WAPDA Tariff

Syed Shahid Husain

Part I 

WAPDA has reportedly filed a fresh petition for yet another upward revision of tariff, presumably on grounds of increasing gap between income and expenditure. The details are being kept from everyone except National Electric Power Regulatory Authority (NEPRA) and the Ministry of Water and Power. By the time hearings start the gap may widen.

 During the financial year 2000-01, WAPDA was allowed four tariff revisions i.e. (1) 11 paisas/KWh in August 2000, (2) 5 paisas/KWh in December 2000, (3) 8 paisas/KWh on account of Automatic Tariff Adjustment (ATA) in Jan.-March quarter and (4) 8 paisas/KWh in Mach 2001. Thus a total of 32 paisas/KWh over average sale rate was allowed in one year alone. In addition, a further increase of paisas 11/KWh was allowed under ATA arrangement. In its petition (Nov. 16, 2000) WAPDA had requested for two part tariff and 98 paisas increase to cover its revenue shortfall of Rs.16.1b, on account of the following factors: -

(a)  Additional capacity cost due to settlement agreement/MOU with HUBCO and               

      KAPCO                                                                                  Rs.5.8                         

(b) Reduced hydel generation.                                                        Rs.1.33b

(c) Increased capacity payment to IPPs                                       Rs.13.3b

(d)  Inflation on O&M.                                                                   Rs. 1.3 billion.

(e)  Periodical increases in price of oil and gas.                                Rs. 9.7 billion.

(f)    Need to finance Public Sector Programme Projects                 Not known                            

(g)   Successive devaluation of Pak. Rupee increasing debt service liability  

The total from a to e above comes to Rs. 31.4b, whereas the shortfall stated to be met was Rs. 16.1b. According to the NEPRA Determination (June 22, 2001), ‘almost the entire increase will come out of the pockets of those who consume less than 300 units a month, that is, those who are already living at subsistence level. Nothing could be more unfair than this.’ After holding the mandatory hearings, NEPRA found most of the arguments advanced by WAPDA unsustainable.

Starting with the additional capacity payment, at (a) above, for which there is no justification, because it had been widely publicized that revised MOUs were the best thing to have happened to this country and they had yielded phenomenal savings, running into billions of dollars. Either those claims were bogus or this demand is unjustified. Otherwise claim of Rs.13.3b during one determination is simply outrageous.

As for hydel generation, what is surprising is the fall in generation in spite of an increase in flows of water. WAPDA officials claim that dependence on IPPs increased because of the two year water scarcity. According to an irrigation expert,    addition of Chashma Low Head Plant and availability of around 0.47 MAF more water released in 2000-01 as compared to 1997-98, the generation should have increased and not decreased. Not only that, statistics from WAPDA annual Report 2000-01 reveal that generation capacity of WAPDA’s own thermal capacity also declined from 4780 MWs to 3915 MWs. The hydel generation dropped by 10.8%, while the thermal generation of its plants declined by 12.81%.

As for inflation and high maintenance cost, Government claims credit for having contained inflation to single digit figure. So the maintenance costs reflect mainly the ever increasing overheads and administrative mismanagement. It should also be noted that the government has been lending a helping hand every now and then to the utility. Lately it has written off a debt of Rs. 35b. Not only that all debts to the organization are provided with exchange risk cover.

  As for the periodical increases in price of oil and gas, WAPDA has been permitted to increase its tariff under ATA. Besides, price of oil has not been going up. It has also come down. Cost of fuel, which was 125.54 paisas/KWh in 1997 increased to 139.32 paisas three years later.

There are two ways of bridging the gap. One is by increasing income and the other by reducing expenditure. The former is not feasible because the tariff is already too high and any increase will only force the marginal users to seek help from the lineman. The other option is to reduce expenditure and start has to be made by reducing line losses; a euphemism for broad day light robbery.

 As to the losses, the figures vary wildly. The Chief Executive of Pakistan in one his recent speeches, while taking stock of achievement of his government, announced reduction in WAPDA’s line losses from 42 to 27%. Obviously, the information was provided to him by WAPDA. WAPDA’s own published data contradicts this claim.

A figure of 42% seems to have gained currency like the famous 22 rich families that had exploited Pakistan. This figure serves the purpose for the managers to be able to walk tall and claim credit for having reduced the losses to 26 or 25% and enhance in the public eye the heroic effort put in the achievement of such an impossible target. It is important to note that each percentage point represents Rs.1.7b and should yield an extra income of Rs.39b. taking care of the gap.

According to one estimate, about 13.9 billion KWh are lost annually in line losses which is more than the annual production of Tarbela Power station. In monetary terms, it translates into Rs. 28b.should yield an extra income of Rs.39b. taking care of the widest revenue gap. Obviously the claim is not true. The auxiliary power consumption in a typical power house is about 7% of the power generated. Generation losses of 7% in case of IPPs are on their own account as WAPDA buys power at bus bars.

