LAHORE: In order to encourage competition, the federal government is mulling changing the pattern of the power distribution companies (DISCOs) from price regulation to incentive regulation, said sources from Pakistan Electric Power Company (PEPCO).

According to the sources, there is a strong feeling in the Power Division that the DISCOs performance, despite all the hectic reform process spanning over two decades is still marred by a number of issues like theft, losses, low recovery, interruptions, overloaded transformers, retail prices away from the marginal cost of production, poor governance, and building up of circular debt.

The distribution companies in Pakistan are subject to rate-of-return regulation for tariff determination as prescribed by the NEPRA rules. As per the rules, NEPRA invites public comments after getting tariff petitions from DISCOs and carries out a hearing to ensure transparency and accountability.

Accordingly, NEPRA decides the tariffs for generation, transmission, and distribution companies separately, and the cost is recovered from consumers through tariffs set for distribution companies.

They said the methodology of tariff determination shows that the tariff rate depends on the company’s petition and revenue requirements in accordance to a base year, and provides data that the cost of the inefficiency linked to the distribution companies is transferred to end-users without imposing fine on the distribution companies. The PEPCO sources said the existing regulatory mechanism in Pakistan’s electricity market provides limited or no incentives for the distribution companies to improve their technical and operational performance. Furthermore, before the final announcement of electricity tariff, the government decides to provide subsidy to the consumers and thus partially or fully finances the inefficiency cost of the distribution companies. Moreover, the quality of service offered by these distribution companies does not become part of the tariff determination criteria.

The sources said the profit-earning approach of DISCOs is resulting into poor service quality leading to socio-economic impact due to the present price regulation approach. Similarly, they said, price cap regulation was distorting the incentives for future development.

Copyright Business Recorder, 2021