Structure and regulation of the electricity networks in Pakistan.
Khan, Amir Jahan
ABSTRACT
The main objective of this paper is to present an account of the
network part of the electricity industry in Pakistan and analyse the
transition of the network operators from part of a vertical-integrated
state monopoly to unbundled regulated state monopolies. Empirical
evidence documented here shows that dispersion in system losses and
revenue losses is high across network operators, although it is not
possible to disentangle managerial inefficiency from exogenous technical
losses in the distribution systems. Asymmetric information on the part
of the regulator and the state ownership of electricity networks is
delaying any incentive base tariff regulation regime for the
distribution firms. It is important that in the early stage of
regulation, standards in cost-based reporting are set and benchmarks are
established in order to perform cost-based regulation effectively. As
only the availability of reliable information about current and
potential future cost can help to rationalise tariffs and generate
resources for the long run investment required for the stable
electricity supply in the country.
JEL Classification: L12, L51, L94
Keywords: Electricity Networks, Incentive Regulation, State Owned
Monopoly, Utility
1. INTRODUCTION
This paper studies the electricity industry network in Pakistan,
particularly in the context of structural and regulatory reforms started
in the 1990s. Published reports by the regulator show that the reforms
process is not going anywhere even after two decades and the industry is
performing poorly [NEPRA (1) (2010)]. The market is not clearing as load
demand is higher than total system supply, particularly during the
summer season. (2) There is no electricity, due to load shedding, for
long hours in major parts of country served by the distribution networks
during the hot and long summer period. An effort is made here to
document the basic facts of industry in an orderly manner and to draw
major lessons from the failure of the reforms process and poor
functioning of the electricity market. The focus will be on the
electricity supply chain networks and issues in the regulation of the
electricity industry. The restructuring of the natural monopoly
components of industry will be discussed in detail.
The electricity industry in Pakistan is quite under researched
[Pakistan (2013)], the main source of industry knowledge is based on
government publications. According to available research [NEPRA (2011),
Malik (2007)], the rich information provided in policy documents and
regulatory reports has not been analysed in detail. Therefore,
documenting basic industry facts and related issues in this paper is a
contribution to the existing literature and will be useful for future
policy reforms.
The electricity industry in Pakistan has been functioning as a
state monopoly for a long time. The state monopoly includes two
vertically integrated electric utilities in the country; the Water and
Power Development Authority (WAPDA) with a customer base of 20.3 million
and the Karachi Electric Supply Corporation (KESC) serving 2.1 million
customers. (3) In the last two decades, two major changes have occurred
in the electricity industry of Pakistan. First, the two state owned
utilities went through structural reforms and unbundling in 2002.
Second, regulation of the electricity industry started in 1998 and an
authority was put in place to regulate electricity prices, allow entry
into the industry and set standards for the electricity supply. The
reforms were motivated by the intuition that state owned monopolies were
less efficient than private enterprises and there was a need to either
privatise or restructure state entities. The unbundling process included
separation of the potentially competitive segment (i.e. power
generation) from the network based natural monopoly of the electricity
industry (i.e. transmission, and distribution of power), and division of
the natural monopoly part of industry into transmission and distribution
networks. The network components of industry are subject to regulation,
and distribution utilities also perform as retail electricity suppliers.
The restructuring plan for the state-owned power sector was
approved by the government of Pakistan in 1992, however the first
substantial change in the industry was the commissioning of independent
power producers (IPPs) in 1994. The IPPs started supplying electricity
to the system in the late 1990s, and this was followed by privatisation
of a public power plant in 1996. These early initiatives created
political debate and legal disputes between government and IPPs due to
the lack of transparency in contractual arrangements and no obvious
change in the competitive structure of the generation segment.
The regulation of the industry started in 1998 when the National
Electric Power Regulatory Authority (NEPRA) was put in place to regulate
price, quality, and entry in the industry. NEPRA issued licences to 9
distribution companies (DISCOs) in 2002, including 8 companies in the
WAPDA system. A licence was also issued to the National Transmission and
Dispatch Company (NTDC) (4) for the transmission business in the WAPDA
system. The 8 distribution companies and the NTDC are working as
government owned monopolies in the distribution and transmission network
of WAPDA served areas, structure of the industry is presented in Figure
1.
The electricity industry in Pakistan is plagued by financial and
operational issues which are affecting the economic efficiency and
growth of the industry [Pakistan (2013)]. The distribution companies and
the transmission company rely on large and recurrent public subsidy (5),
1,290 billion Rupees (6) have been transferred as subsidies to DISCOs
from 2007 to 2012 [Pakistan (2013)]. The regulator decides the
electricity price for each utility (i.e. a DISCO) after taking into
account the consumer mix, transmission losses and operational cost of
the DISCOs in accordance with the tariff standards and procedure rules
[NEPR (2011)]. The government determines the final electricity price,
which is lower than the price determined by regulators for most
utilities. Therefore central government does not pass all of the
electricity supply costs to consumers by charging less than the tariffs
determined by the regulator to promote economic development (7). The
government introduced price differential subsidies in order to pursue
the policy of uniform electricity prices in the country. In this way the
performance incentives for firms in power networks can be partially
determined by the subsidy allocation mechanism and regulatory tariff
structure.
The main objective of this paper is to present an account of the
network of the electricity industry and analyse the transition from
state monopoly to a regulated state monopoly. An effort is made to
highlight the factors which are potentially slowing growth of the
industry and resulting in poor allocation of resources. The
documentation of technical, economic, and institutional factors related
to transmission and distribution segments is an integral part of
understanding market functioning and incentive structure in the
electricity industry [Joskow and Schmalensee (1983)]. The economic
efficiency in the electricity industry also depends on the contractual
nature and consequent incentives in network economy, and the tariff
incentive structure applicable to utilities (DISCOs) and system operator
(NTDC). The current tariff structure and evolution to its current state
is discussed here, with respect to corresponding implications for
incentives for firms in the business of electricity networks.
The electricity networks are an important component of the
electricity industry, efficient functioning of transmission and
distribution companies and timely capital investment in distribution
networks is required for the growth of other segments of the industry.
For instance, the power generation segment performance will depend on
the reliability and structure of the transmission and distribution
networks. The missing interconnection of transmission networks or
inadequate capacity in the networks affects the operation of existing
power plants and has delayed the commissioning of new power generation
plants [NEPRA (2010)].
The analysis of incentive mechanism for the electricity networks
assumes the separation of network segments into clearly defined
distribution and transmission networks [Joskow (2008)]. Although the
unbundling of electric power in WAPDA system occurred in 2002 with the
establishment of distribution companies DISCOs and transmission company
NTDC, however formal contractual relationships between DISCOs and NTDC
are not in place and they were under "de facto" common
management until recently [NEPRA (2011)]. The role of key public
institutions (8) during transition needs to be discussed in order to
understand the incentive structure and resulting behaviour of DISCOs and
NTDC (see Figure 1 for structure of the Industry). The electricity
networks in the main system are government owned regulated monopolies
where the authority (i.e. NEPRA) oversees the regulation and determines
tariffs for the electricity generation, transmission, and distribution.
The knowledge about regulatory effectiveness and incentives creation by
tariff structure or regulator lag is quite limited for Pakistan [Malik
(2007)]. The documentation of all the institutional details with
potential economic consequences for the electricity industry will be
useful for the future reforms of the electricity industry in Pakistan.
The following discussion in this paper is divided into four
sections, the next section discusses issues related to the structure and
management of electricity distribution networks, the natural monopoly
role of electricity networks and its implications for economic
efficiency are also analysed in this part. The Section 3 documents
incentive regulation particularly relevant to electricity networks and
compares it with current practice in Pakistan. The Section 4 expands
discussion to the public sector role in the power industry particularly
in electricity networks and incentive mechanisms for market based
reforms. Some policy recommendations based on analysis and concluding
remarks are documented in the last section. Additional tables and list
of abbreviations are given in the appendices.