The figure of 42 % losses, which are usually claimed to have been drastically reduced appear nowhere in WAPDA publications. According to some knowledgeable sources in WAPDA, this figure represents ‘reported’ losses and the ‘actual’ losses are the printed ones. A very fine distinction indeed! The fact of the matter is that the losses for the last four years have increased despite the claims to the contrary. Power System Statistics (PPS) 25^th Issue, a WAPDA publication with a limited circulation, in Table 3.1 gives the following figures: -

Do you see 42% any where? Of the 11 Asian countries, for which data has been published in PPS, ibid, only India had losses higher than Pakistan i.e. 29.29% (1996).

There is no justification for stealthily taxing the common man for financing public sector programme. Similarly, devaluation too cannot be claimed as the basis for tariff revision because owing to the efforts of this government rupee has stabilized and our foreign exchange reserves reached an unprecedented level.

Part II

Question is how to bridge the gap? Answer depends on the prognosis. If the main cause of the malaise is gross mismanagement, then no amount of revision in tariff will help. Assuming this not to be true (one has to suspend belief) present policies of WAPDA will sink it deeper and deeper into the mire, from which no rescue is possible.

 WAPDA seems to have found a convenient excuse in acting under pressure from World Bank etc. in its periodic request for revision. It conveniently disregards World Bank regime as far as restructuring, corporatisation or privatization are concerned. Faced with an ever-growing deficit, the extent of which can only be guessed, because the figures are either not supplied or are self-serving, the utility is pricing itself out by increasing tariff. Having failed to control the expenditure to bridge the gap , which can come only from following good management practices, it adopts the easy way out of seeking a revision of tariff, which thanks to NEPRA does not come easily.

The World Bank et al have mastered the mantra that increase in rates as hefty as the helplessness of the voiceless people will be to the good of the organization. They do not see the rates in neighboring countries or the capacity of our people to pay. Their knowledge of our institutions is limited to their furtive visits to this country and some discussions with the civil servants dealing with the subject at that point of time, whose total effort is focused on pleasing the visitors to make them sign the loan.And that is that. If they were right we would have seen the promised results in our 55 years of existence. Answer obviously lies elsewhere.  If the lending agencies (for some mysterious reason called the donor agencies) stop infusing fresh funds we will perhaps come to our senses and start putting our house in order. Fresh infusion of funds postpones the day of reckoning.

It is a pathetic sight when two to three federal ministers along with a score of their civil servant subordinates sit like students in a class and fawn upon the representatives of the Bretton Wood agencies and try their hardest to appear in compliance with their ‘conditional ties’. Most of the time we promise to deliver and they know we are lying but depending on the climate we get the loans or are refused.

Imagine Asian Development Bank having refused to lend any money to KESC for the last five years and then suddenly decides that it deserves to be paid $350m after all. Naturally, the Bank is not jeopardizing its investment. It is armed with a sovereign guarantee and is, therefore, not worried as to the mode of disposal of these funds by us. We might as well throw it into the well, for all they care. If I were a businessman I will not give KESC even one hundred rupees, seeing how much it has slid into the abyss particularly in the last three years.

The present tariff structure of power is quite complicated with quite a large number of slabs, sub-slabs etc. The complication is pronounced in residential and bulk consumer. NEPRA in its last Determination (June 2001) has demanded simplification of tariff within a month and propose merger of the energy charges with the FAS and additional surcharge. These two exceed the energy charges many times and do not make any sense unless of course the idea is to deny hydel profits to NWFP, to which it is entitled only out of energy charges. Fuel Adjustment Surcharge (FAS) was first imposed in 1981 and had yielded an income of Rs. 365m. It increased manifold and yielded Rs.18.2b in 2000. Additional Surcharge was first imposed in 1994 and yielded in that year a sum of Rs.5.3b. the figure increased to Rs.93b in 2001-02. Sale of power during the year yielded only Rs.46b, having been overtaken by the other two taxes.

 During 2001-02, WAPDA sold 46.6 GWH units on a national basis, of which 21.4 GWH or 46% were sold to the domestic consumers, whereas the income it derived from this segment was only 29%. Obviously somebody else (other consumers or the taxpayers) was paying for the domestic consumers to the extent of 17%. Commercial consumers were sold 5% electricity during the year and they were made to pay 10.3% of the WAPDA revenues. Industrial consumers paid 33% against 26.3% units sold to them. Anecdotal evidence suggests that they must have stolen lot more units in view of the price and their need to keep the wheals of industry running.

