ASIAN DEVELOPMENT BANK

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1 ASIAN DEVELOPMENT BANK TAR: PAK TECHNICAL ASSISTANCE TO THE ISLAMIC REPUBLIC OF PAKISTAN FOR CAPACITY BUILDING OF THE NATIONAL ELECTRIC POWER REGULATORY AUTHORITY March 2000

2 CURRENCY EQUIVALENTS (as of 15 February 2000) Currency Unit Pakistan Rupee/s (Pre/PRs) PRe1.00 = $ $1.00 = PRs The exchange rate of the Pakistan rupee is determined under a system of managed float. The rate for the rupee is fixed on a daily basis in terms of US dollars. ABBREVIATIONS NEPRA - National Electric Power Regulatory Authority NTDC - National Transmission and Dispatch Company TA - technical assistance WAPDA - Water and Power Development Authority NOTES (i) The fiscal (FY) of the Government ends on 30 June. (ii) In this report, $ refers to US dollars.

3 I. INTRODUCTION 1. The Government of Pakistan s strategic plan to privatize the power sector proposes restructuring the sector into a disaggregated, largely privately owned system, with as much competition as practical to increase efficiency and minimize the burden of regulation. To attract private sector investors and facilitate privatization, the power sector must be regulated in an independent, transparent, and predictable way. The Regulation of Generation, Transmission, and Distribution of Electric Power Act, which was passed by the National Assembly in December 1997, established the legal basis for the newly created regulator, the National Electric Power Regulatory Authority (NEPRA), to implement power sector regulation. Under the terms of the NEPRA Act, NEPRA is responsible for regulating the power sector, and developing and implementing the regulatory system according to requirements and obligations established in the act and in codes and licenses developed under the act. Given the importance of an independent regulator for the power sector, the Government asked the Asian Development Bank (ADB) for capacity building support for NEPRA. The technical assistance (TA) will strengthen NEPRA s capacity to provide effective regulatory oversight. 1 The Fact-Finding Mission visited Pakistan in April 1998 and reached an understanding with the Government on the objectives, scope, costs, financing, and implementation arrangements of the TA. The TA is part of the 2000 TA program for Pakistan. The TA framework is attached as Appendix 1. II. BACKGROUND AND RATIONALE 2. The NEPRA Act bestows six authorities on NEPRA: (i) Determine tariffs and other terms and conditions for the supply of electricity by generation, transmission, and distribution companies; and recommend these to the federal Government for notification, subject to the need to comply with federal Government guidelines that are consistent with the provisions of the act. (ii) Prescribe procedures and standards to determine or revise tariffs, terms, and conditions for generation, transmission, interconnection, distribution, and supply to consumers by licensees, subject to the need to protect consumers from monopolistic prices; and consider the research, development, and capital investment programs of licensees, as well as the economic and social policy objectives of the Government. (iii) Issue and modify licenses. (iv) Prescribe and enforce performance standards. (v) Levy and prescribe fines. (vi) Review the organizational affairs of licensees and encourage uniform industry standards. NEPRA is also responsible for ensuring the sustainable development of the country s power sector; this includes preserving a critical balance between power demand and supply. Under the act, NEPRA is to be an independent regulatory institution. 3. NEPRA has taken important steps to complete the regulatory framework. Tariff rules, procedures, and standards for distribution companies were approved by the Government and notified on December In March 1999, NEPRA issued its Application and Modification Procedure Regulation, which describes the license application process and information requirements. In April 1999, Rules for the Application of a License and Rules for Distribution Licenses were notified by the Government. 4. The development agencies have supported NEPRA s efforts to establish the regulatory framework. From November 1997 to May 1998, NEPRA established a suitable tariff regime, and prescribed procedures and standards to determine and revise tariffs, and also issued 1 The TA first appeared in ADB Business Opportunities in February 1998.

