Tariff rationalisation: myth and reality
The hue and cry over the increase in the prices of petrol, and attributing it to the government is not just.
There appear to be some misperceptions about the recent tariff rationalisation of electricity and the increase in the prices of furnace oil. The media has been reporting that the government is increasing electricity tariffs, which is contrary to the facts. Rationalising the subsidy and withdrawing it from the affluent does not amount to an increase in tariff. The concept of blanket subsidy to all should end if we want a stable and vibrant economy. Economics must be separated from politics. Politicising each and every issue will do us no good. It is necessary that we analyse things in their true perspective. Fair and just criticism would lead to improvement in governance and in the national economy, but playing the blame game and criticising just for the sake of it will harm the positive policies of the government.
If electricity is produced at a cost of Rs18 per unit, how can it be sold at Rs5 or less? Some may argue that the subsidy slab should be increased from 200kWh to 300kWh or more but all this depends on the health of the overall economy. We all know this situation has cropped up due to the wrong energy-mix of power production that was used during the previous government’s tenure. Energy production from expensive thermal power units was encouraged. The principle reason behind the increased cost of production was the change in the energy mix. Seventy per cent of the power is now being produced by using expensive furnace oil and 30 per cent by using inexpensive fuel. The reverse was true in the 1990s.
A key reason for power outages and load-shedding in the country is the failure of full realisation of the costs of production of electricity from consumers. The tariff differential between the government notified rates and the NEPRA determined rates had strangled the power sector. The previous government was unable to pay for the cost of generation of electricity, both in the public and private sector.
NEPRA is a body which determines the cost of production of electricity and makes its recommendations to the government to make adjustments in the tariff structure. Since a tariff increase on May 12, 2012, no tariff adjustment took place for over 14 months (May 12, 2012 to August 4, 2013). It should be recognised that the increase in tariffs covers the cost of service and also the legacy and liabilities relating to the previous years. For example, for FY2011-12, the difference between NEPRA notified tariff and GoP notified tariff was Rs3.01/unit, which increased to Rs5.79/unit after NEPRA’s tariff determination for FY2012-13.
The present government has not imposed any new heads or increased the tariff. The government follows the rate notified by NEPRA for a fiscal year. It bears the cost of subsidising through a tariff differential subsidy. This inaction on the part of the previous government to pass on the cost of production to the consumers gave rise to the circular debt on the one hand and forced the thermal power plants to produce power less than their capacity on the other.
It must be appreciated that the present government decided to tackle the issue head on. The circular debt of Rs480 billion was cleared within 60 days. It is also praiseworthy that the government has decided to protect the vulnerable sections of society through a targeted subsidy. The poor would be protected while ensuring that the monster of circular debt does not re-emerge.
The tariff structure finalised recognises the fact that 70 per cent of the consumers use less than 200 units. They have been completely protected from any rise in tariff. Consumers who use up to 200 units have been protected and tariff has been maintained at the current level. Even after the present tariff rationalisation, a total subsidy of Rs136 billion is estimated to be paid to domestic consumers for using up to 200 units of electricity. In addition, an estimated subsidy of Rs50 billion is envisaged for KESC consumers.
The rise primarily affects 30 per cent well-to-do customers. The government has also rightly decided that well-to-do domestic consumers would not benefit from the tariff charged to the lower slabs as was the case in the past since they can and should pay the cost of using electricity. The tariff structure has been duly approved by the CCI and has a broad-based representation and ownership. The media must criticise the wrong policies of the government but must appreciate it for its right steps. It is high time that the public was told the truth on issues of national importance.
About the increase in petroleum product prices, I must say that Pakistan depends heavily on imports to fulfill its requirements. If the prices fluctuate in the international market, the same would definitely be felt locally. OGRA, an independent body, makes recommendations for the adjustment in oil prices in view of international prices. The price of petrol was Rs109.13 whereas present international prices were calculated to be Rs115.25. Similarly, the present price of high speed diesel was Rs112.26 whereas the international prices were calculated to be Rs118.95. It was, therefore, necessary to increase the prices of petrol by Rs6.12 and that of high speed diesel by Rs6.69 in order to pass over the entire impact of international oil price increase. The prime minister decided that the entire increase of oil prices should not be passed on to the consumers and instead the government would bear subsidy of Rs2 per litre, resulting in a total of Rs2.1 billion being borne by the government.
