Should Coal be imported,inspite of Thar Coal ?

Should Coal be Imported , inspite of Thar Coal ?

Coal is being imported in Pakistan and the imports are increasing every year. Coal is required and used in industries such as cement, brick kiln, metallurgical industries etc.

Hard coal of good quality is also being mined in Balochistan, KP and Punjab. Production of hard coal is limited by manual and artisanal mining. The known sources are not large enough to attract capital and mechanization. Whatever is produced is consumed, and even imports are made to meet the demand.

In this section, we are concerned with a specific question. Should we import coal for power sector? There is advantage in coal. In Pakistan , there are large deposits of Thar coal, and in the world coal is the most abundant fuel, expected to afford 200 years of world consumption. It is abundant in China, US, Australia, India, Canada, and India and the lesser countries of Indonesia and South Africa. Industrial revolution in Europe took place on the shoulders of the then abundant coal there. Coal served as a backbone to progress and production in almost every industrial society.

Coal is being much despised and opposed these days by the generally environmentally sensitive world of today. Pollution and Green-house gases are the two principal factors responsible for the opposition and resistance against coal. On the other hand, this is also true that most electricity in the world today comes from coal. In the U.S., almost 50% of electricity comes from coal. In China, one Coal Power plant goes up every week. India has an installed base of MW of coal power and a sizeable coal resource base. However, it has started importing coal for a variety of reasons; principal among those is excess demand due to production bottlenecks, despite a sizable resource base. In the U.S. all kind of energy is produced, imported and exported.

Why import, when one is exporting; and why export when one is importing. Trade is done for many reasons seasonal factors, location issues, transportation costs, business linkage etc. In the case of coal, imported coal may be cheaper than domestically produced due to shear logistics reasons. Coastal towns and markets may prefer imported coal for convenience and cost reasons , if domestically produced coal is far off in the inner regions. That is the reason behind energy trade in the U.S., involving imports and exports as well. In Pakistan , despite cotton abundance , it is considered wise to keep imports open to have a check on the local prices , as well as seasonal issues. Excess supply and availability in certain months may induce exports and lesser availability in others may induce imports. India, to-date prefers importing coal for coastal towns, as imports are cheaper in coastal towns due to cheaper transportation than bringing domestic coal from inner regions. At some point in time, India may import Thar coal or electricity produced from it, for its coal scarce regions of Rajhastan and Gujrat, which are adjoining Pakistan, in place of coal from south .It is shear economics, if politics permit it to operate. Often it does not. Similarly, Pakistan may import Coal from Afghanistan, in preference to its own coal in the South.

Am I making a case for importing coal for establishing power plants, as some foreign companies have proposed? Why have they done so? For almost the same reasons as we have discussed earlier. However, the primary concern is that people are generally skeptical if Thar coal resource would come on line at all? Our provincial government of Sindh and its relevant departments may not like this kind of skepticism. Every now and then they do announce their actions, projects and approvals. Engro has completed its feasibility study, which gives some credibility and optimism. However, it is still a low key affair, not befitting of a gigantic project of this nature, being largely operated and handled from a single room in Sindh Secretariat. Visibility and profile gives credibility to vendors, technology suppliers, investors etc. Unfortunately, its absence does not appear to be very reassuring. If projects are progressing, these are to be planned, monitored and co-ordinated .It requires qualified managers and manpower, training activity etc. No credible international party is yet on board. The sole public demonstration of such an association is indicted by a trip to Germany by the project authorities. World Bank is double minded, despite its technical and financial assistance project. Some very fundamental issues which may impede progress ultimately are of coal pricing and royalty. These remain unstudied and unresolved. To federal bureaucracy, the provincial set-up appears to be too tight lipped and secretive , resisting involvement of others which may be a requirement of such a huge projects. Some of them are looking forward to the ultimate failure of the provincial government and its relevant department, which appears to be the sole player trying to take it to the goal all alone. Chinese , the most befitting partners , for Thar coal do not appear to be interested at all in it , while they are interested in every thing else from nuclear power plants to dams etc. There is something missing?

However, I do not think that going for the imported coal option for new power plants would be a good idea at all. First and foremost, such a project would crowd out the investment in domestic coal, after there is a limited supply of foreign capital willing to come to Pakistan esp in the difficult political circumstances. Coal prices also increase in sympathy with oil, as has been amply demonstrated by the recent past. We are suffering from a perennial trade gap and balance of payment problems obliging us to approach IMF for loans restricting policy options for economic expansion and peoples’ welfare. Import of coal would be a luxury we cannot possibly afford. In South, we already have Thar coal. Had there been some possibilities of sourcing the same from hypothetical northern sources, there would have been a logistical rationale for meeting the requirements of the upper and central regions. In these circumstances, there appears to be no rationale for entertaining such projects, except slow progress on Thar, which it is hoped, would be speeded up by a co-ordinated action of Federal and provincial governments.

