COMPETITION COMMISSION OF PAKISTAN
THE ANALYSIS OF
COMPETITION AND
ECONOMIC
DEVELOPMENT IN THE
POWER SECTOR
Date:
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COMPETITION COMMISSION OF PAKISTAN
THE ANALYSIS OF
COMPETITION AND
ECONOMIC
DEVELOPMENT IN THE
POWER SECTOR
Date:
Disclaimer
The Competition Assessment Study on the Analysis of Competition and Economic Development in the power sector in Pakistan has been prepared under the supervision of the Research Department of the Competition Commission of Pakistan. The views expressed in the report do not necessarily reflect the Commission‘s views or position arising out of, or impacting upon, any enquiry, investigation or other proceedings carried out by the Commission. Neither the Commission, nor its Members, employees and any of its Consultants, assume any legal liability or responsibility for the accuracy, completeness or any third part use, or, the result of such use of any information contained in this report. Publication of this report is designed to assist public understanding of competition issues.
- TABLE OF CONTENTS............................................................................
- FOREWORD ..............................................................................................
- ACKNOWLEDGMENTS ..........................................................................
- CHAPTER 1: THE POWER SECTOR IN PAKISTAN ............................
- 1.1 Introduction
- 1.2 The Power Sector in Pakistan and Policy Initiative
- 1.3 The Infrastructure and Capacity of the Power Sector
- 1.4 The Power Sector from a Historical Perspective
- 1.4.1 Laws Governing the Power Sector
- 1.4.2 Economic Conditions in the 90s
- 1.4.3 International Move Towards a Competitive Model
- INTRODUCING COMPETITION .......................................................... CHAPTER 2: RESTRUCTURING OF THE POWER SECTOR-
- 2.1 Introducing Regulation
- 2.2 Legal Foundation of Electricity Regulation in Pakistan:
- 2.2.1 Gadoon Amazai Case
- 2.3Restructuring of WAPDA
- CHAPTER 3: DEVELOPMENTS INTRODUCED BY NEPRA ...........
- 3.1 NEPRA
- 3.2Trading Arrangements
- 3.2.1 Single Buyer (Existing Arrangement)
- 3.2.2 Single Buyer Plus Arrangement......................................................................
- 3.2.3 Bilateral Contract Model.................................................................................
- DISTRIBUTION OF ELECTRIC POWER ............................................. CHAPTER 4: STATE OF GENERATION, TRANSMISSION AND
- 4.1 Generation & Impediments to Competition
- 4.1.2 Thermal Generation
- 4.1.2.1 Issues with Tariff Determination
- 4.1.3 Hydel Generation
- 4.1.3.1 Hydel Generation Capacity
- 4.1.3.2 Issues with Tariff Determination
- 4.2 Transmission and Dispatch
- 4.2.1 Single Buyer Stage
- 4.2.2 Single Buyer Plus
- 4.2.3 Open Market
- 4.3 Distribution
- 4.4 Reforms Introduced by NEPRA
- – A CASE FOR THE INTRODUCTION OF COMPETITION .............. CHAPTER 5: DEMAND OF ELECTRICITY AND LOAD SHEDDING
- 5.1 Introducing Competition
- 5.2 Licensing and Performance Evaluation
- 5.3 Balancing between Consumers and Producers of Electric Power
- 5.4 Competition and Non-discriminatory Treatment of Service Providers
- Effectiveness 5.5 Independence of the Regulator — the Foremost Consideration in Judging its
- 5.6 Tariff Determination
- Chapter 6: CONCLUSION AND RECOMMENDATIONS ...................
