Power tariff – a flawed business model

Power tariffs have recently been in the limelight – not for any other issue but for unaffordability of the same. The steep rise during the last two years is of special mention. Amid protestations, it was explained that the falling rupee viz. a viz. the dollar has contributed the most to the present high rates.

The poor electricity consumers, on the other hand, attribute the sad rise due to increasing inefficiency and losses and the all-encompassing non-professionalism woven around the whole sector. According to them DISCOs are dens of inefficiency and corruption, while governance and management of the same sadly remains with the non-professional.

Besides, the make-up of the power tariff based on the trite load suppression model has also been held responsible for the present decay and the low sale of contracted MWs.

The above thinking about the tariff seems to have been incorrect when seen in the context of the latest tweet by the Power Division, Ministry of Energy (recently removed), which states that none of the above is true while basically, “Pakistan’s consumer (power) tariff is based on principle of equity: it transfers resources from the rich to the poor ; from richer regions to poorer regions; and from federal pool to poor consumers in poorer regions”. In this tweet, we are further informed that, “no commodity in Pakistan has more federalising effect than electricity”.

Thereafter, in gusto, the tweet categorises the whole consumer base into some rich consumers and some poor consumers.

The fact that there is no nomenclature in vogue such as the rich or poor consumers is forgotten, though indeed there is a concept of lifeline customers amongst the domestic tariff category, and which are contained in a monthly usage of within 50 units only.

Furthermore, the tweet talks about some subsidy for the poor areas and consumers nearly equalling Rs 900 billion, which is financed through either intra-regional cross subsidy of Rs 470 billion, inter-regional cross subsidy of Rs 156 billion and a federal grant of Rs 327 billion.

All these figures are new for us and so is the category for poor areas and such customers that devour Rs 900 billion of subsidy.

Further, we are also told that the gap on account of non-payment of bills by customers and the requirement for AJK & GB consumers are additional to the above subsidy of Rs 900 billion. However, surely in exuberance, that the GB consumers are not connected to the national grid was forgotten.

All of the above is very disturbing as till date it was thought that basically power tariffs depict the actual cost of service for a specific category of consumers alone.

We do remember that an amendment was made in the Nepra Act of 1997, whereby the regulator was obligated to abide by the various directions of the GoP, but it has never been known that the government has since discarded the earlier basis for tariff setting to convert it into a tool for implementation of socio-economic policies.

If it is so, then it indeed is a very flawed business model (to mirror the PM’s phrase which he used for the print media some days ago). More so, when the present tariff while assuring the so-called socio-economic policies has resulted in outright de-industrialization of the Country, stifling of commerce and exports, resultant high cost of agri-products, etc.

Before we delve into the right way to calculate the power tariff in the Country, it is important to understand as to why we have differential tariffs for DISCOs being determined by Nepra in the first place. For Wapda, the progenitor of the PSCEs, (Discos, NTDC – inclusive of the CPPA(G) and the GENCOs) till 1996, it was simple.

It would calculate the costs involved in generation, transmission and distribution of power all along the national grid and add for it’s O&M, a little for expansion and a wee bit to take-care of what was then known as the lifeline consumers (using less than 50 units a month).

The tariffs for domestic consumers comprised of up to four (4) different slabs – in the incremental manner and also abiding by the basic principle set forth in a load impression tariff model of 1960s. In other words, the more one used the more would be the rate per unit. It all was planned to assure that the consumer-end tariff remained part of DSM (demand side management).

Additionally, the revenues thus garnered just about fulfilled the needs and in a way WAPDA was ever in arrears when it came to its obligations towards its procurements.

The things changed from 1997 onwards with Nepra and the accompanying Act coming to fore. The Act laid down the foundation of the differential tariff for each DISCO and being based on the actual cost of service for each category of customers viz. from the domestic to streetlights etc.

This indeed was a revolution as it allowed for individual calculations into supply to all of the categories. Through this appraised, it was thought that by and by economic delivery of power would be assured to all consumer classes.

As the GoP had decided for application of uniform tariff for all of Pakistan and that too at the rate determined for the so-called most efficient Disco (IESCO at that time), also a part of the law that the GoP could not increase the Nepra determined tariff, it had to bear the differential in shape of a subsidy – which has ballooned over time. This triggered the decision that the consumers of the so-called efficient Disco (with lesser determined tariff) would primarily bear the major brunt for achieving uniform tariff in the country.

The gap, on the other hand, would be filled-up by governmental subsidy. By then other add-ons too had further added to the tariff – including that for paying-off various debts on account of the ongoing inefficiencies, etc. The Nepra Act was thus suitability amended and the basis of the original tariff formulation got changed.

It is no more based on the cost of service – rather, has to be crafted after adding all sorts of charges including the one specially to assure that PTV remains afloat. Rumours are rife that a similar cess for the PBC (Pakistan Broadcasting Corporation) is being considered.

