POWER SECTOR RESTRUCTURING AND THE NEW ELECTRICITY TARIFF
Reforms programme would bring a gradual transition of the power system from integrated, state-owned utilities to a decentralized system
By MUHAMMAD BASHIR CHAUDHRY
Mar 10 - 16, 2003
According to press news the government has been considering introduction of a new basis for determination of electricity tariff for power distribution companies (DISCOs) that have emerged on restructuring of the Power Wing of WAPDA as part of reforms agreed with the international financing institutions. It has been reported that the tariff would be fixed for five years on the basis of cost projections but inflation and fuel price would be passed on to the consumers on a quarterly basis. The retail tariff would comprise power purchase price (PPP) and distribution margin. The DISCOs would pay a PPP for supply of electricity by NTDC. The PPP, adjusted for DISCO's distribution losses, would be added to its overall distribution margin to yield the retail tariff. The average distribution margin would be allocated into a tariff margin for each customer category. It is expected that all the power companies would have their separate tariffs instead of a uniform WAPDA tariff that currently applies throughout the country except the KESC license area.
The government, while announcing the new Power Policy in October 2002, stated that the reform of the power sector was high on its agenda. Implementation of the reforms programme would bring a gradual transition of the power system from integrated, state-owned utilities to a decentralized system with separate generation, transmission and distribution entities.
The enforcement of the new power tariffs would have major implications for the electricity consumers in Pakistan. To assist the government in arriving at proper determination of tariffs including the distribution tariff that the private investors would find attractive and yet that would not increase electricity bills of the consumers in Pakistan, the following suggestions are offered for consideration. It is generally thought that electricity tariffs in Pakistan are excessive, which must be brought down to promote economic activities particularly in the fields of manufacturing, agriculture and exports.
The press news makes no mention of the determination of generation tariff at which the power will be sold in bulk to NTDC. Generation tariff is of critical importance as it would be the base for arriving at the distribution tariff. To be fair to all categories of consumers as well as the DISCOs, it is imperative that the generation-tariff is determined in a transparent manner and that such tariff determination is independently verifiable. The suggestions may be better appreciated in the context of composition of the power sector in Pakistan particularly the arrangements under which different power generating companies are supplying bulk electricity to WAPDA/NTDC/DISCOs.
The power sector of Pakistan comprises of two vertically integrated public sector power utilities — WAPDA and KESC. WAPDA supplies power all over Pakistan, except the metropolitan city of Karachi and adjoining areas of Sindh and Balochistan, which are supplied by KESC. The power systems of WAPDA and KESC are inter-connected through a 220 kV double circuit transmission line. Out of a total generation capacity of about 17,664 MW in the country, 9,949 MW is owned by WAPDA, 1,756 MW by KESC, 437 MW by the Pakistan Atomic Energy Commission and 5,522 MW by independent power producers (IPPs). In addition, about 300 MW to 500 MW capacity for power generation has been gradually added by certain industries, largely to meet their own requirements of electricity. These industries may sell surplus electricity to other consumers in the vicinity or to the NTDC/DISCOs.
In addition to the NTDC and the DISCOs, three thermal power GENCOs have also emerged on the scene due to restructuring of the Power Wing of WAPDA. Hydel generation is still with WAPDA. It is apparent that eventually WAPDA, the three GENCOs, the PAEC, the IPPs and the private captive power producers would be selling bulk power to the NTDC/DISCOs. However, the basis of sale and the contractual arrangements would be different for different power producers. The IPPs would continue supplying power to WAPDA (or to NTDC/DISCOs as its assignees) during the remaining period of the existing contracts. The PAEC at present has a special tariff decided by the government for sale of bulk power to WAPDA. This tariff may perhaps continue in future if the PAEC does not ask for an increase to the level of GENCOs' tariff.
The tariff at which WAPDA would be selling hydel power and the three GENCOs would be selling thermal power to NTDC/DISCOs are of critical importance and would heavily impact the PPP and the final distribution tariff. The determination of these tariffs would involve detailed working and policy decisions; due to the fact that the hydel generating capacity of WAPDA (and also the power generation capacity of PAEC) have been financially supported by the government. The captive power producers would be negotiating rates for sale of their surplus power. All these PPP rates and the final distribution tariffs may be independently verifiable and fair to all the counter parties as well as the different categories of the consumers. Possibly, the hydel generation capacity being developed by the provincial authorities and the AJ&K would also be offered at negotiated prices to the NTDC/DISCOs.