Converting Oil-fired Power Plants to Coal

Converting Oil-fired Power Plants to Coal

By Akhtar Ali

There is some merit in this proposition. Oil has become quite a risky fuel, as the recent oil price hike has amply demonstrated. While apparently , there is no substitute to oil in transportation sector , the recent trend of installing oil based power plants(IC Engines mainly) has been rather unfortunate. Pakistan now has a dubious distinction of being10th largest importer of Oil and also the 10^th largest user of Oil in Power sector in the world. This may prove to be a very costly and tragic distinction indeed, if indigenization of fuel is not pursued seriously.

It is almost certain that oil would be extinct in the next fifty years and as its extinction phase starts, as it already has; its price behavior is projected to be quite volatile. Future price hikes ala 2008 cannot be ruled out. These would occur more frequently in future. Recent reliance in oil has perhaps been for no other short term alternative. Earlier oil-fired power plants have been installed in 30 USD per barrel regime.

Even Earlier oil fired power plants have suffered from low capacity utilization, although these were quite capable of running as base load power plants. A classic example is of HUBCO , which capacity utilization has improved very recently due to the power crisis. Otherwise, oil being expensive, HUBCO came in a low merit order and thus the low capacity utilization, which is ironic indeed for capital scarce countries like ours.

For the reasons discussed , oil fired power stations have been converted to Coal in Europe and ASEAN region in the wake of oil crisis of 1973 , and the trend continues. Despite general environmental dislike and opposition to coal, for instance, Italy’s major power utility ENEL has gone for conversion of a 2500 MW oil fired capacity to coal, as reported by NYT. There are other examples as well.

In the U.S already, coal based power is abundantly installed to the extent of 50 % of the total installed power generating capacity , providing cheap power ( 5 cents or lesser per unit) from cheap coal .Apparently ,the U.S. has no reason to increase the already high predominance of coal , while other resource options are there like gas and nuclear.

Coal , however, is not immune to unruly price behavior. Recently, its price also hiked in the international market in sympathy with oil, to three times its usual level. Therefore, while imported coal could be a short term option, the longer term option has no escape from utilizing our domestic Thar Coal (lignite).Optimally Lignite is better utilized at mine-moth power plants. However, Lignite can be transported to a few hundred kilometers quite economically, comparatively speaking, as is being done in (hard) coal scarce northern regions of India like Gujrat and Rajhastan. We can therefore look forward to utilizing Thar coal up to southern Punjab like Muzaffargarh.

Transportation is an important and significant component of the total received cost of coal and can add as much as 50% to the at-mine cost. Interestingly for some coastal towns, imported coal and its transport can be cheaper than domestic coal. This is one of the major reasons in India today for resorting to imports of coal. Unfortunately, Pakistan will ultimately be having two major energy resources at two geographical extremes, while most of the market may be around the center; hydro power in the north and coal (imported or domestic Thar) and Wind in the South. There would be no other option, but the universally available solar energy , which may ultimately balance out the situation in due course. Reportedly Afghanistan has significantly large Hard Coal resources. Both Pakistan’s and Afghanistan’s economies are going to benefit immensely, if these resources are developed also. These ideas should be kept in view, while planning for reconstruction in Afghanistan and returning of normalcy in the region.

For a variety of reasons, Thar coal cannot be adequately utilized with Thar based installations alone. By 2030, our famous Energy Security Plan (2005) envisages 25000 MW to come from Thar Coal; even more, if the unrealistic projections of gas are taken into account. All of this capacity cannot possibly be installed at one location, whatever be the dictates of transport optimality. There are many issues like security based dispersal, water, ecological limitations, demand location, manpower etc.

For the time being, it is imperative that the proposition of converting Oil-fired power stations to coal be given consideration. It is a long cycle issue, and may take some 3-5 years to materialize .Already, new power plants based on imported coal have been proposed for Balochistan coast, near Hub Power Plant, and regulatory approval obtained in this respect. However, keeping in view the eventual potential conversion to Thar Coal, it is suggested that coal power plants be based on Sindh coast. There was a proposal earlier, mooted earlier in 1988, to install imported coal power plant at Keti-Bandar under the auspices of ADB. Infact, whole of Sindh coast extending from Bin-Qasim to Keti-Bandar is quite opportune for such siting keeping in view the closeness to Thar Coal.

