Tuesday, October 26, 2010

Re-organisation Of electrical sector; the closure of PEPCO

Reorganization of Electrical sector: closure of PEPCO issue ?

Contradictory reports are coming in regarding the closure of PEPCO, which was created a few years ago in the wake of restructuring of WAPDA. Earlier WAPDA used to be the sole organization, responsible for the power sector, which was a continuation of an early power regime, where hydro power used to be a major component of the electricity supplies. Reorganization was done as under; WAPDA restricted to the dams, irrigation system and the hydro generation facilities like Tarbela etc. WAPDA happened to be the owner of these assets and facilities. PEPCO was given the ownership and management of Power distribution companies (DISCOs) and possibly the thermal generation plants. NTDC (National Transmission and Dispatch Company) was to own and manage the Transmission facilities and act as an integrated system operator (ISO) responsible for power dispatch management. There is a CPPA (Central Power Purchasing Authority) under NTDC with a low profile, which bought electricity from all the IPPs and GENCOs and sold it to the distribution companies (DISCO). The need for this arrangement was felt because of a uniform tariff regime system, under a huge subsidy. The whole system except for KESC and other IPPs was in public sector.

Under a Power Utopia, the entire power sector would be eventually privatized, there would be no subsidies and there would be separate regional or DISCO tariff and thus no WAPDA or PEPCO. Two developments have taken place recently. CPPA has been upgraded from a section under NTDC to a full-fledged company under GOP guarantee. Perhaps this was a step in the right direction. It had to be a guarantee company because, it would be entering into power purchase agreements, that had to have the benefit of GOP guarantee for the satisfaction of investors and IPPs. It is being wishfully contemplated by the Power theorists of multilateral agencies under which all reform is being engineered that the subsidies would go away along with the uniform electricity tariff in the country.

The whole electricity sector has been structured under a unified model of uniform tariff and central investment. All assets and fuel sources have been developed under it. Power sector, under 18th amendment has become a Federal subject, rather than being on the concurrent list as it was earlier. Subsidies may go, but a regional tariff is impossibility due to the baggage of the past. In a decade, the sector configuration may change appreciably due to increased contribution of IPPs. Regional tariff may then be a possibility.

Nationalists of KP, rightly or wrongly, already allege that cheap hydro electricity is bought from Tarbela, and sold back to the province through PESCO at a rate many times higher. They, however, forget conveniently that, it is the federal investment through which cheaper hydro electricity is produced. KP contribution it is of its location, which is rewarded under a royalty system. Except in Punjab, the electricity losses are 30-40% which is largely taken care of by subsidies. These subsidies are assumed by GOP were never paid off timely resulting in circular debt which leads to shortage of liquidity in the system and low capacity utilization in a situation of power shortages. The theft in Punjab is at its lowest of 15%. If regional tariff is introduced, Punjab as a whole would benefit, which in effect subsidizes the more theft prone regions of the country. Under go alone system, it would probably have a lower tariff. The utopia may, however, have some chance if all resources are priced at their true value or market worth. Natural gas according to this theory is currently underpriced and thus its price /tariff should go up.

All of this can lead to a political disaster, threatening and risking not just the sustainability of democratic system, but the very foundation of a united federal Pakistan. Federalism is popular under which the political actors and the system is ready to get rights and not the responsibility. Let the people get the putative merits and advantages under the new system for a while, and then the requisite burdens and liabilities may be shifted. No wonder some rebalancing may be demanded later.

Coming back to PEPCO, its role and its rationale, in Pakistan an administrative model has worked satisfactorily in the past of sectoral corporation controlling and administering the sectoral companies. As in the manufacturing sector, the privatization took place these corporations went away, as has happened in the case of PACO, Ghee Corporation and others. The Corporation model is of a holding company that serves as a professional intermediary between the public sector companies and the bureaucracy of the ministry, obviating a direct role of the latter in the day to day affairs of the companies. These corporations are also supposed to take care of the sectoral issues and its development, suggested policies and advised government. However, the enterprise/company management has often complained of a rigid control by these corporations, hampering their management independence and flexibility. The notion is sometimes supported conveniently by the ministry bureaucracy who wants direct control without intermediaries of the corporation. Opposition to PEPCO is to be seen in this perspective, although there are genuine issues of reconciling the roles in face of a rejuvenated CPPA. The role of a sectoral corporation and a holding company would be there in the background of the aforementioned issues. There may be no role for it in a Utopia and a totally privatized regime, which time has not arrived yet.

We cannot possibly afford to be reckless theorists unmindful of the consequences of policies and new regimes. The foreign advisor and theorists do not buy the same medicine for themselves as they prescribe for us. Had they done so, there would have not been much of an inefficient manufacturing sector in their countries surviving on trade barriers .Even agriculture survives there on trade barriers and subsidies. Inefficient and labour intensive sectors would have been long shifted to this part of the world promoting mutual welfare and employment in labor surplus economies. This has not happened and would happen very gradually, minimizing dislocation on the part of adjusting people, labor and sector. Same gradualism would be advised here and not the abrupt actions under the knife of IMF and dagger of project loan giving agencies. PEPCO may be allowed to continue or merged with CPPA.

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