In a move that will raise eyebrows among those advocating for performance-based regulation, Nepra has sided with K-Electric in allowing a recovery shortfall allowance based on a 92 percent recovery ratio — a decision that flies in the face of the Ministry of Energy’s more disciplined proposal. KE had argued that, unlike state-owned discos whose losses are quietly absorbed into the circular debt, its commercial shortfall should be treated as a legitimate pass-through cost.
But instead of asking why a privatized utility with over 100 years of history and significant capital investment still needs regulatory shelter for basic operational efficiency, the regulator has chosen to codify KE’s weakest performance year (FY24: 92.8 percent) into its future tariff framework. Worse still, the benchmark recovery percentage even by the end of the MYT in FY30 period does not reach the levels seen in FY22.
The Ministry’s stance — rooted in logic, precedent, and consumer interest — was brushed aside. The MoE had argued for using a “high watermark” recovery ratio from FY22 or FY23 (96.6 percent and 96.7 percent, respectively) to prevent one off-year from becoming the baseline for tariff calculations. That approach would have halved the burden on consumers, reducing KE’s claimed recovery loss allowance from Rs2.88/kWh to Rs1.41/kWh.
Instead, with Nepra's green light, KE has now locked in a structural inefficiency at a time when the rest of the sector is — at least on paper — moving toward performance benchmarking and fiscal discipline.
Nepra’s ruling signals a worrying precedent: if a private utility can socialize its commercial inefficiencies while retaining operational autonomy, then the case for privatization or performance-linked regulation becomes weaker. What message does it send when a regulator backs comfort over competition?
If the regulator’s decision to validate KE’s recovery allowance set a risky precedent, its approval of actualization of units sent-out could also be problematic. In theory, adjusting tariff revenue to reflect real demand variations — much like what is allowed for discos — sounds reasonable. But in practice, it opens up a perverse incentive: KE’s revenue is now insulated from shortfalls in demand, even if those shortfalls are partially self-inflicted.
Given the regulator’s own acknowledgment that this framework could encourage increased load shedding in high-loss areas, the decision feels like an open invitation for KE to game the system — maximizing revenue protection while shifting risk onto the consumer.
The regulator has held on to usual warnings: KE is “directed to ensure uninterrupted supply” and its performance will be monitored on benchmarks like SAIFI, SAIDI, and load-shed adherence. But let’s be honest — the track record doesn’t inspire confidence. KE has flouted load-shedding rules in the past, often citing commercial losses, and faced penalties so negligible they barely qualify as deterrents.
If the regulator is serious about disincentivizing this behaviour, it needs to do more than issue legalese-laden warnings. It must link revenue protections directly with performance metrics, impose penalties that bite. Otherwise, what Nepra has created is a regulatory shelter — one that could make blackouts not just a coping mechanism, but a profit-maximizing strategy.
This also comes at a time when KE’s future demand growth is under serious question. With overall electricity consumption falling by 7.2 percent in FY23 — and 7.9 percent in residential and 1.5 percent in industrial segments — and with net metering and competitive CTBCM dynamics gaining traction, KE’s captive market is eroding. The Ministry of Energy had flagged this, rightly recommending a downward revision in demand projections and capital spending.
But KE continues to push ahead with an ambitious investment plan, and now has the regulatory cushioning to shift the consequences of demand shortfalls onto consumers. In such an environment, the risk isn't just of rising tariffs — it’s of deepening the disconnect between consumer experience and utility accountability.
Nepra’s accommodation — from recovery shortfall allowances to actualization of sent-out units — may seem like one-off technical approvals, but they carry deeper structural implications as Pakistan inches toward privatizing other discos under the IMF’s watch. By allowing revenue protection mechanisms that decouple financial performance from operational efficiency, Nepra risks embedding regulatory moral hazard into the very model it aims to scale.
If a legacy private utility is allowed to socialize commercial inefficiencies and manage demand risk without tight performance-linked conditions, what incentive remains for future investors to run leaner, consumer-centric utilities? Worse, it sets a precedent where privatization becomes a risk-free return model underwritten by public consumers, undermining the very fiscal discipline that the IMF reforms seek to instill.
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