A fair and transparent basis for tariff determination is said to be the pre-requisite for attracting private investors to the proposed privatisation of the DISCOs/GENCOs. The tariffs allowed to them should sufficiently recover their legitimate operating costs including a reasonable return on investment. In the absence of proper capitalization of all these companies and major revamp of their facilities for efficient operations, there are chances that the final tariffs would be higher than the existing tariffs, which have already been termed as excessive. The situation calls for careful handling of the restructuring/privatisation, subsidy and cross-subsidy matters particularly the determination of the tariffs for different category of consumers. The slab under each category should also be determined carefully.
Over the years, different elements of the existing electricity tariffs/charges have been adjusted up wards to raise more revenue but no major change has been made in the basic structure of tariffs. The existing tariff generally comprises of Energy Charge, Fuel Adjustment Charge and Additional Surcharge. These three elements are given in Rupees per kwh. The utilities also collect Fixed Minimum Charges in Rupees per kwM. In addition, the utilities collect meter rent and also charge penalty for low power factor. Income Tax, Sales Tax and the Excise Duty are also collected from certain consumers. For industry there are Peak and Off Peak tariffs. Now that the vertically integrated utilities are being divided into generation, transmission and distribution, it would be proper that the tariffs at each stage are determined scientifically and fairly to protect the electricity consumers from undue exploitation.
The government is urged to note that various new things, proposed to be introduced in the context of privatisation and/or modernisation of power sector, would tend to increase the distribution tariff over the existing average tariff, which is already excessive. Attempts may also be made to offset such increases through reduction in existing taxes and/or use of gas as fuel in place of furnace oil. The benefits of such remedial measures should reach the consumers in the form of reduced tariffs. For the GENCOs/DISCOs, it would not be impossible to achieve profitability at lower tariffs provided all the companies are capitalized properly, power facilities at each stage are operated efficiently and T&D losses including the alleged pilferage of electricity are suitably controlled. All these companies should be required to first put their house in order. Also, the government may take measures to strengthen NEPRA as a regulator by appointing a regular Chairman and with the provision of competent professionals.
It is essential that the independent experts be assigned the task of determining on scientific basis the different elements of the generating cost for each producing facility. Fuel is the main generation cost apart from financial expenses, maintenance cost and personnel expenses. For each generating facility, the standard fuel cost per unit of electricity may be first determined. It should be much lower than the existing actual fuel consumption. This may then adjusted for obsolescence factor keeping in view the age of each such facility. The GENCOs may be asked to revamp each facility within specified period after which they would be paid on standard fuel cost adjusted for normal plant derating. The GENCOs may be told that they would no longer be compensated through tariff for their inefficiencies. Similarly, the interest cost may be investigated and it should not be allowed through tariff if it is found excessive and with lop-sided capitalization of the GENCOs.
The NTDC, under the proposed arrangements, would be buying bulk power from the power generators and would sell it in bulk to the distribution companies, adding its own margin, to arrive at the selling price to be known as PPP. The NTDC, WAPDA, PAEC and the GENCOs are all in the public sector, while the rest of the power producers would be from the private sector. The sale/purchase arrangements among these entities must be on arms-length basis. This is the crux of the matter and the proposed sale/purchase arrangements may have better credibility with the consumers if the matters are decided through transparent and open negotiation carried out at arms-length basis.
The NTDC buying all power in bulk from the generators and then selling it to the distributors is something new in the electricity industry and its implications may be properly assessed before it is finally agreed. Generally, the transmission and dispatch companies in other countries provide fair and non-discriminatory access to the grid to all power producers and collect lease charge for their services. The sale and purchase of bulk power is between the power producers and the power distributors, i.e. the GENCOs and the DISCOs. In countries where competition has been introduced at wholesale level, there are wholesalers (separate and distinct from the transmission company) who purchase power from producers and sell it to the distributors.
At present WAPDA and KESC are making losses although the existing tariffs are said to be high and the losses are being met through government assistance out of tax receipts from the public. This has to change. The tariff has to be reasonably lowered and yet the utilities have to be making reasonable profits. This calls for thorough investigation of all the relevant cost factors including contractual arrangements and find the loopholes or the waste areas so that the utilities in future operate efficiently and make profits. Wapda is said to be already working out the possibility of reducing tariff in off-peak hours and increasing it for peak hours so that demand curve is as flat as reasonably possible. There may be so many other remedial actions through which the generation and the distribution cost could be reduced. All these proposals may be examined in a transparent and open manner in consultation with the consumers.
