Assessing regulatory effectiveness of Pakistan’s power sector

Regulation is often judged by the rules that are made, the standards that are prescribed and the enforcement actions that follow. But an equally important question is whether regulation actually changes the behaviour of the institutions and actors it seeks to regulate. Modern regulatory thinking has increasingly focused on this distinction. This is also why regulatory regimes have increasingly moved towards aligning incentives, allocating risks and creating accountability for outcomes rather than relying only on prescribed requirements.

A regulator may have extensive legal powers, detailed rules and well-defined performance standards, but these instruments are effective only to the extent that they produce better behaviour and, ultimately, better outcomes. The story of Pakistan’s power-sector regulatory regime demonstrates why this distinction matters.

The public debate in Pakistan about the power sector reform remains heavily focused around tariffs, circular debt and capacity payments. These are important issues, but they also reflect deeper governance challenges. Persistent distribution losses, uneven recoveries, transmission bottlenecks, delayed investment and recurring financial interventions therefore raise a more fundamental question: how effective is the regulatory system in translating rules into better institutional behaviour?

The issue is not that Pakistan lacks regulatory instruments. In fact, Pakistan has developed an increasingly sophisticated electricity regulatory architecture over the past two decades: NEPRA’s mandate now extends well beyond tariff determination to licensing, performance standards, investment oversight, consumer protection, benchmarking, enforcement and electricity market development. Incentive-based elements in the regulatory system are already well introduced by multi-year tariffs, loss benchmarks and performance standards.

This architecture is further expanded by recent reforms. The Competitive Trading Bilateral Contract Market (CTBCM) intends to introduce greater competition and consumer choice; the Independent System and Market Operator (ISMO) is now operational and digital monitoring is expanding. Despite these increasingly sophisticated interventions – sometimes resulting in further fragmentation of the already thinly spread sector, NEPRA’s State of the Industry Report 2025, identifies familiar problems: excessive losses in parts of the distribution system, recovery shortfalls, feeder-based loadshedding, transmission constraints and continuing financial stress. The persistence of these poor outcomes makes the question of regulatory effectiveness more, not less, significant.

This raises some important questions: If Pakistan’s electricity regulatory framework has become progressively more sophisticated, why have many operational outcomes remained stubbornly familiar? If performance is increasingly measured, why do some performance deficiencies persist? If enforcement action is taken, why do some non-compliant practices recur? And if financial restructuring repeatedly stabilises the sector, why do the conditions producing financial stress continue to re-emerge? These questions should not be understood as an indictment of NEPRA. Rather, they go to the heart of what regulatory effectiveness requires.

Formal authority does not automatically translate into behavioural change. For a regulation to be effective, several reinforcing conditions must exist: incentives must reward performance; accountability must correspond with authority; institutions must coordinate where responsibilities overlap; regulatory decisions must be capable of implementation; and reforms must be sequenced with the operational and institutional conditions required to support them. Problems will remain when the regulatory intent encounters an institutional environment and governmental chokepoints, where these conditions are only partially aligned. This appears to be an important part of Pakistan’s power-sector challenge.

Circular debt helps explain this implementation gap. NEPRA reports that the stock of power-sector circular debt has declined from around Rs2.39 trillion in June 2024 to Rs1.61 trillion by June 2025. The reduction was substantial, but it was driven in significant part by stock payments and financial adjustments. At the same time, inefficiencies arising from distribution losses and under-recoveries continued to add hundreds of billions of rupees to the system. This distinction is important. Reducing the accumulated stock of circular debt is not the same as eliminating the conditions that generate its flow. What this means is that circular debt is not merely an accounting problem but is a governance outcome arising from the interaction of tariffs, subsidies, recoveries, operational performance, contractual commitments and public finance. NEPRA may disallow losses above approved targets, but disallowing a cost does not make the underlying cash shortfall disappear. The resulting shortfall may instead re-emerge as arrears, subsidy requirements, borrowing or unpaid obligations elsewhere in the supply chain.

