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Power sector to face Rs592 billion deficit by June

Pakistan’s bleeding power sector is to face a whopping deficit of Rs592 billion by the end of this financial year mainly because of the electricity cost of Rs277 billion (47 percent) not covered in the tariff determination, tariff differential subsidy (TDS) of Rs215 billion (36 percent) and fuel price adjustment of Rs100 billion (17 percent).

USAID has come up with this shocking revelation in its report titled “Pakistan power sector’s circular debt report; the causes and impact of circular debt.”

The report is still in the process of being finalised in partnership with the Planning Commission of Pakistan and it has been dispatched to the Ministry of Water and Power for its input before it is formally made public. The ministry is resisting the publication of the report as it is going to expose the inefficiency and mishandling in the power sector.

The report says that the bleeding power sector is affecting 3-4 percent of the GDP annually. To cope with the ills the joint report of the Planning Commission USAID has suggested and increase in the power tariff by 14 percent per annum for three years’ time and asked for the enforcement of a differential power tariff regime in phases or for the enforcement of a revised uniform tariff with removal of anomalies in the existing uniform tariff regime.

It also suggested increasing revenue though the readjustment of slabs.

The power sector is to sustain the loss of Rs215 billion by June end 2013 just under the head of tariff differential subsidy (TDS).

The report says that the tariff differential between the determined tariff and notified tariff stands at Rs3.08 which is to further swell to Rs6 per unit. The notified tariff is far below the least determined tariff (LDT) owing to which the sector has so far braved a huge loss of Rs98 billion.

The power sector also sustains a loss of Rs115 billion on account of structural anomalies in tariff regime which also aggravate the issue of tariff differential subsidy.

USAID has highlighted the reasons which contribute to the huge loss of Rs277 billion in the electricity cost which is not covered in tariff determination.

The reasons include the loss of Rs6 billion per annum on account of heat rate difference in Gencos (electricity generation companies); damage of Rs60 billion in the wake of delays in tariff determination and notification, Rs29 billion dent because of line losses beyond Nepra’s limits, Rs107 billion loss because of failure in recovery of bills, and Rs75 billion on account of payment of penalties to IPPs and interest on existing loan taken by state owned power sector.

Under the head of fuel price adjustment, the power sector faces a loss of Rs100 billion that include Rs80 billion because of courts’ stay orders and Rs20 billion in the wake of deferment of T&D losses issue.

Suggesting the recipe to overcome the issue of increasing tariff differential subsidy (TDS), the USAID and Planning Commission have stressed the need to raise the notified tariffs up to the level of MDT (minimum determined tariff) and then gradually moving to differentiated tariffs in some of the Discos if not all.

The MDT can be achieved in a phased manner considering socio-political conditions. Initially tariffs for commercial, industrial, higher residential slabs and others where difference is marginal could be raised to the level of MDT. It also suggested that lower residential slabs and agriculture tariffs can be increased at a rate of 4 percent each quarter (or whatever is feasible) till it reaches MDT level.

Raising the tariff to MDT and introducing differentiated notified rates in five Discos would cover 66 percent of the tariff differential. Break-up of remaining 34 percent is AJK (2 percent), TDS for 4 Discos except 300 units (10 percent) and less than 300 unit residential slabs (22 percent).

The higher end residential consumer, however, would still be getting the benefit of lower slabs. This can be avoided if only one previous slab benefit is allowed in tariff determinations and notifications.

This could reduce the gap by 5 percent. In three years the losses in the four Discos that have higher service cost can be brought down to reduce the level of determined tariffs which will in turn reduce the TDS. Introducing differentiated tariffs in lower residential slabs after tariffs have reached MDT level would eliminate TDS due to the residential category.

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