Nepra's Decision and its Impact on Consumer Tariffs, Assessing Financial Consequences
In a decision that might raise a few eyebrows among supporters of performance-based regulation, the Nepra has sided with K-Electric by authorizing a recovery shortfall allowance based on a 92% recovery ratio. This decision, however, contradicts the more stringent proposal put forth by the Ministry of Energy. KE had contended that unlike publicly-owned power corporations whose losses are silently incorporated into a circular debt, their commercial shortfall should be treated as a legitimate cost to be passed on to consumers.
Instead of questioning why a privatized utility with a storied history spanning over a century and a substantial capital investment still needs regulatory shielding for basic operational efficiency, Nepra has decided to embed KE's weakest performance year (FY24: 92.8%) into its future tariff framework. To add to the controversy, the benchmark recovery percentage even by the end of the MYT in FY30 period does not reach the levels seen in FY22.
The Ministry's argument, grounded in logic, precedent, and consumer welfare, was effectively dismissed. The MoE had argued for using a "high watermark" recovery ratio from FY22 or FY23 (96.6% and 96.7%, respectively) to prevent a single off-year from becoming the baseline for tariff calculations. This approach would have substantially reduced the financial burden on consumers, slashing KE's claimed recovery loss allowance from Rs2.88/kWh to Rs1.41/kWh.
Instead, having received Nepra's approval, KE has now secured a structural inefficiency at a time when the wider industry is (theoretically at least) moving toward performance benchmarking and fiscal accountability.
This move sets a troubling precedent: if a private utility can socialize its commercial inefficiencies while retaining operational autonomy, then the case for privatization or performance-linked regulation becomes blurred. What message does it send when a regulator sides with comfort over competition?
If Nepra's decision to validate KE's recovery allowance sets a questionable precedent, its approval of actualizing units sent-out might also be problematic. In theory, adjusting tariff revenue to match real demand variations (much like what public utilities are allowed) seems logical. However, in practice, it establishes a perverse incentive: KE's revenue is now insulated from demand shortfalls, even if these shortfalls are at least partially self-inflicted.
Furthermore, given the regulator's own admission that this framework could encourage increased load shedding in high-loss areas, this decision appears to be an open invitation for KE to manipulate the system - maximizing revenue protection while offloading risk onto consumers.
The regulator continues to maintain the standard warnings, insisting that KE is "directed to ensure uninterrupted supply" and that its performance will be evaluated based on benchmarks such as SAIFI, SAIDI, and load-shed adherence. However, history shows that these warnings are often just empty legalese, with KE frequently breaching load-shedding rules and escaping penalties deemed too trivial to serve as deterrants.
If the regulator is serious about dissuading this behavior, it must take stronger action than just issuing empty threats. A more effective strategy would involve linking revenue protections directly to performance metrics and imposing penalties severe enough to serve as deterrents.
This development comes at a time when KE's future demand growth is a matter of significant debate. With overall electricity consumption falling by 7.2% in FY23 - 7.9% in the residential sector and 1.5% in the industrial sector - and with net metering and competitive CTBCM dynamics gaining traction, KE's captive market is shrinking. The Ministry of Energy had duly flagged this, recommending a downward revision in demand projections and capital spending.
However, KE has opted to proceed with an ambitious investment plan, now bolstered by regulatory cushioning that allows them to shift demand-related risks onto the consumer. In these circumstances, the risk is not just of rising tariffs - it's of deepening the divide between consumer experience and utility accountability.
Nepra's concessions - from recovery shortfall allowances to actualization of sent-out units - might seem like isolated technical approvals, but they carry much larger, structural implications. As Pakistan moves closer to privatizing additional electricity distribution companies under the IMF's watch, Nepra's actions risk embedding a regulatory hazard into the very model it seeks to propagate.
By permitting revenue protection mechanisms that disconnect financial performance from operational efficiency, Nepra could be unwittingly fostering regulatory hazards that could stifle future investments in leaner, consumer-focused utilities. Even worse, it sets a precedent wherein privatization becomes a risk-free return model underwritten by public consumers, undermining the very fiscal discipline that the IMF reforms strive to instill.
- The decision by Nepra to authorize a recovery shortfall allowance for K-Electric, despite more stringent proposals from the Ministry of Energy, might raise questions about the need for regulatory shielding for a privatized utility with a substantial capital investment.
- KE's financial burden on consumers could be substantially reduced if the Ministry's proposed "high watermark" recovery ratio had been used, instead of basing tariff calculations on KE's weakest performance year.
- If a private utility can socialize its commercial inefficiencies while retaining operational autonomy, as KE has done, it could blur the case for privatization or performance-linked regulation.
- The decision to adjust tariff revenue to match real demand variations establishes a perverse incentive, insulating KE's revenue from demand shortfalls, even if these shortfalls are partially self-inflicted.
- Nepra's concessions could be unwittingly fostering regulatory hazards that could stifle future investments in leaner, consumer-focused utilities, undermining the fiscal discipline that the IMF reforms strive to instill.
