The exclusivity of the electricity distribution companies (or DISCO) ends. The Competitive Bilateral Swap Market (CTBCM) is being created and it is the right move. Deregulation of the electricity sector has always been the way to go. However, this should be done very carefully, as doing so in a rush, or simply promoting new players, could be detrimental to existing DISCOs and cost customers who are not supported in the competitive market. There are risks of turning these DISCOs into even bigger white elephants, which in turn will hamper their possible privatization plans. All the regulator needs to ensure is to provide a level playing field for all.

In the first phase of CTBCM, the Bulk Power Consumers (BPC) – having connections above 1 MW, will be open to new players to come and compete. Currently, the respective DISCO supplies electricity to all consumers in its area. DISCOs will remain the supplier of last resort, i.e. to ensure supply in areas and consumers where no third-party player enters and supplies. One consideration the regulator is mulling over is not allowing existing DISCOs to compete in the CTBCM. The idea is to encourage new players to come and grow. However, this could have multiple repercussions.

The existing DISCOs supply all consumers. Good and bad. Small and big. Near and far. They are mandated to do so. They have a transmission and distribution network throughout the coverage area. They have to maintain and upgrade the system. There are costs associated with it. These costs are covered by the tariff which must be applied at all levels. The cost is higher for small consumers – like the housing company with small houses and is lower for large industrial consumers. There is an implicit cross-subsidy element.

Now when new players enter competitive mode, it makes sense for them to get good customers. Also, the model is for PCBs. And if existing DISCOs can’t compete for the right consumers, they have to support the others and charge them higher rates to cover the stranded cost. Or the government must provide subsidies to ensure that tariffs do not increase too much.

The objective of the CTBCM is to reduce the cost of PCBs. That’s good. In competitive mode, the third player will have its own electricity supply close to the load it provides, and the tariff would be lower because there would be no capacity load, no (or little) T&D losses, and everything. All the third player would pay is the transmission fee to the DISCOs for using the network. Any good paying consumer would be willing to turn to the new player.

If existing DISCOs are not allowed to compete and their sustainability is not guaranteed, they will not be able to provide quality network services to the third party. There could be a problem even if they are competing because they don’t want the competitor to have an unfair advantage. Here, the role of regulator is very important. There are global examples where the network operator is in competitive bidding. These can be imitated in Pakistan.

Then there is another problem in CTBCM. The capacity of existing IPPs would be used less. They have “Take or Pay” contracts with the government – whatever the draw, they will receive a certain capacity payment. They are protected against currency depreciation and rising interest rates. Why on earth would they turn to the private sector to assume all the risk?

This would add further pressure on the tariffs of the remaining consumers. Or the government will bear the cost. This is why the CTBCM must be drafted with great care. If existing DISCOs (including KE) are unable to compete, consumers, DISCOs and government must share the additional costs. The balance sheets of these DISCOs would weaken and their cash flow would be further hampered. They would be unable to invest and maintain their system. This could lead to a deterioration of their services. In such a scenario, the privatization of DISCOs would remain a pipe dream and they would become even bigger white elephants.

So, while CTBCM is the way to go, it has to be done very carefully and thoughtfully. Otherwise, it risks becoming a failure and this could jeopardize the complete deregulation of the electricity sector in the years to come.