It appears as if the retargeting of power sector subsidies is finally going to make its way to notified tariffs, sooner than later. The regulator heard the Ministry’s request to incorporate modifications in discos’ tariffs, as a first step towards rationalizing the ever-growing untargeted power sector subsidies.

The blueprint was provided by the IMF earlier, which had outlined the subsidy retargeting as a “prior action”. Circumstances made sure the action was delayed, but it is by no means forgotten. The IMF document states that the first phase of subsidy reform is “aimed at reducing the regressive structure of the tariff structure, which include a more expanded definition of the lifeline tariff as a relief for the vulnerable and the determination of the subsidized tariff slab based on households’ maximum usage from the previous 12 months (rather than monthly consumption)”.

One must keep in mind that this is phase 1 of a three-phase subsidy reform plan. The next two phases envisage gradual reduction in net subsidy for unprotected domestic consumers, reduction in cross subsidies, removal of previous slab benefits, and allocating subsidies on welfare score basis, rather than consumption. It is a long road, but the first step is critical.

The current mechanism allows 99 percent of residential ToU consumers to avail subsidy, at least once a year if not more. Of the 24.5 million residential consumers, almost 90 percent users consume less than 300 units for at least one month in a year, which accounts for 84 percent of the total domestic ToU consumption.

The high degree of seasonality in consumption patterns undeservingly lead to consumers falling in the higher socioeconomic class avail the subsidy. The authorities have relied on HIES data which shows that 92 percent of the poorest income quintiles consume less than 200 units per month. Applying seasonality exclusion criteria of maximum 6 months consumption, results in 11 million electricity meters being protected, versus 18.6 million needed to be protected if seasonality is not adjusted for.

The reforms also aim to include a new category of protected consumers, where consumption is less than 200 units per month for six consecutive months. The idea is to insulate the new proposed protected category from future tariff increase. This will also limit the quarterly tariff adjustment exemption that currently applies to 300 units – and will further widen the base.

Next logical step should be to unwind the domestic slabs in the unprotected segment, but that will require political will. The cross subsidy will gradually come down as there is little sense for a consumer who pays for 1000 units in summers to pay the slab for the neediest in winters. Change this, and a number of revenues issues will be taken care of Nepra will soon be giving its opinion on the revenue impact of the subsidy reforms phase-1 and will decide if the same should be applicable with retrospect, which would make it easier to analyze the inflationary impact. Either way, this is an encouraging start. If the government gets to Phase-3 by the end of its tenure, it will have done a good job.