Jan 19 - 25, 2004

According to a press report, the government has asked the Chairman Wapda for recommendations on rationalization of losses and the introduction of a uniform electricity tariff for all the distribution companies that have emerged after restructuring of Power Wing of Wapda. Most of the distribution companies have filed petitions with Nepra seeking tariff increases. The Nepra reportedly has sought, three thermal generation companies, one transmission-cum-dispatch company and eight distribution companies have emerged. All these companies are now overseen by PEPCO as the successor of Wapda. Assets and liabilities of the Power Wing/Wapda have also been allocated to the new companies. This has been done in accordance with the reforms agreed by the government with the international financial institutions. The breakup of any vertically integrated large unit into over a dozen companies is always a difficult task. The process could be made more manageable if restructuring was carried out with enough of serious ground work. This article is an attempt to delineate the principles for moving towards a power tariff formula that is be equitable to all stakeholders and at the same time provides relief to the loss making distribution companies.

UNDERSTANDING WAPDA'S POWER WING: Wapda has been operating as a vertically integrated utility having power system comprising power generation, transmission grid and distribution networks throughout Pakistan except small area licensed to KESC. For a better appreciation of its operations, let us presume that Wapda's Power Wing comprised of four distinct pools namely, the Power Pool, the Revenue Pool, the Cost Pool and the Reserves pool. Every Pool comprised of a number of items as discussed below:

1- POWER POOL: Wapda system was receiving power generated through various thermal and hydro plants owned by the utility, supplemented by power from nuclear power plants owned by the PAEC and thermal power plants/the IPPs owned by the private investors both local and overseas. These plants are located throughout the country and are connected through the national grid. Different thermal plants owned by Wapda or the private sector were using furnace oil, diesel or gas as the case may be. The sizes of the plants are generally different and so is the operational age. Transmission and distribution lines are also of different sizes and lengths. Lately, Wapda has started buying power from Iran for the coastal areas as these were facing power shortage due to being so far not connected with the national grid. Wapda allowed free consumption of electricity to its employees as per entitlement of each grade. Apart from sale of electricity to the customers, the pool was being reduced due to the transmission and distribution losses.

2- REVENUE POOL: Wapda has been supplying power to the customers through eight Area Electricity Boards (the predecessors of the existing distribution companies). The customers included Domestic, Commercial, Industrial, Agricultural, Bulk Consumers, Railways, the Federal and the Provincial governments; and the agencies and corporations including utilities controlled by the government. There are different slabs of tariff for each category of customers. Along with its own dues, Wapda has been collecting government dues in the form of various taxes imposed on electricity consumed by the customers and remitting such amounts to the government. Wapda had special arrangements for supply of power to the government departments. Wapda was selling power in bulk to the government of AJ&K at concessional rate and the federal government was partly compensating the deficit. Wapda has been selling power in bulk to KESC under special arrangements. Besides, Wapda was supplying power to certain underdeveloped areas at nominal rates and there were no meters installed at the place of the customers.

3- COST POOL: Wapda met its overall administration cost as well as the cost for operating and maintaining of its power system comprising power generation plants, dispatch centres, transmission lines, grid stations, distribution networks, etc. To this was added the cost of power purchased from PAEC and the IPPs, as per contracts negotiated with the counter parties or as determined by the federal government. The royalty paid to the NWFP government is part of this pool. Costs for operation of hydro plants are relatively less than the costs of operating the thermal plants, of which fuel cost is very high and has been increasing in the past few years. Wapda pays large amounts to PSO/other oil marketing companies for purchasing furnace oil or diesel and for purchase of gas pays to SSGCL/SNGCL or other gas producers. Price of gas varies and lately Wapda has started direct import of furnace oil.

4- RESERVES POOL: This is largely the net difference between the Revenue Pool and the Cost Pool adjusted by the debt servicing made to the government and the budgetary support received from the government for the continued operations of the utility. The contribution from the government is considered as government equity. Fresh investments for the development of the power system of generation, transmission or distribution as well as cost of major overhauls are met from this pool.