2. STRUCTURE OF ELECTRICITY NETWORKS
In this section we will discuss the implications of
"electricity network" structure for economic efficiency of the
electricity systems in the context of theoretical considerations and
general practice in the electricity industry. The distribution networks
operator also plays the role of retail business in Pakistan, the issues
related to the quality of electricity supply are also documented in this
section. The structure of electricity networks is considered as a
regulated natural monopoly like gas or water supply networks, where
duplication cost can be avoided by serving a geographical market with a
single transmission or distribution company, instead of more than one
firm doing the same job [Joskow and Schmalensee (1983)]. Transmission
networks carry high voltage power and connect a generator to other
generators and the load centres in the system, while the distribution
networks supply electricity on low voltage to consumers and are
connected to high voltage transmission networks through boundary grid
stations.
In Pakistan, government owned distribution companies DISCOs and
system operator NTDC are functioning as distribution and transmission
monopolies respectively, while government owned generation companies
(GENCOs) are competing with private power producers to supply
electricity in the system (Figure 1 below). This structure of industry
shown in Figure 1 requires explanation of the past institutional
context.
[FIGURE 1 OMITTED]
Historically, utilities in Pakistan were vertically integrated in
their generation, transmission and distribution (9) businesses.
Incentives for vertical integration of distribution with
generation-transmission arise due to some basic complementarities. The
distribution networks are load centres and they provide reliable load
forecast to generation and transmission firms for the efficient
functioning of the electricity system. The accurate load forecasts are
also necessary for short term planning and long term investments in a
generation-transmission system [Joskow and Schmalensee (1983)].
The distribution and transmission networks were part of vertically
integrated state-monopoly Water and Power Development Authority (WAPDA).
As a result of WAPDA's restructuring in 2002, the regulator issued
licences to distribution companies DISCOs and transmission company NTDC
to work as unbundled natural monopolies. Further, Pakistan Electric
Power Company (PEPCO) was formed to manage the unbundling process and to
make sure that electricity networks make a successful transition.
However, centralisation incentive persisted with central government in
guise of NTDC/PEPCO as the current system is without any effective
contractual arrangements between distribution firms and other parts of
the industry, until recently distribution companies (DISCOs) were under
the management of NTDC and PEPCO (NEPRA 2010). However, DISCOs are
functioning as unbundled units and are also performing as retail
businesses in monopoly controlled areas.
There is theoretical justification along with international
practice for the natural monopoly status of distribution networks and
the efforts to "unbundle" electric utility in Pakistan. The
electricity unbundling initiative started in the US in 1980s and a
number of countries, including the UK have "unbundled"
electricity supply. According to the basic model, the network part of
industry became a natural monopoly while power generation firms became
part of the competitive market. The intuition for cost saving by one
distributor sounds plausible, the unit cost is likely to go down as the
number of customers or load increases on a system in a limited
geographical location. But there could be limits to economies of scale
because grid stations, distribution lines, and interconnectors become
overstressed as load increases in a given location. Similarly,
diseconomies in equipment maintenance and overheads along with other
x-inefficiencies can emerge as distribution network area expands
unboundedly. (10)
2.1. Distribution Networks
The distribution networks supply electricity from the transmission
system to lines below 220 kilo volt, the network infrastructure includes
distribution lines and 132 kilo volt and lower capacity grid stations.
As shown in Table 1 below, the electricity industry suffers from high
system losses (including theft) and high revenue losses. The non-theft
system losses can be attributed to the current state of technology and
to the size of the distribution network. The resistance loss increases
as the size of a distribution network increases and the system loss can
also increase as demand increases. The regulator reports that
"distribution system in urban centres is over stressed and needs to
be upgraded, augmented, and expanded" [NEPRA (2010)]. Therefore
technical line losses can arise both in large networks (due to
resistance) and in small congested distribution networks due to
resistance and high demand.
On the other hand, system losses caused by theft and revenue losses
can arise from managerial inefficiency and corrupt governance in the
network segment. Even technical losses resulting from poor engineering
design and system operation can be a result of bad governance and lack
of planning. The influence of managerial effort and pure technical
losses cannot be disentangled, as disaggregate data for the required
analysis is not available, however conjecture can be made where
decentralised system loss data is available for a distribution network.
Similarly, the potential of theft can be assessed from the number of
customers and total number of households not connected to national grid
in a given distribution network.
The average area of a government owned distribution system is 98
thousand square kilometres with average density of 67 customers per
square kilometre, as shown in Table 1. There is considerable variation
in peak load demand and composition of urban towns among networks. There
is significant negative correlation (-0.65) between a network density
and the system losses (including theft) or recovery (billing) losses.
(11) Technical, structural and managerial diseconomies exist in large
distribution companies. For instance, Hyderabad Supply Company HESCO is
losing more than one-third electricity from the system and on the top of
it recovering money for less than 60 per cent of final electricity sold.
(12) The trends in Table 1 persist over time (see Table 2, and Table 3).
The genuine system losses are not disentangled from theft losses,
but three companies QESCO, HESCO, PESCO are susceptible to huge theft
losses due to political instability and lawlessness in the region. (13)
The high losses also suggest that basic infrastructure is getting
overstressed and requires maintenance and replacements, while investment
in substations, distribution lines, and human capital will depend on the
financial health of the firm which in turn depends on system losses and
billing losses.
Despite area-losses correlation, the other factors in poorly
performing distribution regions cannot be ignored, these include lack of
good governance, law and order, and economic development. (14) High
system losses of distribution companies manifest in the power purchase
price for distribution companies, in 2010 price ranged from 7.6 rupees
per kilowatt hour to 11.4 rupees per kilowatt hour. (15) The high
revenue losses in technically inefficient distribution companies suggest
that incentives for improvements in management are low. New investment
is not taking place due to poor financial performance, which restricts
the capability of firms to improve system losses, turning into a vicious
circle.
Tables 2, 3, and 4 show the time trend for system losses, revenue
losses and potential consumers without electricity respectively. In
theory, housing units without formal electricity connections are not
connected to the system, but in practice they might be informally
connected to the system without any billing meter (16), particularly in
congested areas and remote areas where monitoring of the system is poor
or the employees submit to bribes. A major fraction of household
consumers are not connected to the system in distribution networks
operating in Peshawar (PESCO), Hyderabad (HESCO), Karachi (KESC), and
Multan, coincidently the distribution system losses are also high in
these firms (Table 2). This supports the hypothesis that households not
connected to the system in the congested systems, such as KESC, enjoy
stolen electricity from the system. However, it is difficult to
attribute system losses to theft in low density networks, such as HESCO,
because the system is losing at low voltage lines while supplying
electricity to a dispersed population, for instance a high feeder is
supplying electricity on long low voltage lines to a few scattered
houses with low demand.
On the other hand, all is not well with medium density low
distribution loss networks as high technical inefficiency and system
losses prevail in parts of these networks as well. Again this can be a
result of poor engineering design, other technical losses, and
managerial inefficiency. For instance Gujranwala Electricity Company
(GEPCO) is considered to be among the better performing utilities
according to regulator reports, however in more than 40 percent of GEPCO
sub-divisions system losses are higher than 12 percent.
Overall issues with system losses, engineering design, and
managerial practices will affect cost of electricity supply. The system
losses result in higher average unit cost of electricity with negative
welfare consequences for consumers. The shortage of bulk supply coupled
with system losses result in long periods of load shedding and low
system reliability. The system reliability in industry is measured by
utilities reporting System Average Interruption Index (SAIFI) and System
Average Interruption Duration Index (SAIDI). The long durations of power
outage due to lack of power supply in the system render SAIFI and SAIDI
meaningless as it becomes hard to disentangle the interruptions when
there was no power supply and the interruptions when power supply was
there, but utility network collapsed due to poor technology. SAIFI and
SAIDI are reported in Table 5 below.
2.2. Transmission Network
The transmission network plays a fundamental role in coordination
and achieving system economies, and enables the reliable, stable, and
efficient supply of electricity for final use in homes, markets and
industries. The importance of the transmission network in electricity
industry depends on its critical function and not just operational cost,
as the smaller cost (17) component of the transmission network in total
cost of electricity can be misleading [Joskow and Schmalensee (1988)].
