REDUCING THE POWER TARIFF?

The popular political decision to offer relief in the electricity tariffs have become a major challenge

From SHAMIM AHMED RIZVI,
 Islamabad

June 07 - 13, 2004

One is still not sure whether the twice announced decision of the government to reduce the power tariff for general consumers will be implemented in the coming budget effective from July 1, 2004. While the federal cabinet, second time in the last 4 months, decided to provide substantial relief to the domestic consumers, the Water and Power Development Authority (WAPDA) are maintaining that a proposed 50 paisas cut per unit can be allowed to industrial, commercial and bulk consumers. If this concession is extended to all types of domestic consumers, which comes to about 90 percent of the total users of electricity its financial position will deteriorate beyond repair.

According to WAPDA it is already providing Rs. 20 billion subsidy to the small domestic consumers and Rs. 8 billion to agriculture tube wells per annum which is being made up by the government in some form or the other. Only two weeks back, the economic coordination committee of the cabinet has approved over Rs. 61 billion debt for equity swap for WAPDA to offset the debt, which the authority borrowed from the government to meet its losses during the last 4 years. Besides line losses of about 25% of the total production, WAPDA is also loosing about 37 billion annually as it not receiving a penny for the electricity supplied to the Federally Administered Tribal Areas (FATA)

It was in this 3rd week of February last that Sheikh Rashid, Information Minister and the spokesman of the Government of Pakistan announced at a press conference that the cabinet meeting presided over by the Prime Minister earlier had decided to provide relief to the electricity consumer across the board. He assured that the reduction, which will be substantial, would be effective from March 1, 2004. The promise remained unfulfilled till last week the Prime Minister himself announced that government has decided to provide some relief to the suffering of public by reducing the power tariff in the coming budget effective from July 1, 2004.

The popular political decision to offer relief in the electricity tariffs have become a major challenge, as the state-owned power utilities continue to mount losses. According to senior official sources, the government is seriously considering convening an emergency inter-ministerial meeting, comprising officials from the ministries of Water and Power, Finance and Wapda to come up with recommendations and proposals, in line with the decision taken by the cabinet.

The government plans to cut electricity tariffs in the forthcoming budget for all categories of consumers, against the original Wapda offer of a limited discount to industrial and commercial consumers. The loss-ridden public sector power utilities, namely WAPDA and Karachi Electric Supply Corporation (KESC), have become a major drain on the budget.

The government continues to extend huge capital injections to keep them afloat, taking a direct hit on the fiscal side. Under the current tariff structure, WAPDA offers Rs. 20 billion subsidy to the domestic consumers and Rs. 8 billion to the agricultural tube wells, in addition to face major headaches in the Federally Administered Tribal Areas (FATA). The FATA consumers have refused to pay Rs. 37 billion electricity bills, and authorities seem hapless owing to ongoing security operations in the tribal belt. WAPDA demands compensation from the central government to continue power supply in the tribal belt. According to official sources, WAPDA has proposed a 50 paisa per unit discount on billed value of its sales to the industrial and commercial consumers. However, the federal government has insisted to offer a similar relief to domestic consumers.

Under the regulatory regime, only the National Electric Power Regulatory Authority (NEPRA) is competent to revise power tariffs. In case, the political government pursues its popular agenda, it may lead to adverse implications, as rising losses of the power sector would force international financial institutions (IFIs) to review their position on new loans for the power sector reforms and modernization programmes.

Given the pressing needs of the domestic industry, as electricity tariffs are highest in the region, and keeping in view the challenges of the WTO regime with effect from January 2005, the government has to come up with a concrete action plan to address the issue. The current electricity tariffs are too high, which affect the competitiveness of Pakistani products in the international markets. In view of these two contradictory objectives, the government is considering an inter-ministerial meeting within the next few days to finalize a strategy, which may include a combination of measures, like review of taxes on electricity, fuel and sales. Secondly, the government may consider increasing the size of subsidy by offering some budgetary support.

The latest official data on the public sector corporation, released by the Ministry of Finance last week, says the actual line losses of the Water and Power Development Authority (WAPDA) have increased to 27 percent, against the target of 25 percent during January-March 2004. However, there has been good news for WAPDA due to better weather condition, coupled with the commissioning of Ghazi Barotha Hydropower Project, which helped increase hydle-thermal mix from 18.82 to 20.80 during the third quarter of 2003-04.

Availability of additional gas also helped Wapda's thermal generation, leading to an increase of 1042 Gwh in the self-generation, and power purchases decreased by 544 Gwh. These factors contributed to reduction in cost of power purchase and that of fuel by Rs. 6.4 billion and Rs. 2.7 billion respectfully (total saving Rs.9.1 billion) during the third quarter. The authority also got relief in the debt servicing, reduced investment plan and made less than the required payments of hydel projects to reduce cash outflows during this period.

The losses of KESC totaled were 37.6 percent, against the earlier estimates of 38.4 percent due to increase in units billed by 292 Gwh and higher average tariff of Rs. 4.78 kwh as against Rs. 4.78 kwh as against Rs. 4.61 kwh. However, KESC reduced its expenditures only due to reduction in investment on the System Improvement Project, from the target of Rs. 1.1 billion to just Rs. 256 million.