POWER SYSTEM AFTER RESTRUCTURING: Under the structural reforms, the government has allowed Wapda's Power Wing to be broken up horizontally into thirteen companies. PEPCO is the parent body and it has three thermal generation companies, one company for dispatch-cum-transmission and eight companies for power distribution in the country. Hydro power generation is still with Wapda and would continue so for in future. The generation and the distribution companies would be gradually privatized. The power system now is characterized as under:

1- Being independent generation, transmission and distribution companies responsible for their respective operations and profits now the transactions regarding purchase, sale or transmission of power among these companies would be at-arms-length basis. Each company is supposed to fend for herself. This spirit will also be true for rates charged by every generation companies from the transmission company and by the transmission company from eight or nine distribution companies. Special contracts for sale or purchase of power might also come under review in the process. Power system earlier owned by Wapda and since handed over to the new companies is presumed to be in need of substantial revamp for providing reliable services. Moreover, it needs to ascertain whether all the new companies are appropriately capitalized for sustainable operations.

2- Wapda owns all the existing hydro power plants (capacity 5010 MW) as well as the hydro plant that is about to start commercial production (capacity 1450MW). The hydel generation cost, though believed to be different for different plants, is the cheapest when compared to cost of electricity per unit generated by using other fuels.

3- The power plants owned by the three generation companies (capacity 4685 MW) have different configurations and it is believed that their generation cost is also not the same. Reliable data about generation cost per unit might not be available but it is a guess that for old plants it might be in the range as the cost paid to the IPPs per unit of electricity. One generation company is already on the privatization list while more will follow.

4- Wapda has contracts for purchase of power with the IPPs (capacity 5551 MW including Kot Addu capacity 1500 MW) and PAEC (capacity 462). The cost of electricity purchased from the IPPs is believed to be the highest.

5- Transmission and distribution losses of four distribution companies are said to be exceptionally high while for other companies losses are considered as reasonable in the circumstances. If the government sets up a new distribution company for FATA, then there will be nine distribution companies excluding KESC which is vertically integrated utility and purchases part of its electricity requirements from Wapda system. Due to reasons, Wapda is not disconnecting electricity to FATA despite heavy default.

6- Total power generation capacity of the country at present is 17,726 MW comprising hydel 5,010 MW (28%), thermal 12, 254 MW (69%) and nuclear 462 MW (3%). With the start of commercial production by Ghazi Brotha Hydro Power Project (1,450 MW capacity) in the next few months the total generation capacity would rise to 19,176 MW. This will also raise the share of the hydel to 34 % while the share of thermal will slightly decline to 64%. This will also have beneficial effect on bringing down the average cost of generation per unit of electricity.

THE CHALLENGES: The country at the moment is confronted with a number of challenges, some of which are: (i) Existing electricity tariff is already high and the industry is finding it difficult to compete internationally. Realizing the problem, the government has already set up a Task Force to rationalize the tariff. The final report of the Task Force is expected by the end of the year; (ii) While tariff increase is not on the immediate cards, four to five distribution companies particularly in more underdeveloped areas are in losses which cannot be cut unless tariff is raised or some other relief is provided on continuous basis; (iii) The government has initiated the privatization process of some of the generation and distribution companies and the prospective investors are to be assured of fair treatment to them vis-a-vis the companies still in the public sector; and (iv) The government has to fully honour its commitments with the international financing agencies for completing the reform of the power sector on sustainable basis. Appropriate power tariff is part of the arrangements.

