The government has reportedly decided not to notify separate the power distribution tariffs for the eight distribution companies of Wapda due to questions on tariff and possible subsidy to the distribution companies with higher T&D losses. The government has been heavily subsidising the operations of the Power Wing of Wapda and the KESC in the past few years. Large sums of money have been provided with the aim to assure regular power at reasonable rates to the consumers.
However, such arrangements are not sustainable in the long run. The international financing institutions reportedly also want the government to fully recover the cost of service from the consumers. Such a step has the potential to adversely affect exports and also raise socio-political issues.
It might be a matter of a few years that the private producers will sell the gas to private power generation companies for supply to distribution companies also in the private sector. As these private groups will fully recover their cost along with higher return on equity, chances are that the distribution tariff will move higher, at least in the short run.
The benefits of privatisation as well as the operation of utilities in the private sector might accrue to the people but with a lag of a few years or more due to our traditional style of governance and capacity building. As such, in the short run the government might increasingly come under stress for higher distribution tariff or alternately for more subsidies to the power companies.
PPIB, an arm of the Ministry of Water and Power, has on its website released a Power Supply-Demand situation in the country for the period 1999-2000 to 2009-10. Firm generation capacity has been compared with peak demand for each year. According to these figures, the country is expected to face a deficit of 411MW in 2005-06, rising to 5,529 MW by 2009-10.
Demand for power reportedly has increased faster lately due to better business conditions and power shortage is likely to hit the country earlier than estimated. It may be noted that per capita electricity consumption in the country is only 404 kWh, which is exceptionally low and indicates a stage of our economic development. Moreover, there is a pent-up demand of electricity, as a large section of our population as yet has no power connections.
The government is urged to examine the pros and cons of separate or uniform distribution tariffs and other allied matters through discussion among all stakeholders, as part of the comprehensive long-term energy plan. It may be mentioned that separate tariffs might be the ideal tariff from the market-economy point of view but the choice should not be devoid of the ground realities and the socio-political and economic considerations.
The transition to separate tariff/market economy might be through the time-bound uniform tariff in a manner that is less painful and equitable to the people as well as all other stakeholders. The approach adopted for the purpose should aim at rewarding efficiency in oil/gas development, power generation, transmission and distribution through a level playing field, both to the private and public sectors. Also, the approach should be sustainable and not create big financial headaches for the government.
With a view to achieving relatively safe transition from the old system of electricity pricing to the new scientifically verifiable pricing mechanism promoting efficiency at each stage during the transition period of say ten years, the Time Bound Uniform Tariff (TBUT) approach might be more appropriate.
The proposed mechanism has been developed largely on the Deemed Cost of Hydel Power (DCHP) of Wapda and has the potential to provide a reasonable way out of the situation in which our country is presently placed. The TBUT approach is considered a fairly balanced option in the circumstances and therefore is submitted for consideration.
For better appreciation of TBUT, a reference to the situation prevailing before and after the restructuring of the Power Wing of Wapda is in order and therefore is presented first.
POWER WING OF WAPDA - BEFORE RESTRUCTURING: Wapda has been operating as a vertically integrated utility with its networks throughout Pakistan except a small area licensed to the KESC. For simplicity and better understanding, the activities of Wapda are presumed to fall into four distinct pools as under:
1. POWER POOL: Wapda system was receiving power generated through various thermal and hydro plants owned by the utility, supplemented by power from nuclear power plants owned by the PAEC and IPPs owned by the private investors-both local and overseas. Different thermal plants owned by Wapda or the private sector were using furnace oil, diesel or gas as the case may be. The sizes of the plants are generally different and so is the operational age. Transmission and distribution lines are also of different sizes and lengths. Apart from the sale of electricity to the customers, the pool was being reduced due to the transmission and distribution (T&D) losses.
2. REVENUE POOL: Wapda has been supplying power to the customers through eight Area Electricity Boards (the predecessors of the existing distribution companies). The customers included Domestic, Commercial, Industrial, Agricultural, Bulk Consumers, Railways, the Federal and the Provincial governments; and the agencies and corporations including utilities controlled by the government. There are different slabs of tariff for each category of customers. Along with its own dues, Wapda has been collecting government dues in the form of various taxes imposed on electricity consumed by the customers and remitting such amounts to the government. Wapda was selling power in bulk to the government of the AJ&K at a concession and the federal government was partly compensating the deficit. Wapda has been selling power in bulk to KESC under special arrangements, besides supplying power to certain underdeveloped areas like FATA at nominal rates.
3. COST POOL: Wapda met its overall administration cost as well as the cost for operating and maintaining of its power system comprising power generation plants, dispatch centres, transmission lines, grid stations, distribution networks, etc. To this was added the cost of power purchased from the PAEC and IPPs and the royalty paid to the NWFP government or other provinces. Wapda pays large amounts to PSO/other oil marketing companies for purchasing furnace oil or diesel and for the purchase of gas pays to SSGCL/SNGCL or other gas producers.
4. RESERVES POOL: This is largely the net difference between the Revenue Pool and the Cost Pool adjusted by the debt servicing made to the government and the budgetary support received from the government for the continued operations of the utility. The contribution from the government is considered as government equity. Fresh investments for the development or major overhauls of the power system are met from this pool.
POWER SYSTEM AFTER RESTRUCTURING: The power system after the restructuring of the Power Wing of Wapda is largely characterised as under, though in practice many things are in the process of falling the place:
1. SEPARATION OF GENERATION, TRANSMISSION AND DISTRIBUTION: On restructuring, three thermal generation companies, one transmission-cum-dispatch company (known as NTDC) and eight distribution companies have emerged, which are overseen by the PEPCO as the successor of Wapda. Assets and liabilities of the Power Wing / Wapda have reportedly been allocated to the new companies.
