Monday October 25, 2021

Caveats and reform proposals

April 01, 2021

The government has announced its plans to increase the power tariff by Rs5.65 per unit – an estimated 40 percent increase. Gas utilities have asked for the same, or an even higher, increase in the gas tariff.

This article will focus on the power tariff although the two (gas and power tariffs) are related and hurt consumers and the economy badly if they are increased simultaneously. It will also examine other non-tariff options that can help the government deal with the problems of rising cost and circular debt which has forced the authorities to propose the tariff increase.

Overcapacity and high-cost agreements will cast a long shadow over current and future tariff issues. However, reforms are overdue. Without reforms and corrections and without increasing efficiency, increasing tariffs alone may ultimately prove to be counterproductive.

It will be a political and economic risk to try to eke out all circular debt from consumers. As a rule, any capacity payments under the capacity utilisation of 60-66 percent shouldn’t be passed on to consumers until the economy starts growing at a rate of seven percent or above. To the extent of under-capacity utilisation, other measures – including refinancing, debt rescheduling, passing some burden to the provinces, etc – should be adopted to finance part of its adjustment. Some capacity utilisation improvements should be possible by removing transmission and distribution (T&D) constraints as well.

Will a decrease in the power tariff result in an increase in power demand? It is the most controversial subject yet one with great potential. It is the reverse of the result of the increase in the power tariff. Decrease the power tariff and increase the power demand. If this is not true for residential consumers, it should be true for commercial and industrial sectors. Previously, we talked about various options and ways that can help reduce the unit cost of power. With an increase in power demand and, later, an increase in capacity utilisation, the unit cost will decrease and has a direct impact on circular debt. If serious work was done on this aspect, perhaps the IMF would have been less relentless in pursuing its demand for a large increase in the tariff.

Even though the recent IPP agreement is a welcome step, these concessions are for a long- term benefit and do not help tackle the current revenue shortfalls. The National Electric Power Regulatory Authority (Nepra) should fast-track institutionalising these adjustments into a permanent framework; the main issues are revised rates of RoE at 12 percent, interest rates and risk margins. It is highly inequitable that the interest rates of government-to-government (G-to-G) projects which normally enjoy sovereign guarantees have the same returns and debt terms as those that are given to normal commercial contracts which face higher risks. Softer lending rates should be required of G-to-G projects in which normally capex is higher due to a lack of competition. We are suffering under a capacity glut. The least that can be done is to advance the schedule of new projects.

Putting DISCOs right should be on the top of the agenda along with doing away with inefficient Gencos. On the DISCOs and T&D side, major improvements and reforms are required, which is almost half of the problem. T&D losses are high and almost stagnant at 18.3 percent. There is an issue of receivables of around one trillion rupees as well, although allegedly receivables are exaggerated to reduce losses and make the balance sheet look strong. Many reforms have been discussed and are overdue; like reducing the geographical sizes of loss-making companies like Pesco and Mepco. Privatisation, either as leasing or management transfer or outright sale, has been discussed for a long time. The time has arrived to implement any viable scheme in this respect.

Unfortunately, the revival of Pepco has been put off. The power utility could have provided a much-needed intermediary layer for providing the technical and management role which is currently occupied by ministerial bureaucracy. Much hope is being tied to the new independent boards which are neither independent nor effective. Two-hour-long meetings of a motley crowd of experts cannot possibly replace an effective supervisory role that can be offered by Pepco or give it a new and better name with an enhanced role to include Gencos and including a strong technical component.

There are some technical issues as well which require immediate attention for improving DISCO performance and reduce theft. Smart distribution transformers with smart metres installed on DTs have been discussed, offering tremendous efficiency improvement opportunities at a smaller cost than installing smart metres at consumer prices as proposed by the Asian Development Bank (ADB). It will provide an electricity accounting framework on geographically locating theft and losses to manageably smaller areas covered by DTs. KE has done it and is now reaping its benefits. USAID has already provided a nucleus through the installation of its pilot projects at Mepco and Pesco which, being high loss companies, should have been selected in the first place instead of Lesco and Iesco. With the installation of two capital intensive nuclear power plants of 1100 MW each, there should be some action on shutting down inefficient Gencos.

Many experts argue that, ultimately, the open market and competition will open the doors for cheaper gas and electricity. However, it is a long-term and time-consuming issue. Nepra is working on the Competitive Trading Bilateral Contract Market (CTBCM) which has many inadequacies and issues. With or without the CTBCM, there should be no constraints in introducing wires-only models in DISCOs. This will simplify the complications of privatisation. Some competition can be introduced, without waiting for CTBCM and its implementation, under solicited bidding and by doing away with unsolicited projects which are partly a source of many vices.

There has always been a fear in the system in going for competition. Had this not been the case, our situation could have been better. Similarly, all talk of replacing Take and Pay instead of current Take or Pay is simplistic. Take and Pay works in competitive markets where price is determined by competition. Decreasing capacity utilisation from 80 percent to 60-66 percent under Take and Pay has no practical cost reduction impact.

Reforms are due in the Integrated Generation Capacity Expansion Plan (IGCEP) which is prepared periodically by the NTDC. The IGCEP has been made under three assumptions of economic growth rate of four to seven percent.

The current growth rate is three percent and is likely to remain low due to the Covid-19 debt and other issues. Despite these changes, project approvals continue uninfluenced. It's time the horizon should be reduced to ten years and yearly adjustments should be made in a ten-year rolling plan. Also, it should be expanded to include monthly projections in order to assist in scheduling. An integrated energy planning (IEP) system is overdue, which should integrate the fuel side in an adequate manner.

The poor should be our focus and priority in drawing any financial scheme of this sort. There is a case for introducing the direct transfer of power and gas subsidies to poor consumers. It can be introduced under the Ehsaas programme and financed under general budget and debt. It may have acceptability from IFIs and may help in reducing the proposed increase.

There are other proposals of linking tariff subsidies to localities and plot sizes instead of linking them to consumption alone. It may add complexity but may release some resources that can be passed on to the poor.

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

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