KESCs 2002 multi-year tariff determination: lessons for Pakistan and South Asia*

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 pro-posed to assure the prospective investor would be allowed a rea-sonable 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 essen-tially 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 incen-tives to make investment are based on the investors 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 * The views expressed in this paper reflect those of the authors and should not be at-tributed to their employers. Comments were received from participants at a SAFIR workshop on multi-year tariffs in South Asia, held in August 2003 (Raza 2003) as well as from Chris Shugart, Clive Harris, and Bernard Tenenbaum. Helpful comments were also received from an anonymous referee. Any remaining errors are the responsibility of the authors. 1 Aftab Raza is the Senior Economist at the Regulation and Supervision Bureau for th