Audit Report 2025-26: DSS fails to address operational weaknesses, burdens consumers: AGP

ISLAMABAD: The Auditor General of Pakistan (AGP) has observed that the imposition of a Debt Service Surcharge (DSS) of Rs3.23 per kWh reflects a troubling trend of institutionalising inefficiencies through consumer tariffs instead of addressing underlying operational weaknesses, contradicting the vision of a consumer-centric and competitive power market.

In its Audit Report 2025-26, the AGP noted that the National Electricity Policy (NEP) was conceived as an overarching legal and strategic framework under the NEPRA Act to reform and sustain Pakistan’s power sector. The policy outlines key objectives including energy security, affordability, and sustainability, and mandates the development of a National Electricity Plan to translate these goals into actionable measures.

Subsequently, the National Electricity Plan (2023–27) was launched as a comprehensive roadmap aimed at restructuring the power sector value chain. The Plan emphasises integrated energy planning, sets targets for clean energy transition, aims for 100 percent electrification by 2030, and seeks financial viability through subsidy rationalisation and cost-reflective tariffs.

Despite these initiatives, the report highlights that power sector deficits remained significant, averaging 2.8 percent of GDP during FY2014–FY2024, necessitating continued policy interventions. A central objective of the Plan was to reduce circular debt; however, the latest assessment indicates that the issue remains unresolved in a sustainable manner. Although the circular debt stock declined from Rs2.393 trillion as of June 30, 2024, to Rs1.614 trillion by June 30, 2025, the AGP emphasised that this reduction was not the result of structural reforms envisioned under the Plan. Instead, it was largely driven by extra-budgetary government measures, including commercial borrowing to retire liabilities of Power Holding Limited (PHL) and settlement of arrears owed to Independent Power Producers (IPPs).

From a policy implementation standpoint, key reform levers—such as cost-reflective tariffs, improved recoveries, and reduction in transmission and distribution (T&D) losses—remain weak. Public sector distribution companies (DISCOs) continued to underperform against NEPRA benchmarks. During FY2024-25, inefficiencies contributed approximately Rs265 billion due to T&D losses and Rs132 billion due to poor recoveries, directly adding to the circular debt flow.

The report underscores a persistent gap between allowed revenues and actual cash recovery, undermining the Plan’s objective of curbing debt accumulation at its source.

The AGP further criticised the imposition of DSS, noting that it effectively shifts the burden of inefficiencies onto consumers. The report also pointed out equity concerns, highlighting that the consumers of K-Electric — despite the utility not contributing to circular debt — are also subjected to the surcharge.

Overall, the AGP concluded that while the stock of circular debt has temporarily declined, its underlying flow dynamics remain adverse. Progress toward eliminating circular debt has therefore been limited, relying more on fiscal and financial interventions than on sustainable structural improvements in efficiency, recovery, and tariff discipline.

Without decisive reforms — particularly improvements in DISCO performance or their privatisation — the objective of sustainably eliminating circular debt remains at significant risk.

The report also reviewed the proposed 800 MW market allocation and wheeling initiative, describing it as a positive but limited step toward competitive market development through transparent cost discovery. However, its small scale and implementation delays reflect ongoing coordination and execution challenges, rendering it insufficient to meaningfully reduce reliance on the single-buyer model.

Against NEPRA’s approved T&D loss target of 11.77 percent, actual losses of DISCOs stood at 17.55 percent in FY2024-25, indicating excess losses of nearly 5.8 percentage points. Recovery performance remained weak, with shortfalls of approximately Rs132 billion attributed to electricity theft, defective metering, inaccurate billing, and delayed payments by public sector consumers.

Billing inaccuracies and rising overbilling complaints have further eroded consumer trust, constraining recovery efforts. These inefficiencies resulted in unrecovered energy valued at Rs114.5 billion, despite tariffs already incorporating benchmark loss allowances.

The report also found anti-theft enforcement mechanisms largely ineffective. The persistence of illegal connections, meter tampering, and low prosecution rates indicates a lack of deterrence. Instead of addressing theft structurally, losses continue to be passed on to consumers through higher tariffs and government subsidies.

Transmission-related inefficiencies have further exacerbated financial pressures, with capacity payments reaching approximately Rs1.9 trillion in FY2024-25. The AGP warned that without timely expansion and strengthening of the transmission network, additional generation capacity would continue to impose financial burdens rather than deliver cost efficiencies. Despite being a stated policy priority, transmission improvements have lagged, with delays in key projects, underutilisation of infrastructure, and inadequate system resilience undermining reliable and cost-effective electricity supply.

The sectoral analysis concludes that despite the presence of a comprehensive policy framework under the National Electricity Policy 2021 and the National Electricity Plan (2023–27), progress toward a sustainable, competitive, and consumer-focused power sector remains limited and uneven.

Short-term gains — particularly in reducing circular debt stock — have largely been achieved through fiscal interventions rather than lasting structural reforms. Persistent inefficiencies in distribution, delays in transmission upgrades, and slow progress toward competitive market mechanisms continue to impose significant financial and operational burdens on the sector.

The continued reliance on tariff adjustments, surcharges, and government support underscores unresolved governance and performance challenges in Pakistan’s power sector.

Copyright Business Recorder, 2026