REGULATORY FRAMEWORK IN POWER SECTOR

Issues and solutions

    Javed Nizam, Chief Executive
          OfficerPakistan Electric Power Company
                                                      
Apr 21 - 27, 2003 

Government of Pakistan (GOP) has embarked upon an ambitious programme of reform in the power sector so as to ensure continued supply of power to the consumers at affordable price through efficient operations and effective regulatory framework while ensuring economic/financial viability of the utility. Keeping in view these objectives, National Electric Power Authority (NEPRA) was established through NEPRA Act, 1997. The primary objectives of having an effective regulatory framework through NEPRA was to ensure financial and operational viability of the power utilities and to protect the interest of the consumers. It was also envisioned that through an effective regulatory framework the outside investment will be encouraged in the Pakistan power sector without support of the Government of Pakistan so that the existing infrastructure is improved and upgraded for viable operations for the benefits of the consumers. It was also envisaged in the Power Sector Reforms Programme that cross subsidies of certain categories of consumers in underdeveloped areas of Pakistan will be eliminated through a mechanism to be framed by NEPRA. It is interesting to note that presently WAPDA's existing consumer-end tariff contains cross subsidies of about Rs.29 billion to lifeline consumers and agriculture sector which is recovered by charging higher tariff from industrial and commercial consumers thus causing economic distortions.

NEPRA enabling legislation i.e. NEPRA Act 1997 was primarily based on power regulatory legislation of UK and other developed countries in the West. The present NEPRA Act does not take into consideration the ground realities in Pakistan, some of which have been mentioned in the succeeding paragraphs. In developed countries, the power sector is financially viable and profitable while electricity consumers are affluent and do not require any subsidy either from the government or from the utility. However, still sufficient protection is provided to the utilities and the consumers through various means such as provision of adequate return on investment to the utilities, establishment of realistic level of operational standards of service to be adhered to and the consumer obligation in paying electricity charges to the utilities. The performance standards for utility are generally for consumers interest and are also protected through interaction with various consumer protection groups.

By contrast Pakistan is neither a developed country, nor it has a mix of consumers which could match the standards of electricity consumers in the Western countries, nor a developed power sector.

It is discouraging to note that since its inception, NEPRA has not played its role as envisioned in NEPRA Act, which could have been instrumental in achieving the objectives of the Government of Pakistan through fair application of NEPRA Act, for which it was promulgated. WAPDA, the national mega utility and its corporate successors have been agitating about these issues at various forums and also drawing the attention of the policy makers of the grave implications for the power sector in particular and electricity consumers in general. But probably either the issues are too complex to resolve or the policy makers lack the requisite professional will to take a position before the utility and the regulator.

WAPDA's view point on some of the issues involved above is as under:

1. NEPRA'S COMPOSITION

NEPRA Authority consists of four Members, being representatives of the Provinces, and a Chairman to be appointed by the Federal Government. It is strange that none of the Members has the requisite professional background and relevant experience in power sector regulatory framework. In addition, NEPRA has also not acquired the services of professional support staff in a transparent manner which could establish a proper regulatory framework for the benefit of the consumers and the Pakistan Power Sector. Most of the existing professional staff of NEPRA is either drawn from the sectors which have no relevance to the operational requirements of power utility or mostly, ex-WAPDA employees who have no exposure of regulatory concepts/functions. Interestingly, NEPRA's present members are retired bureaucrats and it is being called as "retired civil servants club" in Islamabad. It is also pertinent to point out that NEPRA's professional staff has also not been exposed to any training or professional development which otherwise are needed for establishing an efficient and effective regulatory regime.

2. PERFORMANCE STANDARDS AND OPERATING PARAMETERS FOR POWER UTILITIES

It is incumbent upon NEPRA to establish suitable performance standards and operational parameters in consultation with power utilities and keeping in view the ground realities of the power sector for effective and efficient operations of the utilities and also to ensure that consumers' rights are duly protected. NEPRA has so far failed to provide any guidelines on this account which is a statuary requirement as per provisions of NEPRA Act. Resultantly, all tariff determinations on WAPDA and KESC tariff petitions have been based on arbitrary and subjective considerations never shared with the utilities in an objective manner, which has resulted in deterioration of financial health of both WAPDA and KESC. It may be mentioned here that positive developments and achievements demonstrated by WAPDA in the last four (4) years have not been appreciated while its difficulties in meeting the covenants agreed with the international financial institutions and poor recovery of receivables from public sector organization have also not been acknowledged. As a result, financing of WAPDA's investment programme through self-financing was not possible as agreed with the lenders.

