Daily Times

“Everything should be made as simple as possible, but not simpler.” (Albert Einstein)

James Bonbright in his 1961 landmark, and by now a classic, treatise “Principles of Public Utility Rates”,recommends that to be effective these rates must be: (i) forward-looking and reflecting long-run costs; (ii) focus on the most cost-sensitive components of consumer demand; (iii) simple and informative; (iv) charge forcosts in proportion to actual usage; (v) give consumers a clear signal andopportunity 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 Bonbright is a critical success factor and requires independent and separate exposition, the ensuing discussion is restricted to highlighting only the third feature in the his list, as the electricity bills currently being issued by our Distribution Companies (DISCOs) are anything but “simple and informative”. This situation must change in order for these bills to be effective and not defeat the essential purpose they are designed to serve.

There are two primary issues with the current shape and content of the electricity bills. 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 puzzled as to what these “riders” are. Second, they also carry a host of levies and taxestotally unrelated to the electricity being supplied. This makes them an unsolvable riddle even for professionals, let alone for consumerswho are not familiar with the jargon of the electricitybusiness and itsregulation.

Utility rate reviewsare a complex and expensive mechanism, especially when carried out through open and transparent stakeholder consultative process. Therefore, it’s not conducted frequently, and regulators often allow 3 to 5 years between comprehensive and full-scale rate reviews. During this gap (called “regulatory lag”), regulators often permit some minor adjustment to the previously-fixed tariffs through automatic (formulaic) rules or after casual hearings, to reflect market developments that are beyond the control of the regulated entities.Such adjustments, however, are kept minimal as they lack the rigor, scrutiny, and depth that is characteristic of full-scale, and requisite,regulatory reviews.

When such automatic adjustments become frequent and are also opaque to the consumers, these become problematic and undesirable because they tend to insulate the regulated entities from normalrisks that every corporate entity has to assumeas part of its doing business. Theyalso eliminate any incentive for these regulated entities to improve their efficiency and performance, and become or remain competitive, as the whole onus now shifts to the consumers of their service.Let’s take a recent tariff determination (issued on 26 November 2019) from National Electric Power Regulatory Authority (NEPRA) to illustrate this point.

The Authority, in its above determination, goes into quite a bit of detail to contextualize its repeated approvals of mid-course tariff adjustments in the past few years, but does not specify the grounds for approving the recent tariff raise request from the government on behalf of the power sector entities. All it says is that these tariff adjustments have been sought by the regulated entities on accounts of variation in the power purchase price (PPP), under/over recovery of distribution margins, and impact of T&D losses (paragraphs 1,4, and 6 of the notification).

No details are provided in the notification as to what circumstances had led to these deviations from the set targets, how much of these conditions were out of the control of these regulated entities, and how much was within their control but could not be managed. The notification is also silent on what measures the Authority has taken or will take to ensure that such lapses do not recur in the future. In the face of such flexibility and condoning attitude by the regulator, one wonders if the regulated entities will have any motivation or compulsion to control their costs, losses, and inefficiencies.

The Authority acknowledges the repeated violation by these entities of NERA’s established regulations for submitting tariff review petitions in the prescribed format, but still goes ahead to approve thesepetitions anyway (see paragraph 16 below from the above notification):

The regulator had an obligation to facilitate and foster a culture of active and meaningful participation by consumers in regulatory proceedings and decision-making, and till that happening, watch over and protect their interests

“Having said that, the Authority in its uniform tariff determination dated December 19, 2018 has categorically held that although the petition filed by the Federal Government falls short of the legal requirements of section 31 (4) of the Act but in view of pragmatic considerations, it would he inequitable and unconscionable for the Authority to dismiss the uniform tariff motion on the basis of non-exhaustive compliance of the procedural elements thereof’…. Although, the said directions still remain to be complied with by the Federal Government, however, considering that the instant matter is merely an adjustment in the already approved uniform tariff by the Authority, therefore without prejudice to the said observations and directions of the Authority, the quarterly adjustments have been determined in a uniform manner.”

Unfortunately, no structured mechanism exists or was developed in the country to enableelectricity consumer groups to meaningfully participate in regulatory hearings that are organized by NEPRA. Also, NEPRA has done hardly anything since its inception in 1997 to institutionalize and facilitate consumers’ effective participation. Electricity consumers in the country aredispersed, generally poor, and mostly not-technical people. The regulator had an obligation to facilitate and foster a culture of active and meaningful participation by consumers in regulatory proceedings and decision-making, and till that happening, watch over and protect their interests. It’s sad to see that they are left alone and completely at the mercy of inefficient state entities and greedy private interests.

Including government’s levies and taxes on the electricity bills of consumers is also problematic for a number of reasons. It essentially amounts to dumping the burden of other state organizations on the power sector entities. It distorts the relationship between the cost of electricity supply and its deliveryto consumers leading to power sector’s having to carry unrelated and unnecessary burden of others. As it’s difficult for consumers to decipher what is relevant to their electricity consumption and what isn’t, the added total price adversely affects their link with the grid, inducing them to seek other cost-effective alternatives.

NEPRA has a new leadership recently. The consumers of electricity in the country hope that while it seeks and pursues reforms in other aspects of the power supply and delivery business, it will alsoconsider seriously reforms in the metering and billing practices by simplifying the electricity bills, stripping these of all the unnecessary and frequent tariff adjustmentriders as well as the state’s levies and taxes that are un-related to this service.

The writer is a freelance consultant, specializing in sustainable energy and power system planning and development