Private participation in power distribution

Not all is well in the world of Pakistani DISCOs

High distribution losses, less subsidy, low revenue collection, and lower applicable tariffs are considered among the main issues of Distribution Companies (DISCOs) in Pakistan. These issues are affecting cash flow of distribution companies, limiting their ability to settle their power purchase liability towards the Central Power Purchasing Agency (CPPA). Here is the “trigger-point” of what is commonly known as “Circular Debt”. Circular Debt accrues when DISCOs fail to discharge their obligations to CPPA, the CPPA don’t pay the Independent Power Producers (IPPs), and the IPPs, in turn, cannot pay the fuel supplier – this chain of events ultimately results in increased load-shedding.

Despite the Government’s numerous efforts to curb the pilferage of electricity, the combined losses of the ten DISCOs are continuously increasing. T&D losses and theft of electricity are the main reasons of shortfall of revenue of the DISCOs. Due to the increase in demand for power generation, new power plants are added to the system. The DISCOs are responsible to deliver the power purchased from National Grid Company to the end consumers. When extra electricity units are injected in the system – percentage of T&D losses of DISCOs being stagnant – it results in the loss of more revenue for the DISCO. It is similar to a hole in the bucket: the more water you pour in, the more it will leak. In the near future it is expected that more than 7000 MWs of power will be added in the system. Considering the current state of affairs of T&D losses and pilferage, a logical result would be that the amount of circular debt will increase – at least in proportion to the percentage of increase in electricity production. Thus to evacuate the extra generation of electricity, the distribution network of the DISCOs needs to be upgraded to facilitate the system’s functioning. Similarly, if T&D losses and thefts are not controlled circular debt will continue to haunt the power sector as the Government will be required to introduce further subsidisation to run the sector.

It has been the wish of previous governments to privatise the DISCOs to get rid of such deplorable financial condition due to a shortfall of recovery and losses. Unfortunately, the idea of privatisation has not borne fruit for decades. The ultimate objective of privatisation of these public entities is to bring efficiency through private sector participation. It was expected that a private investor would be in a better position to affect the recovery of bills against the delivered electricity and in the reduction of T&D losses. Without going into further details regarding whether or not the private sector would be able to bring positive change, it must be admitted that if technical losses and the theft of electricity is controlled these public sector entities can operate as a going concern and can even earn revenue for the Government, helping in eradicating other socio-economic issues.

When the privatisation of these entities could not be achieved due to financial or administrative issues, a better solution could have been the systematic deregulation of the distribution business of DISCOs, allowing the private sector a chance to join the business of distribution of electricity. An increase in the number of stakeholders can allow new investors to serve as watchdogs, thus curbing pilferage. This can best be achieved by the implementation of the Franchisee/O&M operator model provided in NEPRA’s legal framework and, more specifically, under the NEPRA Regulations of 2016. Said regulation demands from the DISCOs open access for every generation facility to deliver or sell electricity to a remote, bulk consumer through use of the system. Another area where the responsibility of the DISCOs to distribute electricity can be diluted is the permission to housing colonies/high rise buildings to supply power to its residents. In the existing regulatory regime, housing colonies and other complex/high rise buildings are allowed to distribute electricity within their territory – subject to meeting NEPRA laws’ requirements. Article 3.3 (i) (a-c) of License of each DISCO, provides that the area in use of housing colonies, plazas/complex or bulk purchasers with their own distribution system (within said areas on the date of issue of licence) is not included in Service Territory of DISCOs. Under the NEPRA (Supply of Power) Regulations 2015, a DISCO can supply electricity at one point to a Housing Society or a Complex by facilitating them for distribution in a particular area.

A main hurdle for private sector participation in distribution business is the monopoly of DISCOs in the supply of electricity within their service territories. Under Section 20 and 21 of the NEPRA Act, 1997 (“the Act”), DISCOs enjoy exclusive right to the distribution of electricity within their defined service territory for a period of 20 years from the issuance of their distribution licence in 2002. The key feature of a distribution licence, as given in Section 21 of the Act, is the exclusivity – provided to a distribution licensee to distribute electric power within its defined service territory. Instead of the insistence of DISCOs in monopolising the business of distribution, they should benefit from the regulatory regime by allowing private sector participation. The management of DISCOs should seriously consider innovative solutions to avoid pilferage and improve bill recovery. One option could be outsourcing distribution via franchising. DISCOs should also focus in promoting one-point supply to Housing Colonies.

