By Muhammad Bashir Chaudhry

The World Bank is encouraging Pakistan to let the market set the price for electricity. The country faces difficult policy issues in moving to such a system.

James Wolfenson, president of The World Bank, said in response to a question during annual meetings of world finance ministers in Washington in October that Pakistan is suffering from imbalances in power prices as a result of WAPDA’s “line losses” and implicit subsidies to richer people who should be able to afford electricity without government help. He said he hoped that the government would introduce a more market-based pricing system and get rid of the subsidies, but that The World Bank would not interfere in the timing and method of implementation. The person asking the question had observed that increases in electricity and gas prices might create problems for the manufacturing sector.

The government released a long report called “Power Policy 2002” on October 24. Deregulation of power supply remains high on the government agenda. The government said it is “committed to pursue a far-reaching reform program” that entails moving to a “decentralized system with separate generation, transmission and distribution entities, having substantial private ownership and management, reflecting and encouraging a commercial and competitive operating environment.”

Background

Total nominal generating capacity in Pakistan at present is 18,062 megawatts. Independent power companies control 5,914 megawatts in the private sector, while WAPDA owns and controls 9,930 megawatts, KESC has 1,756 megawatts, and PAEC has 462 megawatts in the public sector. Of the total nominal capacity, 5,009 megawatts (about 28%) is hydroelectric power while the remaining 13,053 megawatts is thermal capacity. WAPDA and KESC are engaged in transmission and distribution of electricity, within their respective license areas in the country. The WAPDA and KESC systems are interconnected through a 220 kv double-circuit transmission line. PAEC and the independent power companies sell power in bulk to WAPDA and KESC.

There are serious technical shortcomings in the WAPDA and KESC systems that extend to all areas of operations: generation, dispatch, transmission and distribution. Most of the equipment and lines are old, are overloaded but poorly maintained, and are in need of urgent replacement or major revamping. Due to this, there are frequent breakdowns and service interruptions. Transmission and distribution losses are abnormally high, and the utility operations are in the red. Losses in the WAPDA system have been reduced to 24.3%. Despite efforts by the KESC management, losses at KESC are still abnormally high.

The government has recently extended significant financial support to WAPDA and KESC. There is a need to rationalize input costs including fuel costs, plant efficiencies, line losses, arrangements for bulk sale and purchases, and the net power tariff realized by the utilities.

Without removing the inefficiencies in the power system, any increase in electricity price would be seen by consumers as a means to prop up inefficient operations. Therefore, it would be better to attack the sources of inefficiency first.

With the rapid urbanization, extension of electricity grid supply and village electrification, the number of ratepayers has increased to 12.5 million. Composition of consumption of electricity by the economic groups at present is: domestic 46%, industry 28%, agriculture 12%, bulk supply 9%, commercial 5%, and railways 0.02%. With only about half of nearly 140.5 million people (2001 population estimate) having access to electricity, a huge population base provides an ideal opportunity for expansion of electricity generation.

Many industrial users have installed their own captive power plants to avoid having to pay the high electricity prices charged by WAPDA and KESC and spare themselves from the frequent interruptions to service. This loss of large customers has adversely affected the utilities. The Ministry of Water and Power gave notice recently of an average increase of Rs 0.065 per unit in the WAPDA tariff under the automatic fuel adjustment formula. There have been protests, particularly from small factory owners, against this increase.

Projected Shortfall

The combined generation capacity available in the public and private sector is sufficient to meet the future power demand up to the years 2004 to 2005. It will require augmentation in subsequent years.

In view of the long lead time required to bring new power plants on line, particularly those based on indigenous resources like water, coal and gas, work on new power projects must commence soon. The government plans to solicit bids shortly for hydroelectric and indigenous fuel-based projects, for which feasibility studies are already available, and to initiate feasibility study work on raw sites for exploiting indigenous and renewable resources.

WAPDA has prepared a “Hydropower Development Plan — Vision 2025.” A consolidated list of potential projects to be implemented in the short, medium and long term has also been prepared. The choice of implementing projects by the public sector, private sector, or by public-private partnership will depend upon the urgency of meeting demand. A shortfall of 5,529 megawatts in electricity is foreseen by 2009 to 2010.

The Sindh government efforts are continuing for a 1,000-megawatt mine-mouth coal-fired power plant based on Thar coal with technical and financial assistance from China. Another 884 megawatts of other hydroelectric projects are also in the works in other provinces.

Originally about 70% of total electricity generated in the country was hydroelectric power. However, over time, more thermal generation was added, thereby reducing the share of electricity that comes from water, a cheaper source of power. Shortages of river water in the last few years have further aggravated this balance. More reliance on thermal power has increased the utilities’ financial burdens, particularly in foreign exchange. As a consequence, the government is again interested in promoting more hydroelectric projects.

WAPDA Restructuring

After the upcoming privatization of WAPDA-Gencos and KESC, the role of private sector in power generation will increase sharply.

