Electricity bills in Pakistan have turned into a nightmare for consumers and a mystery for them. As if the frequent rate hikes were not enough, the government keeps confounding these bills with layer-after-layer of surcharges and levies and taxes not even remotely linked with their electricity consumption. To top it all, it has started announcing special packages for some consumer groups for specific periods which may further twist the puzzle.
For a typical residential consumer, the items listed under the distribution company’s charges include the cost of Electricity; Meter Rent; Service Rent; Fuel Price Adjustment; FC Surcharge; Quarterly Tariff Adjustment; Deferred Amount; and Outstanding Installment. Under the Govt Charges the items listed include: Electricity Duty; TV Fee; GST; Income Tax: Extra Tax; Further Tax; GST on FPA; Extra Tax on FPA; Further Tax on FPA; Income Tax on FPA; Excise Duty on FPA; PROG IT PAID FY; and PROG GST PAID FY.
Even though some of the entries against the items listed under both the charging regimes are currently empty, their very presence in the electricity bills is worrisome for consumers. This writer is clueless about many of these itemised charges and the criteria that will be used to determine these. Many other consumers may also share this ignorance with him.
James Bonbright in his 1961 landmark, by now a classic, treatise “Principles of Public Utility Rates”, recommends that to be effective these rates must be: (i) forward-looking and reflect long-run costs; (ii) focus on the most cost-sensitive components of consumer demand; (iii) simple and informative; (iv) charge for costs in proportion to actual usage; (v) give consumers a clear signal and opportunity to respond by adjusting their usage; and (vi) sensitive to the utility’s temporal and spatial costs in serving the relevant consumers.
While each of the six features recommended by Professor Bonbright is critical and requires separate exposition, we will restrict the ensuing discussion to highlighting only the third feature in his list, as the electricity bills currently being issued by our distribution companies (DISCOs) are anything but “simple and informative”. This situation must change if electricity bills are to be made effective and serve their basic purpose.
There are two primary issues with the current shape and content of the electricity bills in Pakistan. First, on top of the base rate, these bills are overflowing with surcharges and adjustments of one kind or the other, leaving the consumers of this service baffled as to what these “riders” are. Second, they also carry a host of levies and taxes that are unrelated to the electricity being supplied and consumed. This makes them an unsolvable riddle even for professionals, let alone for consumers unfamiliar with such jargon.
The electricity bills need simplifying by stripping them of all the unnecessary and frequent tariff adjustments as well as the government’s levies and taxes that are unrelated to this basic utility service
Utility tariff reviews are a complex and expensive process. It’s therefore not conducted frequently. Regulators often allow 3 to 5 years between comprehensive and full-scale rate reviews. During this gap (called “regulatory lag”), they often permit only minor adjustments to the previously fixed tariffs through automatic (formulaic) rules to reflect market developments that are beyond the control of the regulated entities. Such adjustments, however, are kept minimal as they lack the rigor, soundness, and depth that is a characteristic feature of full-scale, and requisite, regulatory rate reviews.
When such formal or automatic adjustments become frequent and are also opaque to consumers, these become problematic because they tend to insulate the regulated entities from normal risks that every corporate entity has to bear as part of doing business. They also eliminate any incentive for these entities to improve their performance and become competitive. The whole onus now shifts to the consumers of their service.
No structured mechanism exists in Pakistan at present to enable electricity consumer groups to participate in regulatory hearings frequently conducted by the National Electric Power Authority (NEPRA). The Authority has done hardly anything worth mentioning since its inception in 1997 to facilitate meaningful participation by consumers in its tariff determinations.
Electricity consumers in the country are dispersed, generally poor, and non-technical citizens. The regulator had an obligation to facilitate and foster a culture of active and meaningful participation by them in its proceedings and rate settings. They are however left at the mercy of inefficient state entities and private interests.
Including the government’s levies and taxes in the electricity bills of consumers is also problematic for multiple reasons. It essentially amounts to dumping the burden of other state organisations’ inefficiency and mismanagement on the power sector. This practice distorts the relationship between the cost of electric supply to consumers leading the power sector to carry unrelated and unnecessary burdens in addition to its own. As it’s difficult for consumers to decipher what is relevant to their electricity consumption, the added total price of electricity adversely affects their link with the grid, inducing them to seek alternative options.
Such a practice may provide some additional revenues to a cash-starved government, but it defies the basic principles of public utility rate design because it's not fair, efficient, and equitable. Therefore, it must be reviewed and changed.
Electric utilities generally use a two- or three-part tariff structure to recover their approved revenues. In the first part, they recover the customers-related costs that are mostly fixed in nature like metering and billing. In the second part, they recover their capacity and energy costs based on consumers’ volumetric consumption (Rs/kWh). Recovering capacity costs in a separate third part (Rs/kw-month) though isn’t unprecedented isn’t common either.
The consumers of electricity in the country hope that NEPRA and Power Division while seeking and pursuing reforms in other aspects of the power sector, will also consider seriously the much-needed reforms in the metering and billing practices the DISCOs are using. The electricity bills need simplifying by stripping them of all the unnecessary and frequent tariff adjustments as well as the government’s levies and taxes that are unrelated to this basic utility service.