Technically speaking, there are no limitations to the proposal. This is possible in today’s technology. In steam turbine based power plants, Oil fired boilers are to be replaced with coal fired boilers, although not a cheap proposition, as 30 % of the power plant investment may be in the boilers itself. Capital cost component in the unit product cost, do not exceed 15-20 % , bulk of it being the fuel cost. In the long run, even Gas fired combined cycle plants could be converted to coal based IGCC, a technology that would be commercially available in next five years. But let us not just delay action today for options of tomorrow.

Case for a socially sensitive merit dispatch order for power plants

The Wasteful gas operated power plants:

Case for a social dispatch order in running power plants.

By Akhtar Ali

Too technical? Let me explain. Utilities or Electric System Operators have a merit list of power plants .The cheapest source/power plant is put at number one and the most expensive at the very last. As power demand increases, plants are ordered to send/dispatch electricity; the cheapest one comes on line first, and then the next cheapest, and so on and the most expensive one in the very end. The rationale is obvious; to buy minimum from the most expensive source and the maximum from the cheapest. There are two variants of this system, depending on whether it is a competitive market environment where market price is determined through demand and supply as determined in a real-time auction in electricity exchanges which these days operate in most developed economies. In these systems, total unit price of electricity (fuel +capital cost + O&M+ profit), is used as a criterion to decide as to which source is expensive or which one is cheaper. In cost-plus or regulated environments, long term pricing is agreed to according to a certain formula. Essentially, an electricity vendor or generator is paid for all his costs plus an agreed rate of return on his equity .Payments are made in two streams; one is the fixed annual costs paid usually in monthly installments. This stream of payments is to be made by the purchaser or the distribution companies or their agent, irrespective of whether , the purchaser orders electricity or not. It is a fixed liability on the buyer to be discharged as per agreed schedule. The buyer therefore treats these costs as sunk costs. Variable component of the price is to be paid at actual according to an agreed rate determined by a formula that includes fuel costs and O&M costs. Meters are installed , which record electricity units(kWh) received , and payments are made by the distribution companies to electricity vendor or generating companies , as an ordinary consumer pays for the electricity. This is the cost-plus system that operates in Pakistan, as it does in other developing countries, where electricity markets do not exist.

Coming back to the merit dispatch order, in cost- plus environments like ours, merit dispatch criterion is set at the unit variable cost. Purchaser would only compare his variable costs, (which for major part is actually fuel cost) for every incremental unit it buys, as his fixed costs are sunk costs.

There is another peculiarity in our energy and electricity systems .All fuels are not priced at their true worth and in this case their energy content, technically termed as Calorific Value. Oil may be inordinately expensive as it is mostly imported, while gas may be cheaper because it is locally produced. Reverse may be the case in most oil producing countries in the developing world, where often petrol prices are cheaper than crude oil.. to the extent of being literally free ,as is the case in Venezuela. False economies and comparative trade advantages and industrial base is established in such pricing regimes. On the other hand there are social constraints. Energy is an essential commodity and is required by the rich and poor alike, directly or indirectly. Usually some kind of trade offs is made. Normally, international financing agencies are opposed to these trades-offs and pressurize the policy makers to reduce or eliminate cheaper rates of energy than these are worth essentially, they argue for a uniform pricing. It is not the time and place here to examine the merits and demerits of uniform or optimal pricing in general and philosophical terms. We will examine here the implications of energy pricing policies on merit order dispatching, especially in Pakistan perspective.

What is happening in Pakistan is as following. In Pakistan, generally, gas is priced at half the rate of oil in terms of Rupees per unit of energy content, technically called Btu. There are a number of plants which are thermally very inefficient and consume a lot of gas , yet these plants are most frequently employed because the commercial cost is low due to cheap gas. Had gas been priced higher as per its energy content, these inefficient plants would only be used scarcely for peak requirements. Currently these double up as intermediary base load plants. Technically speaking, these come up higher in merit order.

Then what should be done. A simple and straight forward solution as would be practiced in rich countries would be to retire these inefficient gas guzzlers. We probably cannot do that , as we are already suffering from load shedding. But the irony is that due to pricing anomalies , even in the periods when there was no load-shedding , these inefficient plants were utilized much more ,and the most efficient and new and costly power plant like HUBCO remained under-utilized . It is now that there is a shortfall of 4000 MW that HUBCO is being utilized as per its availability and capacity. This is another matter that now there is funds issue and the circular debt that may prevent its fuller utilization. NEPRA has recently taken KESC to task for not utilizing its available capacity, which perhaps was for similar reasons.

