Subject to the regulator’s approval and government’s subsequent notification, power tariff revision is just a matter of time. While it was overdue, looking at the government’s motion with respect to the consumer end tariffs, does not instill a lot of confidence given the rather optimistic nature of a few key variables.
For starters, the increase sought by an average of Rs1.95/unit across all consumer categories, translates into Rs1.49 trillion in terms of consolidated revenues on uniform national tariffs. The actual revenue requirement has been worked out at Rs1.68 trillion, leaving Rs185 billion to be funded by inter-disco tariff differential subsidy, at an average national power tariff of Rs14.84 per unit.
Now, this subsidy amount is higher than any budgeted subsidy amount for 12-mnt period since FY15. This, when Pakistan was supposed to be on a path of gradual retreat from power subsidies. The factors that have caused this day have been discussed over and over again, and start with inefficient generation, to lopsided contracts, and from absolute dire straits of the distribution sector, to the inability to rationalize price in time.
Even Rs185 billion as budgeted subsidy would not hurt as much, if that were the only amount needed throughout the year, and if the sector does not remain unfunded. The reality appears far from it, as the to-be notified tariffs do not incorporate what will follow during the actual consumption period. There will surely be concessional tariffs continued to some extent for various industrial consumers, which will need more budgeting over and above Rs185 billion.
There is the element of abolishing the peak factor tariffs aimed at encouraging incremental industrial power consumption – that would also need funding. Industrial consumption alone accounts for 25 percent of the total – and the additional subsidy requirement could go up to Rs30-40 billion. Recall that unbudgeted subsidy and delays in release of the same have been key contributors towards the circular debt buildup, and more of the same appears to be in store for 2021.
What is also of note is the fact that the tariff revision motion has requested to consider 100.9 billion electricity units as the yearly consumption. This is 3 percent lower from the previous base tariff increase, which had the denominator set at 104 billion units. Mind you, Pakistan’s rather static grid consumption is a problem of serious nature. Here is hoping the actual consumption would be considerably higher than what is envisaged and could lead to higher recovery than sought – specially now that a number of captive consumers would gradually turn to grid.
What remains the most unrealistic part in the whole equation is the treatment of transmission and distribution (T&D) losses in the tariff motion. The T&D losses are assumed at 13.46 percent for the reference period. This is stuff of dreams, and there is absolutely no way the discos are going to pull that off in a year.
For context, FY20’s national average T&D losses were recorded at 17.6 percent, almost in line with FY19’s. What gives is the massive gap between what Nepra has historically allowed in lieu of T&D losses with what is sought for FY20. On an average, the difference between actual and allowed T&D losses has been at 2.4 percentage points, in the last five years. The difference for FY20’s motion goes as high as 4.14 percentage points. Discos would do well to shed 1 percentage point off from the total T&D losses – which would still need them substantially short on revenues. And then the whole cycle of delayed payments starts. You all know the circular debt story.
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