3. MISMATCH BETWEEN COST OF INPUT AND TARIFF

Since May 1999, furnace oil prices went up by 190%, gas prices by 167%, the rupee was devalued by 50% and average rate of inflation has been hovering around 6-8% per annum. However, the tariff increase allowed by NEPRA on WAPDA's four tariff petitions to the extent of 17% was grossly inadequate to meet the minimum operational requirements. The World Bank and other international lenders also acknowledged that tariff reliefs allowed to WAPDA in the tariff determinations have been inadequate. The little increase allowed so far has not been able to bridge the cash deficit of the utility nor it was so sufficient to meet its badly needed investment requirements. Needless to say here that WAPDA existing power infrastructure is crumbling and is in badly need for upgradation, rehabilitation and augmentation.

4. INTERACTION BETWEEN UTILITY AND NEPRA

In countries where regulatory framework has been established, the process of determination of tariff and analysis of utilities tariff petitions is always held and done in a transparent and well designed manner with intensive interaction with utilities professional staff. However, NEPRA in most of the cases has not associated WAPDA/KESC with its analysis of data provided by the utilities in support of its tariff petition nor any independent evaluation has been allowed through another agency to ensure common understanding of the problems of utility and its customers. Rather NEPRA staff has been developing its own projections on behalf of the utility for determination of tariff which had no basis and left utilities and customers equally unhappy.

5. AUTOMATIC FUEL PRICE ADJUSTMENT MECHANISM

Despite clear instructions of the GOP/Ministry of Finance and Ministry of Water & Power to NEPRA to establish a mechanism through which incidence of variations in Fuel Price (Gas & RFO) could be passed on to the consumers periodically in accordance with an appropriate formula to be jointly worked out by utility and NEPRA. However, so far NEPRA has not come up with a mechanism which could insulate utilities from financial impact arising out of price variations resulting from deregulation of oil & gas sector since July 2001. On the other hand, regulatory regime established for oil and gas sector has not been made operational since Oil & Gas Regulatory Authority (OGRA) is not allowed to regulate petroleum pricing mechanism which is now being controlled by Oil Marketing Companies (OMC) in a questionable manner. This arbitrary pricing has put extra strains on utilities financial position.

6. LAYING OF ARBITRARY TARGETS

In order to justify its erratic determination on WAPDA's tariff petitions, NEPRA has asked WAPDA to reduce its line losses beyond reasonable level. At the same time, it failed to acknowledge reduction in losses which have been brought down from 42% in 1997-98 to 25% in 20001-02. It has now virtually become impossible to reduce losses at a uniform level and disregarding the fact that such achievements are not possible without intensive capital investment in the distribution network and could not be achieved in a short-term period. NEPRA has also not appreciated the payment culture relating to receivables from the public sector without acknowledging the constraints faced by the utilities. The Regulator in its exuberance to reduce the existing level of cross subsidization in consumer-end tariff has attempted to rewrite tariff regime for consumers like FATA, AJK and agriculture tubewells in Balochistan without giving due consideration to the socio economic and political considerations. The revision in tariff structure has simply resulted in abnormal increase of receivables of the utilities without having a positive financial impact on its operations.

7. GRANT OF LICENSES TO SMALL POWER PRODUCERS (SPPS)

All eight WAPDA Distribution Companies (DlSCOs) have been granted Distribution Licenses in accordance with the NEPRA (Application and Modification Procedure) Regulations. Similarly, all three Generation Companies have also been given licenses by NEPRA and very recently Transmission License for NTDC has been granted, notwithstanding that the transmissions rules have not yet been notified by NEPRA, because NEPRA feels that there is no need for providing transmission rules or a model license since there will be only one transmission license and its terms will be finalized by NEPRA. NEPRA has shown extraordinary efficiency in issuing generation licenses to the so-called Small Power Producers. Simultaneously, NEPRA has also granted them Second Tier Supply Authorizations, which have effectively allowed the so-called Small Power Producers (SPPs) to sell power to Industrial Consumers in their vicinity. This would have an adverse financial effect on WAPDA's costs and revenues, since under the existing tariff structure, the industrial consumers are the choice customers in terms of revenues per unit of power sold, which also subsidize the under privileged consumers by allowing reduced tariff for socio-economic constraints. WAPDA is being deprived of its valued customers, on the other hand, it has not been allowed by the regulatory to change tariff according to cost of service for rich category of customers.