Despite their failure to supply uninterrupted power to their consumers, DISCOs have taken their “exclusivity” as a sacred privilege. Since 2002, only two distribution companies have been successful in obtaining distribution licences from NEPRA – vehemently opposed by the host DISCOs. There is no cavil to the fact that “exclusivity” is given to DISCOs to secure their investments made in laying distribution network in the country.

Initially the country’s power sector was managed by two vertically integrated public sector utilities i.e. Water and Power Development Authority (WAPDA) and Karachi Electric Supply Company (KESCO). The overall operational inefficiencies in the power sector created the need for its restructuring. Accordingly, in 1992, the “Strategic Plan for restructuring the Pakistan Power Sector” was approved by the Government of Pakistan (GoP)/Council of Common Interest (CCI) and was followed by Power Policies of 1994 to 2002. Later on, in December 1998, the WAPDA Act was amended to facilitate establishment of PEPCO and unbundling of WAPDA in result whereof WAPDA has been separated and 10 distribution companies was incorporated. Every distribution company was subsequently given licence by the NEPRA under section 20 of the Act with a defined service territory.

When Service Territory of all DISCOs were demarcated, the basic purpose of “exclusivity” was to ensure economic viability of the DISCOs as every distribution company had its distribution network and existing consumers including Bulk Power Consumers located within their defined service territories. NEPRA Act ensured that all these BBCs should remain consumer of host DISCO being the prized consumers utilising huge amount of power. Therefore concept of Second Tier Supply Authorisation (refers to a business when a licensee supply power to a BPC) was introduced which required a specific approval of NEPRA in case a DISCO loses its BPC to another DISCO or to a generation company.

At all relevant times NEPRA regulatory regime allowed a generation company to supply power to a BPC. The primary reason for such permission was that a DISCO operates as a “supplier” of electricity which it buys from National Grid Company or a Generation Company.  So as long as electricity is distributed within service territory of a DISCO through use of system of a DISCO, it will receive distribution cost and no prejudice shall be caused to its economic viability. At the same time Section 22 of the Act, ensured that in case a Bulk Power Consumer of a distribution Company wanted to stop purchase of electric power from a DISCO, the BPC was required to give three years notice as well as commitment to pay cross subsidy for uneconomic service to its service provider DISCO as compensation for loss of business to such DISCO. It is also relevant that section 22 of the Act was only applicable for first 15 years from the commencement of the Act and as of today is not more in field. So any Generation Company desirous of sale of electricity to a Bulk Power Consumer can legally sell power to that BPC through utilising distribution network of DISCO upon payment of use of system charge. Therefore DISCOs should facilitate promotion of open access and also mitigate its responsibility by entering into franchise agreements with private sector entities on case to case basis after taking care of its commercial interest.

Another important issue is the Distribution Tariff which would be charged from the consumers of the Housing Colonies/high rise buildings or the fee to be paid by DISCOs to the Franchisee/O&M operators. In this regard it is obvious that every person involving in sale of electricity has to charge tariff which is approved by NEPRA. A DISCO may have one point supply from host DISCO or may purchase power from a Generation Company, the consumer end tariff should be determined by NEPRA. A new DISCO should only be entitled to earn distribution margin and benefits, what other DISCOs are getting. For example if a Housing Society procures power from different sources, e.g., one point supply from host DISCO, purchase power from a generation company and also has its own generation plant, the consumer end tariff should be structured in  a way that consumers should also get benefit of cheap electricity being purchased/produced by Housing Colony from different sources. Promotion of distribution of power by other entities including by O&M operators and Housing colonies will certainly result in reduction of T&D losses and pilferage of electricity.

At the same time to curb the pilferage a serious study is needed to be conducted by DISCOs to exactly identify the geographic areas of high losses. DISCOs should also made public the true percentage of their actual T&D losses and number of units lost due to theft. It is imperative to know the root cause to best fix a problem so identification of key problematic areas will help to solve the issue.