- 6.1 Bridging the Demand and Supply Gap
- 6.2 Recommendations
- 6.2.3 Standards for Procurement and Investment
- within the Reach of the Consumers 6.2.4 Maximum Utilization of the Indigenous Resources to make Available Power
- 6.2.5 Problems with Tariff Determination
- Sector 6.2.6 Competition as a mode of Bringing Efficiency and Affordability in the
- 6.2.7 Strengthening the role of NTDC
- 6.2.8 Distribution
- 6.2.9 Rationalization of Subsidies
- 6.2.10 Independence of the Regulator
- 6.3 Summary & Conclusions
- FIGURE 1: WAPDA’S RESTRUCTURING Table of Figures
- FIGURE 2: PAKISTAN POWER SECTOR PLAYERS
- FIGURE 3: SINGLE BUYER (EXISTING ARRANGEMENT)
- FIGURE 4: SINGLE BUYER PLUS ARRANGEMENT
- FIGURE 5: BILATERAL CONTRACT MODEL
- FIGURE 6: SOURCES OF GENERATION OF ELECTRIC POWER IN PAKISTAN
- FIGURE 7: POWER SECTOR- TOTAL INSTALLED CAPACITY
Our aim is to ascertain the extent to which the current market structure in the power sector is likely to retard the growth of competitive markets and help economic and social development in the case of a developing economy such as ours. A thorough analysis was required before we could fully appreciate the current market structure of this sector and we looked at the policy initiatives, laws and market forces from the historical perspective including regulatory authorities and their efficacy in the power sector in Pakistan. For the purpose of this Report it was relevant to delve into the types of electricity market structures and study the state of generation, transmission and distribution of electric power. This thorough study of the market was a prerequisite to forming any conclusions about the existing under developed state of the power sector.
This Report is meant to serve as a basic reference document for identification of the state of competition in the energy sector and to be used as a milestone in future policy development and reforms by providing a framework of action for policy makers, foreign and local investors. The Report further examines the tension that exists between the application of sector-specific regulation such as rate-setting and licensing. In terms of capacity building and policy dialogue this project was designed to enhance the expertise and influence of national and regional consumer organizations and to increase networking and communication within the sector through training and informing stakeholders including consumers, manufacturers, distributors, retailers, NGOs, civil society organizations about competition policy and its importance in the development of this sector.
ACKNOWLEDGMENTS
The Competition Commission of Pakistan gratefully acknowledges the funding provided by the International Development Research Centre (IDRC) of Canada, and the World Bank for conducting the present research and for the preparation of this Report.
independent agency shall objectively decide on regulatory matters of the power sector without extraneous influence.
In line with the strategic plan, an independent regulatory body in the shape of National Electric Power Regulatory Authority (―NEPRA‖) was created through a Presidential Ordinance in 1995 which was later ratified by the parliament in 1997.^1
1.3 The Infrastructure and Capacity of the Power Sector
The infrastructure and capacity of the power network of Pakistan comprises of generating stations of hydel, thermal (RFO), thermal (Gas), nuclear and coal power plants spread all across the country. Transmission lines of 500/220 kV form the transmission network. For the purpose of distribution of electricity, eight distribution companies (known as ―DISCOs‖) and Karachi Electric Supply Company (―KESC‖) are the main providers of electricity to consumers.
Out of the total generation installed capacity of 19552MW in the country, the available capacity for dispatch for National Transmission and Dispatch Company Limited (―NTDC‖) was around 13500MW, whereas for KESC, it is around 1300MW. The average maximum demand recorded on the system during the summer months of 2008 was 16500MW for NTDC and 2300MW (approx.) for KESC. This resulted in a total demand of 18800MW. In accordance with these statistics, the shortfall recorded in meeting the demand is around18800-14800= 4000MW.^2
As per the available generation mix in Pakistan, sources of generation based on the fuel consumed are as follows:^3
Type Capacity Percentage
Hydel 6550MW 33.5%
Oil 6900MW 35.3%
Gas 5600 MW 28.6%
(^1) The Nepra Act XL of 1997 (^2) Source: Daily log sheet CPPA (^3) Source: Daily log sheet CPPA plus KESC Presentation
Nuclear 452MW 2.3%
Coal 50MW 0.25%
Total 19552MW
However, the availability of generation capacity as per table 1 does not remain the same throughout the year. In fact, it is principally dependent on the availability of generation through hydel power and the seasons. During the peak hydel season, maximum hydel energy is available. In Pakistan this season generally lasts from June/July to October/November. Peak thermal season is in that time of the year when Hydel power is at its minimum that is from December/January to April/May and therefore maximum thermal plants are utilized to generate electricity. During these periods, the shortage of capacity amounting to 4000MW has been witnessed during the peak timings.
