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July 11, 2020

Dealing with the KE muddle


July 11, 2020

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.

Karachi is passing through one of the worst power crises in its history. People are now demanding that the KE contract either be revoked or amended so as to correct the situation.

In the minds of many people, KE has a long history of profit maximization at the expense of consumers. Nepra had faced difficulty with it in making it utilize its furnace oil power plants which it has used only reluctantly, causing hardship to consumers. Nepra has fined it on this issue earlier too. And KE has managed to create a furnace oil issue again which Minister Omar Ayub solved through active intervention.

There are plans to privatize other DISCOs in the country. In addition to relieving the government from the financial burden of DISCOs, the expectation is higher efficiency and service level and consumer satisfaction and not otherwise; unfortunately, KE’s performance does not present a good example. What are the other options to bring about a workable solution of the KE problem other than discontinuing its contract as has been demanded by the general public. Let us examine what can be done in this respect.

Loadshedding in such hot and humid weather is highly painful in addition to causing economic losses of industry shutdowns. It is not a result of any accident and so cannot be condoned or ignored. It is either dereliction of duty on the part of the managers of KE, lack of required management skills, result of uncertainties in KE or an act to force the government to accept whatever concessions may be in the process of negotiations. It may be all of this. In most countries, utilities are fined heavily and consumers are monetarily compensated. In our case, Nepra does this sparingly and pockets the income itself (although for understandable reasons).

Unlike the other DISCOs in the country, KE is a vertically integrated company meaning that it has all three functions combined – generation, transmission and distribution. And it is independent and almost isolated from the country’s larger NTDC system. This problem of KE has to be resolved before any improvement is possible. Accepting and keeping the current status of KE is negating what the government of Pakistan has been doing with the power sector for the last more than two decades. The monolith of Wapda has been fragmented into separate organizations, separating generation, transmission and distribution functions. Separation of these functions has been accepted as the cornerstone of energy reforms in most countries of the world. It may be wasteful to try to prove in this short space the benefits and rationale of separation of the three functions.

KE was privatized hastily in special circumstances when its distribution losses reached an unimaginable level of 40 percent. The government of the time thought it appropriate to privatize it immediately without first restructuring it. Special circumstances have occurred again. Abraaj and its founder chairman who legally control and manage KE are under bankruptcy and facing legal charges which could lead to their liquidation. This may have consequences for KE and a risk that KE may go into unknown hands. However, there is an offer from Shanghai Electric for purchasing majority shares of KE and controlling and managing it.

The fatal mistake of not restructuring KE must be repeated again. The contender for the KE take-over has strong backing. The take-over deal could not go through due to receivables and other financial issues that could not be sorted out yet; otherwise, it would have been implemented a long time back. Now legal issues of liquidation proceedings may delay it further. This gives time for the government to think through the problem and sort out its issues before handing it over to its new owners.

Karachi has a complicated political profile. Distribution companies come in close contact with pressure groups and factions which may create a very difficult situation. It is hoped that the government has adequately considered and weighed the options. In any case, why would we need foreign investment in DISCOs (and restructured KE), anyway? Profits are taken away and we are faced with a current account deficit. Local investors should be capable of handling these companies – including KE.

While the whole country has power surplus, Karachi is in deficit. At some point in time, the people of Karachi and their politicians may bring up a political issue. Do they have rights in the resources and development of the country, the legal issues of KE’s responsibilities apart? Political mantras can be created among common people who do not know and understand the problems and the legalities. All they know is that they are suffering under loadshedding while the country is flush with electricity.

However, the fact is that the government has done all that was possible. It has allocated electricity for KE but it cannot take it due to the lack of transmission facilities that KE had to establish. KE has a vested interest in keeping itself isolated from the national grid in order to be able to install its own generation. There are formal and informal gains in installing new projects. KE has, therefore, all kinds of generation proposals involving coal and LNG.

How are generation, transmission and distribution to be separated? There are complications of KE’s investment in generation, whatever, little it may be. And there is a special tariff formula which combines the three functions. Fortunately, the arrangement is ending in 2022 and by 2023 a new system may have to be negotiated. Thus, this is the right time to restructure KE.

Restructuring does not mean confiscation of any sort. The proposed formula is that KE separates its generation facilities into a separate company and starts acting as an independent IPP with all the benefits and consequences that an IPP have. It loses monopoly in generation but may continue to get preference in installing generation facilities. The transmission system may be bought out by NTDC or STDC under arrangement of KE receivables. Separation of the three functions is feasible and must be initiated without losing further time.

There are other proposals and options, some radical and some not so radical, pertaining to eliminating KE’s monopoly as consumers in Karachi are fed up; geographical splitting to consumer choice, wheeling and retail competition. Geographical splitting of DISCOs is among the policy proposals at Pakistan’s level, although KE has not been considered for this. Consumer choice and retail competition is part of the proposed CTBCM (Competitive Trading Bilateral Contracts Markets). There are some unresolved issues in it and it may take some time, however, for its finalization and implementation.

If nothing else, a cooperative may also be considered, giving the people of Karachi space to participate in KE management, and share profits. There are many cooperative models working efficiently in the US; in fact, five percent of the electricity in the US is generated by co-ops and have 13 percent market share in electricity sales. Forty-two percent of electric distribution lines in the US are owned by cooperatives; there are 831 distribution cooperatives and 62 generation and transmission cooperatives. Electric Cooperatives’ contributions to the American GDP are $88 billion and they contribute $22 billion in taxes. In a no-owner and liquidating situation, the cooperative option deserves serious consideration.

It would be important here to remind policymakers that these issues should be sorted out before the handover of KE to a foreign party which may oppose later-day changes in the electricity regime, and legal complications may emerge causing political repercussions with important friends of Pakistan. The buyer should also be informed of the possible and potential changes that may occur in the electricity regime.

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