Hydro power royalty issue

There are a number of political economy issues in Energy sector that need to be resolved - the issue of Tarbela and hydro royalties or share of a producer province in energy supply. For example, there is currently an issue of gas quota for Sindh wherein the Sindh province asserts its right to be supplied first, and after fulfilment of its requirements, the residual gas supply is to be sent to other provinces.
NWFP (now Khyber Pakhtunkhwa), in due course may make the similar demand in case of its electricity from hydro projects located in its territories. In this article, we will, however, focus on the hydro power royalties' issue, while making some comments on the resource share issue as well.
The issue of Tarbela royalty or Net Hydel Profit (NHP) had once assumed emotional dimensions, so much so that a KP (now Pakhtunkhwa) politician warned that another Bangladesh can or will be made, if the issue was not suitably resolved. Irrespective of the merit or desirability of such statement, the issue deserves serious attention by the parties involved including the general public.
Federal government has recently agreed to pay Rs 110 billion towards royalty arrears and has even made some interim payments, which have partly cooled down the issue. Wapda, however, continues to book only Rs 6.00 Billion per annum as Net Hydel Profit. Wapda finds KP demands excessive, unreasonable and unaffordable. KP insists on its own interpretation of the constitutional provision in this respect. There is no agreement or formula available for future payments.
There is a long history to the dispute. The 1973 Constitution of Pakistan provides for "net hydel profit", to be given to the producer province KP, out of the profits generated from hydel electricity produced in the dams located in that province. While our constitutional fathers did their every bit to leave no ambiguity in defining what net hydel profit would be, but they left the issue of "sales price" of electricity for Council of Common Interests.
The issue has evaded a satisfactory resolution and no meaningful headway has been made in that direction leading to a deadlock, with diverse positions of the stakeholders. On the one hand KP is asking half a trillion rupees in arrears, and on the other Wapda is alleging that there is no over due and even overpayments have been made. Late AGN Kazi devised a formula to solve the problem, which became the basis for the so-called excessive claim. The issue went to a tribunal, which also gave decision in favour of KP. Federal government/WAPDA expressed their intention to approach the Supreme Court, and has apparently backed out on it , and is trying to resolve it , on the lines as mentioned earlier.
No formula is ever-lasting and one need not be a slave of calculations made two-decades ago. Fortunately, we have in the meantime, recourse to more data, facts, methodologies and institutions, which enable us to take a fresh look into the issue with open mind and objectivity. Also constitutional interpretations need to be applied with flexibility, and dynamism, keeping in view new circumstances, not seeking a license to deny the producer provinces of their legitimate dues, but with a view to look for a just solution.
Unfortunately the AGNK formula has created unreasonable expectations following a methodology of selective shadow pricing by valuing hydro-energy at thermal costs. AGNKF's shadow price approach is faulty, as it shadow prices only the output. If inputs are also priced in shadow terms, NHP of AGNKF would be drastically reduced; shadow prices of investment, scarcity value of foreign exchange, the value of Punjab Rivers exchanged in Tarbela deal etc. It may become intractable.
The language of 1973 Constitution /CCI is clearly in favour and style of commercial prices; terms like reserves, obsolescence etc. In a nut shell, complications of AGNK approach aside; the tribunal has further complicated the issue, and has created a difficult situation by making a "wind fall reward" creating unreasonable expectations on the part of one party of the dispute and the issue has spilled into public as a political problem.
Ironically, and rather interestingly AGNK calculations were considered so cumbersome, that it was considered rather impractical to repeat the same for the next twenty years. Hence an increase of 10% was proposed. A formula should be simple and replicable, besides being based on logic and fair play.
The issue of a reasonable and acceptable selling price of electricity has not been resolved by AGNK formula and neither has the council of common Interest (CCI) commissioned any serious study in this respect. The arbitration tribunal headed by Justice Ajmal Mian who has had not much understanding or background of the issue, wrote and announced a decision, based on 50-50 split among four members; two members agreed and two disagreed with the award. What is an appropriate, reasonable and seemingly acceptable selling price of Tarbela /hydro electricity remains a thorny issue, which should be resolved, if a settlement has to be reached in the light of the constitutional provisions.
Thus the positions of the two sides are wide apart. Government of KP draws strength from the Constitution, AGNK formula and arbitration tribunal's ruling in its favour. Wapda questions the methodology and the inclusion of some extraneous items in the calculation. Wapda's major argument is its incapacity to pay either the claimed arrear or the annual due. Federal government is stuck as both Wapda and the KP are and should be dear to it. Its budgetary resources are already under stress and strains of recession, and the law and order situation. It has been giving a subsidy of Rs 100 billion plus to the electricity sector. There is a general outcry against increasing energy tariff. There is an upper limit to what people can pay.
Demand of Rs 27.00 billion per annum only for Tarbela electricity, as opposed to total WAPDA revenue of Rs 12 billion, is clearly unsustainable. Current WAPDA payments of Rs 6-7 billion per annum, amounts to a royalty/NHP of Rs 0.40 per unit, as opposed to Rs 1.80/- royalty/NHP as per AGNK formula and demanded by KP government. The current revenue per unit is Rs 0.78 per unit (Tarbela hydro.). It excludes NHP/royalty which is already being paid by Wapda.
India, which is a federation like us and has similar socio-economic issues, has solved this problem with a very simple formula, which is being implemented smoothly there. The formula is; 12% free electricity to the producer province. It bypasses the complications of computing profit or NHP. It is therefore recommended to adopt the same approach of providing 12% free electricity to the producer province as being done in India.
The surplus out of the 12% can be sold back to WAPDA at a negotiated price, which could be one of the following; adjusted (for T&D loss) CPPA prices announced by NEPRA; cost of production based on replacement cost basis or of new projects .It bypasses the thorny sales price issue and offers the royalty of 12 %( highest in the world), on which a satisfactory agreement among parties may be feasible.
A share of royalties to adjoining districts/ division, already brought into practice by KP government, may be further enriched and strengthened, along with 100 units free electricity per month to the affected households (displaced due to dams) for the next 10-20 years.
On the issue of the paid quota of producer province or priority of meeting its own demand, in India, a paid share of 20% is awarded to the producer province. A similar formula could be devised in Pakistan, not only for electricity but gas as well. There is currently no contention in electricity issue, but on gas there is. In future, same issue may emerge in case of electricity.
The issue has commercial dimensions as well including contractual commitment to clients irrespective of their location. It has moral dimensions as well, which demands equal sufferings of the citizens, in case of short supply, irrespective of his or her location. It also has relevance with resource pricing, as under-pricing of one against the other creates these contentions as well. These are difficult issues indeed.
(The writer has been a Research Fellow at the Harvard University, and has recently authored," Pakistan's Energy Development; the road ahead")