Coming back, what to do then? Increase gas prices and thus hike electricity tariff, which the public is already crying horse against. More of tariff increase is in pipeline for other reasons, most important of which has been the recent Rupee devaluation. Our textile industry and exports are weaned on cheap gas prices and are quite used to wasting gas as well. Wasting habits go away gradually, but tariff increases may make the exports suffer causing unemployment and balance of payment difficulties.

Theoretically, price increase would discourage waste and bring about what the economists call optimal resource allocation, a Utopia indeed. Energy consumption is already quite low, and people are close to being pushed out of the energy market altogether. There are larger questions, but we would restrict ourselves to the problem of inefficient power plants wasting gas unnecessarily. We can’t throw these away and nor increase the gas prices to be brought in line with those of expensive oil. What to do ? Let us examine the following proposition.

The proposition is simple. Bring these plants out of the merit list and operate these for peak requirements and in emergencies as back up power. I wrote a long preface for this simple solution, but the effort perhaps would be well spent, if it makes our power sector operators respond to it positively.

The role and performance of regulatory bodies like OGRA

The role and performance of regulating agencies like OGRA

OGRA is in news these days. Its parent ministry MPNR is criticizing it in public and other senior parliamentary leaders from the ruling party have led onslaught on it. Earlier OGRA chairman came into limelight when public heard of its board members being fired by the latter. Is it a personality syndrome or conflict and infighting or there is something more germane into it. ? What is the role of OGRA and for that matter any regulatory agency of this kind. What role it has been given and what role it could have carved out itself by creative maneuvering and internal negotiations with its main stake-holder which is the Ministry of Petroleum and Natural Resources itself. Its counterpart NEPRA has been more successful in having a working relationship with its parent ministry.

First of all, a regulatory agency may be associated administratively with a ministry, but for all practical purposes it is independent. However, its independence may be circumscribed by the statutes and the rules that are usually made by the Ministry itself. Sometimes the issues are multi sectoral and multi-ministerial and are thus to be handled by the PM himself and his Cabinet Division. It is through the statutes that ministries can control or dictate their way and policies and not through administrative orders. Regulatory agencies can strengthen themselves by bringing in public discussions and hearings and oversight and making it more effective and integrated with their processes. Public consultation process may at times be overbearing and impeding speed and convenience in decision-making , but it is worthy enough to be welcome and built into the decision making process. It is perhaps the only defence and support the regulators have to fall back upon in performing their function.

As to the regulatory agency’s independence, it can vary greatly from country to country and its relevant legislation and from sector to sector. The most powerful regulatory agency in a country is normally the Central Bank or State Bank as we call it here in this country. Obviously, it is much less independent than its US counterpart, in theory and as well as practice. Energy regulatory agencies are more powerful in India than these are in Pakistan. Perhaps size and multi-polarity matters, and makes central organizations more powerful and effective. Even after 18^th amendment, all regulatory agencies and functions have been given under federal domain. Conflicts are going to arise, when the implementation begins .It would be highly debatable, if except for Punjab, any smaller province can have the resources to run these agencies, technical and financial both.

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It has been alleged that OGRA has not been able to perform its function. The latest case that is cited of is the unduly rising prices of LPG. A broader criticism, and perhaps legitimate, is that it has not been able to carve out space for itself. Space is granted by the legislation and statute but the statutes themselves are influenced by the lobbying and input of the regulatory agency itself. In Pakistan, perhaps it would be too much to expect from the retired bureaucrats for whom these positions are lucrative parking places. The salaries are too high to be risked? Ministries generally would like to maximize their power for legitimate and not very legitimate purposes and commercial interests would also not like to be constrained. The maximum support should therefore come from the legislature and the public.

Now coming to the two specific charges on OGRA; LPG prices and the charge that OCAC performed better. LPG is a fuel for the poor. Its prices have been going higher and higher, whether it is justified on some grounds, is a separate discussion. The real policy issue is that LPG has been kept out of the regulatory process and thus it is beyond OGRA’s purview. The culprit is the classical phony and naïve argument of freeing the pricing and the misconception that opening up prices leads to market efficiency and would ultimately lower the price. There are several reasons that these ideologies do not work in societies like ours, for the following reasons:

1) We are always supply scarce countries. Only population and demand is abundant .Supply is usually restricted by a germane shortage of capital. Price signals are not strong enough to attract foreign and local capital. There are other factors such as political instability and the law and order whish over-ride economic factors and signals.

2) The regulatory and legislative processes are weak. Consumer is poorly represented in the power structure. Producer is powerful and integrated into the power structure.