Generation and transmission operations of electricity are simultaneous
decisions, transmission lines link power plants to load centres, and
installing new generation capacity depends on interconnectors and lines
facilities provided by transmission companies. The long run, low cost
supply of electricity depends on investment and new technology adoption
in transmission, and on a high level of coordination between generation
and load centres. Lack of coordination and investment in transmission
systems can make generation investments ineffective or can delay the
supply of electricity due to dysfunctional interconnectors, (18) this
institutional context of electricity industry has favoured vertical
integration of generation-transmission and distribution. The existence
of economies of scale in the use of high voltage lines and transmission
links make transmission networks work efficiently as a natural monopoly.
While the natural monopoly structure of transmission exists in the
electricity industry, however for efficiency reasons high level
coordination between transmission and other components of industry is
required for an efficient and stable system.
Sunk costs in investments, formal and informal contracts, and
system externalities are main features of any transmission network. The
investment decisions by transmission operators require high level
coordination between load centres and generators, as post investment
reallocation of transmission infrastructure and resources becomes
costly. It is not clear that decentralisation (unbundling) in industry
structure will increase or reduce the electricity supply cost in the
system. This aspect is important in Pakistan where policy making
authority appears to pursue more decentralisation and structural
disintegration in the system with independent distribution and
transmission networks. The successful unbundling of electric power will
require mechanisms for the enforcement of formal contracts and
regulatory set up to resolve contingencies uncovered in formal
contracts.
National Transmission and Dispatch Company (NTDC) works as a
licensed monopoly, sole service provider covering a large area. Although
there is no optimal scale for system coordination, some past studies
(Joskow and Schmalensee, 1988) mention 10,000 MW of peak demand for
efficient scale of transmission network. The area coverage and peak load
demand suggest problems in NTDC system, constraints in extra high
voltage transmission lines resulted in increased forced outage of the
power system [NEPRA (2010)]. The overall transmission losses in recent
years are comparable with international standards [World Bank (2011)],
see Table 6.
The inexorable electricity demand in Pakistan, particularly the
air-conditioning during summer months, has pushed the peak demand to
16,000 MW in the system (19) [NEPRA (2011)]. In an electricity system,
supply needs to meet demand in real time, the system becomes unstable if
demand is higher than supply. (20) On the other hand, the system should
be able to hold supply to match rising demand. System operators need to
check the reliability of transmission systems to sustain peak demand, as
policy makers are keen to increase supply to meet unfulfilled demand in
the future. It appears that over the years, large gaps between demand
and supply of electricity during long summer season has weakened the
coordination system between transmission and distribution networks. The
load centres (i.e. DISCOs) are unable to determine potential demand in
the summer season, as full demand is not met in all parts of the network
at any given time. There are even reported incidents stating that when
some DISCOs tried to meet peak demand, the distribution network was
unable to sustain the load.
3. TARIFF STRUCTURE AND INCENTIVE REGULATION
3.1. Cost of Service and Incentive Regulation: Theoretical Aspects
According to the regulator, the electricity industry in Pakistan is
subject to price, entry and quality of service regulation [NEPRA
(2010)], the regulator, NEPRA, determines tariffs for transmission,
distribution, and generation business of electricity. This section
examines the theory of incentive regulation in the context of unbundled
distribution and transmission electricity networks. The basic idea is to
review the issues that arise when the regulator is imperfectly informed
and faces asymmetric information about costs and managerial efficiency,
and is unable to document the optimal price mechanism in specific
scenarios. The prevalent tariff structure in Pakistan is reviewed later
to check the conformity with theoretical knowledge and also to see if
the electricity industry satisfies basic assumptions for exposure to
incentive regulation for unbundled electricity networks [Joskow (2008)].
The knowledge about effectiveness of electricity network regulation
in Pakistan is limited, Malik (2007) documented the overview of
electricity regulation in Pakistan, and highlighted issues including,
the ineffectiveness of the regulator, the lack of autonomy and weak
governance of NEPRA, although it is not quite clear what incentives
there are for network operators in the current setup to cut cost and
enhance efficiency. There are multiple factors affecting the current
state of the electricity industry in Pakistan, but regulation framework
and related incentives appear to be an important constraint in the
growth of the electricity industry. (21)
The proper incentives for firms, operating regulated networks, are
important for the efficiency of networks and the generation segment,
because well performing networks will lead to better decisions and
operations by generation firms. The network service cost contributes to
final electricity supply cost, better incentives manifested in lower
networks cost can improve welfare for society. While documenting the
regulatory discussion Kahn (1971) noted that "... the central
institutional questions have to do with the nature and adequacy of the
incentives and pressures that influence private management in making the
critical economic decisions". Ideally networks should be operated
at minimum cost and the regulator should specify the efficient network
price. However, the economic incentives in lowering production costs are
more important than enforcing the efficient pricing mechanism. This
point is well documented in the literature, as the efficiency loss of
high cost is of "first order" (impact all infra marginal
units) while tariff or price inefficiency loss is second order
(Harberger triangle). These earlier notions and the latter theoretical
advances provide the foundation for incentive regulation in electricity
and other networks.
In a typical situation ex-ante, a regulator is not perfectly
informed about managerial efforts, technical processes and other factors
to lower networks cost, but can get more information through ex post
regulatory hearings and mandatory audits. However, the distribution and
transmission companies are better informed about the cost of production
and managerial practices adopted to improve efficiency. In this
situation two extreme tariff regimes can be followed according to
Laffont and Tirole (1993).
The first regime is a fixed price regime, where network fees will
be charged to consumers by distribution companies going forward. The
fixed network charge will evolve by incorporating exogenous price
changes in factor inputs; this is referred to as a price cap mechanism
[Joskow (2008)]. As a price mechanism is responsive to only exogenous
price changes, the firm's increased effort to lower cost will
result in an equal amount added to the profit of the firm. Therefore the
effective price cap mechanism provides greater incentives for the
network operator to increase managerial efforts to reduce cost, improve
system efficiency, and lower system losses. But given that the regulator
wants to make sure that the firm meets budget constraints, uncertainty
arises about the level of price cap. Too high a price cap can still
generate incentives to lower cost but may leave large profits for firms,
so the mechanism will not be good from "rent extraction" point
of view.
Second regime is standard "cost of service regulation",
under this mechanism the network operator will be compensated for all of
the production or service costs incurred to run a network. This tariff
plan makes sure that firms earn normal profit, so the "rent
extraction" issue discussed above can be fixed, but on the other
hand there are no incentives for firms to reduce costs as there is no
economic rent left by the regulator. Therefore managers will not get a
reward for any cost savings in the "cost of service"
regulatory plan, or they will overspend in capital expenses in line with
Averch-Johnson effects. The fixed price (price cap) regime performs
poorly on "rent extraction" while "cost of service"
regimes will provide no space for being cost efficient. In an ideal
situation a mixture of two regimes can perform better than the adoption
of a single regime when the regulator is imperfectly informed about
networks [Joskow (2008)], so in effect the price will be contingent on
variation in realised cost, while a portion of cost will be fixed ex
ante [Schmalensee (1989), Lyon (1996)].
As noted by Joskow (2008) the theoretical literature provides
partial guidance for incentive regulation in electricity networks, and
other circumstance based factors are also incorporated in the practical
regulation mechanism adopted by regulatory authorities. In practice, a
mix of "price cap" and "cost of service" mechanism
is adopted by utilities. An initial price level [P.sub.o] is set by
using cost based or "return to capital employed" yardstick and
adjusted for the rate of input price increase (RPI) and productivity
factor z of firms in latter time periods, which gives equation,
[P.sub.1] = [P.sub.0] + RPI - Z) ... (1)
The tariffs are initially imposed for usually five years and at the
end of the period [P.sub.o] and Z are readjusted after post regulation
audit and for the firm's realised costs. In practice, incentive
regulation requires an established cost of the service based regulation
system. In Pakistan the cost of service or rate base regulation started
effectively in 2004, and from then on the regulator conducts
"pricing reviews" to determine tariffs, this mechanism is
evolving and recent regulatory reports mention methodological process of
tariff determination. (22) In the next subsection the tariff or
distribution margin determination process for distribution networks is
analysed, this will serve two purposes. First, the regulator's
information sources for distribution companies costs are highlighted,
and the effectiveness of cost reporting protocols are assessed. Second,
we check the potential of the regulator's current cost information
for credible benchmarking of incentive regulation.
