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Distribution companies – divide and rule

Cost of electricity in Pakistan is one of the highest in the region, which makes the businesses uncompetitive; though electricity at subsidized rates is charged to the consumers. Out of three segments of power sector; distribution segment has the key to open the door of efficient power sector while transmission and generation contribute differently in the overall matrix. Continual losses have not only diluted the creditworthiness of DISCOS (distribution companies) but their share in the circular debt is also biggest.

DISCOS have three buckets of losses; i) technical and admin; ii) under-collection of bills and iii) the delta (cost-revenue gap). DISCOS in Pakistan are way off from the established global benchmarks for technical and admin losses and collection of bills. Whereas, delta varies from country to country and Pakistan’s present energy mix is the primary source of its Delta. An inefficient distribution company (DISCO) has the capacity to single handedly drain a large part of efficiency gains of other segments. Pakistan has such ten DISCOS. There is a dire need to do a scientific analysis of the data of DISCOS. Mapping each feeder within a DISCO on the basis of performance (green being the best and red being the worst) would help implementing an effective policy/plan.

For a DISCO, it has become exceedingly difficult to manage the area under its belt therefore, dividing a DISCO, would help managing the network much better. Privatization is too late now, incoming investor will ask for exclusivity for at least 20 years to recover its investment but the government would be shaky to give monopoly rights to a private party especially after the experience of KE. Outsourcing O&M of smaller DISCOS for a term of 5 years (say) with an extension of another 5 years would help attracting a lot many parties. We need to be mindful of the fact that; most of the local companies don’t have the capacity to manage an oversized DISCO while they would also not qualify as an operator but if a DISCO is divided in smaller parts then a number of companies would come forward and would give better options to the government otherwise, 2 or 3 business houses will only qualify, which everyone can guess.

There is an urgent need to do a stock count in DISCOS by engaging a reputable technical firm so that a detailed assessment of store items (copper cables, transformers etc) could be made. It would then be interesting to see how much stock is obsolete or missing.

Presently, DISCOS are finding new ways to curb the increasing trend of CAPTIVE power. On one side, all provincial governments are solarizing their schools, hospitals, buildings while on other DISCOS are discouraging private sector to install CAPTIVE power. On one side, DISCOS are of the view that they have excess capacity and have to pay capacity payments to IPPS thus no more private power while on other they themselves are heavily investing in CAPTIVE and utility scale power projects. Public sector doing power projects from PSDP should be discouraged and infrastructure projects of strategic importance including dams be done through PSDP.

Wheeling and competitive market are the permanent solution of current crises of the power sector. DISCOS are asking for over Rs. 8/Unit as wheeling charges (‘W-charges’), covering Cross Subsidy, Standard Assets Cost, and System Losses hence making it financially unviable for the interested parties. In addition; Utilities are also asking for Rs. 4/Unit as Capacity Charges.

Cross Subsidy is given on the pleasure of the government hence, there is no rationale for including it in W-charges. Likewise; if DISCOS intend to include their transmission losses then global benchmark of 9 percent should be used in calculating as opposed to DISCOS’ average loss of over 28 percent. The loss over and above 9 percent is DISCOS’ inefficiency. Likewise, under recovery is obviously happening with the nod of the administration. DISCO (Wheeler) should bear its burden rather than shifting it to the Wheelee. Question is, will gains in the DISCO system be also shifted to the Wheelee in future, obviously NO.

DISCOS bill in arrears but if the billing system is moved to advance payment system then government can collect a one-off considerable additional amount in a fiscal year and thereafter billing cycle will be adjusted back to 12 monthly advance payments. Instead of spending millions on installing pre-paid meters; just make a change in the billing software and invoice on the basis of units consumed in the last-month-last-year, if someone consumes more than the last-month-last-year then true that up in the following month. Stop the supply of electricity who doesn’t pay in advance and if “someone” asks for restoration of supply of electricity; then that “someone” will have to guarantee defaulter’s payment. This will automatically transfer the risk of non-payment from federal to the local level. Pakistan has a political economy so let the local administration handle the consumers locally.

Tariff setting mechanism of DISCOS needs a complete overhaul where proper costing should be done and assumptions are to be realistic. No point in taking depreciation as cash expense, whereas technical assessments should be made for assessing the repair and maintenance cost. Gone are the days when depreciation was synonymous with repair and maintenance cost.

Since ages, federal government is giving bailout packages to DISCOS because of their consistent operational and financial shortcomings. The exclusivity of DISCOS will end in Dec 2022, which should not be extended. Just like cellular sector; multiple companies after getting a license be allowed to procure power from anyone and distribute power to their customers while residential and strategic consumers remain within the scope of the State. Government’s plan of having a competitive market can only work in a non-exclusive environment; therefore; let the rusted distribution system meet its logical conclusion.

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