4 2 Tariff Standards and Procedures in late Although the development agencies had earlier committed additional assistance to assist NEPRA develop its regulatory strength, the planned assistance was canceled in May 1998 and has not been revived. 5. NEPRA has made some progress, but much work remains. Work to notify generation licensing rules remains outstanding, licensing requirements for the National Transmission and Dispatch Company (NTDC) have not been completed, and NEPRA has yet to issue licenses to the corporatized entities. 6. ADB is currently processing the Power Sector Restructuring Program loan to support the Government s initiatives for structural reforms in the power sector. NEPRA s role in the restructured sector is clearly established in the Government s Strategic Plan for the Privatization of Pakistan s power sector. The strategic plan states the Government s objective is to establish an electric power system consisting of autonomous, financially viable, and efficiently operated entities for generation, transmission, and distribution governed by an independent regulatory authority. 7. Work to implement power sector reform has already started with restructuring the Water and Power Development Authority (WAPDA) into three generation companies, which will take over WAPDA s remaining thermal generation assets; eight distribution companies to supply power within their licensed areas; and a single transmission and dispatch company (NTDC) to transmit electricity in the WAPDA franchise. WAPDA will retain control over its hydro generation facilities. Further work is required to complete the restructuring process. NEPRA s initial functions in the unbundled power market include issuance of licenses for each of the corporatized entities and review of the power sector s overall structure. The TA will not only strengthen NEPRA s ability to discharge its responsibilities as mandated by the NEPRA Act, but will also promote the continued restructuring of the power sector and facilitate the power market s evolution toward a fully competitive market where consumer welfare is maximized. 8. ADB support is urgently needed to strengthen NEPRA s capabilities as an effective sector regulator. The TA s support of $1 million is not envisaged to meet all of NEPRA s critical capacity building needs. 2 Rather the TA represents one of many steps to strengthen NEPRA s regulatory capacity over time, and to establish a sound and stable regulatory regime in the process. It recognizes that a regulator s ability to provide effective oversight depends significantly on the strength of its technical capabilities, and therefore expects to familiarize NEPRA with international best practices and standards in regulatory reform. As NEPRA gains regulatory expertise consistent with international standards, the confidence of the international community of financiers and investors will increase and they will mobilize their support to address the power sector s needs, where investment requirements far exceed the resources available. By helping to establish the regulatory rules, procedures, and standards required for sector oversight, the TA also hopes to minimize the political interference of the past. 2 These requirements are expected to exceed $3 million. Other areas for which NEPRA requires assistance from development agencies, but which this TA will be unable to address, include work to assist NEPRA establish criteria and guidelines for risk allocation among project developers and power purchasers, develop a pricing regime for distribution companies, prescribe guidelines and procedures for the investment programs of transmission and distribution licensees, develop a uniform system of accounts for the industry, and update the Government's 1992 Strategic Plan for the Privatization of the Power Sector.

5 3 9. Finally, by helping to increase NEPRA s effectiveness as a regulator, the TA expects to support the Government in its efforts to provide adequate and reliable power at affordable prices while serving ADB s objectives to promote good governance in the power sector and sustainable economic growth in the country. 10. NEPRA s board of directors consists of four members and a chairperson, the chief executive. The chairperson and the four board members, representing the four provinces of Balochistan, the Northwest Frontier, Punjab, and Sindh are appointed by the federal Government. NEPRA has 39 professional staff out of a total staffing strength of 94. Of its professional staff, 7 have doctorates, and 14 have advanced degrees in engineering, business, energy, and law. NEPRA also benefits from eight senior utility experts, each with at least 40 years of experience in power utility operations. Its remaining staff provide accounting, management information system, and administrative support services. NEPRA s professional staff have worked continuously to develop a regulatory regime since the establishment of NEPRA and are capable of implementing this TA. III. THE TECHNICAL ASSISTANCE A. Objective 11. The TA s objective is to strengthen NEPRA s regulatory capacity for effective enforcement of the environment and social aspects embodied in the laws, and to regulate those aspects of utilities that remain a monopoly. The TA will also help NEPRA to foster the industry s competitive structure, ensure the reliability of electricity supply, and above all ensure that the interests of the customers and investors are balanced through judicious decisions based on transparent commercial principles. B. Scope 12. The TA consists of six primary tasks. (i) Help NEPRA issue licenses to NTDC, and complete ongoing work on issuing licenses to the power generation and distribution companies currently operating in Pakistan. (ii) Assist NEPRA to determine the most appropriate market structure for fulfilling its requirement under the NEPRA Act to prescribe procedures and standards for the transmission and distribution companies investment and power acquisition programs. (iii) Help NEPRA review and finalize the guidelines for the Grid Code, including guidelines for the Connection Code, Bulk Supply Metering and Protection Code, System Operating Code, Dispatch Code (Generation Scheduling, Dispatch Objectives and Process), Maintenance Outage Forecasts and Coordination Code, System Planning Code, and Wholesale Market Code. (iv) Assist NEPRA to establish the guiding principles and standards required for NTDC to develop its costing system. This will include the development of models based on embedded and marginal costs required for developing the pricing structure for transmission services, and work to determine ancillary services that will be priced separately, and the methodology for pricing these services. (v) Help NEPRA finalize guidelines for the power acquisition programs of distribution licensees in the future. (vi) Help NEPRA strengthen procedures for handling consumer service complaints. The terms of reference are detailed in Appendix 2.