3) Anti-competition and price collusion behavior is rampant and generally well entrenched. Competition protection legislation is weak, ineffective and perpetually sabotaged as we have been observing in the case of Competition Commission of Pakistan.

4) We can not wait for the ultimate rationalization and resource allocative process to show its promised results. It may never happen or may be too little too late. Our consumer is poor. One-third of our people lives in abject poverty and cannot get the minimum nutritional requirement. And others are only marginally and slightly better off except for a very thin minority.

Thus the price unfreezing and letting it to be decided by the market and in fact by the producers does not seem to be working and resulting into lower prices. Price decontrol of such things as energy and LPG is a fools’ paradise. It should be shun at the first opportunity indeed immediately. Only when price decontrol is lifted by the ministry of petroleum, OGRA cannot do any thing in this respect. People can do it in the long run, but they rise only occasionally and randomly and such processes are only disruptive, as there is ample history to suggest.

Now coming to the case of oil pricing, it is alleged that OCAC (Oil Companies Advisory Committees) has performed and could perform better than OGRA. I have no mandate or axe to grind with OGRA to defend its performance. As for OCAC, there could not have been a more shameless and disgusting name for an entity that is to set prices; a producers club setting prices for consumers with the support of the ministry. This may have been valid in military oligarchies of the past but it is very disturbing to find support for this coming from the ministry of petroleum .Oil prices used to be set on a cost-plus basis earlier and supported an essential but basically inefficient oil industry which made huge profits in the past. Now that the more saner policy of oil pricing based on landed price parity with imports , the oil industry is crumbling .It would need support like many other inefficient but essential entities. OGRA’s’ job today is implementing a formula, calculate the price and publish it. There are many ifs and buts in it, which OGRA should have made a practice of discussing in broad day light in public hearings than adjudicating on these quietly and slipping into the pricing system. No wonder it has not managed to attract a lot of respect from the stake-holders and the public.

Ingredients of Public Policy

Ingredients of Public Policy

Somebody said it well : our policy is to have no policy .Policy can be a drag and a liability , if it tries to be too ambitious , attempts to lay down ground rules for every micro issue ,does not have openness and flexibility ( too much of which can be counter productive to a policy , nullifying the very purpose of issuing a policy ) , is prepared without consultation of stake-holders ( without being a hostage and victim of powerful vested interest) etc. Policy can be annoying to all as it tries to optimize and balance the interests, and consequently every body may not get its desired want and objective fulfilled. If it tries to be hunky-dory, it may be an exercise in useless journalism as many policies really are.

Energy Policy can be a thankless job, as it may try to reconcile producer and consumer interests; producer wanting to have more profits and returns for share-holders which may maximize investments and supply; and consumers with their limited means and general poverty in this country, would want to have it dead cheap. Expensive energy may otherwise lead to widespread stealing bordering looting, as is the case with Electricity in most parts of the country except Punjab. Ironically in Punjab, natural gas theft is the highest than in any other province, perpetrated, not by the poor house-hold but by industrial sector. Then there are supply chain dependency and linkages. If the policy satisfies primary energy sector, it may leave little margin for electricity producer, sending a chill wave to them. All problems are for a sensitive and conscientious policy maker and government functionary. For those who don’t care, there is no issue. People don’t expect much from them, lose hope and look forward or pray for their exit or ouster.

Policy has to have a heart, and not mind only. It has to consider the weak and the poor, who cannot often defend it, and is not adequately represented and lobbied of. It should provide for pay-off and compensation of sorts to the intended and unintended policy victim. A dam may be a public good, but may displace a lot of people and deprive them of their livelihood. Alternative accommodation and resettlement, sharing of the output (free or near free electricity), sharing of royalties, preferential employment etc are the usual ways and means to broaden the acceptability of projects and policies. Opposition to Kalabagh dam in Sindh could be ameliorated, if the claimed loss of land and livelihood can be internalized in project costs.

A policy makers and a functionary must integrate himself with stake-holders intellectually, but insulate from stake-holders/vested interests socially. In our set up, secretaries and officials routinely wine and dine, attend marriage ceremonies, travel on the expenses of the company with family and entourage, have their son’s tuition of foreign universities picked up and to harmlessly stay in London apartments of the business friends. There are apparently no rules regulating the social conduct of officials except ISI regulating foreign mission’s contacts. These kinds of officials are usually very popular among all kind of people, bosses, juniors, clients, public, friends and family. The one who has some qualms about propriety and has some principles, is often disliked and abhorred by almost every one and even suffers from the contempt of his family, particularly of the spouse. Often he may not be that suave and welcoming and receptive open-door type, as his life is often difficult. He cannot and does not invite and entertain. Such a person is awarded various names and pejorative like Khushka ,Be-faiz ,non-practical etc..

