KESC's 2002 multi-year tariff determination: Lessons for Pakistan and South Asia

Abstract

In preparation for privatization of the KESC (Karachi Electricity Supply Company), a state-owned vertically integrated electricity utility in Pakistan, the company requested that the regulatory body NEPRA (National Electric Power Regulatory Authority) grant a MYT (multi-year tariff). The new regulatory framework was proposed to assure the prospective investor would be allowed a reasonable period to recover the losses of the initial years of privatization before the base tariff is adjusted through a review. Thus permitting a much smaller initial price increase than would have been necessary if an MYT framework were not established. The MYT – established by NEPRA in September 2002 – is essentially a consumer price index-X price-cap on the controllable costs of KESC while uncontrollable costs are considered on a pass-through basis. The assurance to earn reasonable returns and incentives to make investment are based on the investor's ability to meet efficiency targets, especially those relating to losses, set by NEPRA. The adoption of MYT for KESC is a radical shift from a rate of return regime to a performance-based regulation in the power sector of Pakistan. Similar MYT schemes are expected to be introduced for other distribution companies in the country. This paper briefly reviews the most salient features of the MYT that has been established. As the first clear MYT in the energy sector in South Asia, there are lessons in this determination that other regulators and regulated companies should consider. Issues for consideration have also been noted.