Structure of the Power Sector

Institutional Framework and Infrastructure

Background
Initially, Pakistans power sector was owned and served by two public utilities; the Pakistan
Water and Power Development Authority (WAPDA) and Karachi Electric Supply
Company (KESC). Over the years it was observed that these institutions were not able to
meet the electricity demands of the country that resulted in supply-demand gap. The
performance of power sector was continuously deteriorating due to the institutional
weaknesses, lack of management in tariff structure and subsidies. To improve the
performance of power sector, the Electric Power Act was passed in 1997 and an institutional
framework was setup. National Electric Power Regulatory Authority (NEPRA) was
established to function as an independent regulator and to ensure a transparent, competitive,
commercially-oriented power market in Pakistan. (Emphasis supplied)
In the new setup, the Power Wing of WAPDA was unbundled into four Generation
Companies (GENCOs), nine Distribution Companies (DISCOs) and one National
Transmission and Despatch Company (NTDC). The large hydro power projects remained
the responsibility of WAPDA. The KESC has also been privatized. Nuclear power plants
remained under Pakistan Atomic Energy Commission (PAEC). Private Power and
Infrastructure Board (PPIB) have been established to facilitate private investment in power
sector. Alternative Energy Development Board (AEDB) has been set-up for the
exploitation of renewable energy resources.
The overall planning of electricity system was and is under the control of The National
Economic Council (NEC) which is the supreme body responsible for ensuring balanced
development of the country. It was created in December 1962 under Article 145 of the
Constitution of Pakistan. NEC is headed by the Head of Government. Its members are
Federal Ministers, Governors/Chief Ministers of the provinces, and the Deputy Chairman of
the Planning Commission.
The Planning Commission is the chief instrument for formulating the national plans. The
Energy Wing of the Planning Commission estimates the energy demand on the basis of
information obtained from all concerned entities and formulates unified short and long-term
national energy plans. The NEC approves all plans and policies relating to energy/electricity
sectors development. The Executive Committee of the National Economic Council
(ECNEC) supervises implementation of the energy policy laid down by the Government,
and approves any energy sector project to be built by the public sector. The planning and
development of nuclear power is the responsibility of PAEC.
Current Structure

1.

Development of Power

The federal Ministry of Water and Power is responsible for development of water and
power resources in the country. It is the Government of Pakistans executive arm for all issues
related to electricity generation, transmission & distribution, pricing and consumption in the
country. The Ministry exercises this function through respective organizations. It also
performs certain specific functions such as coordinates power sector plans, formulates policy
and specific incentives, and liaisons with provincial governments on all related issues.
(Emphasis supplied)
2.

Pakistan Electric Power Company (PEPCO)

Initially, WAPDA was catering to the Power and Water wings of Pakistan. However,
subsequently WAPDAs growth caused inefficiencies, 'demand suppression' and high tariff
policy, proliferated theft. All these factors, over the years adversely affected WAPDAs
financial condition and WAPDAs functions under its wings were to be segregated. In
consequence thereof, WAPDA was given the responsibility for water and hydropower
development while PEPCO (an agency within WAPDA) was vested with the responsibility of
thermal power generation, transmission, distribution and billing.
PEPCO has been fully empowered and is responsible for the management of all the affairs of
corporatized nine Distribution Companies (DISCOs), four Generation Companies (GENCOs)
and a National Transmission Dispatch Company (NTDC). These companies are working
under independent Board of Directors (Chairman and some Directors are from Private
Sectors).

3.

Generation and Distribution Network

There are four Generation Companies and nine Distribution Companies responsible for
generation, transmission and distribution of power to their respective cities. There are around
20 independent power producers (IPPs) that contribute significantly in electricity
generation in Pakistan
Amongst the distribution and generation Companies, KESC is the most prominent one since
it is responsible for generation, transmission and distribution of power to the city of Karachi
and surrounding area. It operates thermal capacity of 1,955 MW.
4.

Electricity Transmission Network

The NTDC is responsible to construct, operate and maintain electricity transmission system
of the country that comprises transmission lines of 220 kV & 500 kV, and grid stations
linking all power plants of the country. It also provides services to the distribution companies
in designing and construction of 132 kV transmission lines and grid stations.

5.