TIME BOUND UNIFORM TARIFF: Allocation of relatively cheap hydel power and billing the cost to the selected two or three distribution companies and allocation of the relatively costlier power from the IPPs to the other three-four distribution companies and billing the high cost would not be fair and would invite unprecedented protests from all stakeholders. This option has serious implications and therefore should not be pursued. A mechanism which is less discriminatory shall have to be devised and improved as time passes. With a view to achieve relatively safe transition from the old system of electricity pricing to the new scientifically verifiable pricing mechanism, the time bound uniform tariff is suggested below. It is expected to pose relatively less problems to the customers and is considered to be fair to all stakeholders.

1- To overcome the difficulty, for the initial few years at least, the Power Pool described above might have to be followed for purchase of power from the generation companies and sale of electricity at average cost to the distribution companies but with certain adjustments. The new power pool might be managed by the transmission-cum-dispatch company, but closely supervised jointly by Nepra and Wapda. The three generation companies would be paid for the electricity supplied using the Average Uniform Cost of Electricity which will be calculated by dividing the total cost paid to various suppliers of electricity including the IPPs, Wapda and PAEC with the total electricity received in the pool from all sources. Reliable data on per unit generation cost of each plant and loss during transmission through the national grid can provide a better basis for paying to the power generation companies other than the IPPs. Such data is believed not to be available at the moment. Collection of such data should be started at the earliest for completion in six months.

2- The IPPs will continue to be paid as per contracts and so will PAEC. For determining the deemed cost of hydel power supplied by Wapda to the power pool, the rate actually paid to PAEC per unit might be used. However, all of it will not be reimbursed to Wapda for the hydel power of which generation cost is much less.

3- Wapda, the owner of all hydro power, will be reimbursed its cost of generation with agreed rate of annual profit and the agreed royalty payable by Wapda to the provinces. Wapda shall also be paid annually allocations to its Power Development Fund for undertaking new hydel projects in future determined say at Rs 1.00 per unit of electricity supplied to the pool. The difference of the amounts so paid to Wapda and the deemed cost of Wapda included in the total cost for calculating the Average Uniform Cost of Electricity, will be credited to the Special Fund to be used for subsidizing the loss making distribution companies provided they meet the annual target for reduction in T & D losses. The subsidy would be considered only during the initial period say three years.

4- Matters such as self-reliance for fuel and technology, abolishing of taxes on electricity or taxes included in fuel prices and the cross-subsidy to ensure affordability might also be considered and reflected in the power policy.

5- The transmission-cum-dispatch company would provide power to all the distribution companies at the Average Uniform Tariff Rate which would be arrived at by adding transmission loss per unit, transmission charges and reasonable annual profit rate for the transmission-cum-dispatch company to the Average Uniform Cost of Electricity paid to the electricity suppliers. The AUTR per unit is expected to be lower than the average tariff rate as at present.

6- The thermal generation plants (other than the IPPs and PAEC), Wapda's hydel plants and the transmission grid may be given specific time limit (say three years) to become efficient to the international standards, suitably adjusted for age of the plant. They might be warned that the present rates for purchase of electricity or for transmission service would be discontinued in three years. From then onwards, they would be paid cost for electricity or transmission service according to the agreed rates determined in reference to international standards including rate of annual profit. Also, electricity dispatch from the IPPs and the PAEC plants should be reviewed for efficiency and corrective measures taken. The distribution companies shall also be subject to such stringent measures and asked to be efficient like the international companies within the specified period.

7- The government might consider special one-time grant for revamping the systems of the generation companies, the transmission company and the distribution companies as well as the proper capitalization of these companies. The government might consider lowering the interest rates charged on loans to Wapda and / or the new companies. In future, government subsidy to be credited to the Special Fund mentioned above and utilized as per rules of the fund.

Closing Remarks: The way-out described above submitted to the government for consideration might be treated by the stakeholders as the first step in a difficult area in which progress would only be possible through open dialogue aiming at equitable solutions. Detailed calculations of the amounts involved can be made by the utility experts after the broad principles are agreed upon. Our attempt as far as possible should be to arrive at solutions that are fair to the people of all areas and thus enhance the goodwill among them.