The National Electric Power Regulatory Authority (Nepra) has recently issued its determination on the applicability of open access charges to consumers and has rejected a petition of the Central Power Purchasing Agency-Guarantee (CPPA-G) in this respect connected with wheeling charges.
Buyers or consumer’s choice and competition are the basic tenets of capitalist markets. Under open access, the consumer has a choice of procuring or generating his own electricity.
Open access is one of the key instruments for fostering competition, promoting new investments and power supplies, improving capacity utilisation, reducing cost and prices for large customers – industries in particular.
It is achieved through consumer choice of the source of electricity – he can use his own electricity generated at one location and get its surplus transmitted to another location to be used in his own enterprise or elsewhere. However, this is what one may call classical open access.
In competitive markets of industrial countries, the whole power and gas sector is under open access, even for small residential consumers. In regulated markets of developing countries, it is available under certain regulated terms and conditions.
It is these terms and conditions (monetary) of open access that are under contention, which we will focus on in the following.
However, power distribution companies (DISCOs) argue, in technical regulatory jargon, that the buyer pays what they call cross-subsidy, stranded costs and other incidentals such as emergency power.
One would readily understand that there are cross-subsidies in electricity tariff – small residential consumers may pay as low as Rs5 per unit and large residential ones may be paying in excess of Rs22 per unit.
In terms of stranded costs, DISCOs argue that they have made infrastructural investments, which will remain under-utilised if open access gets on its way and a significant number of large good-paying and low-loss consumers shifts to this system. This appears to be a genuine argument as well. One may like to support such initiatives as open access but the issue is who pays the burden of this incentive. If DISCOs are not paid for these heads, this will be passed on to other customers – may be poor man’s tariff increases, may be subsidies and circular debt increase.
CPPA-G estimates that a reduction of 1% in sales from its system would have an impact, or cause loss, of Rs14 billion. Nepra maintains that the wheeling charge of Rs8 per kilowatt-hour (kWh) is too high, but does not tell what ought to be the correct figure. Instead, it rejects the issue of two main components of wheeling charges altogether.
In India, the corresponding wheeling charges range between INR2 (PKR4) and INR5 (PKR10). A recent regulatory determination for wheeling charges for Maharashtra DISCOM (MSEDCL) allows INR1.31 for stranded cost and INR1.71 for cross-subsidy, with total wheeling charges of INR3.02 (PKR6.04).
Keeping in view a traditional higher cost differential in Pakistan vis-a-vis India, the wheeling charge of PKR8 does not appear to be outlandish, which could be rejected outright.
Nepra’s determination has not brought any solid argument to reject cross-subsidy claims except that it will not be feasible for open access, neither have the consequences or impact considered.
In other jurisdictions, eg India, these claims (cross-subsidy and stranded cost) have been provided in open access regulations and we quote: “… a surcharge is to be levied on switching consumer … under open access ... to compensate for the loss of cross-subsidy built into the tariff of such consumers. An additional charge (stranded cost and others) may also be levied for meeting any additional fixed cost of the distribution licensee …” (Section 5.8.3. Open Access Policy, India).
Actually, unless there is sunk cost and open access consumer benefit from marginal cost, there does not appear to be much rationale for any economic advantage.
Captive power plants are smaller and less efficient. They cannot compete with the efficiency of large coal (42% efficiency) or gas plants (60% efficiency). Competitive markets and tariffs depend on the economies of scale and not on some niche situations.
Perhaps, India is not a good example for success of open access. On the other hand, there aren’t many examples available in this case. India has been playing with the idea for many years.
The share of open access in India remains very small in this long period. There are other non-monetary operational issues there, which may have marred success of the scheme.
Open access has resulted in frequent switching between regular and open access tariff, causing operational difficulties for a DISCO in planning and scheduling operations. Long-term wheeling agreements haven’t been in majority. The same may happen here.
Competition requires a level playing field. Exploiting market inadequacies is no competition. With a difference of Rs6 per unit, a class of inefficient producers or free riders may be brought into the market and a class of privileged industrial users will unbalance the product market.
Such incentive schemes have not worked in the past eg Gadoon Amazai during the tenure of Benazir Bhutto government. Unless and until an alternative system of subsidies replaces the current cross-subsidy system, loading one party with cross-subsidy and relieving the other of it would not promote efficiency and genuine competition.
We are suffering from power surplus with circular debt poised to increase from Rs2.3 trillion to Rs3.3 trillion in a matter of a few years.
Classical open access appears to be a matter of the past when there was power shortage and even bad economics of open access was good enough. However, open access will be required for a competitive power market.
That will require doing away with the electricity sales business by DISCOs, when there will be no issue of either cross-subsidy or stranded costs associated with DISCOs.
Such a promised land has yet to be there. Until such a power market comes into effect, the discussion on the subject is rather premature. A moderate and compromise solution may have to be worked out that may not cause unaffordable consequences. Perhaps, a case can be made for not considering stranded cost (or dealing with it in a different way, eg on actual basis, etc), which may not be substantial initially or may not be there in initial stages.
Can a case be made for special industrial zones or private sector hydroelectric power production in Khyber-Pakhtunkhwa, one may think about it?
The writer is former member energy of the Planning Commission and author of several books on energy