ISLAMABAD: The Privatisation Commission has proposed a major restructuring of Pakistan’s power distribution sector, envisaging separation of electricity distribution networks from competitive supply businesses, transfer of legacy generation contracts and capacity-payment obligations to private-sector suppliers, and introduction of a performance-based regulatory framework to improve efficiency and reduce government intervention.
According to the commission’s policy paper, titled “Post-Privatisation Regime for Power Distribution Companies”, the proposed reforms would divide the electricity value chain into four distinct but interconnected functions: Distribution Network Operators (DNOs), Competitive Suppliers (CSs), Supplier of Last Resort (SoLR), and ring-fenced ancillary businesses.
The proposed model aims to retain distribution networks as regulated natural monopolies while progressively opening electricity supply to licensed competitive suppliers. The objective is to introduce competition, improve service delivery, attract private investment and create opportunities for reducing electricity tariffs.
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The commission has emphasised that privatisation of distribution companies (DISCOs), by itself, would not resolve the structural problems confronting the power sector. Sector-wide reforms must precede or accompany ownership transfers to ensure financial sustainability, regulatory certainty and an investable environment for prospective buyers.
Pakistan’s power sector continues to face persistent circular debt, high electricity tariffs, declining grid demand, inefficient operations and substantial capacity-payment obligations under long-term generation contracts. Despite successive reforms over the past three decades, including the unbundling of WAPDA, establishment of the National Electric Power Regulatory Authority (NEPRA) and introduction of the Competitive Trading Bilateral Contract Market (CTBCM), many underlying problems remain unresolved.
Under the proposed architecture, DNOs would own, operate and develop distribution networks under NEPRA’s regulatory oversight. Their returns would gradually move away from the existing asset-based model towards a performance-oriented framework that rewards measurable improvements in operational efficiency, reliability and consumer service.
The commission argues that the current tariff structure primarily rewards utilities for asset ownership and approved investment rather than demonstrable performance improvements, creating a bias towards capital expenditure and weakening incentives for efficiency-led value creation.
Under the proposed arrangement, DNOs would be allowed to undertake activities directly contributing to lower consumer tariffs, subject to regulatory approval. These could include meeting peak-hour requirements through energy storage, procuring cheaper energy sources and undertaking permitted ancillary businesses.
The second component, Competitive Suppliers, would be responsible for electricity procurement, customer management, billing, collections and associated commercial obligations.
A major feature of the proposal is the transfer of legacy generation contracts and their associated capacity-payment obligations from the Central Power Purchasing Agency-Guarantee (CPPA-G) to private-sector competitive suppliers, along with corresponding customer portfolios.
The commission maintains that aligning supply-related benefits and obligations would ensure that market participants assume responsibility for both procurement and commercial risks, while creating the conditions necessary for opening the electricity supply business to competition.
However, the paper acknowledges that existing power purchase agreements would continue to be honoured during the transition. The proposed transfer of legacy contracts and capacity-payment obligations would require careful implementation to ensure that the associated costs, customer portfolios and contractual responsibilities are appropriately allocated.
Protected consumers would continue to receive regulated tariff protection and would remain part of the customer portfolios assigned to competitive suppliers. Existing cross-subsidy arrangements would also be preserved during the transition to avoid creating additional fiscal liabilities or separating commercially attractive customers from obligations towards protected consumers.
The third component would be a designated Supplier of Last Resort in each distribution region. The function would be performed by the DNO owner within its licensed territory, ensuring continuity of electricity supply where competitive arrangements are unavailable or a supplier defaults, exits the market or becomes unable to operate.
The fourth component would comprise ring-fenced ancillary businesses. Limited activities closely associated with distribution networks could remain within the regulated DNO, with appropriate sharing of revenues with consumers. Broader commercial and energy-transition activities would be undertaken through separately licensed and ring-fenced affiliates.
The commission has also proposed seven design principles to guide the transition, including functional unbundling, network neutrality, a regulated last-resort supply mechanism, gradual market opening, performance-based regulation, predictable tariff-setting and an appropriate allocation of commercial risks.
Under the network-neutrality principle, DNOs would be required to provide all licensed competitive suppliers with fair and non-discriminatory access to distribution networks, connections, metering data, billing interfaces and other essential network services.
