Power tariff hike

The government, it has been widely reported, is likely to raise power tariff by 4 rupees per unit across the board after National Electric Power Regulatory Authority (Nepra) allowed a hike in power rates to Islamabad Electric Supply Corporation (IESCO), the most efficiently run entity in the country. A Nepra official revealed that it had dispatched the proposed revised rates to the federal government for gazette notification for implementation within 21 days.
The announcement of the proposed rise in tariff coincided with the decision to decrease the sale price of oil and its products to give effect to a decline in their international price during the past month raising questions about the need to raise power tariffs given that a key input, fuel, witnessed a decline in price. The answer is simple: power tariffs continue to be lower than the cost per unit of electricity and the recommendations by multilaterals particularly the World Bank to increase power tariffs to attain full cost recovery have not been implemented for political reasons.
According to data available with Business Recorder, the cost of producing per unit electricity from furnace oil is around 16.5 rupees (accounting for 36 percent of total generation), from gas 6 rupees (accounting for 31 percent of total generation) and from hydel around 3 rupees. Tariff for lifeline consumers is around 4 rupees per unit while the top end consumers pay around 13 rupees per unit. Industrial and commercial tariff off peak is 14 rupees per unit and in peak hours 18 rupees per unit. In short there is a major disconnect between the cost of production and sale price which needs to be bridged as a preliminary step towards power sector reforms.
The government can, and has in the past, exercised its right to adjust the power rates for various consumers proposed by Nepra, particularly life line consumers, and has utilised IESCOs tariff, the lowest amongst the ten distribution companies (Discos), as a base sale rate for consumers throughout the country.
In this context it is relevant to note that the full impact of the upward revision proposed by Nepra in May of last year was not passed on to consumers by the federal government for what is widely believed to be political compulsions. The fact that the caretaker set-up is in place which, by definition, has no political ambitions no doubt accounts for Nepra's decision to seek federal government approval for the proposed tariff hike at the present moment in time.
The crisis in the power sector is also attributable to the burgeoning inter-circular debt reflecting the failure of federal and provincial ministries/departments as well as influential private sector industries/individuals to clear their bills in time or else face disconnection as well as transmission and distribution losses well above the international average.
This debt also periodically disables Pakistan State Oil (PSO) from paying for its L/Cs and the danger of international default looms large compelling PSO to seek injections from the Ministry of Finance. Recently, Ministry of Finance officials have disturbingly noted that the Treasury simply does not have the wherewithal to release funds to enable PSO to meet its international commitments. There is therefore an urgent need for the government to undertake governance reforms that have so far remained pending.
Any delay in granting the tariff hike approval would simply compound not only the sector's debt but also compel the government to increase subsidies which have already been revised upward from the budgeted 134.9 billion rupees for the entire year to 291 billion rupees with 267 billion rupees already disbursed in the first nine months of the current year. It is no doubt feared that with another three months to go before the end of the year subsidies would exceed the revised target substantially and may well be in excess of 419 billion rupees as released in the revised budgeted estimates for fiscal year 2011-12. The resulting rise in the budget deficit would fuel inflation and lead to a further deterioration of the quality of life.
What is unfortunate is that the government has focused on increasing tariffs as a major reform measure without taking appropriate measures to either reduce circular debt and thereby ensure generation at optimum capacity or indeed reduce theft or desist from allowing deferrals of massive electricity bills to state and private influentials which accounts for ever rising bills coupled with ever rising load shedding. This has understandably angered the general public and there is therefore a need for implementing reforms across the board on an emergent basis.