3.2. Cost of Service and Incentive Regulation: Practical Issues
The analysis of incentive regulation for electricity networks
usually assumes that the electricity supply is unbundled with a clearly
defined distribution and transmission network, and the industry is
regulated by an independent regulator staffed with adequate strength and
skills to monitor the industry and implement regulation activities
(Joskow, 2008), both of these assumptions are subject to caveats in
Pakistan. Although the electricity delivery is unbundled, contractual
relationships between network utilities, i.e. DISCOs and transmission
monopoly, i.e. NTDC are not well established, at least on transparency
grounds [NEPRA (2010)]. The appointment of the board of directors for
DISCOs and interference of NTDC in DISCOs highlights the lack of
independence of utilities to run their managerial affairs. The regulator
faces constraints to implement the procedures and monitor generation and
transmission activities, and standard procedures to supply basic
industry data have not yet been adopted by distribution networks, from
regulator reports it appears that although uniform system of accounts
for DISCOs were proposed, such systems have not been operational till
recently.
The cost of electricity supply includes generation cost,
transmission cost, and distribution margins (DM), these tariff
components are fixed by the regulator NEPRA. In 2011 the distribution
margin including line losses contributed to approximately 25 percent of
the average electricity cost, while network fees were less than 2
percent of average electricity cost. (23) The tariff structure is based
on cost of service or rate of return regulation, the electricity
networks recover costs through distribution margin and transmission
cost. The cost is collected from consumers by DISCOs, and then DISCOs
transfer power purchase price (24) including transmission fees to the
central transmission/dispatch company NTDC. (25) In a single buyer
model, NTDC procures electricity from all generators at the prices
agreed in Power Purchase Agreements (PPA) and transmits bulk power to
DISCOs on high voltage lines. The regulator enforces the tariff
mechanism under the principle that network operators (transmission and
distribution firms) recover sufficient return on capital to cover all
operation costs and reasonable funds for capacity expansion for future
needs (NEPRA 2010). The tariff is imposed for a period, and intermediate
requests for fuel adjustment charges are entertained by the regulator.
The frequency of pricing reviews and average cost for a selected
distribution company are shown in Appendix Table 1A and Figure 2.
The regulatory tariff standards listed in the Appendix (see Table
2A) and the discussion above imply that the current practice of price
regulation in the electricity industry is set in a "cost of
service" or rate of return framework. There is no "price
cap" mechanism enforced and tariff petitions are settled on a
case-to-case basis. The distribution networks are publicly owned
monopolies facing no incentives to cut operation costs or line losses as
ultimately government through subsidy have to finance the cost of the
distribution companies to meet their budget constraints. Earlier, some
of the distribution companies proposed multi-year tariffs for five year
periods, but the regulator declared an incentive based price cap regime
unsuitable for the government owned distribution companies, until the
companies are partly divested or privatised [NEPRA (2004)]. All of the
distribution networks in the main system are government owned; therefore
the chances of incentive based regulation are minimal until distribution
firms are privatised.
[FIGURE 2 OMITTED]
3.3 Case Study of a Distribution Network
The analysis based on a sample distribution company, Gujranwala
Electric Power Company (GEPCO) shows that the regulator determines a
firm's distribution margin on the basis of reported costs for
operation and maintenance, depreciation, and Return On Rate Base (RORB)
(e.g. cost of capital). The frequency of pricing reviews for GEPCO is
given in Table 1A. The distribution margin (26) is the economic rent,
which the firm gets for operating the distribution network. The margin
consists of operation and maintenance expenses, depreciation charges,
and return on rate base, further adjustments are made for any income
earned by the firm. The detail of the distribution margin components is
given in Table 7.
Operation and maintenance expenses, including wage and salaries,
are the largest component of a distribution network's cost (about
90 percent) excluding transfer prices for generation and transmission
companies. Distribution networks are public owned companies and jobs are
sanctioned for various pay scales historically with employees entitled
to post retirement benefits. The regulator allows costs for salaries and
wages based on past audited figures with the adjustment of annual pay
increases of public employees and the impact of hiring on vacant
positions, with very little allowance for new staff hiring, particularly
for non-technical contract employees. (27) But pricing reviews reveal
information asymmetry with the regulator, for instance, in 2012 the
regulator allowed Rs 3,563 million for wages and salary, while audited
account puts the figure at Rs 5,040 million. Apparently, the company
spends money through public exchequer and put in prior year adjustments
in the next year "pricing review". This shows a lack of
consistent accounts data availability for current expenses of
workers' wages and postretirement benefits. The regulator matches
the GEPCO request for new staff hiring with the justification for
"prudent utility practices", while neither of the firms supply
matching information on any potential "efficient utility
practices" gained by new hiring, nor does the regulator specify any
yardstick for new appointments.
This is quite similar to the situation when new investment
requirements by the firm are matched with potential system improvement
gains to justify new investment. The lack of information coordination
between the regulator and the distribution company underlines the gap in
current cost-based regulation regime. This information gap needs to be
filled in order to set the platform for incentive based regulation and
continual human capital investment in the distribution firm. (28)
Since regulation started in 2004, it is important that in this
early stage, standards in cost-based reporting are set and benchmarks
are established in order to enforce cost-based regulation effectively.
To some extent goals were set at the same time as the "rate
base" was set in 2004, and updated accordingly in pricing reviews
(Table 8). However, the basic accounting information is coming from the
distribution company through internal audit reports. The regulator
requests for the required information from firms, but has not
commissioned any study to determine the standards for various cost
components, listed in Table 7 and Table 8.
According to regulation rules, sufficient tariffs should be allowed
to generate a reasonable investment in technology to maintain the system
and improve the reliability of the electricity supply [NEPRA (2012-13)].
In practice the regulator examines the effect of a firm's capital
investment on rate base, so that chances of overinvestment can be
reduced. However there is no mechanism available to ascertain a
reasonable amount of investment in infrastructure that will ensure a
reliable electricity supply. In regulatory pricing reviews, GEPCO has
not provided evidence of any perceived benefits of proposed investment
to the regulator, but the regulator allowed investment on the basis of
past trends. That shows a gap of information in the regulatory system
which can result in overinvestment or under investment in infrastructure
for distribution companies. Since a reliable electricity supply depends
on continued investment in infrastructure, the regulator should develop
a detailed knowledge base for the investment needs of distribution firms
after taking into account future demand growth and system reliability.
4. PUBLIC SECTOR OWNERSHIP, SUBSIDY, AND REFORMS INCENTIVE
The electricity supply network including distribution companies
DISCOs and the transmission company NTDC are publicly owned monopolies,
(29) this is in line with industry practice in most countries where the
natural monopoly part of a power supply chain is treated as a regulated
monopoly. (30) The power sector reforms started in the 1990s to unbundle
electricity industry and thereby establish distribution networks as
independent organisations with their own command and management
structure. However corporatisation of DISCOs has not been worked out
fully and no formal contractual relationship exists among transmission,
distribution and generation (government owned) segments of the industry
[NEPRA (2010)]. A new government-owned establishment, Pakistan Electric
Power Company (PEPCO), was formed in 1998, to corporatise generation,
distribution and transmission units of the vertically integrated state
monopoly WAPDA, and make these entities administratively and financially
independent.