2. OWNERSHIP OF POWER GENERATION CAPACITY: Of the total installed capacity at 19,478 MW, Wapda's system owns the lion's share at 59 % (11,436 MW).
The share of IPPs is 30 % (5,824 MW), Nuclear over 2 % (462 MW) and KESC 9 % (1,756 MW). Wapda owns all the existing hydro power plants (capacity 6,696 MW). Cost of hydel power, though believed to be different for different plants, is the cheapest when compared to the cost of electricity per unit generated by using other fuels such as furnace oil, diesel, gas or coal.
The power plants owned by the three-generation companies (capacity 4,685 MW) have different configurations and it is believed that their generation cost is also not the same.
3. GRADUAL CHANGE IN POWER PURCHASE ARRANGEMENTS: Wapda has contracts for the purchase of power with IPPs (capacity 5,824 MW including Kot Addu capacity 1,500 MW) and PAEC (capacity 462 MW). The cost of electricity purchased from the IPPs is believed to be the highest.
A time might come in the near future when the NTDC or another special company, and not the Wapda as at present, would be buying all the power in bulk from these producers and sell the power in bulk to the distribution companies and bulk consumers on a tariff determined by NEPRA.
4. ERA OF ALL TRANSACTIONS AT ARMS LENGTH: All the new companies are now supposed to be independent and should be responsible for their respective operations and profits. Now the relationships and the transactions regarding the purchase, sale or transmission of power among the generation companies, Wapda's hydel generation division, NTDC and the distribution companies are expected to be at an arms-length basis. All tariffs will be determined by NEPRA. Wapda will now be a big seller of electric power.
TIME BOUND UNIFORM TARIFF (TBUT): Main elements of TBUT and how the power system networks might work during the transition period are described below:
1. TRANSITION PERIOD AND OVERSIGHT: To overcome the tariff issues, for the initial few years at least, Wapda's Power Pool and Cost Pool arrangement described above, with certain adjustments, might be followed for the bulk purchase of power from various generation companies, IPPs, etc and the bulk sale of electricity to all the distribution companies. The New Power Pool may be managed by the NTDC, but during the transition if so desired by the government, Nepra, PPIB or Wapda might monitor it.
2. AVERAGE UNIT COST OF ELECTRICITY (AUCE): The three thermal generation companies, instead of presumably receiving actual cost incurred by them, might be paid AUCE for the electricity supplied to NTDC.
The AUCE will be calculated by dividing the total cost paid to various suppliers of thermal power under the contractual arrangements and the DCHP of Wapda with the total power received in the New Power Pool from all sources. AUCE will be replaced after standardised cost estimates for similar plants are available.
3. DEEMED COST OF HYDEL POWER (DCHP): The cost of power from Tarbela, Mangla or other hydel projects is much lower than the cost of electricity from thermal plants including PAEC. DCHP would be determined on a basis to be finally determined by the government. For example let us say that the DCHP is equal to the rate actually paid to the PAEC for bulk power supply.
The PAEC rate is believed to be much lower than the rate paid to IPPs. Through the mechanism of DCHP and during the transition period, the profitable distribution companies would hopefully be partly subsidising the distribution companies that are incurring losses. Thus, the customers of loss-making distribution companies will be getting the relief.
4. SPECIAL FUNDS FOR DEVELOPMENT AND ASSISTANCE: In actual, Wapda, the owner of all existing hydropower, might be reimbursed its cost of hydel generation with the agreed rate of annual profit and the agreed royalty payable by Wapda to the provinces. Subject to government approval, Wapda might also be annually paid the for development of new hydel projects through the Power Development Fund calculated at say 50% of the difference of average amounts paid to Wapda as above and the DCHP of Wapda included in the total cost for calculating AUCE.
The other 50 % of difference will be credited to the Special Assistance Fund to be used for subsidising the loss making distribution companies provided they meet the annual target for reduction in T & D losses. The government will approve the guidelines for the Special Development Fund and the Special Assistance Fund.
The subsidy would be considered only during the transition period. In future, any government subsidy to the distribution companies might be channelled through the Special Assistance Fund and utilised as per Rules to be developed by the government.
5. TIME BOUND UNIFORM TARIFF (TBUT): NTDC would provide power in bulk to all the distribution companies at TBUT, which would be AUCE plus transmission loss per unit, transmission charges and reasonable annual profit. Nepra will be the determining authority for TBUT, which is expected not to be much different from the average distribution tariff as at present.
6. EFFICIENCY AND STANDARDIZED COST: The thermal generation plants (other than IPPs and PAEC), Wapda's hydel plants and the transmission grid may be given by the government/Nepra specific time limit for improving operational efficiency. They might be warned a that the present rates for the purchase of electricity or for transmission or distribution services would be discontinued thereafter.
From then onwards, they would be paid standard cost for electricity or for transmission or distribution services as determined by Nepra in reference to international standards including the rate of annual profit, adjusted for plant life.
TBUT is submitted for consideration with the understanding that it might be treated as the first step in a difficult area in which progress would only be possible through open dialogue aiming at equitable solutions.
The authorities might entrust the calculations of the amounts to the utility experts having access to actual data and documents if required for discussion on the broad principles.
Our attempt, as far as possible, should be to arrive at solutions that are optimally fair and equitable to the people of all areas and thus enhance the goodwill and harmony among them.
In order to build capacity for such an important work, the government might also consider setting up a Special Unit within the Planning Commission to co-ordinate with different ministries and departments on matters pertaining to a long term energy plan and other allied matters such as the privatisation of oil, gas or power companies, the actual realisation of objectives, the long term impact on the country's balance of payments, etc.
This unit might be staffed with appropriate technical, financial and legal experts and fully supported by all the stakeholders.
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