In Pakistan, we have special and additional sets of problems. The department secretaries may be coming from totally irrelevant departments like Hajj and Auqaf depending on their lobby and clout with the government in power and other landed interests and connections. On the other hand experts from line departments such as WAPDA etc may be to narrowly focused, specializing in only wire and cable and transformer. Consequently, except for Hajj policy, all policies are usually made with a heavy dependence and input from international agencies. Some times, local bureaucracy cannot even write the TORs for such studies and input. Often this dependence also stems from the loan conditionalities. Quite a few of these consultants often are strong disciples of John Adams who try to implement all economic principles of user charge ,pricing ,resource allocation, and efficiency etc. ,trying to specify treatment without much regard and sensitivity to the condition of the patient. A patient can die of the right medicine due its side effects.

So should we have policy for policies? We certainly need to train our bureaucracy well, introduce some sensitivity to specialization and expertise in recruitment and placement policies. We need to involve and develop think-tanks, NGOs, foundations etc. The political parties should get deeper into policy making while being out of power, by instituting the shadow cabinets, not for being an alternative for military dictators but for developing expertise and capability. We see that finance ministers invariably come from outside having a lobby in the World Bank or IMF. One can be acceptable to these veritable international institutions and yet be honed in the domestic political process. Unfortunately, in today’s circumstances, these are mutually exclusive attributes.

Competition, competitive pricing, decontrol of prices, market development are the usual catch phrases and prescriptions of foreign consultants and their parent institutions. Competition, except among the poor and the labor, has seldom worked in countries like ours. Often it is collusion and conspiracy among the producers and of the controller which may hold sway, which kind of behavior may attract severe penalties including prison sentencing. We have noticed the difficulties of Competition Commission of Pakistan. Penalties are resisted tooth and nails and not paid; if at all some officials are stupid enough to risk their jobs and even safety. Policy makers have to be watchful of such often external advice. Conspiracy theorists may go as far as blaming the donor agencies for conspiring against our national interest and for having an agenda to keep us begging and underdeveloped.

The need to have an overall Energy Policy

The purpose here is to discuss Energy Policy, although in Pakistan there is no Energy Policy issued as a single document, but is spread subject wise into separate sub-policies. There is Petroleum Policy, Power Policy, renewable Energy Policy etc. It may not be a bad idea to issue an Energy Policy document, that integrates the residual , remaining and interfacial issues and defines vision ,goals and objectives , while introduces the sub-policies. There are multi-ministerial issues connected with ministries of Petroleum and Water & Power and even of Environment where in joint determinations are required and are lacking at this moment, some of which have required prime-minister’s interest and intervention in the recent past, although the latter may have been done foe stressing and emphasizing the need to fast-track processes and solutions.

There are specific issues that may have to be answered by such policy such as the following: 1) Although energy or electricity for all may be a good slogan or vision, Some quantitative target and schedule should be included not of the rural electrification, but also for thermal/cooking energy need, in which context LPG policy and its pricing become a major issue. Also of concern is gas distribution network’s expansion. Bio gas is also an important component of rural energy policy. Electricity and gas distribution to Katchi Abadis is to be an aspect worthy of attention in policies. 2) There is today confusion as to the role of regulatory bodies. IN this respect OGRA‘s performance and conduct has received external criticism. Where do the Ministries’ role end and regulatory bodies begin? There are extreme cases of liberty and control at the same time. For example, NEPRA is at almost unlimited liberty at approving capital costs without defining limitations or guiding principles and criteria. In fixing rate of return, NEPRA has arrogated authority to itself, while it should be given in an energy policy announced by GOP. On the other hand, NEPRA has been constrained to waste its time and energy in Quarterly Tariff determination of DISCOs , in addition to the monthly announcements of Energy prices. NEPRA cannot do anything about it. People are crying hoarse that excessive profiteering is being resorted to by the LPG companies and that LPG prices are unreasonably jacked up. Ministry of Petroleum criticizes OGRA for inaction and inefficiency, while OGRA argues that it lacks jurisdiction.3) although there is a renewable energy policy, there are serious issues of Capital costs. Infact, jacking up of capital costs are a perennial issue; NEPRA does not seem to have guidance in this respect. They are resorting to common sense or/and looking the other way, in place of a policy guidance.4) There used to be a uniform tariff, irrespective of costs, subsidies filled the gap. As subsidies go, what is to be the policy and criteria or the principles forwarding the costs to the regions? Some rules of Tariff differentiation among user groups and the cross-tariff subsidy; 5) some policy on T&D losses and their reduction, schemes and incentives; 6) Royalties issues on hydro/Tarbela, gas royalties and well-head prices , resolving the grievances of producer provinces like Balochistan.7) The policies of appointing Regulatory bodies’ management such as members and chairmen of NEPRA and OGRA remain either unimplemented or seem to suffer from gaps and aberration. One has never come across the advertisement for recruitment of chairman or members of NEPRA , although one would have noticed advertisements for OGRA members. Chairman NEPRA’s appointment is under litigation, with claims that he does not have the right qualifications, although I do not really believe in rigid qualifications parameters. For such positions, selection committee’s determinations should get priority. Similarly members keep lobbying chief ministers nominations of provincial quota. These senior appointments should be done on merit. Any way now with the 18^th amendment, all regulatory bodies being Federal Subjects, should mean that such provincial requirements would no longer apply.

