Sunday October 01, 2023

Price of electricity is price of misgovernance

September 03, 2023

In July this year, the outgoing federal cabinet approved a 25.5 per cent increase in the base electricity tariff. The decision’s impact resulted in a hike in the August bills for millions of consumers, sparking country-wide demonstrations.

The high prices of electricity can be attributed to four key factors, each one of them a consequence of mis-governance in the power sector’s ecosystem.

First, incorporating indirect taxes within electricity bills is almost a form of coercion, stemming from the government's inability to gather taxes from influential landed and business elites. The weight of these levies is crippling for millions of households.

Second, three categories of losses in the system are responsible for driving high prices. Theft, line losses, and nonpayment of bills result either in higher per-unit cost charged at the consumer’s end or ballooning of circular debt.

Theft of electricity is pervasive in the country. Meter fudging is enabled through the connivance of public- sector electricity distribution company (DISCO) officials. The use of ‘kundas’ is extremely common to the extent of it becoming a parallel power supply. There are certain feeders in which all or a majority of consumers have gotten direct connections (kundas) bypassing their meters. There are other ‘innovative’ ways in which theft manifests. For example, in Balochistan tube wells are subsidized, but often we see entire villages taking advantage of this.

Theft by commercial consumers manifests as meter fudging and kundas. The magnitude of theft is rumoured to be around Rs500 billion. Public-private collusion and systemic rent-seeking involving DISCO officials is a key factor in enabling malpractices. Riddled with corruption and misgovernance, DISCOs have faltered on their premise which was to provide efficient electricity. Political board appointments have led to rampant monetary and political rent seeking, furthering theft. The needed tough decisions are never taken due to the fear of politically connected unions.

Technical line losses are another factor, which are exacerbated because of our failure to invest in efficient connectors, transformers, and grid stations due to resource constraints, onerous public sector procurement procedures, and corruption. Therefore, the massive, antiquated infrastructure that transmits and distributes electricity to 37 million consumers in the country incurs heavy technical losses.

Non-payment is the third category of losses. It has been reported that Rs2200 billion is outstanding in bills, of which Rs350 billion is owed by federal and provincial government agencies. Losses deeply matter for price. The regulator allows 13 per cent loss in the system, but in some DISCOs, line losses go up to 40 per cent. These losses either get passed on to the consumer as higher per unit cost or build up as circular debt, which now stands at Rs2,500 billion. Misgovernance is glaring at each level.

The third reason for the high cost of electricity is expensive production. The bulk of electricity produced in Pakistan (61 per cent) comes from Independent Power Producers (IPPs), who were guaranteed high rates of dollar-based returns and capacity payments back in the 90s.

One explanation for this is that this was done to attract investment, but poor contract management and contractual corruption has been rampant. Consumers also have to bear the load of capacity payment. Our seasonal consumption patterns don’t make things easy in this regard. The country’s electricity demand varies from 30,000 MW at the peak of summer to 10,000 MW during the peak of winter. In gas there is a reverse dilemma, hence there is a need to adjust the market, which can have implications for price, but that hasn’t been done for political reasons.

The increase in global oil and gas prices following the Russia-Ukraine conflict, coupled with devaluation of the rupee, has exacerbated the issue by substantially raising input costs. It was fortuitous that in 2021, the rates of around 35 IPPS were renegotiated at a fixed rate of $168. If that weren’t the case, the impact of plummeting devaluation would have been devastating, today.

The fourth reason for high electricity prices is related to the cost of generating electricity in new plants, which are needed in view of the natural growth in electricity demand. In this regard, the 2021 National Electricity Policy stipulated a cardinal capacity expansion principle – one that centered on the least available cost possible. This was approved by the Council of Common Interests as the Integrated Generation Capacity Expansion Plan (IGCEF) in 2021. Under its framework, 36 variables are used to calculate the cost of production based on certain principles. Sadly, however, the ‘least available cost’ formula is rarely implemented, and higher generation costs get justified for ‘strategic’ reasons. While at a national policy level, this may be justified, but then the cost difference has to be underwritten by the government and not the consumers.

In a nutshell, consumers pay for line losses, nonpayment, and theft; consumers pay for idle capacity; consumers pay higher price because of strategic reasons and consumers pay higher price because the government has gotten into the habit of easily collecting indirect taxes!

This is unacceptable and must change. The solutions, however, are not simple.

To address the immediate August billing issue, the government must either find alternative sources of revenue in case the taxes levied in bills are dropped or opt for spending cuts to provide the money to subsidize slabs other than those consuming less than 200 units.

This measure, needed as it is, would be temporary, given the need for a deep-rooted reform of the energy sector. The government needs to phase out the indirect taxation burden on consumers and this can only happen when they increase their revenue mobilization capacity. The FBR must draw on data analytics to catch tax evaders, just as we caught more than 850,000 undeserving beneficiaries of BISP stipends in 2019, using data analytics.

Governance of DISCOs must be fixed, and the entrenched corrupt mafia has to be weeded out aggressively.

The failure of privatization is a failure of delivery and the lack of accountability in the government system. Privatization of DISCOs has to be combined with a strong and impartial regulator with teeth – a custodian of public interest and an effective watchdog. In the setting where DISCOs are privatized, the government has to be willing to underwrite expansion plans with revenues through parliamentary assent.

A seasonal reverse pricing policy for electricity and gas needs to be formulated in addition to strict implementation of the least cost principle when it comes to new capacity installation.

Prices must be subsidized only for the most deserving in line with the February 2022 reforms, where we ensured that those with higher consumption do not take advantage of high subsidies during the low consumption months of winter.

It must be recognized that there is a pressing need for deep-rooted energy sector reform to address structural flaws. This essential transformation is contingent upon the level of effectiveness in governance, upholding integrity, fostering transparency, ensuring impartiality, fostering a culture of evidence-based decision-making, and enhancing the government's ability to deliver. I firmly believe these attributes are pivotal in addressing each of Pakistan's challenges.

The writer is a senator and former special assistant to the prime minister for poverty alleviation and social safety. She tweets/posts @SaniaNishtar