Govt to raise power tariffs by 3%

ISLAMABAD: The government is set to impose another electricity surcharge that will increase the average prices by about 3% aimed at bringing down overall power subsidies to Rs200 billion by end of this fiscal year, slashing its subsidy bill by two-thirds compared to the previous year.

The Rs0.36 per unit surcharge will be levied to recover the additional cost of power generation and distribution that the National Electric Power Regulatory Authority (Nepra) is not accounting for while determining the prices.

After the fresh adjustment, which will be third of its kind, the average effective tariff for customers of the state-owned power distribution companies (which serve all of Pakistan except Karachi) will increase to Rs12.78 per unit, helping the government cut the power subsidies by another Rs20 billion, showed
the Memorandum of Economic and Financial Policies
(MEFP) that the International Monetary Fund released on Tuesday.

Currently, according to Nepra calculations, the government is paying an average of Rs13.81 per unit to power generation companies, called the determined tariff. The notified tariff, which is what consumers pay, is currently Rs12.42 per unit. The differential between the determined and notified tariff is what the government has to pay in subsidies, an amount which will be reduced to Rs1.03 per unit after the latest surcharge is implemented.

This will be the third such increase. The government slapped a Rs0.60 per unit surcharge in January 2015 to cover costs in the electricity sector. It has also levied a Rs0.30 per unit surcharge.

The government will levy the third surcharge by withholding price decreases that might otherwise have gone through on account of lower fuel costs for oil-fired thermal power generation during the month of February. In its statement, the government said that it stood ready to take advantage of lower world oil prices to bring additional costs into the tariff base set by Nepra to strengthen cost recovery in the sector while allowing consumer prices to continue to fall.

It added that the government will also ensure that diagnostic studies on technical losses for all power distribution companies will be finalised by June 2015 so that more realistic loss rates can be considered by Nepra in its fiscal year 2016 tariff determination.

The Rs0.36 per unit will give the government additional savings equivalent to 0.1% of the total size of the economy. With this, the overall power subsidies are claimed to be coming down to just 0.7% of gross domestic product (GDP).

In the fiscal year 2013 when the PML-N came into office, energy subsidies amounted to 2.3% of GDP. As part of an agreement with the IMF, the government brought the subsidies down to 1.3% of GDP by end of fiscal year 2014. Fiscal years for the government run from July 1 through June 30.

In the second phase, which is under implementation, the government has promised with the IMF to cut the subsidies by Rs175 billion or 0.6% of GDP by the end of June 2015. The last phase, which is expected to be implemented from the next fiscal year, the Ministry of Finance has assured the IMF that the power subsidies will amount to only 0.3% of GDP and meant for only ‘life line’ consumers, people who use only 50 units or less each month.

The purpose of cutting power subsidies is to achieve this year’s overarching goal of reducing the budget deficit to 4.9% of GDP or Rs1,387 billion. To achieve this goal, the government has also introduced additional revenue measures, which are expected to generate 0.35% of GDP or Rs101 billion, revealed the MEFP, which was submitted by the Finance Ministry.


Published in The Express Tribune, April 8^th, 2015.