Published reports by the regulator suggest that PEPCO continues to
interfere in matters of government-owned generation and distribution
firms, posing problems for independent and optimal decision making and
resource allocation of these firms. The distribution networks claim that
noncompliance with efficiency and quality regulation targets results
because of centralised management of routine decision making through
PEPCO [NEPRA (2011)]. This gives an impression that the power industry
has not completed the transition from state monopoly to unbundled
electric supply. On the one hand, the efficiency gains from vertical
integration and central planning have decreased, while on the other
hand, scant benefits have emerged from unbundling. The actual situation
regarding overall management practices in industry might be even worse,
as in the past all of the firms were part of a vertically integrated
monopoly with coherent managerial hierarchy, while in the post-reforms
period there is an increase in an interventionist role of other
ministries and corporatisation departments. (31)
In the following discussion, two questions are raised. First, what
is the role of public institutions in allocating resources among
distribution firms and how efficient are these transfer mechanisms?
Second, what is the motivation for changing ownership from public to
private enterprise in the electricity industry and is there any evidence
within the industry to support this?
The government of Pakistan has adopted a uniform electricity price
policy across the distribution networks in the country, although prices
vary across different customer categories within each distribution
network. The regulator determines the retail price of electricity for a
distribution network after taking into account revenue requirements of
the firm including distribution margin, while the government only allows
a uniform end user price according to the lowest determined price for
each customer category among all distribution firms [Pakistan (2013)].
The government does not allow the full passing on of the electricity
supply cost to customers, the gap between the cost of electricity and
government set tariff results in a subsidy referred to as tariff
differential subsidy (TDS), Table 8 highlights this gap for few periods.
The failure of the government to settle tariff differential subsidy,
regularly results in the accumulation of Circular Debt (32) in the
electricity industry. The other major contribution to this resource gap
emerges from the inability of distribution firms to collect revenue
(either in the shape of no recovery of bills or high system losses, see
Table 1).
The tariff differential subsidy is transferred by the central
government to the central power purchasing company NTDC, and the NTDC
allocates the subsidy among distribution firms. During 2007 to 2012
Rs1.29 trillion worth of price subsidies for distribution networks was
transferred to the central transmission company. There is no transparent
information available for the transfer of these payments [Pakistan
(2013)]. Assuming transfers are made according to the actual difference
between regulator price (cost of electricity supply) and the consumer
end price (government allowed), the resulting subsidy allocation
mechanism lacks any incentive for an efficient distribution firm. On the
contrary, subsidy payment compensates for inefficiency caused by a
distribution firm.
For instance, Peshawar Electric Supply Corporation (PESCO)
experiences the highest operation cost including line losses, but it
charges the end consumer the price of the lowest cost supply firm
according to the government policy. As a result, PESCO recovers
substantial business cost through tariff differential subsidy, while an
efficient supply firm collects most resources through consumers. Since
fulfilling budget balance constraints and subsidy internalisation
mechanisms are not transparent, therefore, the exact welfare
consequences for each firm are not clear. However, in the current
regulation and subsidy transfer system there are virtually no incentives
for unbundled electricity networks to increase efficiency and reduce
system losses.
4.1. Privatisation Reforms
The basic idea of the 1990s strategic reforms for state monopoly
was to make unbundled firms in the electricity industry administratively
and financially viable and then sell these firms to the private sector.
However, current financial chaos partially caused by the political
pricing regulation regime (uniform end user electricity price), lack of
financial transparency in unbundled firms, and the Circular Debt,
probably provide few incentives to private buyers to invest in the
electricity network business. (33) For instance, for some time now,
publicly owned distribution firms with high line and revenue losses have
been potentially available for privatisation, (34), but so far, have not
been privatised despite government efforts.
In theory, if electricity is considered as a basic infrastructure
facility and the government wants to continue the supply of electricity
to consumers at an "affordable" price, then the government can
transmit and distribute electricity in-house or procure through a
private supplier. The private owner has an incentive to lower costs
while facing a given output price, but the private supplier might lower
product quality. The private supplier might lower quality of the
product, as quality is non-contractible component of the contract [Hart,
et al. (1997)]. In the case of the electricity supply specifying the
quality of product is relatively easier than another public good such as
schooling or hospital as electricity is a homogenous product. The
private distribution firms can be monitored by a quality regulation
regime with specific parameters including average interruption indices.
The efficiency gains and asset ownership incentives also go in favour of
the private supplier, as private firms can offer a more flexible
contract to employees depending on their human capital and experience.
However, it is not clear what the economic gains of privatising a
state monopoly (say a distribution network) will be, if the current
regulation with asymmetric information along with government's
subsidy policy continues. Keeping the regulatory regime unchanged will
result in an inefficient private monopoly instead of an inefficient
public monopoly. The opinion on privatising state owned firms is divided
among policy makers and politicians [World Bank (1997)], overstaffing,
non-performance based worker salaries, and lack of transparent
procurement are associated with public owned electricity networks
[Pakistan (2013)]. However, in the absence of a fully informed regulator
and without an incentive based regulation regime there is a chance that
private firms will not function very differently from public firms.
The pace of privatisation and market based reforms in the
electricity industry are slow, so far one distribution firm, Karachi
Electricity Supply Corporation (KESC), has been sold to private firms.
KESC was privatised in 2005; the comparison between KESC and other
distribution companies can give some idea about potential gains by
privatisations in some selected indicators. As the government implements
the same tariff policy in the whole country, so KESC also receives a
public subsidy to cover the difference between cost of electricity
supply and average tariff charged to costumers. However KESC's
policy is to cut power for longer hours in the locations where revenue
recovery is low and theft or system loss is higher. Although KESC earned
profit for the first time in 2012, the system losses are still high,
Table 2. There is a modest reduction in KESC losses, again it is not
clear if that shows improvement in infrastructure or the effectiveness
of a better load shedding management plan. In comparison, no incentives
are available to government owned distribution companies (DISCOs) to
lower cost and improve quality of the electricity supply. The government
recently reconstituted boards of directors for DISCOs and increased the
number of private board members in these public companies, but still the
utilities are far from privatisation.
5. CONCLUDING REMARKS
The cost of supplying electricity and the price charged to
consumers are two basic parameters that can be employed to evaluate the
performance of power sector reforms and the future of the industry. The
production incentives generated by current ownership structure and the
regulatory regime, along with other residual factors, are affecting
price and cost of the electricity supply. The price charged for
electricity produced is not covering the cost of production giving
incentives for consumers to overuse electricity. The inefficiencies in
distribution networks including high line losses and low recovery are
making the electricity supply costly.
The technical losses in the system cannot be disentangled from
non-technical losses (including theft), continuous investment in
physical capital and system maintenance is required to improve the
reliability of the electricity supply and reduce technical losses. The
experience of privatisation of one utility does not support that
nontechnical losses can be reduced in short run with a change of
management or ownership structure. The multiproduct nature of the
electricity supply requires a reliable demand forecast, as the cost of
the electricity supply in high-demand summer hours will be different
from the low-demand winter season. The cost of the high-demand season
supplies has to incorporate future investment in infrastructure in order
to ensure reliability. In the current practice, the regulator and the
firms lack sufficient knowledge about the required investment and
potential costs of a multiproduct electricity supply.
In the current practice, investment rules of utilities that would
affect system loss reduction efforts and timely investment for reliable
supply of electricity are not being implemented. The distribution firms
lack information about the investment gap or at least they cannot
justify the required investment to the regulator, while the regulator
has not set any tangible yardstick for better utility practices. This
information asymmetry between the regulator and utilities is slowing
down the growth of the electricity industry and is not reflecting the
actual cost of a reliable electricity supply, which might be
substantially higher than that determined by the regulator. The revenue
losses and system losses create a real challenge to generate the
investments required for revamping the basic network infrastructure, let
alone moving to new technologies such as real-time monitoring and smart
meters.