There is also a legacy dimension. Earlier procurement and contracting decisions including long-term, power-purchase agreements and associated capacity obligations, were undertaken in response to legitimate policy objectives, particularly when Pakistan faced acute generation shortages. Those commitments are now inherited by today’s regulator and policymakers who must operate within contractual and financial commitments concluded under different circumstances. Such obligations cannot simply be wished away even when conditions drastically change. Regulatory effectiveness therefore also requires managing legacy commitments while ensuring that future procurement reflects demand uncertainty, transmission readiness, system flexibility and technological change.

Perhaps the clearest test of regulatory effectiveness comes from the distribution companies. NEPRA has already prescribed loss and recovery targets and has set quality of service standards but incentives work only when institutions are capable of responding to them. If a DISCO’s management is unstable, its operational authority is constrained or enforcement against theft depends on other agencies, then it cannot be reasonably held responsible for every outcome. Additionally, there are five specific externalities that constrict and inhibit operations of various DISCOs in a separate and distinct manner. These are the design and urban specific tilt of the “one size fits all” country-wide electricity tariff, the investments made during the last 35 years in specific DISCOs, the per capita income of a particular DISCO’s geographical jurisdiction, the HDI of the territory and lastly the level of governmental writ in the DISCOs. That all of these five specific externalities are of extreme nature is surely of great importance to contendwith whenever some action is contemplated to be undertaken.

The latest in the series of regulatory edicts are the brand-new Performance Standards (Distribution) Regulations, 2026, issued by NEPRA. This document requires DISCOs to leapfrog and start delivering a service that equals with the best of the power utilities of the world. That this would require complete overhaul and nearly a complete replacement of the present and existing infrastructure is surely mindboggling. On the other hand, this may also be an opportunity for the DISCOs to quickly graduate and join the best, if the Regulator allows and commits the needed finances as legit revenue requirement of DISCOs etc.

At the same time, such constraints cannot become a permanent explanation for avoidable losses or poor service. Accountability must therefore follow authority. Stable and professionally capable management, functional boards and measurable performance are essential elements of regulatory enforcement. Incidentally, the good results of the present effort by the government attest to this fact, and when great strides have been made under the auspices of the present professional content of the BoDs. This is also where ownership and regulation intersect. Where the government remains an owner while regulatory, policy and operational responsibilities are distributed among different institutions, clear lines of authority and accountability become particularly important.

Transmission raises the same issue from another direction. Pakistan substantially expanded its generation capacity, but network constraints continue to limit efficient dispatch. This is not merely an engineering problem – it concerns planning, project sequencing, procurement, financing and coordination. A regulator may establish standards and assess performance, but it cannot by itself deliver transmission projects, resolve land or financing constraints or coordinate with every agency involved. The mere fact that the grid lacks the strength and design to counter the present ingress of RE, further highlights the issue. The effectiveness of regulation therefore depends partly on whether the wider institutional framework enables regulatory decisions to be implemented.

Market reform provides yet another test. CTBCM can introduce competitive discipline, bilateral contracting and greater consumer choice but competitive markets do not emerge merely because regulations permit them. They require, among other things, credible and effective system operation and institutional arrangements capable of supporting contracting, settlement, enforcement and dispute resolution. Moving before these foundations are sufficiently developed risks creating new disputes and standard obligations. Regulatory effectiveness therefore requires sequencing, not competition for its own sake. Market reform must be supported by the operational, financial and institutional conditions that allow competition to produce better results.

The harder issue for Pakistan’s power sector is the alignment between regulation, ownership, authority, government policy and financial responsibility. Even where each institution formally performs its assigned functions, poor outcomes may persist when responsibilities overlap without corresponding accountability or when one institution is expected to deliver an outcome without control over the instruments required to achieve it. Pakistan has already built many of the formal elements of modern electricity regulation. The remaining weakness lies in completing the institutional chain that makes regulation effective. The true test of regulation is not how many determinations are issued, regulations notified or penalties imposed; it is whether utilities become more efficient, investments are delivered when needed, consumers receive more reliable service and the sector becomes progressively more financially stable.

The problem, therefore, is not that Pakistan’s regulatory architecture is too formal or too ambitious. Rather, it remains insufficiently connected to the institutions responsible for implementation and to the consequences that should follow non-performance. Until regulation is more closely tied to authority, institutional capacity and financial responsibility, Pakistan risks continuously producing increasingly sophisticated rules alongside disappointing outcomes.