Hike in power tariff

After dithering for a long period, the government finally decided to increase electricity tariff by 10 percent with effect from 24th February, 2007 for all categories of consumers except those who consume 50 units per month or less.
The announcement came a few hours after the government had notified a 10 percent reduction in the prices of natural gas for commercial consumers and 7.82 percent for domestic users. Giving the reasons for the increase in electricity tariff, a spokesman for the Ministry of Water and Power asserted that such a step was unavoidable "otherwise the Water and Power Development Authority and KESC would have gone broke". The National Electric Power Regulatory Authority (NEPRA) had proposed a 33 percent increase in power tariff, but the government had curtailed it to 10 percent.
To mollify the impact of shock on the consumers, a statement from the ministry claimed that the government had increased power tariff for the first time since November, 2003 despite an increase of 90 percent in oil prices and 54 percent higher gas charges since then. "If the decision to raise tariff were not taken, the Wapda deficit would have touched Rs 80 billion, and that of KESC Rs 17 billion. Despite the tariff increase, the government will still have to provide a subsidy of Rs 54.5 billion to Wapda and about Rs 14.15 billion to KESC consumers".
The World Bank had been nudging the government in this direction for a long time due to the precarious financial position of power companies. It was also of the view that end-user tariff was not adjusted for the last three years in spite of significant rise in input costs and accused the government of putting power sector in a difficult situation due to lack of financial autonomy to the distribution companies and weak regulatory framework.
However, as per announcement of the government, there will be no difference in tariff between different regions although consumer-end tariff for all Discos is different. The government would extend a subsidy of Rs 21-22 billion irrespective of the fact whether the consumers reside in the jurisdiction of financially a weak Disco like Hyderabad Electric Supply Company (Hesco) or a financially healthy Disco like Islamabad Electricity Supply Company (Iesco).
The rates for the consumers of KESC have also been increased but the overall increase in Karachi would be somewhat less than 10 percent due to slightly higher rates already prevailing in the region than the rest of the country. By addressing this anomaly, the tariff for domestic and commercial consumers has been made uniform all over the country.
The facts on the ground being what they are, the rise in electricity tariff, was almost inevitable. Without such a step, the power companies would have been unable to provide reliable service, avoid load-shedding and meet the growing demands of the economy. The huge cash shortfall year after year would have made the electricity companies insolvent or forced the government to allocate increasing resources in the budget for keeping them afloat. The irony is that all the governments could foresee the coming crunch but did practically nothing to avert it.
Country's potential for hydro-electricity which could be the cheapest source of power was not fully explored for political reasons. Thermal generation has become very expensive due to ever increasing fuel costs. The problem was further compounded by the inability of the government and Wapda authorities to recover the dues, particularly from FATA and certain other regions of the country. When almost one third of the electricity generated is either stolen or not paid for, there is usually the need to increase the rates without realising that such a step could even tempt the honest consumers to look for dishonest means to evade due payment.
Although we feel that there was no other alternative for the government but to increase the electricity tariff at the present juncture, it is incumbent on the authorities to look for other ways which could reduce the pressure to raise the tariff in future. It is a must to build more dams to produce cheap electricity, reduce dependence on thermal power generation and force all the consumers to pay the electricity dues irrespective of their location or political clout. However, it was prudent on the part of the government not to have passed on the entire proposed price increase of 33 percent in one go.
There was also sound justification, at least for the time being, not to pass on the burden to households consuming less than 50 units and maintain the electricity tariff at a uniform rate throughout the country. It would have been imprudent to ignore the political dimensions of any other approach, especially when inflation is already hitting the ordinary people hard.
It is true that pressure on the budget would be somewhat reduced and the balance sheets of power companies could improve through the increase in electricity prices while the decision of the government to increase power tariff would certainly accelerate price pressures in the economy by increasing the cost of production of almost all the major items. The impact of such a step on the rate of inflation could partly be neutralised by adopting appropriate monetary and fiscal measures, but the relevant authorities do not seem to be particularly inclined to consider the option.
The rise in inflation would further erode Pakistan's competitiveness in the international market and boost demand for imports, thus further aggravating the trade deficit of the country and increasing pressure on the rupee rate. The target of 6.5 percent inflation rate during 2006-07 would definitely become more difficult to achieve.
The government, in our view, has, however, done the right thing in announcing a simultaneous reduction in the gas price to deal with the negative political fall-out of the increase in power tariff. The assertion by the Minister for Petroleum and Natural Resources that "if oil prices decline further below the current levels, the gas prices will also be adjusted accordingly" could be cited as a proof that the government is sensitive to the plight of ordinary people and is responding only to the financial imperatives of the country at present.