Further research should focus on the economic model of electricity
supply in Pakistan to address the fundamental question, is electricity a
public good, a private good or a marketable public good? The historical
experience in Pakistani context puts electricity closer to being a
marketable good supplied by the government. In the current situation,
privatisation will make electricity a privately provided public good as
has happened in the case of Karachi Electricity Corporation (KESC),
because KESC has supplied heavily subsidised electricity in private
ownership since 2005. The politically motivated village electrification
plan falls in line with the "cheap affordable electricity"
model where the supply of electricity to a scattered housing unit could
result in substantial system loss. The future industry reforms should be
undertaken in light of further research and clarity on the business
model for the electricity supply in Pakistan.
Amir Jahan Khan <a.j.khan@warwick.ac.uk> is PhD student at
Department of Economics, University of Warwick and Assistant Professor
at Institute of Business Administration (IBA) Karachi.
Author's Note: Author is thankful to Professor Michael
Waterson and Dr Robert Akerlof for their comments on the earlier drafts
of this paper. Author is also thankful to Syed Safeer Hussain Registrar
for National Electric Power Regulatory Authority (NEPRA) for his
valuable comments on the institutional details documented in this paper.
APPENDIX
Table 1A
Tariff Determination, Gujranwala Electric Power Company (GEPCO)
27-03-2013 Determination of the Authority in the matter of Petition
filed by Gujranwala Electric Power Company Ltd. for
Determination of its Consumer end Tariff Pertaining to
the FY 2012-13.
24-02-2012 Decision of the Authority in the Matter of
Reconsideration Request filed by Ministry of Water &
Power against Authority's Determination for GEPCO for
the FY 2011-12.
13-12-2011 Determination of the Authority in the matter of Petition
filed by GEPCO for determination of its Consumer end
Tariff Pertaining to the FY 2011-12.
27-04-2011 Determination of the Authority in the matter of Petition
filed by GEPCO for Determination of its Consumer end
Tariff pertaining to the 2nd, 3rd and 4th Quarters
(October-June 2011) of the FY 2010-11.
09-12-2010 Decision of the Authority with respect to Motion for
Leave for Review filed under Rule 16(6) of NEPRA (Tariff
Standards and Procedure) Rules, 1998 by GEPCO against
the Authority's Determination.
08-09-2010 Determination of the Authority in the Matter of Petition
filed by GEPCO for Determination of Consumer-End Tariff
for 4th Quarter (April-June 2010) of FY 2009-10.
19-04-2010 Determination of the Authority in matter of Petition
filed by GEPCO for Determination of Consumer-end Tariff
for 2nd Quarter (October-December) of Fy 2009-10.
09-12-2009 1st Quarterly Determination Based on the FY 2009-10
Determined under NEPRA (Tariff Standards and Procedure)
Rules, 1998 for GEPCO.
14-09-2009 Determination of the Authority in the Matter of Petition
by GEPCO for Determination of Consumer-end Tariff for
the Year 2008-2009 under NEPRA (Tariff Standards and
Procedure) Rules, 1998.
15-01-2009 Modified Decision of the Authority on Federal
Government's Request for the Reconsideration of
Gujranwala Electric Power Company Ltd (GEPCO) Decision
dated 1st January, 2009 [Case No.
NEPRA/TRF-102/GEPCO-2008 (3)].
09-09-2008 Determination of Tariff in respect of Petition filed by
(GEPCO) [(Case No. NEPRA/TRF-102/GEPCO-2008 (3)].
30-05-2008 Decision of the Authority on Federal Government's
Request for the Reconsideration of GEPCO decision dated
January 10, 2008 (Case No. NEPRA/TRF-36/GEPCO-2005).
01-02-2008 Biannual Adjustment in the Consumer-end Tariff on
Account of Charge in Power Purchase Price.
10-01-2008 NEPRA/TRF-36/GEPCO-2005 (Revised).
28-06-2004 NEPRA/TRF-23/GEPCO-2003.
Notes: In between more than 35 "fuel price reviews" were conducted by
NEPRA to adjust fuel prices in electricity supply prices.
Table 2A
Regulation Standards for Tariff
1. Tariffs should allow licensees the recovery of any and all costs
prudently incurred to meet the demonstrated needs of their
customers, provided that assessments of licensees' prudence may not
be required where tariffs are set on other than cost-of-service
basis, such as formula-based tariffs that are designed to be in
place for more than one year
2. Tariffs should generally be calculated by including a
depreciation charge and a rate of return on the capital investment
of each licensee commensurate to the rate earned by other
investments of comparable risk.
3. Tariffs should allow licensees a rate of return which promotes
continued reasonable investment in equipment and facilities for
improved and efficient service
4. Tariffs should include a mechanism to allow licensees a benefit
from, and penalties for failure to achieve the efficiencies in the
cost of providing the service and the quality of service.
5. Tariffs should reflect marginal cost principles to the extent
feasible, in view of the financial stability of the sector.
6. The Authority shall have a preference for competition rather
than regulation and shall adopt policies and establish tariffs
towards that end.
7. The tariff regime should clearly identify interclass and
inter-region subsides and shall provide such subsides transparently
if found essential, with a view to minimising if not eliminating
them in view of the need for an adequate transition period.
8. Tariffs may be set below the level of cost of providing the
service to consumers consuming electric power below the consumption
levels determined for the purpose from time to time by the
Authority, as long as such tariffs are financially sustainable.
9. Tariffs should, to the extent feasible, reflect the full cost of
service to consumer groups with similar service requirements.
10. Tariff should take into account Government subsidies or the
need for adjustment to finance rural electrification in accordance
with the policies of the Government.
11. The application of the tariffs should allow reasonable
transition periods for the adjustments of tariffs to meet the
standards and other requirements pursuant to the Act including the
performance standards, industry standards and the uniform codes of
conduct.
12. Tariffs should seek to provide stability and predict ability of
customers; and
13. Tariffs should be comprehensible, free of misinterpretation and
shall state explicitly each component thereof.
Source: NEPRA (2010).
Table 3A
Abbreviations and Acronyms
CPPA Central Power Purchase Company
DM Distribution Margins
DISCOs Distribution Companies
FESCO Faisalabad Electric Supply Company
GEPCO Gujranwala Electric Power Company
GENCOs Generation Companies
GOP Government of Pakistan
GWh Giga-watt Hours
HESCO Hyderabad Electric Supply Company
IESCO Islamabad Electric Supply Company
IPP Independent Power Producers
KESC Karachi Electricity Supply Company
KWh Kilo-watt hours
MEPCO Multan Electric Supply Company
MMCF Million Cubic Feet
MWP Ministry of Water and Power
MW Mega Watt
NEPRA National Electric Power Regulatory Authority
NTDC National Transmission and Dispatch Company
PEPCO Pakistan Electric Power Company
PESCO Peshawar Electric Supply Company
PPA Power Purchase Agreement
QESCO Quetta Electric Supply Company
SAIFI System Average Interruption Index
SAIDI System Average Interruption Duration Index
SEPCO Sukkur Electric Supply Company
SO System Operator
WAPDA Water and Power Development Authority
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Comments
This paper is a valuable collection of information relating to the
electricity network of Pakistan (especially in the light of theoretical
justification); despite the fact that some (of courses not all) of the
details documented here in this paper have repeatedly been discussed in
the previous studies on the electricity sector of Pakistan. Overall
it's a well-written paper. The author has done a useful analysis on
the distribution system in Section 2.
It is true that economic incentives in lowering production costs
are more important than enforcing the efficient pricing mechanism and
can help in improving welfare for the society. This point is well
documented in the literature and has been proved empirically. As
efficiency has become a main concern in electricity networks,
benchmarking analysis of company's inefficiency levels is more
frequently used as an instrument to monitor the companies and induce
cost-saving incentives. Benchmarking can be used in many forms in
regulatory arrangements. For instance, the efficiency estimates of
different firms can be used to adjust their X-factor in price cap
regulation to differentiate maximum prices across companies. At the same
time benchmarking can also be used to reduce the information
disadvantage of the regulator about companies' expenditures. For
instance, parametric frontier methods can be used to predict costs in
order to assess if the reported company's costs used in rate of
return regulation are reasonable. (1)
In Pakistan, despite the availability of empirical research on the
benchmarking and regulation for the electricity distribution sector,
regulator, unfortunately has not been able to set benchmarks for
efficiency and performance of the distribution sector. It may be because
either they don't have the expertise or the authority to implement
those decisions.
