EDITORIAL: The poor performance of power sector companies cost the exchequer Rs660 billion in FY24 despite a significant upward revision in power tariffs. Of this, Rs281 billion is due to higher transmission and distribution (T&D) losses compared to the permissible limit. Notably, the share of the only private entity, K-Electric (KE), in these losses is a mere 2 percent, while its share in power distribution is 16 percent.
This alone highlights the benefits of privatisation. That the privatisation of distribution companies (Discos) is critical for implementing comprehensive reforms in the power sector is a fact.
The private entities, like KE, would have skin in the game, whereas government-owned Discos operate as cost centres. To attract private players, fair treatment of KE is essential, as it is crucial for improving power supply in Karachi, the country’s business hub.
Like any other utility company, KE incurs business costs, but recovery remains a significant challenge. One issue is the difficulty KE faces in obtaining regulatory approval from power regulator, Nepra, for Rs68 billion in write-offs for a seven-year period, as discussed in a recent hearing related to its Multi-Year Tariff (MYT).
Globally, no business operates without provisions for operational losses or bad debts. However, Nepra expects power utility companies to recover 100 percent of their billed amounts — an unrealistic expectation. The provincial governments between themselves owe over Rs 90 billion to the power utility companies in unpaid bills.
Power utility companies are compelled not to disconnect supply of power on account of non-payment by different departments of the provinces. The federal minister for power, Sardar Awais Leghari, has sought help of chief ministers for recovery of this huge outstanding amount.
All Discos have low recovery rates, and these losses are eventually borne by the government of Pakistan, contributing to the infamous circular debt, which has now soared to over Rs 2.8 trillion, according to industry sources. Part of this debt servicing cost is passed on to consumers, with Rs3.23 per unit currently being charged across Pakistan.
KE’s contribution to circular debt is zero, as its shareholders absorb all associated costs. However, KE consumers are still burdened with additional surcharges, which is unfair to both the company and its customers. During the recent hearing, KE’s plea for write-offs was poorly received by the audience and the regulator alike.
Many seem to believe it is their inherent right to receive electricity without considering the cost. Ironically, many Karachi residents willingly pay exorbitant amounts for water, a basic necessity but expect electricity to be free. This attitude may be tolerated in public sector companies but is unsustainable for private shareholders.
Despite this, Karachi consumers pay some of the highest electricity rates in the country, thanks to poorly negotiated federal contracts with power producers, a weak transmission system, and mismanagement by public sector utilities. They also face load-shedding in areas with high theft rates, where many consumers fail to pay their bills on time.
Despite removing hook (kunda) systems in Karachi, KE’s ability to recover bills from everyone is impaired, given the higher penetration of slums and poor law and order situation. Recoveries are nearly impossible without collaboration with law enforcement agencies, which are often influenced by political parties that protect power thieves.
It is unfair to expect the utility company to act as a policing agency, though it uses technology and other measures to curb theft. Complete elimination of theft, however, is nearly impossible.
The optimal solution is to allow for a certain level of non-recovery and approve legitimate write-offs. Without these measures, the privatisation of distribution companies will remain a distant dream, circular debt will continue to grow, and consumer tariffs will keep rising.
Copyright Business Recorder, 2024
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