regulator of the Wapda-spun corporate entities with nothing in sight if and when they would be privatised. In this eventuality, Nepra became a body that was superior to the federal government [emphasis added].
Corporatisation didn’t happen for nearly a decade. During this period, two power policies were announced – in 1998 and 2002. These were supposed to undo the ‘wrongs’ that were committed in 1994. However, the 1998 policy, which was based on competitive bidding, failed to elicit any investment. The 2002 policy did succeed in attracting investments. But these were the same form of investments (oil-based) as those that the 1994 policy drew, the only difference being the absence of foreign investors. The tariff determination was based on competitive bidding and afterwards Nepra was awarded the final tariff. The contradiction in the process is self-evident.
Although the law required that Wapda would also seek a licence from the authority within six months of the commencement of the act, delays in the corporatisation of entities prevented the working of the authority. Its work begun in earnest in February 2007 after corporatisation was completed, licences were given to each entity and policy guidelines were issued to Nepra to determine ‘differential tariffs’ for each distribution company.
Nothing has been more detrimental to the fiscal system of Pakistan and the health of the power sector than the policy of differential tariffs. To understand the malice inflicted through the process, it is important to know how the new policy transformed the process of tariff-setting in the country.
As an example, if there were three entities distributing power under the Wapda system with individual costs of Rs2 per kWh, Rs3 per kWh and Rs4 per kWh, respectively, Wapda would pool all three costs in a basket and charge an average tariff of Rs3 per kWh throughout the country. Let’s suppose Nepra has also determined the same individual tariffs and awarded them to each distribution company. However, now it wasn’t legally possible to charge the average tariff of Rs3 because the consumers being serviced by the entity with lower costs could challenge a higher cost than Rs2. More importantly, the policy of differential tariff was only a one-way street: consumers would not be charged differential tariff; rather, a single tariff would be applicable in the country [emphasis added].
So, the government’s desire to charge a single tariff across the country meant that only the lowest tariff can be charged because those with higher costs would not mind getting a lower tariff. This was an integral part of the new arrangement, which nobody gave any serious thought to when implemented. With time, it was so deeply entrenched in the system that even to this day it has not been corrected. In the meanwhile, the fiscal costs associated with this policy have been colossal. As much as Rs4 trillion have been paid as tariff differential subsidy (TDS) since the time the policy was initiated.
The new notion of the TDS came into existence. Wapda’s average basket tariff fully covered the costs of electricity to consumers and no subsidies were involved, except some for Balochistan tubewells and ad-hoc payments to cover pathetically low collections from Fata. With the new requirement of setting a single tariff as the lowest determined tariff (LDT), huge gaps emerged in meeting the underlying costs. In the above example, there is a gap (TDS) of Rs3 per kWh (adding 3-2 and 4-2). With billions of electricity units produced, such subsidy payments become astronomical. Since this was a policy decision, the budget started bearing this unnecessary burden. The notion of the circular debt is a by-product of this ill-conceived policy reform and the failure to fully recover the costs.
Numerous efforts were made, intermittently, to correct this anomaly, but they invariably fell on deaf ears. In our next article, we will reflect on some parts of the law that contributed to this malice.
To be continued
The writer is a former finance secretary. Email: waqarmkngmail.com