As far as privatisation is concerned it is not the only solution to
bring market efficiency and improve competition. As author has also
pointed out that keeping the regulatory regime unchanged will result in
an inefficient private monopoly instead of an inefficient public
monopoly. It is also obvious from the case of KESC. There are countries
like Norway with very efficient and competitive electricity markets
without privatisation where better public participation through a
corporate sector was a strong alternative. Therefore, complete corporate
structure for all DISCOs; and tariffs for each DISCO based on its
efficiency, is must for progress in the sector.
The power system (though unbundled to a certain level) as an
outcome of first generation reforms in the power sector has again become
centralised under PEPCO which continues to hold influence (in financial
management, power purchase and sales and in the appointment of senior
management) over the operating companies (GENCOs and DISCOs). Further,
these companies lack technical and managerial skills to operate
independently. For instance, DISCOs besides having inferior operational
performance, are not aware about their role and need of good governance
as a corporate entity. Despite being a corporate entity their attitude
is still that of a public sector organisation. Unless all distribution
companies in Pakistan are made accountable for all their decisions and
finances, it would not be possible to bring in efficiency in the system.
At present inefficient DISCOs like Quetta, Hyderabad, and Peshawar are
being indirectly subsidised by some profit making DISCOs like Lahore,
Islamabad, and Faisalabad.
Lack of expertise in the form of financial and commercial skills is
a serious impediment in the way of accountability, quick decision-making
and commercial orientation, and it is applicable to not only the network
operators but also to the regulator. All the issues can only be
addressed if the management of energy sector becomes more professional
and competitive. With improvement in managerial capacities they would be
able to identify required investments and potential costs.
Generally speaking, vested interests in the successive governments
have stalled the due level of competence and commitment that are
prerequisite for progress in the electricity sector. They not only
lacked the capacity to foresee the emerging challenges but were also not
able to respond in an efficient manner. As a result of these problems
tariffs, investment and appointment of senior management and staff have
largely been politicised. Therefore, improvement in the processes of
decision making and implementation could be an important ingredient in
working towards a fair and sustainable electricity sector.
Professor Mohen Munasinghe in Allama Iqbal Lecture (in this
Conference) very rightly pointed out that ownership does not matter
whether its public or private what really matters is the government
interference. The least the intervention the better it is.
Afia Malik
Pakistan Institute of Development Economics, Islamabad.
(1) For details, see Farsi, el al. (2007) "Benchmarking and
Regulation in the Electricity Distribution Sector". CEPE Working
Paper No. 54, ETH Zurich, Zurich, Switzerland.
(1) List of abbreviations and acronyms is provided in the Appendix
Table 3A.
(2) There are no official figures available on load shedding hours.
The summer season runs from April to October in most parts of the
country.
(3) In the year 2011, 90 percent power generation (91,663 GW h) was
done by WAPDA system while 10 percent (10.036GW h) in KESC system [NEPRA
(2011)].
(4) This paper covers transmission and distribution networks of
WAPDA system, KESC is a vertically integrated company operational in the
greater Karachi region (with no effective separate cost centres) and
issues related to KESC might need a different framework for discussion.
However, possible experiment can be done to compare performance of KESC
with government owned distribution companies.
(5) The issues related to network part of the industry are
discussed here in detail, as the focus is on the distribution and
transmission segments of the industry in WAPDA/NTDC system.
(6) about 18 billion US dollars.
(7) Government documents show that electricity sale price for all
utilities is equal to the lowest determined price for any utility (among
all utilities) for a given year [Pakistan (2013)].
(8) One example, Pakistan Electric Power Company (PEPCO),
PEPCO's main responsibilities included to oversee WAPDA's
unbundling, and to restructure and to corporatise distribution and
generation public firms [NEPRA (2010)].
(9) In Pakistan distribution companies also perform the role of
electricity supplier or retailing. In principle, a government or a
private firm can run retail business by procuring electricity and paying
to intermediary firms in power supply chain. The words distribution
companies, DISCOs, and utilities are used interchangeably in this paper
for electricity suppliers.
(10) As demand for new connections increases or power is supplied
to household not already connected to the system.
(11) Except privatised KESC distributing electricity in Karachi,
high line losses in KESC are probably caused by theft and lawlessness in
a city of 12.9 million.
(12) The regulation authority appears to be concerned about the
inefficiencies in large distribution networks; HESCO was divided into
two distribution companies in 2011 (HESCO and SEPCO).
(13) This is validated by published regulator reports and
unstructured interviews with officials.
(14) Particularly poor state of law and order and weak political
administrative structure in Quetta QESCO, Hyderabad HESCO, and Peshawar
PESCO regions
(15) The variation in regional power purchase price is not in
contradiction with uniform tariff policy as average tariffs are affected
by consumer mix and other tariff adjustment by the regulator as shown in
Table 9.
(16) An illegal connection to system without a meter is called
"kunda" (the hook on the wire) in local jargon
(17) The cost components of generation, distribution, and
transmission in Pakistan are 90 percent, 8 percent, and 2 percent
respectively. However when system losses are included effective cost of
network components increase substantially.
(18) For instance, recently a number of new power plants failed to
supply electricity because of inadequate capacity of interconnectors and
transmission system (NEPRA 2011).
(19) The minister for power affairs recently mentioned in an
interview that during hot summer months demand keeps on exceeding supply
despite system adding electricity from more production or new plants. In
summer, rolling blackouts have been observed since 2008 that imply
system operator might not even know exact peak demand during summer.
(20) Constraints in transmission or distribution networks can make
power system unstable; the load shedding is required to keep the system
stable. Since 2008 load shedding is prevalent in country particularly in
summer months.
(21) The comparison of electricity industry between a state
monopoly (till 2002), and regulated industry since 2002 requires deeper
understanding of issues in both periods, and is not feasible due to
limited information available.
(22) NEPRA tariff determination 2012-13.
(23) Estimates based on public data (NEPRA 2011).
(24) Power Purchase Price PPP is a pass through cost item.
(25) NTDC is given transmission license for a term of thirty years
in 2002 by the regulator. "The Company is entrusted to act as
System Operator (SO), Transmission Network Operator (TNO), Central Power
Purchase Authority (CPPA) and Contract Registrar and Power Exchange
Administrator (CRPEA)" [NEPRA (2011)].
(26) Although revenue requirements of a distribution network
include power purchase price including transmission network user fee but
that requirement is part of transfer fees so is not directly related to
incentive items for a distribution company.
(27) GEPCO is a 100 percent Public Sector Company, since unbundling
the employees are hired on contractual basis and regularised to
permanent posts after sometime.
(28) The current annual total investment in the government owned
network segments is US $ 885 million while the Ministry of Water and
Power (MWP) reports that US $ 6 billion is required to revamp the
national grid.
(29) There are also some generation plants owned by public
generation companies GENCOs.
(30) Although electricity networks can potentially save resources
as regulated natural monopolies, but they are not necessarily government
owned in practice.
(31) A complete study of history of reforms requires detailed
information and is beyond the scope of the present study.
(32) Circular Debt is common terminology in Electricity Industry of
Pakistan, the debt is caused by accumulation of deficit which results
when payments flow in supply chain of power is disrupted. The
distribution companies do not pay to the transmission company (power
purchasing agency) that does not pay to power generators who do not pay
to oil/gas supply companies for fuel.
(33) PEPCO was formed in 1998 to monitor unbundling and
corporatisation for two years, the slow pace of reforms can be judged
from the fact that PEPCO dissolution occurred in 2012.
(34) Some of electricity firms including PESCO, QESCO, HESCO, and
FESCO are listed on privatisation priority list, not clear about the
timing of the inclusion or any future selling date. Privatisation
Commission Pakistan http://www.privatisation.gov.pk/power/power.htm
(Accessed 13 September 2012).
