Interprovincial Differences in Power Sector Subsidies and Implications for the NFC Award

Power sector subsidies constituted 83 percent of the federal government’s total subsidies of PRs 558 billion in 2012; the tariff differential subsidy (TDS) amounted to PRs 457 billion. TDS is provided to distribution companies (DISCOs) to cover the difference between the NEPRA-approved tariff schedules and the uniform tariff schedule (by consumer group) set by the Ministry of Water and Power for all regions of the country. The tariff approved by NEPRA takes account of all components of DISCOs’ costs, including salaries, overheads, depreciation and maintenance, line losses, return on assets and so on. These cost elements differ across DISCOs. The fact that NEPRA approves different per-unit tariffs while the Ministry of Water and Power sets a uniform tariff (by consumer group) across all DISCOs implies that each DISCO receives a different per-unit TDS (by consumer group) from the federal government. The TDS to individual DISCOs can be aggregated to calculate provincial shares in the total power sector subsidy. This paper outlines the electricity tariff determination process; reports on the TDS by consumer group, DISCO and province; and considers the likely changes in the federal/provincial shares of the divisible pool of tax revenue if TDS were given to the provinces in the form of a revenue share from the divisible pool. We find that residential consumers are the highest recipients of TDS and that it is distributed unequally among the DISCOs. Moreover, TDS is distributed unequally among the four provinces and the distribution is not in line with the shares determined under the 7th National Finance Commission Award.