As Pakistan grapples with economic instability and rising electricity prices, many voices call for the immediate privatisation of government-owned electricity distribution companies (DISCOs). These advocates argue that privatisation is the solution to rampant electricity theft, operational inefficiencies, and financial haemorrhaging.
While their concerns are valid, a crucial element often overlooked is the importance of deregulation. Privatisation without deregulation can transform a public sector monopoly into a more dangerous private sector monopoly, with dire consequences for consumers and the economy.
The pitfalls of privatization without deregulation
Privatisation, in theory, promises increased efficiency and reduced costs. However, without a robust deregulation framework, it simply transfers the monopoly from public to private hands. This can be more detrimental, as private monopolies often operate with profit maximization as their sole objective, with little regard for service quality or consumer welfare.
The case for deregulation
Deregulation involves removing government-imposed controls and restrictions to allow for a free and competitive market. In the context of Pakistan’s energy sector, it would mean allowing multiple private players to enter the market, fostering competition, encouraging innovation, and ultimately benefiting consumers through better services and lower prices.
Economic incentives and efficiency
Without the possibility of new private players entering the market, a privatised monopoly has no economic incentives to improve efficiency. A private owner bound by governmental regulations cannot implement new technologies or innovations freely. For example, if a privatised DISCO is still tied to government entities through contracts, the system remains monopolistic. This scenario limits the potential for technological advancements and operational efficiencies.
The issue of bill collection
A privatised distributor, without the legal and enforcement capabilities to collect bills, will continue to seek government subsidies, much like the case of K-Electric. This perpetuates the dependency on government support, negating the benefits of privatisation.
International examples of successful deregulation
Several countries have successfully deregulated their energy sectors, resulting in improved efficiency, lower prices, and enhanced service quality. These examples provide valuable lessons for Pakistan.
The UK’s energy sector deregulation in the 1990s is a prime example. The government introduced competitive markets for electricity generation and supply. This led to a significant reduction in electricity prices and improvements in service quality. Consumers benefited from a wider choice of suppliers and innovative service offerings.
Closer to home, India provides a compelling example of successful deregulation in the electricity sector. In 2003, India passed the Electricity Act, which aimed to transform the power sector by promoting competition, protecting consumer interests, and ensuring the supply of electricity to all areas.Power markets are hosted on a power exchange. Exchanges facilitate competitive pricing, improved resource allocation, and greater market liquidity in the power sector.
Power exchanges were first introduced in Europe in 1990-91, and they now operate in about 50 countries around the world. The Electricity Act of 2003 established the framework for exchange operations in India, and exchanges commenced in 2008.The spot market was introduced in 2020, which further enhanced the flexibility and responsiveness of the power trading system.
India has three major power exchanges regulated by the Central Electricity Regulatory Commission (CERC), where generators, utilities, and large consumers trade electricity. The Indian Energy Exchange Ltd (IEX) dominates with more than 90% market share, followed by Power Exchange India Limited (PXIL) and Hindustan Power Exchange Ltd (HPX).
In FY 2023-24, IEX traded about 110 billion units (BU) of electricity, growing 14% year-on-year. The government has recently amended various regulations to encourage and incentivise participation in power exchanges, reflecting their growing importance in India’s electricity market.
Key outcomes of India’s deregulation: 1. Increased competition:
The Act facilitated open access in transmission and distribution, allowing private players to enter the market. This increased competition among power producers and suppliers, leading to better services and competitive pricing.
2. Improved efficiency
With the entry of private companies, there was a significant push towards improving efficiency and reducing losses. Modern technologies and management practices were adopted, enhancing the overall performance of the sector.
3. Lower prices and better supply:
Consumers benefited from lower electricity prices due to a competitive environment. Additionally, the quality and reliability of supply improved, reducing outages and ensuring a steady supply of electricity.
4. Consumer choice
Deregulation allowed consumers to choose their electricity suppliers, fostering a customer-centric approach among service providers. This led to better customer service and more innovative product offerings.
5. Investment in Infrastructure
The regulatory reforms attracted substantial private investment in the power sector, leading to the development of new power plants, transmission lines, and distribution networks. This infrastructure development was crucial in meeting the growing demand for electricity.Our regulator NEPRA can learn a thing or two from its Indian counterpart.
The Pakistani context
In the early 1990s, Pakistan unbundled the Water and Power Development Authority (WAPDA) into various generation, distribution, and other companies. The aim was to corporatize these entities and pave the way for privatisation. However, apart from the partial divestment of government shares from Karachi Electric Supply Company, no significant progress was made. The absence of a comprehensive deregulation framework hindered further advancements.
The National Electric Power Regulatory Authority (NEPRA) formulated the Competitive Trading Bilateral Contract Market (CTBCM) policy to promote electricity wheeling. However, exorbitant wheeling charges demanded by government entities like the Central Power Purchasing Agency (CPPA) thwarted its implementation. These high charges deter potential private players from entering the market, stifling competition and innovation.
The path forward: deregulation before privatization
To avoid the pitfalls of privatisation without deregulation, NEPRA must urgently focus on creating a conducive environment for deregulation. This involves several key steps:
1. Implementing a robust regulatory framework:
Establish a transparent and fair regulatory framework that promotes competition and prevents monopolistic practices. This includes setting reasonable wheeling charges to encourage private players to enter the market.
2. Facilitating market entry
Simplify the process for new entrants to obtain licenses and permits. Reduce bureaucratic hurdles and provide incentives for private investment in the energy sector.
3. Unbundling and Restructuring
Further unbundle existing government entities involved in the generation, transmission, and distribution of electricity. Ensure that these entities operate independently to foster competition.
4. Strengthening Legal and Enforcement Mechanisms
Enhance the legal framework to ensure efficient bill collection and reduce dependency on government subsidies. Empower private companies with the necessary tools to enforce contracts and recover dues.
5. Promoting transparency and accountability
Ensure transparency in regulatory decisions and the operations of privatised entities. Establish mechanisms for consumer protection and redressal of grievances.
6. Learning from global and regional examples
Study successful deregulation models from other countries, including India, and adapt best practices to the local context. Engage with international experts and stakeholders to design effective deregulation strategies.
The call for privatisation of DISCOs in Pakistan is not without merit. However, privatisation without a robust deregulation regime is a recipe for disaster. To transform the energy sector and achieve economic stability, we must prioritise deregulation.
By fostering a competitive market environment, encouraging private investment, and ensuring transparency and accountability, the country can achieve the twin goals of efficient energy supply and consumer welfare. The sooner this is done, the better it will be for Pakistan’s socioeconomic development.
Copyright Business Recorder, 2024
The writer is a civil servant with deep interest in the oil, gas and climate change issues
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