The contours of Karachi, the heart of the metropolis, resonate alongside the 20 million souls that live and breathe within the city, boasting a beautiful yet chaotic blend of the concrete jungle and magnificent shrines that hum with the deepest harmonies, pulsating alongside the wonderful citizens. K-Electric (KE) is the sole power utility company in the city and has found itself in a difficult position. On June 2nd, the Ministry of Energy (Power Division) appears to have filed a review petition infused with frustration against NEPRA regarding KE’s Multi-Year Tariff (MYT) determination for fiscal years 2023-2029.

NEPRA’s decision prioritizes KE profitability, striking a devastating blow to consumer interests.

The decision includes claims that were neglected in NEPRA’s cost ruling, which has permissive pricing that lacks careful consideration and is burdened with numerous careless costs and special allowances. With this decision, Pakistan will face a loss of Rs 350 billion, which will either increase inflation on consumer bills or strain the federal budget. KE is criticized for its relentless blackouts, often juxtaposed with the overcharging of citizens since its privatization in 2005. This is brought to your attention to highlight KE’s efficiency, which operates within a slab structure, incentivizing the cost of transmission, distribution, and supply.

In principle, this system should align the utility company’s economic needs with what consumers are willing to pay, while also enhancing business process efficiencies. The government’s petition, however, paints a picture of regulatory breakdown alongside rampant abuse of the regulatory framework’s protective functions while disregarding equity.

The Ministry of Energy describes NEPRA’s approval of KE’s tariff as an extreme breach that contravenes the NEPRA Act, the National Electricity Policy and Plan, as well as the standing orders of the federal government. The government contends that this decision brings “excessive financial burden” to end-users and the national treasury, endangers equitable market dynamics, and works against the uniform tariff regime that has been foundational for Pakistan’s electricity sector. Even more concerning is the claim that this undermines the government’s attempts at what is termed the DISCOs privatisation, a key component of the government’s energy reform plan. DISCO’s privatisation is expected to enhance operational efficiency and lower fiscal spending in the electricity sector.

NEPRA’s decision has profound financial consequences. During the MYT period, the government forecasts a cumulative fiscal impact of Rs. 350 billion, which will be either incurred through consumer bills or covered by the federal budget in the form of subsidies. The petition outlines this amount to several main components, which, when tallied, portray a disturbingly consistent trend of lax enforcement towards KE.

Compliant consumers are funding subsidies for unpaid bills in one of the most regressive forms of taxation.

The first focus area is the issue of fuel costs. NEPRA has set KE’s fuel cost adjustment submission at a ceiling of Rs . 15.99 per kWh, which the government considers grossly excessive. This results in an additional Rs. 41 billion in expenses for only FY 2024–25. Since fuel expenses are a pass-through cost to the consumer, the burden will have to be borne by inflation-stricken consumers in Karachi. The government’s critique suggests that NEPRA has not adequately assisted KE by examining its fuel purchase policies, thereby allowing the utility to pass on excessive costs without consequence.

The allowance for recovery losses is yet another form of indirect taxation rewarded to KE for the outcome of theft, non-billing, or non-payment. NEPRA’s allowance for KE to recover non-existent losses has expanded liabilities by Rs. 71 billion for FY 2024-25 and Rs. 30 billion per year subsequently. Effectively, compliant consumers are funding subsidies for unpaid bills in one of the most regressive forms of taxation, punishing honest households and businesses across the city. In a city where families from the lower and middle classes are already squeezed financially, this added burden feels like a grave injustice.

Another sore point is working capital markup. NEPRA’s approval of a 24% markup on KE resulted in staggering costs of Rs. 15 billion over the MYT period. While such borrowing rates are more common here, they are outlandishly high in most other countries, indicating either poor rigor exercised by NEPRA or unwarranted favor to KE.

In line with the above, NEPRA also set KE’s distribution losses at 13.90%, which is higher than the utility’s claimed figure of 13.46%, resulting in an additional expense of Rs. 21 billion. Undoubtedly, NEPRA seems to be rewarding inefficiency and incentivizing underperformance by passing the cost to consumers through lenient targets.

Perhaps the most striking concession is the 2% law-and-order margin, a security-related measure specifically designed for KE to address concerns about security risks in Karachi. This will, in turn, contribute Rs. 99 billion over the MYT period. While the city’s law and order issues are indeed troubling, the concern remains that this margin is too high and grants too much leeway to KE, thereby creating an uneven playing field compared to other DISCOs. If security issues are systemic, they should be addressed through policy measures rather than by imposing costs directly on consumers.

In Pakistan’s power sector, KE’s receipt of Rs. 62.5 billion for inactive plants under take-or-pay contracts exemplifies the problem: overcapacity combined with demand forecasting failures. Consumers essentially bear the costs for power plants that do not operate. Economically wasteful practices like these require a focus on NEPRA’s active enabling. Lastly, the government considers KE’s return on equity (RoE) set at 12% in US dollars as excessive.