Table 1
Electricity Prices, Density, and Losses for Distribution
Companies, 2010
Density
Distribution Total Peak demand (consumer/
Company Consumers (MW) area)
IESCO 2,059,207 1457 88.9
LESCO 3,182,292 3916 166.9
GEPCO 2,454,254 1813 142.6
FESCO 2,879,188 2298 65.0
MEPCO 4,057,491 3006 38.5
PESCO 2,947,108 3685 29.0
HESCO 1,511,878 1797 11.2
QESCO 490,805 1316 1.4
KESC 2,051,964 2562 315.7
Power
Purchase
Distribution System (1) Billing Price
Company Losses (%) Losses (%) (rupee/kWh)
IESCO 9.8 4.1 7.6
LESCO 13.7 8.2 8.2
GEPCO 11.0 4.0 8.1
FESCO 10.9 3.0 8.2
MEPCO 18.9 4.2 8.7
PESCO 37.0 14.6 11.4
HESCO 34.8 40.2 11.0
QESCO 20.7 42.3 9.0
KESC 34.9
Source: NEPRA, State of Industry Report 2010-11, (1) distribution
network losses.
Table 2
Distribution Network, Total System Losses (1), (%)
Distribution
Company 2006 2007 2008 2009 2010 2011 2012
Peshawar 31.8 32.2 32.4 35.2 34.7 35.2 34.9
Islamabad 13.3 12.2 10.3 10.8 9.8 9.7 9.5
Lahore 10.2 11.7 11.2 10.7 11.0 12.0 11.2
Gujranwala 13.1 12.8 12.5 13.3 13.8 13.3 13.5
Faisalabad 11.6 11.5 11.1 10.6 10.8 11.2 10.8
Multan 20.5 18.7 18.5 18.4 18.9 18.2 19.3
Hyderabad 39.2 37.0 35.9 35.1 34.8 28.6 27.7
Sukkur 49.4 49.4
Quetta 20.7 21.4 20.8 20.1 20.7 20.4 20.8
Karachi 37.5 34.2 33.8 38.5 37.3 34.8 32.6
Source: NEPRA, State of Industry Report 2010, 2011, (1) percentage gap
between units purchased and sold/billed by the firm.
Table 3
Distribution Network, Revenue Losses for Domestic Consumers (1), (%)
Distribution Company 2008 2009 2010 2011 2012
Peshawar 23.0 48.3 28.0 48.8
Islamabad 2.0 -3.0 0.4 4.0 -1.1
Lahore 1.0 3.8 3.1 0.8 -1.5
Gujranwala 2.0 3.1 4.1 2.0 3.4
Faisalabad 1.0 1.8 1.7 0.8 0.2
Multan 1.0 2.2 3.6 1.7 1.2
Hyderabad 26.0 42.1 51.1 54.1 36.7
Sukkur (2) 62.8
Quetta 10.0 28.2 31.0 26.5
Karachi 100.0 0.0 0.0 17.1 16.2
Source: NEPRA, State of Industry Report 2010, 2011. (1) percentage gap
between amount billed and amount recovered, (2) Sukkur was part of
Hyderabad before 2012. The negative numbers show additional recovery
on account of deferred payments for previous years.
Table 4
Domestic Consumers without Electricity, (%)
Potential
Distribution Consumers
Company 2012 2006 2007 2008
Peshawar 2,761,232 45.2 42.7 41.5
Islamabad 1,882,619 0.0
Lahore 2,258,940 14.1 11.5 8.6
Gujranwala 2,808,748 20.6 17.1 14.6
Faisalabad 2,712,234 30.4 25.7 21.2
Multan 3,888,629 45.4 40.2 35.8
Hyderabad 718,422 71.2 70.5 70.3
Sukkur 552,110
Quetta 394,843 71.9 71.2 70.6
Karachi 1,659,766 22.2 21.3 21.6
Distribution
Company 2009 2010 2011 2012
Peshawar 41.2 37.4 36.6 36.0
Islamabad 0.0 0.0 0.0 0.0
Lahore 7.3 4.9 2.6 0.6
Gujranwala 12.5 10.0 7.7 5.7
Faisalabad 18.1 15.8 13.4 11.3
Multan 33.8 31.2 29.5 27.3
Hyderabad 70.2 70.1 70.1 67.5
Sukkur 72.8
Quetta 70.0 69.7 69.6 69.4
Karachi 22.5 21.5 20.6 20.8
Source: NEPRA, State of Industry Report 2010, 2011, estimates suffer
substantial downward bias due to lower estimated total potential
consumer data in the distribution network, particularly in later
years, the last Population Census was conducted in 1998 and the
available projections are much lower than actual figures based on
partial housing census of 2012.
Table 5
Distribution System Performances, 2008-09
Distribution
Company Consumers SAIFI (1) SAIDI (2)
Islamabad 2,059,207 0.5 22.8
Lahore 3,182,292 100.2 6847.7
Gujranwala 2,454,254 17.3 19.4
Faisalabad 2,879,188 64.9 114731.9
Multan 4,057,491 0.03 2.01
Peshawar 2,947,108 193.97 15787.43
Hyderabad 1,511,878 918.53 83969.3
Quetta 490,805 155.4 12757.3
Karachi 2,051,964 0.1 1074.6
Source: NEPRA, State of Industry Report 2010.
(1) SAIFI= (Frequency of Interruption/Total Connected Customers).
(2) SAIDI= (Hours of Interruption/Total Connected Customers).
Table 6
Energy Generation, Units Sold, and Losses in NTDC System, 2002-2010
Net Units Sold Transmission Distribution
Year Generation (GWh) Billed (GWh) Losses (%) Losses (%)
2002 59545 45204 7.6 16
2003 62694 47421 7.7 16.2
2004 67697 51492 7.3 16.1
2005 71670 55342 7.4 14.9
2006 80404 62405 7.1 14.8
2007 85987 67480 3.7 17.3
2008 84584 66539 3.4 17.5
2009 82705 65286 3.5 17.1
2010 87072 68878 3.1 17.4
Source: GOP, Electricity Demand Forecast, NTDC.
Table 7
Distribution Margin GEPCO, Selected Years (Million Rupees)
2006-7 2007-8 2008-9 2011-12 2012-13
Operation and
Maintenance 3,298 3,254 3,739 6,318 5,454
Depreciation 510 556 829 971 1,098
Other Income -970 -970 -1,116 -1,505 -1,960
Return on Assets 893 799 1,522 1,313 1,583
Income Tax 195
Net Distribution
Margin 3,732 3,833 4,979 7,097 6,175
Source; NEPRA, Tariff Determination Reports Various Issues, data is
missing for some years.
Table 8
Rate Base GEPCO, Selected Years (Million Rupees)
2011-12 * 2012-13 **
Opening Fixed Assets in Operation 27,681 31,379
Assets Transferred During the Year 3,698 2,914
Gross Fixed Assets in Operation 31,379 34,239
Less: Accumulated Depreciation 9,387 10,485
Net Average Fixed Assets in Operation
(Rate Base) 21,992 23,754
Plus: Capital Work In Progress (closing) 2,811 4,371
Total Fixed Assets 24,803 28,125
Less: Deferred Credit 11,516 13,324
Total Regulatory Base 13,287 14,801
Source: NEPRA, Tariff Determination Reports Various Issues, data
is missing for some years, * actual, ** projected.
Table 9
Average Cost of Electricity Supply and Price charged in Rupees
Cost Per Price Per
Period (1) KWh (2) KWh Gap Per KWh
24 February 2007 5.14 4.25 0.89
01 March 2008 5.6 4.78 0.82
05 September 2008 8.42 5.58 2.84
25 February 2009 8.42 5.63 2.79
01 October 2009 8.42 5.96 2.46
01 January 2010 10.09 6.67 3.39
Source: NEPRA, State of Industry Report 2011, (1) Cost based
Tariff determined by regulator (2) Consumer-end Tariff
determined by Pakistani Government.