Since NEPRA has shown complete disregard to WAPDA's view point in the DISCOs Licenses, therefore, WAPDA had no option, but to bring the whole matter to the knowledge of the GOP, which has now established a high powered committee to resolve the ongoing disputes between utility and NEPRA taking note of the consequences of NEPRA policies on power sector as a whole.

WAPDA and its corporate successors have a number of reservations on the contents of these Distribution Licenses, such as the following:

The existing territory of the DlSCOs has not been protected. Cantonments, Housing Societies and certain industrial consumers (who are being served by the so-called Small Power Producers) have been excluded from the service territory of the DlSCOs. Also all areas more than eight (8) kilometers distant from an existing feeder will form part of the DlSCOs territory. Hence the DISCO will be deprived of valuable customers by disfigurement of the service territory; and the outlying; prospective consumers will have no legal or moral claim for electric supply, having been excluded from the DISCOs exclusive territory.

Other arbitrary conditions have been imposed which are beyond the scope of the NEPRA Act and Rules. For example, the Companies are required to submit territorial maps in digitized form although conventional maps have already been submitted as per NEPRA's original requirement, while no funds have been made available by NEPRA in the tariff to cover the expenses of digitization, which will run into millions of dollars.

The licence requires conformity to numerous rules and regulations which have not beet gazetted, so that the licensee is unable to make an informed assessment of its ability to fulfill such vague terms. On the other hand, the NEPRA licence does not provide the most essential protection to the licensee needed for due discharge of its functions, such as recovery of arrears and right of way, although the licensees under the Electricity Act enjoyed all these protections.

Based on the above, it can be conclusively assumed that regulatory framework as envisioned in the NEPRA Act, is non-existent, it is not protecting the rights of consumes and utilities during the transitionary period rather it is putting the entire power sector's existence at stake by not taking appropriate decisions to ensure the financial viability of the utilities. WAPDA/PEPCO has repeatedly invited the attention of the special committee of the GOP in its various meetings held with participation from all stake holders on the implications of defective regulatory regime and has suggested a number of measures before the committee, which if implemented could resolve the licensing and other disputes between NEPRA and the utility, clear the perception of the consumers about utility and provide a credible regulatory framework which would facilitate smooth operation and attract badly needed private sector investment in the power sector.

1. NEPRA's enabling legislation be appropriately amended keeping in view a role of the utilities which have been structured in a manner so as to provide power to weaker segments of the society to offset the socio economic and political constraints.

2. Composition of NEPRA Authority be structured in a manner which should promote professionalism and should be in line with the other regulatory bodies like PTA, OGRA, PEMRA and other regulatory agencies being established in the country.

3. As per existing law, no right of appeal against the decision of NEPRA has been provided to the utilities at a forum other than NEPRA itself. It is proposed that an appropriate high powered quasi judicial forum comprising eminent professionals and judicial officers be established which should have the powers to adjudicate between NEPRA and the power utilities in case of disputes.

4. NEPRA be asked to prescribe operational and performance standards keeping in view the existing infrastructure capabilities and the local environment.

5. WAPDA's current power generation mix is highly dependent on its thermal power plants and IPPs. This has resulted in very high fuel cost for thermal generation to WAPDA. However, no appropriate formula for automatic fuel price adjustment has been allowed to WAPDA despite its repeated requests. This has deprived WAPDA of timely recovery of incremental costs arising out of the fuel price variations. Interestingly, the international financial institutions have repeatedly asked for this mechanism to be made part of the tariff structure. WAPDA and its corporate successors would be more than willing to offer its records for a periodical audit of its cost inputs data and implementation of automatic fuel price adjustment formula.

6. NEPRA's fee structure for tariff petition, license applications and annual regulatory fee is high and puts extra financial burdens on the utility which would invariably be passed on to the consumers through the tariff. This needs to be rationalized and it would be appropriate if NEPRA is funded through national budget by the GOP and is subject to independent review and control by respective government agencies.

It is our earnest desire that Pakistan power sector should operate in an environment which is conducive for the economic development of the country and betterment of its consumers. However, it is apprehended that with present non-professional and ineffective regulatory framework, the operation of power sector would be in jeopardy, and the approach adopted by NEPRA will not be conducive for its development and sustainable operations. This will deprive WAPDA of the benefits of good work done so far on recurrent basis.