Now it seems that the formula for tariff setting has changed and the Power Division has informed us about a Rs 600 billion burden on the power customers themselves in shape of inter and intra-Disco subsidies. The result, of course, is for all to see. This tariff has simply shut Pakistan’s economy, while some may gloat over the implementation of some social (political) obligations – to what avail is of course not understood.

We see unhappy people, closure of business and industry, unemployment and stunted exports and a seriously disgruntled and fragmented federation. In other words, the present make-up of the consumer-end tariff is an unmitigated disaster. And this is but natural as it indeed is on the basis of a seriously flawed business model.

The question that begs for an answer is what exactly is the anti-dote to the above malady of inter and intra-Disco subsidies. The first step that needs to be taken up is to immediately revert back to the cost of service-based calculations.

Once that is done, each Disco management (hopefully to comprise of professional BoDs and full time CEOs) would understand the issues relating to delivery of power to different categories of consumers – which now gets smothered away from any audit.

This could also be the reason for continuing below-par infrastructure of the Discos. The situation is so precarious that the system extends itself at will with no consideration of distribution engineering. Once the Discos are forced to contain their expenditures to the calculated costs for each category, then the efficiency of operations will automatically increase.

Secondly, best practices would have to be followed assuring up-dating of the existing distribution system at all levels of supply. Here Nepra’s distribution code would be considered as the bible to be followed for all intents and purposes.

However, Nepra, mandated to assure the required level of consumer service through the needed distribution infra-structure, will have to re-invent itself from a purely clerical to a dynamic regulator. This could be done by setting a standing and duly paid POE (panel of experts) for advice.

Thirdly, the electricity/power tariff has to be set in accordance with the needs of particular areas/provinces (geographical areas) – specially, when Pakistan is a Country that boasts all four seasons at the same time of the year.

The tariff should fulfil the peculiar needs/load/demand conditions of different geographically areas. For example, the northern snow bound areas merit a lesser tariff to counter their heating needs – specially, on account of stunted natural gas and fastly denuding forest cover.

The requirements of the barani areas (away from the canal command) and the perennial drought has to be catered along-with the needs of the thousands of tubewells in the fruit-growing swaths of Balochistan. In other words, the Discos will have different tariffs for different areas of the Country.

This incidentally is not to be based on any socio-political considerations – rather, is needed to assure DSM (demand side management) and sale of available MWs all around the year. In this way the changing usage patterns in different areas of the Country would also get considered.

According to some experts, even urban areas needs to be differentiated from the rural outback. The principle thus is to make the sector profitable while also taking care of the needs/demand of different geographical areas and also the times of the day (the present peak and off-peak tariffs have become trite now).

Fourth of the steps that need to be taken is to recognise that even utilities are businesses – specially, when typical states like Pakistan are unable to dole out subsides on the federation level. As such, this aspect now has to be passed on to the provinces that are privy to a large share of revenues.

The provinces thus can provide subsidies to whichever category of power consumers are found fit to be helped. The example of Indian Punjab, Haryana and Rajasthan can be followed where agriculture loads are assisted through heavy subsidies.

Fifth of the steps is the formation of a national plan based upon which the distribution network/infrastructure of all Discos [including KE to an extent as it has been dubbed as a Disco in 2007 and is since reaping the facilities too] would be up-graded to assure the least cost of service right to the customer premises presently being served at the low voltage level.

This step is very important and a necessary appendage to full change over to a tariff based on cost of service. Besides, this step would assure implementation of the presently ignored modules of distribution engineering.

Sixth of the steps would be to do away with the various monthly and quarterly adjustments, which would need to be replaced with yearly adjustments. Fact of the matter remains that Disco operations should result both for the viability of the utilities and for acceptability and ease of the consumers.

Besides, it is of utmost importance that predictability of rates has to be assured. Presently, because of volatility in the PKR-USD parity and the killing inflation, the monthly and quarterly jumps simply make commerce, industry and agriculture gasping for their breath – a reason for the falling exports, etc. It actually is akin to death by a thousand cuts and also allows inefficiency as ever.

All of the above leads us to the conclusion that the trajectory taken by the power tariff since 1960s, as being a document responsible for covering-up costs of whole process right from generation to distribution (a methodology to cover full costs) to the stage to re-cover the exact cost of service to a particular category of power consumers had its own peculiar issues to contend-with.

However, before full transition to rates based on exact cost of service, the tariff has been hijacked and now it is required to take care of the socio-political considerations of the various governments while also being packed with the charges for inefficiencies etc.

Besides, it is also used by the FBR as a tax collector of the first resort. During the process, economy and economic requirements of the country have been ignored and so has been the sector itself.

This surely is due to continuing non-professionalism around the sector and the penchant of the un-initiated to decide things. Probably, the wayward policy tweet by the Power Division in an indicator of this mindset.

Copyright Business Recorder, 2023