Energy sector: Constitutional issues

Some confusion persists as to the distribution of the roles of federation and provinces in the energy sector. Questions have been raised on the maintainability of Nepra in its present form and the possible adjustments that may be required. And there are other issues as well. It is highly desirable that constitutional issues and confusions, if any, be sorted out so that possible litigations of the future are avoided. Otherwise there is a danger that considerable time may be wasted in the legal adjudication process.
Already cases are pending with the courts challenging the role of Nepra in determining a uniform tariff in the country. There are demands for lower tariff s in the provinces (KP) which produce cheaper hydro electricity. In this space we will examine the contentious issues and look for possible adjustments and solutions in the pre-18th Amendment energy regime that by and large persist even today.
Electricity used to be in the concurrent list, the latter has been superseded by the 18th amendment. Although Electricity was in Concurrent list, there was hardly any provincial role in it. This could have been said for all items on the erstwhile concurrent list. This was perhaps the reason that the concurrent list has been eliminated altogether. Provinces in the earlier regime could have built power plants up to a capacity of 50 MW. The provision was minimally utilised by the provinces except for KP where significant activity took place in small hydro power under a provincial agency called SHYDO.
Eminent Federal domain
1. Mineral oil and natural gas
2. Nuclear Energy and its complete fuel cycle
3. Taxes on minerals and oils (raw material inputs) for nuclear energy
Concurrent Federal domain
4. Hydro electricity and dams thereof
5. Thermal Electricity generation
6. Inter-provincial transmission network
7. All regulatory authorities established under the Federal Law (Nepra and Ogra).
Eminent provincial domain
8. Levy tax on consumption of electricity within the province.
9. Construct powerhouses and grid stations and lay transmission lines within and for use of the province.
10. Determine tariff for distribution of electricity.
11. Coal (by omission; any thing not mentioned in the federal list is automatically in the provincial domain)
12. Renewable Energy (same as 11)
Source: compiled by the author from the official text of the Constitution of Pakistan 2010 version.
Under the current (post-18th Amendment) regime provinces can install any type or capacity of power plants out of their own resources and for use within the province. Also grid stations and transmission infrastructure could be handled or controlled by the provincial governments. However, it is seldom that a power plant of a reasonable capacity be restricted to local provincial use, except in Punjab where there is a large market. Investors and financiers may like to have no restriction on this account. In most federal systems including India, Canada and the US, electricity is in the provincial domain with independent provincial regulatory bodies. However, there are regulatory bodies at the federal levels like the FERC in the US and CERC in India for dealing with inter-provincial and safety issues and performance standards. Borrowing from these countries, the role of NEPRA could be accordingly adjusted, meaning thereby that Nepra's regulatory power is restricted to the federally financed projects and the IPPs exceeding a certain size like 250 or 500 MW. Also the performance and safety issues may remain in exclusive Nepra purview. The problem, however, is of capability and resources. Even at the federal level, performance of Nepra has a lot to be desired not to talk of its future provincial offshoots. Then we have been talking of one window operation, which although could never be achieved, nevertheless remains a requirement for investor facilitation. The role of PPIB is another question in the new constitutional set-up. Then there are issues of sovereign guarantees as well which may cause complications and cross-purpose processes. Although sovereign guarantees are becoming outmoded, in some cases these may be essential. A clear organisational plan needs to be developed, whatever be the preferences and it has to be consistent with the constitutional provisions or the constitution itself is amended or elaborated where it is found that there are inadequacies.
Even on Thar coal, where there is a clear provincial domain and the Thar Coal Board remained in provincial domain, reportedly there are issues and uncertainties that are vexing the potential investors .Who finances the Thar coal infrastructure and accordingly what role is expected in lieu of the finances and possible guarantees provided by the federal government. Who approves Thar coal IPP's tariff, if it is for provincial purposes. On the tariff of distribution companies, provincial exclusive domain has been provided by the constitution (18th Amendment) and thus the provincial regulator may be called for. It is another thing that some of the smaller provinces like KP and Balochistan may voluntarily transfer such a role to a federal body like Nepra, for which there is a provision in the constitution. People in Sindh do not want to travel to Islamabad for approvals and may welcome the opportunity of installing its own provincial regulatory body.
On oil and gas, the 18th Amendment has not done much towards decentralisation. There is the eminent and exclusive federal domain on oil and gas which has been put under Part I of the fourth schedule. There are clear provisions of royalty and GST being transferred directly to the provinces. There is a case for looking into sharing corporate taxes with the producer provinces, especially Balochistan. At times corporate income tax may fetch much more money than the royalties, although this is truer in the case of minerals where typical royalties are 1-3% as opposed to 12% of sales in case of oil and gas. Some nationalists or enthusiasts may argue for direct provincial collection of royalties which we would strongly oppose on grounds of transparency and institutional capacity issues. In most Africa, there is a lot of leakage in this respect in the smaller African states. Federal collection and straight transfers would be in the interest of the provinces especially smaller ones. Those who are aware of the problems and leakages in the provincial collections of vehicle tax especially in Sindh would agree with this proposal of continuing with the existing system.
There are much more complicated issues in the uniform prices of Electricity through out Pakistan. Smaller provinces seem to be more vocal with respect to the proposition of doing away with uniform pricing. Uniform pricing is largely an off-shoot of the subsidy system. Its rationale may go away, if and when, the subsidies go away, which does not seem to be feasible in the near-term. One is not sure as to which province would be the net beneficiary or which one would be the net loser. There are counterbalancing factors. In Punjab, distribution losses are around 10-12%, as opposed to 30-45% elsewhere. But then oil-based expensive generation of electricity is more common in Punjab, while KP has cheap hydropower, and Sindh and Balochistan have relatively cheaper natural gas. New hydropower projects may not produce as cheap electricity as the existing ones due to much higher construction costs involved now. Hydropower from new projects may cost in excess of Rs 5.00 per unit as opposed to the current rate of Rs 1.50 per unit.
Royalties or net hydro profit issue has not been finally resolved. Constitution of Pakistan from the very beginning provides for the computation of the elusive term net hydel profit. Wapda would like to pay, and as it is currently doing, on the basis of actual prices. KP, however, demands computation as per AGN Kazi formula and the tribunals award, which calculates profit or benefit with respect to imputed prices and competing fuels. As per this formula, arrears of royalty/net hydro profit of Rs 110 billion have been computed. The present government in its initial euphoria committed to pay this amount and accepted the tribunals' award. It could not pay this liability, for obvious reasons. Only 10-15 billion rupees could have been paid yet. Either a more acceptable formula may have to be devised or the Tarbela project may have to be partially given in the ownership of the KP government, which may be able to earn some profit as a substitute for interest on the arrears that is not being paid to KP. We have made a similar case for a partial transfer of ownership of PPL in lieu of the arrears of Royalty payment of Sui gas.
Concluding, there are a host of issues on which policy decisions have to be made with provincial consultations and working rules developed in other cases. Also new organisational adjustments have to be made in the wake of and in consistence with the 18th Amendment. There is a need of looking into the 18th Amendment itself for some adjustments such as a possible sharing formula for corporate taxation from minerals and oil and gas. Resolution of the issues and the required fine-tuning would clear up the current confusion and future potential litigations marring the prospects of growth in the energy sector, which currently suffers from very dim prognoses.