Planning and execution of Hydropower

WAPDA is responsible for planning and execution of hydro power projects. At present,
WAPDA has accumulative generation capacity of 25,000 MW for hydro power.
WAPDA's vertical-monolithic Power Wing has been restructured into twelve (12) distinct autonomous
entities under Companies Ordinance 1984. These are: three generation, one transmission and eight
distribution corporate entities. The restructuring programme of WAPDA's Power Wing is based on the
new strategic policies of the GoP and endorsed and supported by the donor institutions.

6.

Private Sector Power Generation

PPIB provides support to private sector in implementing conventional power generation

projects, including hydro power projects of more than 50 MW capacity. At present, 24
thermal IPPs (Independent Power Producers) with a total installed capacity of 7,301 MW and
3 hydel IPPs with a total of 118 MW installed capacity are operating in the country.
7. Promotion of renewable energy resources
The AEDB is responsible for promoting and facilitating exploitation of the renewable energy
resources in Pakistan. It is tasked with implementing government policies and plans,
developing projects, promoting local manufacturing, creating awareness and facilitating
technology transfer, channelling international assistance, and coordinating all associated
activities as the national facilitating agency for the development of renewable energy in the
country. It has also been designated as a one-window facility for processing RE power
generation projects (of all capacity sizes except hydel projects larger than 50 MW; for hydel
projects below 50 MW capacity, consultation with and concurrence of the provinces is
mandatory).
Provincial and AJK Agencies
Provincial and Azad Jammu and Kashmir (AJK) governments support the implementation of
renewable energy projects within their geographical jurisdiction, either on their own or in
collaboration with the AEDB, such as by expediting and facilitating allocation of land use rights (e.g.,
for wind farms), permitting, creating awareness of RE use, and removing other impediments which
may hinder progress in their development.
8. Regulators

a) National Electric Power Regulatory Authority (NEPRA)

NEPRA is responsible for: (i) granting licenses for generation, transmission and distribution
of electric power; (ii) determining electric tariffs for the consumers and producers; and (iii)
prescribing performance standards for generation, transmission and distribution companies.

b) Pakistan Nuclear Regulatory Authority (PNRA)

PNRA is responsible for granting licenses to all nuclear installations in the country including
NPPs. The Authority is formulating and implementing effective regulations to ensure safe
operation of NPPs.

Prevalent problems in the current structure

WAPDA and KESC are still facing institutional and organizational weaknesses. The combined direct
and indirect losses incurred by these utilities during the period 1996-to date have created large fiscal
deficits, being covered though taxpayers money and through borrowings. What NEPRA, as an
independent organisation has done so far and what it has not done and why needs to be analysed.
Problems in the Governance System of NEPRA

The quality of a regulatory agency is determined primarily by the quality of its governance.
In order to determine the governance loopholes, analysis of the governance attributes with
reference to NEPRA to find out to some extent the reasons behind the poor performance of
the sector is required.
1. Lack of independence of NEPRA
Initially, it was an autonomous body, however, later came under an absolute administrative control
from the government. Currently, NEPRA is working in an extremely centralised manner. All the
decisions regarding tariffs and standards need to be approved by the government. It consists of a
Chairman and four members (one from each province), all appointed by the government.
Some observations from various reports are pertinent:

Independent regulator can provide assurance to investors that prices, outputs and inputs will
not come under the pressure of regulatory capture and pressures from economic and political
interest groups.

NEPRA is not autonomous (or independent), as the government continues to exercise

considerable control over it in matters of tariffs and pricing.

They also need to be financially independent of the government. The independence of the
regulator must be supported by sufficient funds; otherwise the regulator can be improperly
influenced by cuts to its budgetary allocation, i.e. political capture.

The most appropriate approach is levies charged from regulated services (license fee for
regulated firms etc.). The NEPRA operations are funded from licensing fees, filling fees etc.
as prescribed by it from time to time and approved by the Federal Government.

However, there are instances where NEPRA compromised on its financial autonomy. This can
have a negative impact on consumers confidence in the regulatory arrangement.

2. Inadequate regulatory resources

Inadequate regulatory (human capital) resources lead to poor decision making. The key
requirements for independence are the personal qualities of regulators that allow them to take
independent decisions and resist improper pressure or incentives. Their technical knowledge,
professional expertise and institutional capacity to discharge its responsibilities are important
attributes. In addition, to prevent comeback from the affected parties, regulators must be
appointed for fixed terms and protected from arbitrary removal. All of this is absent in the
current system.