Given the estimated depreciation of the Pakistani rupee by 5 to 10% per year, a dollar-denominated return on equity (RoE) provides a significant and enhanced boost to KE’s returns in rupee terms, increasing the cost of servicing dollar-denominated loans alongside worsening inflation. Moreover, this structure subjects consumers to needless exchange rate risks, which adds unnecessary burdens.

The financial burden is only part of the story. The government’s petition also illustrates the overarching policy and market concerns stemming from NEPRA’s decisions. Pakistan’s electricity sector operates under a uniform tariff policy that aims to achieve geo-economic pricing neutrality for all regions and utilities. Special treatment, such as the law-and-order margin and dollar-denominated RoE granted to KE, allows NEPRA to deviate from the single-tariff system and creates a discriminatory two-tier tariff structure that burdens other distribution system operators (DISCOS) and their consumers, undermining fairness and fueling public outrage while eroding the government’s efforts for a consolidated national energy policy.

This move…creates a discriminatory two-tier tariff structure that burdens other DISCOs.

This move also underscores the urgent need for reform in the energy sector. The government expects that privatization will enhance operational efficiency and lower fiscal spending. However, NEPRA’s undue lenience towards KE sets a troubling benchmark. A change is needed to ensure fairness and efficiency in the energy sector.

Without similar concessions to privatized DISCOs, they may struggle to attract investors, as KE has higher tariffs and profit margins, making it a more attractive investment. Conversely, if future privatizations follow KE’s model, the financial burden on consumers and the government increases, which risks undermining the entire reform strategy.

Additionally, the petition alerts that NEPRA’s decision “risks market evaluation,” which most probably refers to the anti-competitive consequences the decision may have within the power market. KE’s exorbitant tariffs and specific regulatory exemptions grant him a dominant position over other utilities, increasing the likelihood of reduced competition and forcing stagnation in the utility market. A competitive power market requires a level playing field, and NEPRA’s decision tilts the scales in KE’s favour, undermining systemic improvement.

For Karachi residents, the consequences are painfully vivid. Increased tariffs worsen the already distressing cost-of-living crisis, particularly among low and middle-income families. Small businesses, which are vital for many families, will also be forced to close due to their inability to withstand increased operating expenses. The recovery loss allowance, which compels paying consumers to subsidise defaulters, is particularly unjust from the point of view of honest households.

For the government, subsidizing these costs reduces critical funding for the healthcare system, education, and infrastructure development. Pakistan’s fiscal situation is already challenging due to the ever-increasing burden of debt and the limited resources allocated to developmental activities. The NEPRA expense of Rs. 350 billion is deeply concerning, especially when a significant portion arises from what the government perceives as inefficiency combined with regulatory laxity.

The core of this dispute lies with NEPRA, the regulatory body tasked with balancing the competing interests of utilities, consumers, and the government. The MYT decision for KE indicates a severe case of regulatory oversight neglect. NEPRA, in the face of glaring fuel cost and recovery loss and working capital mark-up expenses, granted excessive costs without any oversight or scrutiny. Such decisions, dispensing special grants like the law-and-order margin, lack a defendable rationale justifying the overarching loss of regulatory logic.

NEPRA’s lack of incentive doesn’t seem to encourage efficiency. Granting a high piracy distribution loss target cape and paying KE for non-functioning plants, idle plants as they are, NEPRA commends KE’s inefficiency instead of incentivizing improvement. This is the gap between regulated performance and the objectives for profit: rather than being rewarded, utilities should be penalized for functioning below expectations. Most unforgivingly, the decision prioritizes KE profitability, striking a devastating blow to consumer interests and exposing NEPRA’s breach of its core obligation: to safeguard the public interest.

NEPRA should reconsider KE’s tariff by addressing the reduction of cost targets that exceed loss targets and removing unreasonable allowances. There is a need for independent verification of KE’s operational data and cost claims to ensure accuracy.

Pakistan will face a loss of Rs 350 billion, which will either increase inflation or strain the federal budget.

On a broader scale, NEPRA and the Government need to address the chronic issue of unnecessarily costly take-or-pay contracts resulting from overcapacity and inadequate demand forecasting. There should be adherence to the uniform tariff policy, ensuring equality among all utilities and geographical regions. In addition, legislation must be enacted to safeguard consumers, either through limits on reimbursement of recovery loss allowances or caps protecting them from exchange rate non-neutrality based on dollar returns.

The debate over K-Electric’s MYT highlights the rational discourse within Pakistan’s electricity industry. NEPRA’s decision, involving the Rs. 350 billion figure, exemplifies yet another instance of regulatory failure in transferring costs to consumers while addressing budget deficits, further undermining the equity principle of competition. For the residents of Karachi, this situation reflects a continuation of the already declining economic conditions. For the government, it signifies an increased effort to reform and privatize the entire energy sector. However, this is where we need to shift the perspective.

Through refining KE’s tariff structure and improving its regulatory framework, Pakistan can unlock a more just and effective power sector, benefiting the entire country, not just Karachi. The impact of this decision is profound and could hinder progress for years to come, deepening dysfunction, inequity, and financial crises. There is little time left, and users across Pakistan should be prioritized.

Disclaimer: The opinions expressed in this article are solely those of the author. They do not represent the views, beliefs, or policies of the Stratheia.