Therefore, the price of petrol, which should have been increased by Rs6.12 per litre and that of high speed diesel, which was supposed to be increased by Rs6.69, were instead increased by Rs4.12 and Rs4.69 respectively. Now the hue and cry over the increase in the prices of petrol, and attributing it to the government is not just. We must educate and tell the truth to our public. Facts, if shared with the public, can help them understand things in their true perspective.
Published in The Express Tribune, November 3rd, 2013.
If electricity is produced at a cost of Rs18 per unit, how can it be sold at Rs5 or less? Some may argue that the subsidy slab should be increased from 200kWh to 300kWh or more but all this depends on the health of the overall economy. We all know this situation has cropped up due to the wrong energy-mix of power production that was used during the previous government’s tenure. Energy production from expensive thermal power units was encouraged. The principle reason behind the increased cost of production was the change in the energy mix. Seventy per cent of the power is now being produced by using expensive furnace oil and 30 per cent by using inexpensive fuel. The reverse was true in the 1990s.
A key reason for power outages and load-shedding in the country is the failure of full realisation of the costs of production of electricity from consumers. The tariff differential between the government notified rates and the NEPRA determined rates had strangled the power sector. The previous government was unable to pay for the cost of generation of electricity, both in the public and private sector.
NEPRA is a body which determines the cost of production of electricity and makes its recommendations to the government to make adjustments in the tariff structure. Since a tariff increase on May 12, 2012, no tariff adjustment took place for over 14 months (May 12, 2012 to August 4, 2013). It should be recognised that the increase in tariffs covers the cost of service and also the legacy and liabilities relating to the previous years. For example, for FY2011-12, the difference between NEPRA notified tariff and GoP notified tariff was Rs3.01/unit, which increased to Rs5.79/unit after NEPRA’s tariff determination for FY2012-13.
The present government has not imposed any new heads or increased the tariff. The government follows the rate notified by NEPRA for a fiscal year. It bears the cost of subsidising through a tariff differential subsidy. This inaction on the part of the previous government to pass on the cost of production to the consumers gave rise to the circular debt on the one hand and forced the thermal power plants to produce power less than their capacity on the other.
It must be appreciated that the present government decided to tackle the issue head on. The circular debt of Rs480 billion was cleared within 60 days. It is also praiseworthy that the government has decided to protect the vulnerable sections of society through a targeted subsidy. The poor would be protected while ensuring that the monster of circular debt does not re-emerge.
The tariff structure finalised recognises the fact that 70 per cent of the consumers use less than 200 units. They have been completely protected from any rise in tariff. Consumers who use up to 200 units have been protected and tariff has been maintained at the current level. Even after the present tariff rationalisation, a total subsidy of Rs136 billion is estimated to be paid to domestic consumers for using up to 200 units of electricity. In addition, an estimated subsidy of Rs50 billion is envisaged for KESC consumers.
The rise primarily affects 30 per cent well-to-do customers. The government has also rightly decided that well-to-do domestic consumers would not benefit from the tariff charged to the lower slabs as was the case in the past since they can and should pay the cost of using electricity. The tariff structure has been duly approved by the CCI and has a broad-based representation and ownership. The media must criticise the wrong policies of the government but must appreciate it for its right steps. It is high time that the public was told the truth on issues of national importance.
About the increase in petroleum product prices, I must say that Pakistan depends heavily on imports to fulfill its requirements. If the prices fluctuate in the international market, the same would definitely be felt locally. OGRA, an independent body, makes recommendations for the adjustment in oil prices in view of international prices. The price of petrol was Rs109.13 whereas present international prices were calculated to be Rs115.25. Similarly, the present price of high speed diesel was Rs112.26 whereas the international prices were calculated to be Rs118.95. It was, therefore, necessary to increase the prices of petrol by Rs6.12 and that of high speed diesel by Rs6.69 in order to pass over the entire impact of international oil price increase. The prime minister decided that the entire increase of oil prices should not be passed on to the consumers and instead the government would bear subsidy of Rs2 per litre, resulting in a total of Rs2.1 billion being borne by the government.
Therefore, the price of petrol, which should have been increased by Rs6.12 per litre and that of high speed diesel, which was supposed to be increased by Rs6.69, were instead increased by Rs4.12 and Rs4.69 respectively. Now the hue and cry over the increase in the prices of petrol, and attributing it to the government is not just. We must educate and tell the truth to our public. Facts, if shared with the public, can help them understand things in their true perspective.
Published in The Express Tribune, November 3rd, 2013.