The business and industry are particularly vocal about the high electricity tariffs in Pakistan and of the cross-subsidies as some categories of customers are said to be subsidised by the other customers. There is need to investigate this aspect scientifically to determine the extent of cross-subsidy and to rationalize the tariffs as far as possible. It may not be impossible that the industry with a view to hide its own inefficiencies is blaming the electricity tariffs as exorbitant. Let the detailed analysis bring out the truth. The trade and industry also allege that high cost of electricity locally is making Pakistani products less competitive internationally. Detailed investigations of the comparative tariffs in different countries may help clarify this point as well. In this context data about ranges of average tariff for residential, commercial and industrial customers in the ASEAN countries is presented in the table.
BASIC ELECTRICITY TARIFF
Ranges Per Kilowatt hour (kWh) in the ASEAN Countries
As of 20 July 2002 (In US cents/kWh)
2.88 - 14.42
2.88 - 11.54
2.88 - 11.54
9.17 - 17.03
15.72 - 17.03
12.58 - 15.72
1.62 - 4.41
2.62 - 5.41
1.64 - 4.20
0.55 - 3.80
4.18 - 5.22
5.53 - 8.95
2.63 - 10.53
2.63 - 10.53
3.45 - 11.71
4.03 - 10.77
3.67 - 11.86
4.42 - 7.18
4.16 - 6.70
3.37 - 7.38
2.91 - 7.38
2.91 - 7.04
2.97 - 8.30
4.31 - 14.18
2.88 - 14.18
Source: ASEAN Centre for Energy
Domestic consumers using up to 50 kWh electricity enjoy the highest subsidy in the domestic category. The tariffs are also lower for consumers using electricity up to 300 kWh. FATA people have special rates and so are the rates at which electricity is supplied in bulk to the government of AJ&K. It is said that the agriculture tube-wells were already highly subsidised, and being charged an average rate of Rs 3.33 per unit in Punjab and Sindh and Rs 2.81 per unit in NWFP as against the utility's average cost of Rs 4.4 per unit. While the farmers of Balochistan were being charged Rs 4,000 per tube-well. The federal government picked the balance charges. WAPDA reportedly has recently turned down a proposal from the government regarding restoration of flat rate for agriculture tube-wells, due largely to its financial difficulties. In case the government wishes to provide power to people of certain areas as well as for the agriculture tube-wells at reduced rates, the subsidy burden would have to be picked up by the government. These tariffs may be rationalized keeping in view the socio-economic and political situation of different areas. In order to arrive at the exact amount of subsidy, all elements of generation cost, transmission cost, distribution cost and the T&D losses at each stage need to be made transparent, fair and independently verifiable.
The electricity tariff shall affect all people in the country and also have a big impact on export capability of our industry and agriculture. We should guard against the unjustified increases in tariff particularly for the purpose of making attractive the privatisation of GENCOs and the DISCOs to the private investor. One way to safeguard against such practices is to discuss the tariff determination on different public platforms including FPCCI. Such open discussion on the new tariff has to precede the tariff determination at the NEPRA.
In 1993, the Centre for Policy Dialogue (CPD) was established in Bangladesh, to promote an ongoing process of dialogue between the principal partners in decision-making and implementing process. The dialogues are designed to address important policy issues and to seek constructive solutions to these problems. These dialogues have brought together ministers, members of parliament, business leaders, NGOs, donors, professionals and other functional groups in civil society within a non-confrontational environment to promote focused discussions. In support of the dialogue process the CPD is engaged in research including public perception surveys. The CPD Dialogue Reports are brought out to widely disseminate the summary of discussions. The government may consider setting up such a forum for dialogue on electricity tariff and other important policy issues in Pakistan. The new tariff determination is a fit case for such public debate and the government must consider public/open debate before the proposal is formally submitted to the NEPRA for consideration.
Restructuring and reforms of Pakistan's electricity sector is expected to ensure its rehabilitation and gradual transformation into the market-oriented efficient sector. Henceforth, setting and regulation of tariffs on each stage should reflect efficient costs of generation, transmission/dispatch and distribution of electricity and assure reasonable rate of return to investors coupled with the financial and technical stability of the utilities. On the other hand, such tariffs based on the international principles of tariff setting, should protect the captive consumers from monopoly prices and excessive profits by the private investors.