National average electricity tariff — an anti-climax of power sector reforms

In a recent meeting, the cabinet’s Economic Coordination Committee (ECC) agreed to begin the process of rationalising subsidies, a long-term demand from global lending agencies led by the International Monetary Fund (IMF).

The decision was based on a presentation made by Dr. Waqar Masood Khan, who headed the Ministry of Finance’s Subsidy Cell before being promoted to the prime minister’s special assistant on revenue. Dr Khan is claimed to have estimated that the action plan proposed for the first phase of the Oil, National Food Security and National Savings Subsidy Rationalization Plan will provide an annual gain of Rs488 billion.

The ECC, led by Finance Minister Dr Abdul Hafeez Shaikh, welcomed the plan and requested that adequate summaries should be drawn up by the ministries concerned as necessary under the 1973 business rules for the approval and implementation of policy acts.

The “adoption of the national average electricity tariff by consolidating distribution company accounts (Discos), minimising electricity pricing slabs and subsidies to be clearly identified on bills, which will save Rs200bn,” is the biggest move in terms of financial effect.

If the accounts of poorly controlled and productive discs are to be merged to ensure a uniform tariff, there is no point in creating a competitive energy market.

For this, the Central Power Purchasing Agency (CPPA) or defunct Pakistan Electric Power Company (Pepco) would be directed to file a single tariff application to the National Electric Power Regulatory Authority (Nepra) based on combined accounts of all Discos. At present, all Discos are filing their separate tariff petitions and Nepra is deciding their separate tariffs. But then to all Discos, like privatised K-Electric, a single rate is applied.

This will be accomplished by implementing Section 31(4) of the Nepra Amendment Act 2017, which requires a uniform tariff in this case for companies owned by a single owner-the federal government. As the weapon of choice, the government will then use surcharges.

This is essentially an anti-climax to the changes already underway in the power sector. Not only is this unfair to honest buyers, it is also counter-productive. The federal government and Nepra are currently in the process of introducing the Competitive Trading Bilateral Contract Market (CTBCM), which eventually needs to create competition between market participants in terms of both service quality and pricing for the benefit of consumers.

But there is no point in wasting time and energy on CTBCM if the accounts of poorly run and profitable Discos are viewed as one and the tariff has to continue to be standardised across the country. The plan is also counter-productive in that it leaves no attraction to further enhance or stay effective for efficient Discos and gives no motivation to reduce losses and become efficient for the weak and loss-making Discos.

Since good businesses and honest customers cross-subsidize poor businesses and energy criminals, the uniform tariff is the main cause of all the inefficiencies faced by the power system. The power sector will not change until the real cost of the power supply hits every user.

In reality, the repeated build-up of equalisation surcharges or cost funding surcharges to ensure standardised pricing has forced honest customers to turn to renewable sources, with good industrial customers setting up their own captive plants and switching to their individual solar systems by residential customers. In exchange, this saves the already surplus current power capacity and attracts high capacity charges. The government will have to avoid the supply of gas for energy generation by factories in the near future as a way out.

The machine loss of 1pc, for example, used to be about Rs6bn a decade ago. It has by now gone beyond Rs17bn. This basically means that, instead of Rs120bn, a 20pc failure now costs the system around Rs350bn. The affordability aspect, on top of that, also causes ordinary customers to try to find short-cuts, including fraud.

In addition, in the short term, the government also allocated subsidised power prices to the export industry and then paid a marginal cost for the next two years. This will mean that the burden of removing subsidies for some plates will move to fewer buyers, mainly in the middle class, who are already dealing with high inflation and low growth challenges.

The subsidy presentation showed the cost of all existing, due and secret subsidies and contingent liabilities and transfers at approximately Rs5.2 trillion (stock) and projected annual subsidies of approximately Rs2tr (flow)-nearly 4.5pc of GDP and 58pc of the budget of the current year, excluding interest payments. It was clarified that, in the absence of sufficient returns, substantial quantities of past deposits, loans, guarantees and uncovered borrowings often constituted a real and future loss to the government. As such, by the end of 2019-20, the total stock of such liabilities and subsidies was valued at Rs.5.2tr, roughly one-fourth of domestic debt.