The donor agencies are urging for a raise in tariff


July 07 - 13, 2003

As far as the power sector is concerned the government is faced with a dilemma. While the domestic and the local industry is crying hoarse for reduction in tariff, the donor agencies are urging for a raise in tariff to make WAPDA and KESC economically viable. WAPDA maintains that it can manage itself economically without further raising the tariff provided the provincial governments and other government departments clear their arrears and the Federally Administered Tribal Areas (FATA) start paying for their electricity consumption. WAPDA further claims the electricity charges can even be reduced substantially provided the federal government allows it to import its furnace oil requirement for generation of electricity free of taxes which is alleged to be the highest in the world about 60 percent of the sale prices of the petroleum products. The Ministry of Finance which is making about Rs. 80 billion a year through such levies is not willing to accept this proposal.

To find a solution to this complex issue and at the same time provide some relief to both the domestic and industrial consumers of electricity the Federal Minister for Water and Power, after attending a detailed briefing from WAPDA Chairman directed setting up of a Task Force comprising all stakeholders to suggest measures for reduction in power tariff on long term basis.

The Minister directed that other stakeholders including Water and Power, Finance, NEPRA and PPIB to also come up with such papers/suggestions for a consolidated tariff reduction effort. The Minister also said that joint efforts are needed to manage potential savings in the input costs of fuel for electricity and that reduction in tariff would be possible, if major tariff would be possible, if major players in power sector are going in the same direction. The task force shall carry out a study within two months. After the meeting, the minister reportedly said that the task force would be headed by a private sector expert who could analyse various aspects with an independent mind.

The package presented by the Chairman, WAPDA in the meeting for reduction in tariff comprised the proposals:

i) allowing the IPPs to import furnace oil directly that would reduce tariff in the range of two to six paisa per unit;

ii) converting Rs. 17.5 billion debt liability payable by WAPDA to GoP into equity and lowering of interest on both the re-lent and new loans, entailing a relief of around 17 paisa per unit;

iii) increasing the gas quota by 150 MMCFD to the existing allocation of 400 MMCFD, reducing fuel cost with tariff relief of 11 paisa per unit;

iv) rationalizing levies on fuel oil and gas resulting relief of paisa 42 per unit;

v) removing sales tax, withholding tax and electricity duty to bring down the tariff by a further 41 paisa per unit; and

vi) capping WAPDA's O&M cost at the current level, cost escalation to be met through efficiencies.

Except for the capping of the WAPDA's O&M costs, all other proposals submitted by WAPDA pertain to other stakeholders such as the IPPs/PSO, Ministry of Finance, Central Board of Revenue, gas companies and the Ministry of Petroleum and Natural Resources and logically would require further consideration before a final decision is reached. Moreover, the major reduction in tariff as per WAPDA's proposal is from the reduction of taxes on electricity as well as the fuel oil/gas and the reduction of interest on loans to WAPDA. There is relatively little reduction in tariff from the projected improvement in the actual operations of WAPDA.

In due course of time, other stakeholders would also be, as desired by the Minister for Water and Power, submitting their papers/recommendations as to how to reduce the power tariff on long term basis. They might have different perspective in the matter.

There is another aspect of the tariff and the operations of WAPDA and KESC. These utilities have been facing loss situation and cash shortages at the existing level of power tariffs, which are recognized as excessive and detrimental to the economic progress and the competitiveness of the Pakistani products. The government injected large amounts of cash to keep these utilities operational. Arbitrary reduction in tariff has the potential to further damage the financial health of these utilities and therefore has to be avoided. Realistically, the aim of the Task Force might be to reduce power tariff on long term basis in such a way that the financial health of these utilities is restored and these utilities become self-sustaining for future operations on commercial basis. This might not be an easy task and it may possibly require substantial initial cash outlays to revamp the power system and/or the capitalization structure of the utilities including the transmission, distribution and generation companies carved out of the power wing of WAPDA as a result of the power sector reforms. For such a 'miracle' to take place, the Task Force and the stakeholders might have to give extra attention in understanding the problems confronting these utilities and then devising pragmatic solutions.

For the consumers, the electricity tariff is what they pay for the actual electricity used. For the utility receiving the payment from the consumers, the tariff is what is left with it after remitting to the government various taxes and royalty collected as part of the electricity bills. To be profitable, the utility must be left with some amount after meeting administration expenses, cost of electricity purchased or generated, losses in transmission and distribution, depreciation on the power system and the financing cost payable to the creditors. Technical or administrative inefficiencies in any part of the power system and/or the capitalization structure of the companies and their operational/contractual arrangements with counter parties might further increase the cost and consequently reduce the profits or result into losses. Heavy line losses may be due to system deficiencies or pilferage or both. For a lasting solution of power tariff, all these aspects of the utilities might have to be carefully studied/analysed for arriving at appropriate remedial measures. It may be appreciated that the stakes are very high and half-hearted measure in the present situation would not solve the problems. With this in mind, full scale review of different aspects of the utilities might have to be attempted.

However, it may be pointed out that the time allowed (3 months only) to the Task Force is too short in view of the enormous work of complex nation. It should be given at least six months with power to hire independent experts and analysts to hammer out a workable solution.

The Task Force may study the reports/information provided by the utilities and other stakeholders which have been asked to submit papers like WAPDA did in the past. The information would give the Task Force full picture of the operations of the existing utilities and enable the members to identify potential areas for possible reduction in tariff. In carrying out its task, the Task Force might be encouraged, if need be, to hire experts/independent consultants for special studies or physical inspection of the plant and other facilities or to seek other details from whatever sources considered appropriate. After the study is completed the Task Force should be able to suggest remedial measures including one-time additional funding for revamping the utilities and bring improvement in areas that are discovered as weak or inefficient or otherwise badly managed.