Surely there may be some rules and procedures, but these are a patch-work requiring integration and consolidation and removing gaps and writing out un- written arbitrary practices. Users and stake-holders should know about it, removing monopoly and undue discretion and thus obviating the abuse of power and its associated manifestations. Lastly, announcing a Policy is a good way for politicians and ministers to take charge of their portfolios and greater say in affairs than the day-to-day determinations of the bureaucracy. It is a good way of getting known and publicizes their work and acquires respect and credibility among the public. Time to put an end to kuch nahin ho raha criticism and syndrome.

Provincial governments demand transparency in Electrical pricing

Yesterdays newspapers reported that provincial governments have expressed dissatisfaction over fuel charges being levied by the electricity system , which they call non-transparent.Ministry of finance Has reportedly demanded from NEPRA to require audit of fuel purchased and consumed by the generation companies.This writer earlier had also misgivings on fuel adjustment charges levied by the utilities.Earlier NEPRA used to reveal fuel charges in one line statement issued monthly.Lately NEPRA has started publishing some details in this respect.Perhaps more is required towards this end,and detailed tabulation in this respect may satisfy the concerns and skepticism of the stakeholders.

On a larger plane Government has taken an institutional step to bring more order into the electrical system by organizing CPPA-Central Power Purchasing Authority.Readers may know that CPPA 's function is to purchase electricity from various generating companies like IPPs,WAPDA,GENCOs etc at formula previously determined by NEPRA.NEPRA,however,determines reference unit fuel charges and annual fixed charges under a cost-plus system.Actual prices paid by CPPA are ,however, according to a price escalation formula reflecting the changes in fuel prices.Meters have been installed at the required points to record electricity received.I am sure there is audit for all such payments,which although doesnot enjoy confidence of the governments themselves and other stakeholders.Hence the demand for transparency and publishing details on the net ,if not,by CPPA ,then by NEPRA.

Organizing CPPA as a company(under government guarantee) is expected to bring normalcy and the required transparency.Currently,the authority seems to have the status of a cell under NTDC.Company laws would require CPPA to make the required declarations.Advertisements have appeared in the newspaper for induction of a chief executive of CPPA.It is hoped that a candidate is found in time who meets all the requirements.

The criticism regarding fuel charge variations partly stems from lack of knowledge .It is perfectly all right that different generators would consume different quantities of fuel to produce same quantity of electricity,as there are differences in vintage,capital cost,technology etc.However there may be issues when the same producer charges for varying quantities of fuel for the same quantities of electricity.There may be variations of fuel mix,load factor.number of starts and offs etc that may cause variations.Hence that may require discretion on the part of buyer and seller.And hence the scope for abuse.Some measures towards declaring and transparency towards this aspect may satisfy the related skepticism from various quarters. However it may be only fair to also acknowledge that NEPRA publishes relatively much more data and info than other bodies like OGRA-Oil and Gas Regulatory Authority.

KESC Tariff difficulties;Shun constant Tariff formula

There seem to be difficulties again with the implementation of a rather unique tariff system given by foreign privatization consultants. I have not been closely following KESC tariff issues over the past many months.However my cursory following indicates to me that there are implementation issues involved in KESC tariff.There was earlier some kind of a divide on KESC issue at NEPRA board ,wherein two of the honorable members either wrote a note of dissent or withheld signature altogether.Now there are difficulties in awarding fuel price and O&M adjustments.NEPRA member Tariff,who reportedly presided over three member public hearing on KESC tariff,ordered physical verification of fuel expenditure invoices from the KESC. Let me give the reader some background on the tariff setting systems.

