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Redesigning power sector

The tariff regime of public utilities has completely unnerved the people of Pakistan and despite a stupendous increase in utility bills, it appears that further increases are expected.

If such a thing happens then the majority of the people will completely lose their ability to pay.

The situation is critical as IMF is breathing down the neck and is insisting on further increase in tariffs. The choice is hazardous as the political dispensation is already pushed far enough and may not be able to withstand another wave of inflation that may certainly be followed by an increase in utility prices. It is this compulsion that is pressing the power policymakers to design a workable method to keep public anxieties under control.

This is precisely the reason that the policy planners in the power sector have impressed upon the political executive to approach the IMF and promise that a timeframe will be prepared for reforming the power sector so that the IMF agrees to put a freeze on further tariff increase. The policy planners have not given up their rhetoric as they keep on promising lower flat rates for industrial and SME sectors though they know it will not be possible.

However, the plan they propose addresses the needs of the sector by means of decentralisation of power from the centre to the provinces and the boards of directors and management of individual companies under an incentive-and-performance-based public-private partnership (PPP) model, including provincialising the distribution companies (Discos).

There is hardly any doubt the over-centralisation has proved cumbersome for power sector in Pakistan and the time has come to decentralise it.

The policy planners advocate that the federal ministry of energy may only be concerned with planning and policy encompassing both the power and petroleum sectors and regulating them through NEPRA and OGRA. They advocate that within three years, the delivery and pricing of power and petroleum products  will be deregulated under a multi-seller/multi-buyer plus wheeling arrangement to ensure consumer choice in retail distribution by abolishing all existing natural-monopoly exclusivities.

This is certainly easier said than done in a country that thrives on monopolies.

However, the most audacious proposal pertains to do away with the countrywide uniform pricing formula, meaning more efficient Discos and lower end-consumer tariff and vice versa.

This will be done through the removal of all cross-subsidies meaning from industrial to residential customers. The centre and the provinces will for the time being provide targeted cash transfers to the most deserving population through the Ehsaas programme.

Another aspect of the proposed design mentions that the government will shift its focus from investment in distribution and largely restrict its financing and ownership role to augmenting and removing the existing bottlenecks in the power, oil and gas transmission infrastructure for a more faithful merit order dispatch regime to lower the incremental cost of power generation for consumers.

In this context, primary payment commitments will be transferred from Central Power Purchasing Agency-Guarantee to various other private-sector parties on a power commodity exchange within the next 18-24 months and the federal government will be responsible for only backstopping the residual capacity payment obligation subsequently.

The reconciled net outstanding circular debt amount is planned to be settled through a 10-year government of Pakistan Sukuk bond that the final intended recipients may choose to also monetise on the stock exchange. The key principle is not to recover the added cost of previous inefficiencies from paying customers in the tariff.

The contentious part of the plan mentioned that after the 18th Amendment and the 7th NFC Award, plugging the leakages in the end distribution network by reducing theft and improving collections would be made the primary responsibility of the local and provincial governments.

This is something that the province may not be amenable to accept as they have never been giving the required exposure in the power sector. A province-led PPP model envisaging the transfer of assets and 100 per cent equity ownership of all nine Discos to the respective provincial governments will start with Punjab for Re1 notional payment. All external debt and liabilities on the books of various Discos that are currently guaranteed by the Ministry of Finance will remain sovereign debt and the Discos will stand effectively transferred to the provincial governments on a debt-free basis.

 

Another proposal is that the Discos or their respective provincial governments will be free to set up their own power generation capacity or source surplus power from IPPs not already fully contracted to NTDC. More importantly, they will be fully responsible for controlling theft, improving supply and reducing load-shedding or supplying power as per commercial and non-political considerations. The various provincial government-owned Discos will be encouraged to sign PPP deals with the private sector and such deals will handover management but not ownership, control to the private sector that will also agree to finance 100% of an agreed business value creation plan for each Disco.

An appropriate incentive-based profit-sharing formula can be agreed between the two parties
on a case-by-case basis. The plan envisages that NEPRA will continue to regulate the power sector, including tariff setting, by eliminating the inter-Disco cross-subsidies and doing away with the countrywide uniform power tariff policy that has become a major source of a disincentive for improvement.

This article originally appeared on The Weekender and has been reproduced with permission

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Disclaimer: The views expressed in this article are solely of the author and do not represent ARY policies or opinion.