More to the point, between the periods, 1st Aug. ‘96 to 1^st July 2001, there have been at least thirteen upward revisions. Average sale price for the domestic consumer increased during the period from 178.12 paisas to 290.2 paisas. For commercial category the increase was from 510.02 to 715.26 paisas. Agriculture was the hardest hit and its average price increased three fold from 94.76 to 272.77 and that too during excess capacity for which we had no use. Public lighting, which is paid for by the poorest and the most neglected lowest tier of the government, had to pay the highest tariff of 718.65.

A typical domestic consumer, who used 568 units in a month, had to pay Rs.5.433 per unit of electricity for any units over and above the first 200 units as against Rs.1.23 in 1996- more than four fold increase. Energy charges are a small percentage of the total. There are other charges, like the meter charges of Rs.20 and GST Rs.350, Fuel Adjustment Charge (FAC) and additional surcharge form the basic structure of the tariff. According to the Determination (ibid), the punitive tariff for commercial sectors w is as high as Rs. 7.13. If one assumes a monthly consumption of 3,000 KWhs for a typical shop, the rate including fixed charges would go up to Rs 8.48. For industry the highest rate is Rs. 4.81 and for street lighting Rs. 7.19 and so on.

To this complexity should be added a plethora of tariffs, which are at least as many as twenty-five (25), five (5) for domestic consumers, three (3) for commercial, four (4) for industry and so on. This tariff structure was put in place by some convoluted mind in the early phases of WAPDA’s life.  Lot of water (or for want of availability, may be very little water), has flown down the River Indus since.

These tariff rates make little economic sense particularly in view of the fact that WAPDA is forced to waste an excess generation capacity of about 2000 MW during peak hours (5 p.m. to 11 p.m.) and about 4000 MW during off peak hours (11 p.m. to 6 a.m.). WAPDA will have added another 1450 MW to its excess generating capacity when Ghazi Barotha Hydro electric Power comes on stream. Although the goal post for its completion has been shifted a number of times, it is not likely to be completed by the now promised date of December 2002.

The principles of demand and supply dictate that this huge wastage should be averted and price of electricity rationalized. I mean reduced and not increased. There is a huge unmet demand in the system mainly in industry and commerce. The incentive for theft will be neutralized with the rationalization.

A former Chief Executive, PEPCO in one of his articles in a national newspaper had stated that in spite of excess generating capacity, 50% of population goes without power.  Commercial and industrial sectors have been forced to opt for self-generation because the supply is both uncertain and uneconomic. He has alleged that WAPDA’s own thermal generation capacity has considerably degraded by about 30-50% “due to weak management, lack of spare parts, extensive delays in overhauling of turbines etc”. He has gone on to claim that WAPDA continues to be faced with cash flow problems; and loss reduction efforts after initial success now seem to have stalled.

Contrary to the World Bank recipe, there is a case for reducing tariff. There are at least two reasons why the energy charges should be reduced rather than increased. One is the excess electricity which we are wasting anyway and the other is the comparable rates elsewhere. It is well known fact that electricity is much cheaper in India, but that country cannot serve as a model in view of its enormity of problems in the sector. Let us take the case of USA. In the Eastern Pennsylvania New Jersey, Maryland area, hourly rates do not exceed 5 cents in any 24 hours cycle. This translates to less than Rs.3.60ps. On the contrary our highest rates which are as high as Rs.8.48 for commercial category equivalent to more than 14 cents And yet a third reason for a lower tariff is the economy, which uses power as a basic component, to revive. Cheap power can help reverse the recessionary trends in the economy.

As a result of revised MOUs (Memoranda of Understanding) with the Independent Power Producers (IPPs), WAPDA has achieved a tariff of less than 6 cents per KWh, which translates into Rs. 3.60 at the current dollar/rupee parity. Of the 25 slabs, only three domestic tariff slabs and that of KESC (Rs. 3.34/KWh) are below this price. The question is whether cross subsidizing the domestic consumer is justified on economic grounds. The answer is no, in view of the fact that except for the poorest consumers (less than 50 units) the rest of them could easily afford to pay Rs. 3.60 per unit plus a small profit. For the first 100 units, the price of electricity would be Rs. 360 per month. This is a price, which even the lowest paid employee of the government i.e. Naib Qasid can pay.

 One must remember that his unfortunate counterpart, living in rural areas, may have to spend much more for lighting his ‘kutcha’ abode. Therefore the whole edifice of irrational tariff has been built, all in the name of subsidizing the domestic consumers, who on the one hand are not so deserving of the subsidy and affect the whole spectrum of tariff on the other. Periodic increases, sometimes on quarterly basis, make bad public relations for the government and a very poor economic sense. The principle that should govern the tariff should be ‘higher the consumption, the lower the tariff’. So that higher sales translate into higher income for WAPDA and utilization of excess generation of electricity. There is greater elasticity of demand in commercial and industrial sectors.