Electricity costs: Nepra, power ministry duke it out over proposed 77% tariff hike

Regulator wants to raise prices; ministry afraid of political consequences.

ISLAMABAD:

One small bureaucratic change may result in power tariffs across the country rising by a whopping 76.6%, the realisation of which has sparked a turf war between the water and power ministry and the National Electric Power Regulatory Authority (Nepra).

The tussle began with the government’s decision to grant Nepra the authority to unilaterally allow power distribution companies across the country to raise tariffs on account changes in fuel prices (which typically account for about 85% of the cost of a unit of electricity). Now that Nepra has actually started utilising that power – uncomfortably close to election season – the government appears to be getting cold feet.

In addition to the fact that raising power tariffs is hugely unpopular with consumers, there is a little snag in the mechanism: Nepra makes the decision, but the water and power ministry has to notify and announce it. In other words, Nepra can make decisions based purely on their economic and technical merits and leave the government to deal with the political fallout.

“Nepra has done this to shift the burden of the blame for tariff increases on the [ministry] in order to avoid public resentment,” alleged one official of the water and power ministry.

In this current round, Nepra has raised the tariff primarily by raising the base price of furnace oil to reflect changes in international oil prices. Based on Nepra’s pricing formula, this will cause tariffs across the country to rise by an average of Rs6 per kilowatt-hour, to Rs13.83 per unit, compared to the average of about Rs7.83 per unit that consumers pay now.

The water and power ministry had been pressuring Nepra to withdraw that increase, but Nepra has thus far stood its ground.

“The government will now notify the increase in the power tariffs,” said one source familiar with the matter.

Nepra has done this once before, when it raised the base price of furnace oil from Rs45,000 per ton to Rs65,000 per ton for the fuel costs of the state-owned Islamabad Electric Supply Company (Iesco) and the Peshawar Electric Supply Company (Pesco). Tariffs for Iesco customers increased by an average of about 30% to reach an average tariff of about Rs4.53 per unit. For Pesco customers, the increase was 18.2%, which caused the average tariff to rise to Rs6.5 per unit.

Water and power ministry officials are incensed at Nepra’s refusal to toe the ministry line and have alleged that the regulator is misinterpreting the powers it has been granted. Nonetheless, they also seem to suggest that the ministry has no choice but to accept Nepra’s decision and make plans accordingly. One of those plans involves passing through the tariff hike in several phases, rather than all at once.

“After such an alarming hike in the power tariff by Nepra, the government has also decided to shelve its plan to impose a tax on power in order to reduce the subsidies,” said one ministry official.

Another official, who wished to remain anonymous, said that Nepra’s move was bad for consumers. “Power consumers will not get relief if furnace oil prices start declining,” he said.

The government currently subsidises electricity by about an average of Rs1.57 per unit though this number is rising rapidly as the nation’s power generation becomes more and more dependent on imported furnace oil due to the dwindling of Pakistan’s domestic gas reserves.

In fiscal year 2011, the government spent about Rs295 billion subsidising electricity, or about 1.5% of the total size of the economy. This year, that number is expected to reach Rs350 billion.

Published in The Express Tribune, February 21^st, 2012.