to a situation where the GoP has no option but to keep on injecting funds to keep WAPDA and KESC operational.

The managements of state-owned utilities term the IPPs the sole reason for the financial malaise. However, they never accept the fact that high T&D losses, rampant corruption, mismanagement and waste of resources are the key reasons for the losses of electric utilities. The situation had reached a point, in late eighties, whereby multilateral lenders declined to extend more funds to public sector. While demand kept on increasing, no corresponding increase in power generation led to severe load shedding through out the country. This led to establishment of IPPs in the country.

It is also said that bulk power purchase tariff is unbearable for the public sector utilities. However, some sector analysts say, "The higher tariff agreed was also due to the inefficiency of public sector utilities. The agreed formula was cost plus approach. The IPPs based their feasibility on the cost of generation of public sector utilities. While the IPPs demanded all the conceivable incentives, the GoP was forced to accept their terms and condition, due to acute load shedding going on in the country at that time. The then government was in such a haste that it ignored all the apprehensions expressed by the sector experts. One must accept the fact that the country was forced to make a bad choice. The subsequent actions further aggravated the situation.

It is necessary to reiterate the fact that even at that time WAPDA and KESC were suffering from huge T&D losses, mostly comprising of theft. However, the pinch was not felt because WAPDA was generating over 50% of its electricity from hydroelectric projects. With the commencement of power generation by HUBCO, privatization of Kot Addu thermal plant and lower water level at Mangla and Tarbella dams around the same time the situation went entirely against WAPDA.

Establishment of IPPs helped the GoP in overcoming the immediate problem but policy planners went into deep sleep once again. After allowing the thermal-based IPPs the GoP should have accelerated the process of establishment of new hydroelectric projects as well as privatization of transmission and distribution network, the real cause of losses. Some analysts say, "It is amazing as well as amusing that the GoP was prompt in privatizing Kot Addu but could not find a buyer for Faisalabad Electricity Board (FEB) in last fifteen years. Asian Development Bank has been actively supporting privatization of the FEB but transaction could not be completed only because the various governments were never serious about privatization. The lack of commitment still prevails because privatization of corporatize entities of Power Wing of WAPDA has not been made possible as yet."

As stated earlier, the real losses of public sector utilities are due to massive electricity theft, being done with the connivance of staff of these entities. The real eye opener is the prevailing situation at KESC. The number of units billed are even less than the self-generated units. In other words whatever electricity KESC buys from WAPDA, IPPs and others is only meant for theft. Saying this does not imply that situation at WAPDA is not different. Since KESC is a listed company, most of the relevant information is available in its annual reports. It is difficult to comment on WAPDA because no such data is made public on regular basis.

Another reason for higher tariff is imposition of GST on electricity bills. The GoP has made oil and gas expensive by collecting billion of rupees as development surcharge. Now the utilities have been assigned the role of tax collection agent, he GoP collects 15% GST on electricity bills. Interestingly it is often said that electricity tariff is low in Pakistan as compared to the tariff being charged in some other countries in the region. This is because 'energy cost' is used as a reference point. However, a number of surcharges are also collected. For any electricity consumer the effective tariff is energy cost plus all the surcharges. Even a small or medium size consumer pays around 8 to 10 rupee per unit. Industrial and commercial consumers, despite being the 'bulk buyers,' pay even higher tariff as compared to the rates being charged from domestic consumers.

WAY FORWARD

One have enough reasons to conclude that higher electricity tariff in Pakistan is due to the bad power policy and inefficient management of public sector electric utilities. Therefore, some radical steps have to be taken to overcome the situation. If the GoP is really serious it must begin with privatization of corporatize entities of WAPDA's Power Wing and KESC. These entities must be privatized without further delay.

As such these entities are heavy burden on national exchequer. In the current budget the GoP has allocated Rs 160 billion for Public Sector Development Programme (PSDP) and the largest sum will go to WAPDA. Out of a total sum of Rs 47,938 million allocated for infrastructure development, WAPDA will get over Rs 13,630 million. Similarly, Rs 3,672 million have been kept under the programme for KESC. The injection of funds in WAPDA and KESC has not helped in improving their financial condition and can be simply termed waste of resources. If electricity generation, transmission and distribution are completely transferred to private sector, the GoP would be able to spend these amounts on other infrastructure projects.

However, the case of KESC is a little different from WAPDA. One of the key reasons for losses of KESC is higher cost of electricity generated as well as purchased. The average unit cost of electricity generation at KESC is higher because its entire generation is thermal-based. Whereas WAPDA gets around 40% of total generation from hydroelectric plants. Though, the cost of electricity generated by KESC has always been higher, it has been forced to sell electricity at the rates being fixed for WAPDA. The GoP follows the policy of uniform electricity tariff throughout the country. Therefore, unless the GoP pays the difference in cost to KESC it will not be able to post even marginal profit.

It is also on record that WAPDA sells electricity to KESC at substantially higher rate. It has been suggested in the past that WAPDA should charge a rate based on cost of generation from hydel plant. It is not a favour to the consumers located in KESC's franchised area, it is their inherent right. The basis of this demand is that when prices of POL products were uniform throughout the country, the residents of Karachi and adjoining areas were forced to pay higher cost. Besides, over 10% of country's total population lives in KESC's franchised area, which is also the hub of industrial and commercial activities. Therefore, WAPDA must sell 10%, at least, of the electricity produced at cost to KESC.

As regards reducing tariff for KESC consumers, the GoP must facilitate establishment of IPPs in its franchised area. The PPIB has already floated tenders and these IPPs must come online at the earliest. Since these units have to either use furnace oil or gas, it will be more appropriate to run these units on gas. However, these should have duel fire system, capable of using gas as well as furnace oil. As such WAPDA is not in a position to meet KESC's growing demand of electricity. On top of this, WAPDA is supplying electricity to KESC at higher rate. Therefore, alternate source of supply must come online in KESC's franchised area without further delay to ensure uninterrupted supply of electricity at affordable cost.

There was a proposal to supply electricity directly from HUBCO to KESC. However, its implementation has been delayed only because of resistance by WAPDA authority. Efforts are being made to stop this project on the grounds that HUBCO cannot supply electricity to another buyer. However, it is the weakest point because WAPDA still remains the sole buyer and only the point of delivery has to be shifted from Jamshoro to Baldia grid station of KESC. This will help in overcoming the short supply in the interim period, till the time the IPPs commence power generation. This arrangement will also help in containing line losses of WAPDA pertaining to supply from HUBCO and onwards delivery to KESC under the prevailing system.

The GoP must expedite privatization of KESC. Billions of rupees are required to revamp its T&D network, which has gone obsolete and also incapable of handling additional supply. It is necessary to reiterate that sale of KESC as a compact seems difficult. Therefore, it is suggested that KESC should be split into various entities, one responsible for generation and transmission and four/five distribution companies. However, the only concern is that some of the distribution may face mammoth problem in stopping electricity theft. However, it is believed that once tariff is brought down and uninterrupted supply is guaranteed, consumers will be willing to pay their bills in-time.

Establishment of IPPs and Ghazi Brotha will help in overcoming the present short supply. However, it is imperative that more hydroelectric units should be established in the country to keep the average cost of generation low. The GoP must also ensure that coal-based power plants are established in the country.

It is heartening to note that present economic managers are taking interest in bringing down electricity tariff in the country. Their intention must be supported by actions. However, actions can only be taken when there is commitment.