6 4 C. Cost Estimates and Financing Plan 13. The TA is estimated to cost $1,472,000 equivalent comprising $1,000,000 in foreign exchange costs and $472,000 equivalent in local currency costs. ADB will finance the entire foreign exchange cost of $1,000,000 on a grant basis from the ADB-funded TA Program, and NEPRA will finance the local currency costs of $472,000 equivalent. Appendix 3 details the cost estimates and financing plan. D. Implementation Arrangements 14. NEPRA will be the Executing Agency for the TA. The TA will require about 33 personmonths of international consulting, and will be supplemented by 100 person-months of domestic consulting. Domestic consultants will work closely with the international consultants on each of the tasks identified in the terms of reference. The TA will require professionals with expertise and experience in power sector regulation and institutional development in both developing and developed countries. This will allow NEPRA to benefit from the experience of power regulatory agencies worldwide. 15. The TA will be undertaken primarily in Islamabad and will require the consultants to work very closely with NEPRA staff to gather and review information, and conduct technical seminars and workshops to seek views and increase participation of stakeholders in the formulation of rules, requirements, and guidelines. Such close working arrangements will maximize the on-the-job training of NEPRA staff, and facilitate the transfer of skills and knowledge. The consultants will document the proposed regulatory procedures, instruments, and recommendations in the appropriate report, taking into consideration the feedback provided by the Government, NEPRA, other concerned parties, and ADB. 16. The consulting firm(s) will be selected in accordance with ADB s Guidelines on the Use of Consultants and other arrangements suitable to ADB on the engagement of domestic consultants. The domestic consultants will be engaged by NEPRA. The terms of reference and the short listing of domestic consultants will be subject to ADB s concurrence. The international consultants will take the leadership for the assignment and will be responsible for the completion of the TA. 17. The TA is expected to begin in June 2000 and be completed in October The consultants engaged to undertake each task will produce the following reports: (i) an inception report one month after the commencement of the assignment; (ii) an interim report after three months; and (ii) a final report at the end of assignment, taking into account feedback provided by the relevant parties. IV. THE PRESIDENT S DECISION 18. The President, acting under the authority delegated by the Board, has approved the provision of technical assistance, on a grant basis, to the Government of the Islamic Republic of Pakistan in an amount not exceeding the equivalent of $1,000,000 for the purpose of Capacity Building of the National Electric Power Regulatory Authority, and hereby reports such action to the Board.

7 Appendix 1, page 1 1. Goal TECHNICAL ASSISTANCE FRAMEWORK Design Summary Targets Monitoring Mechanisms Assumptions/Risks Promote the sustainable development of good governance in Pakistan s power sector by strengthening the National Electric Power Regulatory Authority s (NEPRA) ability to provide proactive and effective oversight. Improve the power sector s efficiency, financial viability, and long-term sustainability, and thereby improve consumer welfare by promoting adequate and reliable power supply at affordable prices. Support the Asian Development Bank s (ADB) work to restructure Pakistan s power sector, and promote the creation of a transparent, stable, and sound regulatory regime over time. Strengthen NEPRA s capacity to discharge its responsibilities mandated by the NEPRA Act. Help minimize the political interference of the past. Build the foundation for a financially sound and selfsustaining power sector in the medium term. Legislation, rules, codes, guidelines, etc. to complete NEPRA s regulatory regime Progress and final reports Technical assistance (TA) review missions with participation of NEPRA and Ministry of Law and Justice staff TA completion report The Government supports NEPRA s independence. 2. Purpose Facilitate the development of a fully competitive market that maximizes consumer access to an affordable and reliable power supply. Support ADB s work to restructure Pakistan s power sector and promote the creation of a transparent, stable, and sound regulatory regime over time. Strengthen NEPRA s capacity to discharge its responsibilities mandated by the NEPRA Act. Support the creation of a stable and sound regulatory regime in Pakistan s power sector. Complete work to help NEPRA with the following: Issue licenses to the National Transmission and Dispatch Company (NTDC) and to power generation and distribution companies. Develop the most appropriate market structure for fulfilling its requirement under the NEPRA Act to prescribe procedures and standards for the transmission and Working manuals containing proposed guidelines, etc. Interim and final reports TA review missions TA completion report The Government respects NEPRA s autonomy.