1.4 The Power Sector from a Historical Perspective
Electricity is a commodity capable of being bought and sold, however its inherent quality of being difficult to store does not leave any room for lapses in generation and distribution. At the time of its independence, Pakistan, like in any other sphere of public life, faced a dearth of power supply and the total installed capacity at the time was only 9.6 MW which was supplied through plants at Jabban in (NWFP) North West Frontier Province. The private electric supply catered to the partial needs of a few cities. However, with the creation of WAPDA in 1958, substantial addition of power plants in the public sector was achieved.
The structure of bodies that functioned to provide this basic service to the people of different social strata, of the newly created state, varied and from privately owned listed companies, such as the cosmopolitan city of Karachi, to the area electricity boards, a number of ownership models of electricity operators existed in the country. 4
(^4) Another table by Mr. Salah-ud-din Rafai attached at Table II.
Until 1995^5 , the operating law was the Electricity Act, which regulated provision of electric power services in the areas of generation, supply of power and its usage by consumers. In 1997 however, the Regulation of Generation, Transmission and Distribution of Electric Power Act of 1997 (―REPA‖) replaced provisions relating to regulation of generation and supply. Moreover, the supply of electricity was also bifurcated between distribution and transmission.
1.4.2 Economic Conditions in the 90s
In order to trace the origin of the prevalent structure of the power sector, it is important to keep the economic conditions of Pakistan in the early nineties in the backdrop.^6 The World Bank sponsored restructuring and privatization of the power sector, coupled with the introduction of private sector in the generation of electric power hitherto carried out by the public sector WAPDA in 1992^7 and 1994^8 , also led to the birth of a national regulator for the sector, i.e. NEPRA.^9 The experiment was not a novelty in itself, though it was first of its kind in Pakistan^10. The decision makers decided to unbundle the vertically integrated WAPDA into generation, distribution and transmission companies, with a view to prepare them for privatization and as prospective players in a competitive power market. The role of a regulator was therefore of a pivotal nature, who could safeguard the interests of the stakeholders under the set rules, regulations and standards prescribed by the regulator.
(^5) The promulgation of Regulation of Generation, Transmission and Distribution of Electric Power Ordinance, 1995 6 The statistics show that the GDP of the country and the national budget was funding WAPDA in terms of subsidies to cater for uneconomic service to different classes of consumers, further no capacity addition was allowed to be conducted under WAPDA. A full section on the rise and fall of WAPDA is attached as Table III. 7 Plan for restructuring and privatization of WAPDA approved by the Government of Pakistan in 1992, also known as the Strategic Plan of the Government of Pakistan. 8 The 1994 Power Policy of the Government of Pakistan which invited a lot of criticism in respect of the manner of induction of private power in the Pakistan power sys 9 tem. http://www.pakistan.gov.pk/cabinet-test/reg-autorities/nepra.jsp indicates history of establishment of NEPRA as: ―It was initially established under a 1995 Ordinance, which was periodically extended up to 1997 until an act was passed by the parliament called the Regulation of Generation, Transmission and Distribution of Electric Power Act XL of 1 10 997 ‖. Developments in this sector later led to the creation/reorientation of similar corporate, telecommunication, oil and gas, nuclear power usage, media and procurement sector regulatory authorities.
1.4.3 International Move Towards a Competitive Model
The introduction of the concept of privatization of electric power systems first took place in Chile in the early 1980s, which was generally perceived as successful in bringing rationality and transparency to power pricing^11 , but it contemplated the continuing dominance of several large incumbents and suffered from the attendant structural problems.^12 Argentina improved on the Chilean model by imposing strict limits on market concentration and by improving the structure of payments to units held in reserve to assure system reliability. Similar to Pakistan, one of the principal purposes of the introducing free market concepts in Argentina was to privatize existing assets of generation companies which had fallen into disrepair under the government-owned monopoly, resulting in frequent service interruptions and to attract capital needed for rehabilitation of those assets and for system expansion.^13
Further, the privatization of the United Kingdom Electricity Supply Industry in the 1990s catalysed the deregulation in several other Commonwealth countries, notably Australia and New Zealand. However, privatisation took place on a much smaller scale in these countries compared to the widespread privatisation that characterised the UK‘s move towards deregulation. Pakistan benefited from the experience of the UK by seeking aid from UK based consulting organisations while establishing NEPRA. Along with Pakistan, the main proponent of structural reform, the World Bank was active in introducing a variety of hybrid markets in other Latin American nations including Peru, Brazil and Colombia, during the 1990s, however with limited success.
