Asset 1

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Published Date: Feb 3, 1999

NEPRA Tariff Setting Strategy (PB-4)

Shahrukh Rafi Khan, SDPI

Based on the information provided by WAPDA, it is difficult to assess if WAPDA’S requirement for a higher utility charge is justifiable. Utility rates need to be based on marginal unit costs and not on debt obligations. The relevant marginal unit cost would depend on demand and WAPDA’s marginal cost structure based on electricity generated via various sources (see below)

WAPDA’s marginal cost is a composite of the different methods via which it generates electricity including hydel, hydro and nuclear. I have termed these AB to GH and, for simplification, shown the marginal cost curve as an increasing step-function. (In fact, marginal cost for some modes of generation are likely to be falling). Based on some demand curve, once can estimate what the optimal price should be. As shown above, this is P*, based on power generation CD. This would suggest that WAPDA should only be using two generation modes (see AB and CD). In any case, with price set at P*, (i.e marginal cost pricing), the shaded areas above the MC curve and below the MR curve represents the consumer surplus WAPDA gets.

It is actually likely that WAPDA is losing a lot of the surplus via line losses. In its petition to NEPRA, WAPDA has made a commitment (5 a) to reduce energy losses to 20%. Thus WAPDA has acknowledged that they are energy losses and they are above 20%.

My recommendations are as follows:

a.    Ask WAPDA to provide a cost schedule (based on the actual cost structure) and a demand schedule (based on past experience). Only than will it be possible to see if the current tariff is below marginal cost.
b.    WAPDA’S claim for a tariff increase to meet debt obligations should be rejected out right. Efficient pricing has nothing to do with accumulated debt.
c.    WAPDA should be asked to provide more information on how it has calculated line losses. I would argue that losses of above 10% should not be considered acceptable by NEPRA. Also, WAPDA can not make requests for tariff increases to compensate it for its loss in consumer surplus.
d.    If the cost structure and demand curve does suggest a rate revision, NEPRA should only concede this based on strict service conditionalities such as assurance of no load shedding for a specified period, no brown outs and no power fluctuations.