Consumer end tariff design and National Electricity Plan 2023

Utilities consider investments in generation, transmission, and distribution infrastructure as fixed costs because these investments are not influenced by individual customer energy consumption.

Traditionally, these costs are covered by variable energy charges.

Concerns have been raised regarding the transparency of the consumer-end tariff determination process by Nepra the regulator, particularly following the recent tariff determination for DISCOs on June 14, 2024.

In this determination, Nepra increased the fixed charges to 2,000 Rupees per kW per month for industrial and bulk supply consumers and introduced per-connection fixed charges for residential consumers.

Notably, DISCOs did not request these fixed charges in their tariff petitions, nor was the amount clarified during hearing presentations, yet it was included in the final notification. This raises the question: Does Nepra have a defined methodology for determining a two-part tariff?

The primary regulations governing consumer-end tariff determination are the “Nepra Tariff Standards and Procedure Rules 1998” and the “Nepra Guidelines for Determination of Consumer End Tariff (Methodology and Process) 2015.” Neither of these documents defines fixed charges.

Nepra justified the increase under the directive of the National Electricity Plan 2023. However, when legislatures or ministries issue a directive or policy, the authority should first establish a clear methodology for determining consumer tariffs.

The recent tariff determination lacks clarity on the derivation of fixed charges for both residential and industrial users, especially the 2,000 Rupees figure for industries.

Moreover, it is unclear how the regulator will monitor the collection of fixed charges from industrial and bulk supply customers, which are sometimes based on the Maximum Demand Indicator (MDI) or alternatively on 50% of the sanctioned load.

The metrics need to be more elaborated, and it would be beneficial to segregate minimum charges and demand charges.

For residential consumers, the methodology for assigning fixed charges of 200, 400, 600, and 1,000 Rupees based on consumption slabs is also not well-defined.

These charges appear to be arbitrarily calculated based on the number of connections, which could be more accurately adjusted according to the sanctioned load. The lack of clarity is appalling, and does not provide clarity regarding how the same charges would evolve.

NEPRA’s determination fails to provide specific figures or a clear methodology for implementing a two-part tariff (fixed charges + variable charges). There are no guidelines to ensure transparency in this process.

Critical details such as the amount of fixed charges, minimum charges, and how these will be collected and balanced in the tariff on a quarterly basis, in case of over or under-recovery, remain undefined.

Globally, many utility industry trends drive changes in electricity rates. These include aging utility infrastructure in need of replacement, grid modernization efforts, environmental regulations, flat or declining loads and load factors due to greater energy efficiency and a slow-growing economy, and declining costs alongside rapidly growing markets for distributed energy resources, particularly solar PV and battery storage.

Net metering programmes nearing or exceeding existing caps trigger reviews, and there is strong interest from growing numbers of large corporate and institutional buyers to source more of their electricity from renewable or other low-emission resources.

Higher fixed charges shift costs from high-volume customers to low-volume customers, often impacting low-income households. This shift reduces incentives for energy efficiency and diminishes customers’ control over their bills. From a tariff rate design perspective, higher fixed charges have both pros and cons.

On the pro side, they stabilize utility revenues and customer bills from the utility’s perspective and reduce the need for frequent rate cases, such as quarterly adjustments in Pakistan.

However, on the con side, lower energy charges reduce customer incentives for energy efficiency and onsite generation. For example, a 25 Rupee off-peak rate could compete with solar renewable PPA (Power Purchase Agreement) pricing in Pakistan. The increase in fixed charges penalizes low-volume consumers, raising significant equity and social justice concerns.

There are various electricity rate design methodologies that can be adopted to address these changes, but it appears that our legislators and regulators have not engaged in substantial discussions on utility rate design.

The regulator, NEPRA, has a broader responsibility to ensure transparency in pricing grid services. Section 7 of the Regulation of Generation, Transmission, and Distribution of Electric Power Act, 1997 (Nepra Act), clearly defines the authority’s powers and functions. It states that the authority will determine tariffs, rates, charges, and other terms and conditions for the supply of electric power services.

In performing its functions under this Act, the authority must protect the interests of both consumers and companies providing electric power services in accordance with principles of transparency and impartiality.

Section 14A of the Nepra Act discusses the National Electricity Policy and Plan, which must be approved by the Council of Common Interests (CCI). It specifies that the authority shall perform its functions in accordance with the national electricity policy and the national electricity plan.

Therefore, the first step for the authority to ensure transparency is to establish rules, regulations, or guidelines to implement any directions received under this policy and plan, maintaining a transparent process.

Some options, particularly the high fixed-charge approach, shift fairness and equity in the wrong direction and reduce customer control over their bills.

There are alternative rate design options such as “Revenue Decoupling,” “Lost Revenue Adjustment Mechanism,” and “Formula Rate Plans” that can be explored.

However, the crucial aspect is having a transparent tariff design procedure that allows for the determination of tariffs in a clear and efficient manner. It is necessary for the authority to start discussions with different stakeholders on advanced tariff design options and, in the meantime, issue updated Consumer End Tariff methodology guidelines for two-part tariffs.

Copyright Business Recorder, 2024