The introduction of competitive supply would be phased in line with DISCO privatisation, regulatory preparedness and market capacity. The commission has stressed that critical reforms should be implemented early so potential investors can assess future cash flows, risks and valuations with greater certainty.
The paper identifies demand erosion as another major challenge for the sector. High electricity tariffs, energy conservation, self-generation and the rapid adoption of distributed solar systems, particularly among higher-paying consumers, are reducing grid consumption and putting additional pressure on the existing tariff structure.
As grid demand declines, fixed costs and capacity-payment obligations have to be recovered from a smaller consumption base, increasing per-unit tariffs and encouraging further migration away from the grid. This creates a negative cycle that threatens the financial sustainability of distribution companies and the broader power sector.
The commission has also highlighted persistent consumer-service deficiencies, including unreliable electricity supply, outages, billing disputes, delays in complaint resolution and slow provision of new connections.
According to the paper, NEPRA’s State of Industry Report 2025 recorded a sharp increase in consumer complaints to 5.7 million in FY2025, while 106,895 consumers who had paid application fees for new connections were still awaiting service. The unserved load associated with these pending connections exceeded 1,021 megawatts.
The commission has proposed linking utility returns and penalties more directly with measurable service-quality indicators, including the System Average Interruption Duration Index (SAIDI), System Average Interruption Frequency Index (SAIFI), complaint-resolution times, connection timelines, billing accuracy and customer service.
It argues that poor reliability is contributing to demand erosion, particularly among industrial and commercial consumers, and that a performance-based regulatory regime is necessary to encourage utilities to improve service delivery rather than focus primarily on expanding their asset base.
The proposed reforms also seek to address weaknesses in the existing procurement framework, which provides limited predictability regarding future electricity prices and supply conditions. Generation costs are largely passed on to consumers through tariffs, while suppliers have limited exposure to the associated risks, weakening incentives for accurate demand forecasting, portfolio optimisation and cost-efficient procurement.
Long-term generation contracts based on demand projections that subsequently proved higher than actual consumption have further constrained the sector. Their fixed capacity-payment obligations remain payable irrespective of the electricity consumed, limiting flexibility as grid demand changes.
Although the CTBCM represents an important step towards liberalisation, the commission believes its gradual implementation presents structural challenges that must be addressed through a coherent transition plan.
Regulatory certainty, tariff visibility, subsidy receivables, foreign-exchange risks and approval timelines remain key concerns for investors. The commission has warned that privatisation would not be a one-off transaction, as new owners would need to invest substantial additional capital over several years to improve operational performance.
The paper has also drawn attention to potential weaknesses in the protected-consumer framework, arguing that misclassification and subsidy leakage could increase the burden on the government and other electricity consumers.
It states that, out of approximately 34.3 million domestic consumers, only around 2.2 per cent are on Time-of-Use tariffs. According to the commission, the low proportion indicates the need to examine whether multiple single-phase connections allow some households to split consumption across meters and remain within protected-consumer thresholds despite higher aggregate consumption.
The commission argues that such practices, where established, could extend subsidised tariffs beyond the intended beneficiary base. The resulting cost is ultimately borne either through the federal government’s Tariff Differential Subsidy or through cross-subsidisation by other consumers, putting additional pressure on electricity tariffs.
The proposed framework also calls for strengthening NEPRA’s governance, institutional autonomy and technical capabilities to support the transition towards a competitive electricity market. Transparent multi-year tariff methodologies, timely regulatory decisions, credible enforcement and predictable rules have been identified as essential to attracting long-term investment while safeguarding consumers.
The commission has cautioned that the proposed reforms must be implemented in phases, with clear sequencing linked to regulatory readiness, privatisation plans and market development. However, it has stressed that essential elements of the future regulatory regime should be settled before ownership transfers, allowing investors to make informed assessments and potentially improving the valuation of state-owned distribution companies.
The paper notes that certain underlying datasets and system-planning tools, including detailed PLEXOS outputs, were unavailable during its preparation. Consequently, key parameters relating to capacity allocation, tariff impacts, electricity procurement and transition sequencing would need to be validated by the relevant institutions before implementation.
The commission believes that a comprehensive reform package, rather than a change in ownership alone, is necessary to establish financially sustainable power-sector entities, reduce dependence on government support, improve operational efficiency and develop a competitive electricity market capable of supporting investment, innovation and better consumer services.
Copyright Business Recorder, 2026