Rising power tariff
This time bomb is ticking before the public could absorb the recent unparalleled hike in petroleum prices. Apart from social, economic and political impacts, the power tariff syndrome may put the federation under strain as the centre takes steps that come under the domain of Council of Common Interests (CCI). Then there are suggestions to subsidise the three provinces at the cost of consumers in the fourth province (the Punjab). Separately, the NWFP feels aggrieved for non-payment of net hydro-profit as determined by a constitutionally constituted arbitration tribunal.
The provinces have already lodged their protests with the federal government for its decision to revise power rates on monthly basis to pass on fuel impact under the automatic fuel adjustment formula. They have informed the centre that any matter that could affect the provincial interests could not be taken up by the national assembly. They believe electricity is an inter-provincial matter being part of the concurrent list and any change in the tariff pattern could only be made with the approval of the Council of Common Interest (CCI).
The National Electric Power Regulatory Authority (Nepra) has just concluded the process of public hearings for increase in base tariff requested by Wapda’s distribution companies. Initial calculations by the regulator indicate that base tariff would go up between six and 10 per cent even in the case of financially sound firms like Islamabad, Lahore, Gujranwala and Faisalabad electric supply companies. The tariff hike for poorly-managed Hyderabad, Multan, Quetta and Peshawar Electric Supply companies would be 22-30 per cent higher than the existing rates.
Given such a huge tariff increase in Balochistan, Sindh and NWFP might be politically and socially unviable for the central and provincial coalition governments, there have been consultations for a uniform rate of increase across the country. That would mean that the electricity rates would go up by an average 10-12 per cent for all companies most probably in early August. Such a mechanism has an inbuilt shortcoming to encourage corruptions, theft and inefficiencies and penalising efficient management and paying consumers.
Additionally, the electricity rates would go up every month under the automatic fuel adjustment formula that allows power companies including the KESC to meet increased expenditure of higher fuel prices, double-digit consumer price index and the resultant increase in operation and maintenance costs. For this to happen, the government has already amended the Nepra Act through Finance Bill 2008-09. For the last many years, fuel cost, inflation and O&M costs used to be passed on to the consumers on six-monthly basis – an exercise that would now be made on monthly basis.
So the consumers would have to make a difficult choice between power shortage and unaffordable power supply. How this is going to affect cost of industrial production, exports, commercial activities, agricultural input cost or using a fan or a bulb at home could be anybody’s guess. Already, the exporters and manufacturers are struggling to survive.
On the whole, the power distribution firms of Wapda are estimated to have a total revenue requirement of about Rs455 billion for the current year. Of this, about 80 per cent or Rs380 billion has to be paid for power purchases from independent power producers. Estimates suggest that all these distribution companies should be given an additional amount of Rs65-70 billion through increase in base tariff. If the increase is allowed at a uniform rate, this would translate into Rs1-1.50 per unit (kWh). In other words, the sale rate of electricity would go up from about Rs6 per unit to Rs7-7.50 per unit.
There are indications that when the new base tariff is increased next month, the tariff would go up for poor lifeline consumers who use 50 units per month. This slab will be increased to 100 units per month but the rate would almost be doubled from existing Rs1.40 per unit.
The second domestic slab of 100-300 units per month would remain partially protected. The problem is that power rates for industrial and commercial consumers are already too high and still subsidise domestic and agriculture consumers. So, the industrial consumers cannot be overburdened further, the cost of increasing agriculture tariff could have a spin-off effect on eatables and then it is politically difficult to raise domestic tariff too much. The increase in tariff is inevitable but the trade-off is very difficult and would require tough decisions.
Politically, the Punjab government would be more than justified to oppose uniform electricity rates given the fact that except for the Multan Electric Power Company (Mepco) all companies in the province are either profitable or require a minimal increase of 5-10 per cent. Here too, the government has made an amendment in the finance bill to impose a new power surcharge to subsidise loss making companies like Quetta, Peshawar and Hyderabad.
To be fair to these companies, a major reason for their losses could be attributed to poor law and order situation that makes it difficult to recover full cost of units supplied in these areas. Whether it is war on terror in tribal areas and adjoining NWFP regions, a long-run military operation in Balochistan or general law and order situation in Karachi and parts of Hyderabad, the distribution companies suffer the most.
Apart from provincial bickering against such a power surcharge that is expected to be levied to finance new power projects and maintain equal rates for all firms, the international lender and commercial banks have legal objections. Since they have to provide loans for the power companies and want timely repayments, they argue that the government could use this power surcharge recovered through the electricity for any purpose other than the power companies because this surcharge has to go into the federal account.
This is just the tip of an iceberg. All the upcoming capacity additions are in the shape of expensive thermal power projects. Indicative tariffs for all these projects start from 18 cents per unit. With the fuel impact, most of the projects would be selling electricity at about 29 cents per unit to the distribution companies that would be passed on to the consumers on a monthly basis.
Ironically, there has been only a lip-service to the development of indigenous energy resources like hydro and coal, which are not only environment-friendly but much cheaper than thermal and could save on huge wastage of foreign exchange reserves. Against 18 cents per unit cost of thermal power and natural gas based projects have a production cost of 6-7 cents per unit against 9.5 cents per unit of coal-based projects and 4.7-6.0 cents per unit of hydropower generation. Still, the government attitude towards hydro-power generation has been discouraging and most of the capacity addition would come in thermal sector over the next 8-10 years.
Last financial year, Pakistan’s oil import bill stood at about $11.4 billion. Out of the total oil imports of about 18 million tons, 15 million tons of import accounted for diesel and furnace oil, mostly consumed for power generation. When the new thermal power projects would come into production, the oil import bill may cross $20 billion over the next couple of years.
Perhaps the most prudent approach for the government should be to promote hydro-power projects on a war-footing under a lucrative upfront tariff. It does not require anything more than common sense to choose between 18 cents per unit and 5-6 cents per unit power generation cost to save future generations. There should also be an explanation why it is hard to pay Rs12 or 18 billion annually to NWFP to promote hydropower elsewhere than paying Rs380 billion per annum to the thermal power producers.