(^11) During the times when the government was planning to introduce power sector reforms, the Supreme Court of Pakistan handed down a landmark judgment on the subject of power pricing; the famous Gadoon Amazai Case 12 – discussion in section 38 on pp. 711 of 1997 SCMR 641. 13 The vertically disintegrated entities carved out of WAPDA pose a similar challenge. The power sector has been facing the problems to deal with a bulk of government bodies, political interference, and high tariffs where subsidies are imposed to keep the distribution companies in business. Similarly, the Pakistani experience of privatizing power assets in general and particularly the generation plants needs another lengthy exercise.
The Constitution of Pakistan endorses the idea of regulation of trade, commerce and industry by prescribing qualifications, such as the regulation of any trade or profession by a licensing system, which is in the interest of free competition [Article 18 – Freedom of trade, business or profession]. Hence, under Article 18, freedom of trade, business or profession is guaranteed subject to such regulations as may be prescribed by law. The jurisprudence of Regulatory Laws in Pakistan is very much entrenched in the Constitution and is a flourishing field of law. The ever increasing advancement of human society in different sectors has expanded the role of law, from mere maintenance of law and order in the society to promote social and economic justice and aid smooth advancement of human civilization.
2.2.1 Gadoon Amazai Case
The history of electricity regulation in Pakistan would remain incomplete without referring to the landmark case of M/s Gadoon Textile Mills vs. WAPDA [ SCMR 641]. In August, the Supreme Court of Pakistan, while deciding constitutional issues that arose with respect to powers of WAPDA to fix rates and charges and levy surcharges upon its consumers, underscored the importance of a regulator who could take notice of public interest while fixing electricity rates. This judgement is particularly important in view of the constitutional scheme applicable for handling matters related to electricity in the country. After providing an exhaustive analysis of the right of provinces to generate and transmit electricity, WAPDA as functioning at that time under the Federal Government was allowed to charge tariff as per the provisions of the WAPDA Act though it was desired that the process should ideally involve public while determining such rates. The regulatory scheme envisaged service providers to be permitted to charge prices, which would ensure recovery of their full costs, guarantee reasonable rates of return and a reduced risk of stalling long-term competition. For example, an electric utility may be allowed to sell electricity at a price that will give it a 12% return on its capital investment. If not constrained by the
regulator, the company would likely charge a far higher price and earn an abnormal profit on its capital.^15
2.3Restructuring of WAPDA
Over time the electricity sector in Pakistan has undergone substantial changes. Previously, WAPDA was vertically integrated and provided retail and wholesale service, subject to no competitive pressures, with exclusive retail service territory that was established by the state. This structure did not allow for customer self generation, ‗fringe area‘ competition and franchise competition. As a result, electricity generation, transmission, physical distribution and sales were the responsibility of one corporation.
However, under the 1995 Power Policy WAPDA was vertically and horizontally unbundled. The vertical unbundling entailed the separation of generation, transmission and distribution functions, while the horizontal unbundling resulted in eight distribution companies, a National Transmission and Dispatch Company (NTDC) and state owned generation companies meant for privatization at a later stage. Despite this restructuring, WAPDA continues to have monopoly over retail service subject to some competitive pressures. Exclusive retail service territories for each of the distribution companies have been established by the regulator. As a result, large retail customers are permitted to self-generate, there is some "fringe area" and franchise competition and wholesale customers located within the service territory: not captive; can shop for electricity by buying access to the host utility's transmission system. The thermal assets of WAPDA are distributed among three generation companies. The hydel generating units and dams left behind were the residuary functions of WAPDA. Two other important functions of WAPDA, i.e. taking care of transmission and despatch of power, were left with NTDC. Figure 1: Wapda’s Restructuring
(^15) The Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997(REPA) outlays a licensing regime for all generation, transmission and distribution companies and inter alia takes care of the tariffs, investments, performance issues of its licensees. Further details are under the individual sections on Generation, Transmission and Distribution.