8 Design Summary Targets Monitoring Mechanisms Assumptions/Risks distribution companies investment and power acquisition programs. Build the foundation for a financially sound and selfsustaining power sector in the medium term. Finalize guidelines for the Grid Code. Sharpen NEPRA s regulatory effectiveness, empowering it to succeed with balancing the competing interests of consumers for cost efficiencies, reduced tariffs, and high quality service improvements, the interests of the industry s service providers, and equity stakeholders for adequate returns on their investment, and the Government s socioeconomic objectives. Establish guiding principles and standards required for NTDC to develop its costing system. This will include the development of models based on embedded and marginal costs required to develop the pricing structure for transmission services, and work to determine ancillary services that would be priced separately and the methodology for pricing these services. Finalize guidelines for the power acquisition programs of distribution licensees in the future. Strengthen procedures for handling consumer service complaints. 3. Outputs By Oct (expected completion of TA) A TA paper containing a credible program to strengthen NEPRA s ability to provide effective and proactive oversight. Completion of guidelines for NEPRA s issuance of licenses to NTDC and to the power generation and distribution companies; an appropriate market structure to fulfill NEPRA s requirement under the act to prescribe investment and power acquisition procedures and standards for the transmission and distribution companies; Working manuals containing proposed guidelines, etc. Progress (inception, interim, etc.) and final reports TA review missions TA completion report Sustained commitment within the Government to respect NEPRA s independence Close coordination and good working relationships between consultants, the relevant Government entities, and NEPRA staff

9 Design Summary Targets Monitoring Mechanisms Assumptions/Risks guidelines for the Grid Code; 4. Activities guiding principles and standards required for NTDC to develop their costing system; guidelines for the power acquisition programs of distribution licensees in the future; and procedures for handling consumer service complaints. Help NEPRA issue licenses to NTDC, and complete ongoing work on issuing licenses to the power generation and distribution companies currently operating in Pakistan. Help NEPRA develop the most appropriate market structure for fulfilling its requirement under the NEPRA Act to prescribe procedures and standards for the transmission and distribution companies investment and power acquisition programs. Timely completion of required tasks for prompt submission of inception, interim, draft final, and final reports Prompt and regular fielding of TA consultation and review missions Working manuals containing proposed guidelines, etc. Inception, interim, and final reports TA review missions TA completion report Good coordination and close consultation between NEPRA, the consultants, relevant government agencies, and ADB staff Assist NEPRA to review and finalize the guidelines for the Grid Code. Assist NEPRA to establish guiding principles and standards required for NTDC to develop its costing system. This would include developing models based on embedded and marginal costs required for developing the pricing structure for transmission services and work to determine ancillary services

10 Design Summary Targets Monitoring Mechanisms Assumptions/Risks that would be priced separately, and the methodology for pricing these services. Help NEPRA finalize guidelines for the power acquisition programs of distribution licensees in the future. Assist NEPRA in strengthening procedures to handle consumer service complaints. 5. Inputs Thirty-three person-months of international consulting and 100 person-months of domestic consulting, both with expertise in power sector regulation and institutional development in developing and developed countries Government counterpart staff, administration, and financing support Active participation of NEPRA and the Ministry of Law and Justice staff (where required) to facilitate the consultants work Consulting work completed within estimated time and budgeted cost Working manuals containing proposed guidelines, etc. Progress reports TA review missions Timely recruitment of consultants Consultant availability to undertake assignment immediately Good working relationships between consultants, NEPRA staff, and staff from relevant government agencies