The power wing of WAPDA is being restructured into independent companies: there are nine distribution companies called “Discos” and four power generating companies called “Gencos.” The National Transmission and Dispatch Company — called “NTDC” — has been formed to transmit power in bulk to the distribution companies for distribution. The Pakistan Electronic Power Company, or “PEPCO,” may act as the new holding company for all these corporatized entities. The capitalization of over a dozen new companies is understood to be in process. The challenge will be to structure each company so that it can sustain itself in future without being a drain on WAPDA, PEPCO or the government. The government might have to make cash contributions to bring the equity of each new company to a satisfactory level. Ultimately, the Discos and Gencos will be privatized. Initial steps have been taken for the privatization of Peshawar Electric Supply Company by inviting expressions of interest from reputable institutions to act as financial adviser.

After the restructuring, bulk power sale and purchase are expected to be along the following lines:

1.   WAPDA will sell hydroelectric power to NTDC. The Gencos and independent power companies will sell thermal power to NTDC. NTDC might replace WAPDA under existing contracts with independent power companies and the PAEC.

2.   NTDC will sell power in bulk to the Discos as well as to KESC. NTDC may expect some profit for its efforts in addition to recovery of transmission charges and the adjustment for the transmission losses.

3.   The Discos will distribute electricity to their consumers within their respective areas. They should recover the purchase price, distribution cost, adjustment for reasonable transmission and distribution losses, and some profit margin for growth.

KESC

The abnormally high transmission and distribution losses at KESC might be controlled quickly if the distribution function were privatized first. Based on the areas served by different grid stations, four to five private-sector KESC-Discos might be created. KESC-Gencos could be incorporated later for subsequent privatization. Transmission and dispatch in the KESC service area might be merged with NTDC. Like WAPDA’s power wing, KESC could be restructured after an objective study.

According to press reports, WAPDA has agreed to supply power to KESC only for about nine months, but will not assure supply during low water months. This might not be adequate to cover shortfalls fully in the KESC system.

Issues Requiring Attention

The existing policy on thermal and hydroelectric power are outdated and need to be revised.

The tariff for independent power projects does not reflect fiscal and other incentives allowed to the independent power companies, so the real tariff would be higher if the impact of these incentives were factored into the nominal tariff. Careful review of the risks the government should assume in future projects would be useful. It is also worth reviewing what lessons have been learned from the experience to date with private sector provision of services that used to be solely the domain of the public sector.

Pricing for electricity distribution must be settled. The government must choose between a uniform tariff to all Discos or a separate tariff for each Disco. This is linked with the tariff for sale of bulk power to the Discos.

NEPRA

NEPRA is an independent body that was set up under a 1997 law to regulate electric power services in the country. NEPRA has since issued generation and distribution licenses to a number distribution and generation companies, independent power producers and captive or small power plants. NEPRA has also approved a number of increases in electricity tariffs. NEPRA is committed to providing a fair return to the investor while ensuring safe and reliable service at competitive rates to consumers. WAPDA and KESC have not been happy with NEPRA in respect of tariff determinations. A special seven-member committee has been formed to look into the matter.

Overall, Pakistan’s approach should be that the power system gets the cheapest electricity, from whatever sources, whether Gencos, WAPDA, PAEC or independent power producers. WAPDA has certain special tariffs with independent power producers. To the IPPs,WAPDA pays 100% of the capacity purchase price at a specified load factor, say 60%. If WAPDA asks the independent power producer to supply power below that load factor, then WAPDA will be paying a higher total average price per unit. However, if electricity is purchased at more than the specified load factor, then it will be cheaper for WAPDA per unit. WAPDA must be careful in comparing its own cost to generate with the cost of buying more electricity from independent power producers.

The tariff determination has not been worked out for each plant based on its capital structure, cost and the cost of generation. Rather, NEPRA is believed to have adopted the existing tariff as the base and allowed increases on the basis of increases in the costs of inputs, particularly the fuel oil. In the future, there would be different Gencos and Discos and so there are likely to be two or three different tariffs — one for bulk sales by Gencos to Discos or NTDC, another for sales by NTDC to Discos, and another for sales by Discos to consumers. The sales of power are likely to be at different locations. Detailed bases and benchmarks need to be developed for deciding on each tariff for bulk or retail sales, at whatever location.

Tariffs include government taxes. The consumers pay higher amounts, but the utility is left with a smaller amount after passing the taxes on to the government. This is not all. Fuels used for power generation are also taxed. Taxes along each step of the process make for a higher cost of generating electricity. The final tariff the consumers pay, as well as the financial help extended to WAPDA and KESC, should be viewed in this perspective. There might be some justification to rationalize the taxes to maintain the power tariff at a reasonable level with a view to promoting industrial and economic development.

Conclusion

WAPDA, the independent power producers, KESC and every other entity in any way associated with power generation, transmission or distribution must be managed efficiently and assigned a tariff that is reasonable and commensurate with the quality and reliability of service. The government has its work cut out for it moving to a reasonable tariff. Adoption of an equitable approach in determining the fuel prices and applicable taxes at different stages of electricity might free the electric utilities to concentrate more on tackling the technical and managerial issues of power generation, transmission and distribution.