CHAPTER 3: DEVELOPMENTS
INTRODUCED BY NEPRA
3.1 NEPRA
Of the regulatory techniques employed worldwide, NEPRA, in view of its mandate under the REPA, has developed the following:-
3.1.1 Patronizing Generation Companies for Capacity Addition
Under REPA, NEPRA has been declared as the exclusive regulator for the provision of electric power services^16 and, based on the same, is to award licence for generation of electric power. All decisions vis-à-vis location of plants, technology, tariff etc. is to be decided by NEPRA.^17 Unfortunately, this function of NEPRA runs counter to the successive policy initiatives taken up by the Government of Pakistan under its Power Policies for setting up generation plants by IPPs.^18 After restructuring, the lost harmony of WAPDA‘s different constituent operations^19 was envisaged to be regained under this technique and specific Power Procurement (Standards and Procedure) Regulations, 2005 were also issued by NEPRA for guidance of all stakeholders. In addition, NTDC being the only transporter of electric power within the country (except for the franchised area of KESC) was mandated through its
(^16) Taken from Section 7(1) of the REPA. (^17) Rule 3(5) of the NEPRA Licensing (Generation) Rules, 2000.1q ` (^18) The role of the GOP after putting in place an exclusive regulator for the power sector had to be reviewed and retreat in areas relegated to statutory exercise of powers by NEPRA; instead what followed was blatant encroachment of the executive upon powers of the regulator contrary to the provisions of Section 7(6) of the REPA. Under this provision of the Act, the regulator was obligated to observe only such policy guidelines of the GOP which did not conflict with the REPA. Interestingly, there have been long drawn exchanges of correspondence between the regulator and the GOP over the interpretation of Section 7(6)., and finally in complete disregard of the legal principle that policy cannot override law, the executive succeeded to lay down its Guidelines for Determination of Tariff for Independent Power Producers in November 2005. 19 Apart from three main areas of operation of WAPDA i.e., Generation, Distribution and Transmission disintegrated under the Strategic Plan, its functions of system planning, siting of plants and system expansion in all three service areas of production and supply of electricity remained unattended for a long time and is one of the reasons of present day electricity shortages.
license to develop a least-cost generation expansion plan for capacity addition in the country.
3.1.2 Franchising and Outsourcing
All distribution companies (DISCOs) have been allotted a franchised area within which they may operate. Recently, proposals are under consideration by NEPRA for allowing bulk power purchasers (BPCs) within the franchised territory of a DISCO to undertake power supplies^20. Although competition within a natural monopoly market is costly, it is possible to set up competition for the market.
3.1.3 Common Carriage Competition
The basic consideration of electricity networks being assets, which are huge and un- economical to be replicated, has led to the kind of approach where different firms compete to distribute goods and services via the same infrastructure - for instance, different electricity companies competing to provide services to customers over the same electricity network. The government intervened to break up the vertically integrated monopoly of WAPDA and the generation sector has been separated from distribution and transmission. Here, the key element is open access, i.e., the ability of any firm to have access to the network to supply its service, with the price the infrastructure owner is permitted to charge being regulated, also commonly known as the use of system charges developed by NEPRA.
Such a system may be considered a form of deregulation, but in fact it requires the regulator‘s creation of a new system of competition rather than simply removing the existing legal restrictions. The system may also require continuous fine tuning, for example, to prevent the development of long-term contracts from reducing the liquidity of the generation market too much, or to ensure that the correct incentives for long-term security of supply are present. This may be one of the reasons behind the current demand-supply gap in the power system. The possible alternatives for the
(^20) Though it is another debate that REPA recognizes bulk power consumers only, who by definition purchase power for their own consumption and not for further sale.