The federal government has asked Nepra to consider its submission on Phase-II of the power sector subsidy reform. Recall that Phase-I was approved and implemented late last year, which streamlined the regressive tariff structure through introduction of a more expanded definition of lifeline tariff and creating distinctions between protected and unprotected categories.
While Phase-I had no financial impact, Phase-II promises to have a meaningful one. The government intends to implement Phase-II as a two-part approach given the enormity of the task at hand to possibly spread the financial impact over a longer period than at once.
The core objective of Phase-II of the subsidy reform is gradual reduction in total net subsidy for residential consumers, reduction in cross-subsidy, and removal of previous slab benefit.
It appears the removal of one-slab benefit, also known as incremental block tariff, is first in line for Nepra’s consideration. The government intends to implement the revised tariff structure by February 1, 2022, in line with earlier arrangement with the IMF. The total financial impact of the first past of phase-II has been estimated at Rs20 billion, which translated roughly into an impact of 58 paisas per unit for the unprotected domestic category.
The tariff increase ranges from 8 paisas to 95 paisas per unit across different consumption slabs. In terms of financial impact, this pales in comparison with previous rounds of increase in base tariffs, or other adjustments, and is not that hard a pill to swallow.
That said, the two-part approach means there is more to come in phase-II, as the reduction in net subsidy comes into play. The government’s motion for Nepra’s consideration does not discuss the financial impact of the latter stage of Phase-II implementation, which could be much higher than the impact of removal of one slab benefit.
On the inflation front, this would not be massive, but could well be tricky for the Pakistan Bureau of Statistics (PBS).
As highlighted in this space over the years, the PBS fails to recognize the benefit of previous slab in calculating the end consumer tariff for domestic sector. The revised tariffs without the previous slab benefit could look significantly different from the existing slabs.
For instance, Rs21.2 per unit base tariff for 301-400 slab will look like Rs15.73 per unit in the new proposed structure. But when the slab benefit is taken into consideration, the effective current tariff comes at Rs14.73/unit. One hopes the PBS does the right thing and alters the computation methodology. Or else, the electricity price may well read negative change from March onwards.
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