The first phase of power sector subsidy reforms is now only a matter of government’s notification before it gets implemented. Nepra issued its determination on the Ministry of Energy’s request to incorporate modifications in discos’ tariffs, as a first step towards rationalizing the ever-growing untargeted power sector subsidies.
Recall that the authorities had principally agreed to undertake a comprehensive subsidy reform in a phased manner, under the IMF program. The first phase was a prior action and got delayed but is now back on track. The first phase 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)”, as per the IMF document on Pakistan.
The revised power tariffs have been approved by Nepra and remain to be notified by the government. But there is barely any financial impact on the consumers in terms of tariffs. One may ask the need for such a step that does not even lead to any financial gains in a lopsided subsidy mechanism. It must be kept in mind that this is a three-phased program, of which only Phase-1 has been approved. The other two phases envisage substantial reduction in the amount of subsidy, and the cross subsidy across slabs. But that needs more groundwork from the authorities to be submitted for the regulator’s consideration.
The most important aspect of Phase-1 is the clear distinction between protected and unprotected categories. The definition of lifeline consumers has also been further refined, with two slabs from 01-50 and 01-100 units introduced. The protected category now also includes consumers where maximum consumption does not exceed 200 units for six consecutive months. The broader slab of 301-700 units has been further divided into four slabs of 100 incremental units each – with the same marginal tariff, allowing previous benefit of one slab.
There was a suggestion by the Planning Ministry to broaden the scope of protected category by applying “average” 12 months consumption instead of “maximum”. It must be mentioned that 92 percent of the bottom two income quintiles consume no more than 200 monthly units on an average. But applying average consumption would lead to inclusion of more undeserving consumers, as exceedingly low winter consumption distorts the picture. This would have killed the whole purpose of the subsidy reform, the more critical parts of which are slated to come in second and third phases.
Using average consumption would have meant protecting almost 19 million electricity meters, as opposed to 11 million under the maximum usage criteria. More importantly, using average consumption would have required placing 55 percent of total consumption under protected category, versus 18 percent using maximum consumption. Note that one-third of consumers left out consume two-third of electricity, further asserting that maximum consumption is indeed the right way to go.
The stage has been set for the subsidy structure to be more targeted and rationalized going forward. This must not be mistaken for power sector reforms, but only a small cog in the wheel. The next two phases are where political will is required for the government which has of late found it exceedingly difficult to take pricing decisions.
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