3. Lack of Regulatory Expertise

Power has used to be a provincial rather than a federal subject in Pakistan. Therefore, NEPRA
comprises of nominees from the bureaucracy of the four provincial governments and now, a
former military person is the chairman. All are appointed by the government. None of the
members have the requisite professional background and relevant experience in a power
sector regulatory framework. They are mostly retired bureaucrats, and serve only for a short
period in NEPRA.

4.

Lack of Credibility

In the optimal design of any regulatory institution, there is always a risk of organisational
failure unless credibility and transparency in regulatory decisions are in place to counter
organisational failures.

Independence, accountability and proficiency of the energy regulators are crucial for
credibility. Direct involvement by ministers in pricing and licensing decisions can undermine
regulatory credibility, and hence investment (as is the situation in Pakistan)

Smith (1997) notes the crucial importance of utility services in politics, e.g. electricity
consumers as voters. For short-term political goals, politicians or parliamentarians turn down
the justified increase in tariff (as in the case of Pakistan separate tariff determinations for all
DISCOs have been reserved) at the expense of long-term benefits of consumers and
investments. Investors being aware of organisational risks associated with their investments
will demand high tariffs (as what has happened in the case of IPPs in Pakistan) to
compensate for increased risk or they will invest in industries with independent regulatory
agencies (with no government involvement).

5. Lack of Accountability

The regulators are feared to have the tendency to come under the influence of corporate
interests; therefore, their proceedings should be held in a transparent manner by involving all
the stakeholders, particularly, the consumers in a meaningful way. It is often argued that the
IPPs controversy could have been avoided in Pakistan provided the procedures were
followed in a transparent manner and by making all the relevant information available to
the media and citizens. As the deals were kept secret, there were speculations of bribes; a
crisis was thus created in the power sector with significant implications for the national
economy and consumers.(Emphasis supplied)

6. Lack of Public Participation

Laws in NEPRA allow for a complete grievance redress mechanism, but it is meant for
industrial consumers only while the domestic consumers are not properly entertained.

7. Lack of Clarity of Roles

Need for relevant expertise of the regulatory staff to define regulatory missions clearly and
carry out the functions effectively.

8.

Delay in the Regulatory Process

Delayed issuance of licences.

Problems in the overall Power Structure

Background
We may say that there is deficiency in the overall regulatory structure as highlighted by Laffont
(1996) when infrastructure reforms were introduced in developing and transition economies, many of
them had little experience to guide the design of regulatory mechanisms. Under pressure from
multilateral institutions and international donors, many of these countries hastily adopted a regulatory
model from the developed countries. These models were hardly modified to the political and
institutional characteristics in these economies including lack of checks and balances, limited
technical expertise, weak auditing, accounting and tax systems, and widespread corruption and
regulatory capture. This may be what seems to be happening in Pakistan.

Main factors that are responsible for the current crisis in the power sector at a macro level
are:
Lack of generation capacity, Circular debt, and increasing constraints in Transmission and
Distribution systems are the main issues.
1. Availability and Efficiency of Existing Power Plants:
Pakistan has not only failed to make substantial additions in the generation capacity but it also could
not use the existing power plants to their full potential. The problem could be linked to the failure of
adding new power generation capacity. In order to avoid power cuts and load shedding, the existing
power plants operate round the clock resulting in the essential maintenance schedules being
overlooked, specifically for power plants in the public sector. Such a practice which has been
continuing over the years has a telling effect on the operational performance of the existing power
plants and their capability to supply power to the grid. Their efficiency and availability have reached
alarmingly low levels; resulting in frequent breakdowns. The overall requirement of fuel has
increased to produce the same amount of energy and the plants operated at their required design
efficiencies. This issue needs the urgent attention of the concerned Authorities.
2. Circular Debt:

In Pakistan, the power sector has effectively become hostage to Circular Debt which is created when
the power generation companies fail to clear their dues to the fuel suppliers. The fuel suppliers in turn
default on their payment commitments towards refineries and international fuel suppliers.
Inefficiency in collection of revenues from the private sector, non-payment of dues by the public
sector including the provincial governments and ineffective contractual arrangements between the
Pakistan Electric Power Company (PEPCO) and the Karachi Electric Supply Company (KESC) are
the major causes for inter-corporate debt.
The factors responsible for the circular debt in the power sector include:

The inability of the DISCOs to pass on the cost of electricity to consumers. The cost of
providing electricity to consumers could not be fully recovered as no real increase in tariff
was notified by the Federal Government from 2004-05 to 2006-07. The tariffs allowed by the
GoP were inadequate to cover the average costs of the companies, therefore the companies
started to incur losses which continued to build up to unmanageable limits.

