K-Electric has the exclusive right to distribute electricity in Karachi till July 2023. But with only three more years to go, Nepra is looking to prematurely terminate this ‘monopoly’, on the pretext that public interest should take precedence over contractual obligations.
K-E cites lower availability of gas from Sui Southern Gas Company (SSGC) as the sole reason behind the current power crisis in Karachi. Before the gas shortage, it was torrential rains that drowned the city and disrupted fuel supplies, forcing K-E to shut down the power supply. And besides these recent problems, this private sector-run power utility company has been facing a host of challenges in Karachi, such as pressures to not disconnect power supply to slums that hardly pay, piling receivables from public sector, and pressures for political appointments. But that’s the investor’s view.
What is the citizens’ view? They were stuck in the dark for days during the recent spell of rains and now they are facing unprecedented load-shedding. They don’t care about the blame game between K-E, SSGC, and the provincial and federal governments. They just want safe and reliable supply of electricity.
On the surface, terminating K-E’s exclusivity seems to be a debate between investor rights and public interest. But digging deeper, it becomes clear that this debate is based on a self-defeating argument. At best, terminating K-E’s exclusivity prematurely will make no difference on ground, but at worst, this could be severely detrimental to both investor rights and public interest.
Let’s first examine the underlying argument. In principle, opening up the market and ending monopoly is good. But having a free market will only work if there are solid investors interested to invest in the market. They would create a healthy competition, reducing prices and improving service. But creating competition by violating the rights of an investor is turning the argument on its head. The move will discourage investors, defeating the very notion of a private sector-driven marketplace. If we want investment, then let’s respect investors’ rights.
Secondly, even if K-E’s exclusivity is terminated now, it will not make an immediate difference on ground. It is unlikely that any new generation capacity by a new entrant will come any sooner than the planned commissioning of 900MW BQSP-III by K-E by summer 2021.
Moreover, any new entrant will bring in new generation capacity but will still be using K-E’s transmission and distribution infrastructure. The existing problems with the distribution network will therefore persist. Even more importantly, any new entrant to the market is likely to avoid high-loss and low-collection areas and will try to cherry-pick well-paying consumers by offering them a competitive price. As a result, either the tariff for the remaining not-so-well-paying consumers will increase or K-E’s revenues will take a hit, undermining its capacity to invest to improve its infrastructure.
Lastly, as exciting as the idea of a competitive market sounds, it is much more complex to implement on ground and will need a lot of preparation. A number of issues need to be ironed out, such as the future of the government’s uniform tariff and cross-subsidisation policy, the obligation of K-E to lend its infrastructure to the new entrants while competing with them on power supply, the investment obligations by K-E in transmission and distribution infrastructure to match expected increase in power supply, etc.
Let’s accept the fact that such massive transitions cannot take place overnight. However, what can happen overnight is a wrong decision, deterring investors’ confidence for a long time to come and costing much more to the consumers.
Therefore, rather than prematurely terminating K-E’s exclusivity, the government should prepare to create the right conditions for the competitive market to operate post-2023.
Published in The Express Tribune, October 13th, 2020.
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Investor rights are to be respected if they maintain their end of the bargain. By providing generally negligent service, including deaths of citizens, and not being proactive about diversifying supplies, leading to annual blame games, I doubt that KE is holding up to its commitment. Terminating the monopoly will send the message that the customers are not to be toyed with and that the companies have to act responsibly and with accountability.