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The exclusivity of the electricity distribution companies (or DISCOs) is ending. The Competitive Trading Bilateral Contracts Market (CTBCM) is in the making and it’s the right move. Deregulation of the power sector has always been the way to go. However, it must be done with great caution, as doing it in a rush, or merely promoting new players, could be detrimental to the existing DISCOs and cost heavy for the customers which are not being catered in the competitive market. There are risks of making these DISCOs even bigger white elephants which will in turn hinder their potential privatization plans. All the regulator needs to ensure is to provide level playing field to all.

In the first phase of CTBCM, the Bulk Power Consumers (BPC) – having connections over 1 MW, will be opened for new players to come and compete in. Currently, respective DISCO is providing electricity to all the consumers in its area. The DISCOs will remain the Supplier of Last Resort i.e., to ensure supply in areas and consumers where no third player is entering and supplying. One consideration the regulator mulling overis to not allow existing DISCOs to compete in the CTBCM. The idea is to encourage new players to come and grow. However, that could have multifaced repercussions.

The existing DISCOs are supplying power to all the consumers. Good and bad. Small and big. Near and far. They are mandated to do so. They have network of transmission and distribution in the whole area of coverage. They have to maintain and upgrade the system. There are costs associated with it. These costs are covered in the tariff which is to be charged across the board. The cost is higher for smaller consumers – like housing society with small houses and is lower for bigger industrial consumers. There is an implicit element of cross subsidy.

Now when the new players come into competitive mode, its logical for them to get good customers. Plus, the model is for BPCs. And if existing DISCOs cannot compete for good consumers, they must provide to the remaining and ought to charge higher tariff to those to cover the stranded cost. Or government must provide subsidy to ensure tariffs do not grow too much.

The objective of CTBCM is to lower the cost of BPCs. That is good. In competitive mode, the third player will have its own supply of electricity close to the load it is providing, and the tariff would be less as there would be no capacity charge, no (or little) T&D losses, and all. All the third player would be paying are the wheeling charges to the DISCOs for using the network. Any good paying consumer would be willing to go to the new player.

In case, the existing DISCOs are not allowed to compete, and their sustainability not guaranteed, they will not be able to provide quality network services to the third party. There could be a problem, even, if they compete, as they would not want the competitor to have an unfair advantage. Here the role of regulator is very important. There are global examples where network operator is in competitive supply. These can be emulated in Pakistan.

Then there is another problem in CTBCM. The capacity of existing IPPs would be less utilized. They have ‘Take or Pay’ contracts with the government – irrespective of the offtake, they will get certain capacity payment. They are protected against currency depreciation and interest rates hike. Why on earth would they move to the private sector to assume all the risks?

That would add further pressure on the tariffs of remaining consumers. Or government will take the cost. That is why the CTBCM has to be drafted very carefully. If the existing DISCOs (including KE) are not provided with the option to compete, the consumers, DISCOs and government have to share the extra costs. The balance sheet of these DISCOs would become weaker and their cashflows would hamper further. They would be unable to invest and maintain their system. This could lead to deterioration of their services. In such a scenario, the privatization of DISCOs would remain a pipedream and they will become even bigger white elephants.

So while CTBCM is the way to go, it has to be done in a very careful and thoughtful manner. Otherwise, there are risks of it becoming a failure and that could jeopardize the complete deregulation of the power sector in years to come.

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