Affordability of consumers has always remained a key consideration before the Federal
Government in notifying any change in the consumer-end tariff. Sociopolitical pressures
prevent the government to pass-on the cost of power to the consumers. After the year 2007 the
NEPRA determined tariffs were not passed on to the consumers, as the Federal Government
notified lower tariffs with the gap reaching Rs.3.43/kWh on January 1, 2010. The policy
affected negatively on the financial viability of the companies.

Externalities like global economic meltdown and extraordinary high oil prices further
compounded the circular debt issue. In order to pass on the fuel price variation NEPRA
provided adjustments on a six monthly basis. However the oil prices fluctuated so rapidly that
the six monthly adjustments could not support DISCOs in their day-to-day operations. As a
result DISCOs had to resort to bank borrowing which became tougher under the liquidity
position of the financial institutions who considered that their exposure to the power sector
had already reached an unsustainable level.

3. Declining Hydropower:
Hydel power is considered as one of the cheapest and environment friendly source of energy. By
keeping a generation mix dominated by cheap hydel generation the government could have achieved
the objective to keep consumer-end tariffs at affordable levels while also passing on the true cost of
electricity. However, after the construction of Mangla and Tarbela reservoir-based power generation
projects, no major project was constructed with the exception of Ghazi Barotha Hydropower Project
which is a peaking power plant.

4. Depletion of Natural Gas Reservoirs and Slow Efforts for the Import of LNG:
Gas is considered a clean fuel for power generation and is cheaper than oil-based generation. Natural
gas has been Pakistan's key input for energy including for the power sector. Rapid depletion of natural
gas reservoirs resulted in expensive sources of power generation replacing it. The continuity of natural
gas to the power sector by the end of the year 2011 has not been guaranteed. Efforts for import of gas
and the development of LNG terminals for the import of LNG have also remained slow which led to
ad-hoc solutions for the induction of new capacity in the form of expensive furnace oil-based power
generation.

5. Failure to Exploit Coal Reserves:

Pakistan has failed to exploit and develop its huge reserves of coal which, according to conservative
estimates, are good for more than 100,000 MW of power generation.
6. Energy Security Issue:
The electricity generation in the country is heavily dependent on furnace oil imports. Therefore
any fluctuation in the international oil market directly affects power generation costs. Similarly
any interruption in the oil supplies may result in power supply interruption.
7. High Losses in Distribution Companies:
Consumer-end tariffs are highly sensitive to the losses in the transmission and distribution systems.
With every percent increase in losses, the tariff increases exponentially. At the country level the
average losses are around 22%, ranging between 10.51% -37.4%.
8. Low Revenue Collection Efficiencies:
The revenue collection efficiency of the distribution companies is very low. Incidentally the
companies with higher losses also have lower collection efficiencies than others. Collection efficiency
of such DISCOs with heavy losses is around 75%-80%.
9. Governance Issues:
Besides having inferior operational performance, almost all the Ex WAPDA Distribution Companies
(DISCOs) are not aware about their role and the need of good governance as a corporate entity. The
DISCOs, even the loss-making ones, are not reducing their operation and maintenance costs. Their
mindset is still that of a public sector entity without due regard to their rights and obligations. Their
power purchase contracts are not in place and defaults and delays are routine.
Other Factors include:

poor management, exhibiting considerable institutional overlap and poor capacity

rising political instability, together with rising demands for power and lack of
efficiency
weak legislation and poor implementation of rules and regulations
large enterprises still enjoying the economic power
resources allocated to regulation are low
weakness in public policy (governments lack the co-ordination and planning
capacities)
access to information is the key for better regulation, is also poor in Pakistan
Weak administrative governance in NEPRA
WAPDA and KESC still the inefficient giants that they used to be as a result of weak
governance structure, with inefficient and non-optimal tariffs, high line losses and
high level of corruption.
No competition at the level of distribution
Tariff structure is not based on long run marginal cost but used as an instrument to
achieve political objectives

Conclusion

Power industry needs an effective governance framework

Independent regulation in the true sense can play an important role
A regulatory agency with good governance is needed. This is a necessary condition but not a
sufficient condition for improving the overall performance of the sector. It should be
accompanied by a well designed industry and market structures.
Enhanced security for investors, their personnel and assets is required.