There are broadly two system:one of cost-plus,where all costs of the utilities are paid as these occur,and a fixed or variable Return on Investment(ROI) or Equity(ROE) is paid,generally related to the on-going interest rates.All IPPS are paid based on this cost-plus approach.There is a reference tariff determined through regulatory process,escalation above which is provided based on agreed formula and current fuel and other variable prices.It is relatively fair and simple.In case of distribution companies,with highly depreciated assets and often negative equity,Return on Asset(ROA) approach is used.OGRA is also doing the same with the gas distribution companies.

In case of KESC , a constant price tariff approach was adopted,however,with provision of escalations.The difficulty with KESC is that ,it is an integrated utility,with generation,transmission and distribution.Electricity is self generated by the KESC and is also supplied from WAPDA network.At the time of privatization, a certain mix of self generation,and purchase and an assumption of oil/gas mix was made.Depending on such assumption, a reference tariff was given with provision of escalation.At that reference price, there was an implicit loss to KESC, and the expectation was that the new KESC management would make the required investment and essentially earn through loss reduction.There were and still are Transmission and Distribution losses in the KESC system more than if compared with the

public owned companies like LESCO and IESCO etc.Also the thermal efficiency od most of its plants is very low,wasting a lot of expensive fuel oil.KESC has done some investments and is in the process of making more investments towards improving thermal efficiency and saving fuel cost.This saving ,however,will go towards reduction of losses,wiping out the accumulated losses and finally towards return on investment.These savings cannot be passed on to the public as some people seem to be demanding.

However the existing system of constant price with escalations has become very cumbersome and even lacking in terms of transparency due to its complexity.Traditionally,this constant price formula has been used in distribution companies only, and that also for up to three years,with no provision for escalation.

In most of the developed world, electricity generation is out of regulatory process.Whole sale electricity prices are set through demand and supply through an auction process through electricity exchanges on the lines of share bourses.Generation prices are relatively more stable in the OECD countries as most electricity generation is based on gas,coal and nuclear power,where price volatility has been lesser.Even in the neighboring India,the electricity prices are much more stable than here,due to the domestic and public controlled coal.In Pakistan,hydro and gas based electricity used to provide price and tariff stability,but due to increasing contribution of oil based generation.price volatility has increased.This oil dependence and the increasing trend on oil dependence is the single largest threat to Pakistan's economy and social stability.The earlier other sources such as hydel and coal are utilized the better.

Coming back to KESC,the very purpose of constant price system of offering simplicity and transparency seems to have been defeated due to so much variability and complexity.It is quite possible that the young men at NEPRA who do these calculations may sometime fail to appreciate the issues and commit mistakes.Even this writer often gets confused and finds himself at a loss as to how to separate permitted variabilities from the non permitted ones.The situation would get even more complex and complicated if and when KESC makes new investments in new generation capacity.Questions have already been raised by the stake-holders,casting doubt and feeling confused.

Our business community,which is not used to spending money on building institutional capacity in their representative organisation,has never managed to make a technically valid case and has relied more on delaying litigation to oppose tariff increases.If nothing else ,the KESC tariff system is becoming too cumbersome to be transparent.Recent load balancing practices and requirements ,and the consequent changes of oil and gas mix have further complicated the situation.

It would be only appropriate that the government and the regulatory bodies consider changing the KESC tariff system to a conventional simpler system of Cost-plus,which is being practiced with other IPPs ,and distribution companies.Even KESC management may feel at ease, if the stake-holder confidence in the system is improved.For this to happen,KESC tariff has to be a three part tariff, separately for generation ,transmission and distribution.In this case comparability with other similar companies would be available preventing abuse or error.This would be for regulatory body and the KESC: public would be having one tariff as usual and would not be burdened with such disaggregation.Foreign consultants as usual are to be appointed,as the requisite expertise and objectivity may not be available locally.

Targeting loss reduction and basing tariff on it is to make tariff contentious,controversial and fluid.KESC tariff system has this feature as well.It has been demonstrated now that the private sector has no special leverage in reducing T&D loss reduction.most of which is theft and pilferage.In fact private sector is susceptible to political and group pressure more than the government functionaries.As to the reduction of fuel cost and increasing thermal efficiency,it is a matter of attractiveness of investments in the sector and tariff stability.Third party investment for Karachi is being discouraged due to the existing system and KESC would itself be discouraged to make the requisite investments,if tariff issues remain fluid as these are at the moment.Lenders would also be hesitant as well.

And finally contemplating over these problems,one reaches a conclusion that after all,the idea of privatizing distribution utilities may not be a good one.Government would have to be around to take responsibility and to keep footing the bill,if there are losses,be it private or public sector.However,IPPs have been a successful innovation that must continue and in all probabilities would be sustaining into the long term future.