11 Appendix 2, page 1 OUTLINE TERMS OF REFERENCE FOR CONSULTING SERVICES 1. The consultants, working closely with National Electric Power Regulatory Authority (NEPRA) professionals, will undertake six major tasks. 2. The consultants will assist NEPRA to issue licenses to the National Transmission and Dispatch Company (NTDC), and to complete ongoing work on issuing licenses to the power generation and distribution companies currently operating in Pakistan. The consultants will (i) study the existing licensing regime, (ii) identify the guidelines and rules necessary to complete the licensing regime, and (iii) work with NEPRA to comprehensively define the regime for licensees. This will require the services of two international consultants with combined expertise to cover all aspects of licensing power utilities, a license expert (3 person-months), and a utility management expert (3 person-months). 3. The consultants will help NEPRA develop the most appropriate market structure for fulfilling its requirement under the NEPRA Act to prescribe procedures and standards for the transmission and distribution companies investment and power acquisition programs. This task will require the services of three international consultants: (i) an electricity trading expert (2 person-months), who will recommend a basic framework and the most suitable model to establish a competitive electricity market in Pakistan, including recommendations on trading practices; (ii) a contract expert (2 person-months), who will suggest the outline and structure of the long-term power purchase contract(s) entered into by the transmission and distribution companies most suitable for Pakistan; (iii) a utility regulation expert (3 person-months), who will assist NEPRA to draft rules and regulations to encourage economic growth while serving the best interests of electricity consumers. 4. The consultants will assist NEPRA to review and finalize the guidelines for the Grid Code, including guidelines for the Connection Code, the Bulk Supply Metering and Protection Code, the System Operating Code, the Dispatch Code (Generation Scheduling, Dispatch Objectives and Process), the Maintenance Outage Forecasts and Coordination Code, the System Planning Code, and the Wholesale Market Code. This task will require the services of three international consultants, with combined extensive knowledge of industry norms relating to the allocation of operational responsibility and system security among the system s three main operators, the generator, the provider of transmission services, and the power distributor: (i) a grid code expert (2 person-months) with previous experience in designing a grid code; (ii) a utility operation expert (2 person-months) with comprehensive knowledge of standard utility operating procedures and the allocation of operational responsibility among players in the power industry; and (iii) a transmission expert (2 person-months) with prior experience in investigating and managing disputes related to the Grid Code. 5. The consultants will help NEPRA establish the guiding principles and standards required for NTDC to develop its costing system. This will include the development of models based on embedded and marginal costs required to develop the pricing structure for transmission services and work to determine ancillary services that would be priced separately and the methodology for pricing these services. In undertaking this task, the consultants are expected to interact with other experts working on developing NEPRA s Power Acquisition Program rules. This task will require the services of three international consultants: (i) a transmission costing expert (3 person-months), who will develop a pricing model relevant to the accounting practices prevailing in Pakistan s electricity industry; (ii) an electricity economist (2 personmonths), who will develop the short and long-run marginal and incremental cost models; and (iii) a systems operations expert (3 person-months), who will review the envisaged NTDC (Reference text: page 3, para. 12)

12 Appendix 2, page 2 organizational structure, and suggest linkages or the creation of relevant offices to facilitate the timely preparation and reporting of transmission costs. 6. The consultants will assist NEPRA finalize guidelines for the power acquisition programs of distribution licensees in the future. This task will require the services of two international consultants with combined expertise in the fields of power utility operation and commercial management, power procurement and contract administration, and strategic and investment planning: an investment analyst/strategic planner (3 person-months) and a power purchase specialist (2 person-months). 7. The consultant will assist NEPRA strengthen procedures for handling consumer service complaints. This task will require the services of an international consultant (1 person month) with experience in establishing customer grievance procedures in the power sector. (Reference text: page 3, para. 12)

13 Appendix 3 Item COST ESTIMATES AND FINANCING PLAN ($) Foreign Exchange Local Currency Total Cost A. ADB Financing a 1. International Consultants a. Remuneration and Per Diem 728, ,000 b. International and Local Travel 55, , Equipment 60, , Regulatory Training and Seminars 85, , Workshops, Policy Coordination and Dialogue, Contract Negotiation, Reports Production, and Other 20, , Contingencies 52, ,000 Subtotal (A) 1,000, ,000,000 B. NEPRA Financing 1. Remuneration, Travel, and Per Diem 0 322, ,000 of Domestic Consultants 2. Counterpart Staff, Office Facilities, 0 110, ,000 Transport, and Communication Support 3. Workshop and Tripartite Meetings 0 5,000 5,000 4 Contingencies 0 35,000 35,000 Subtotal (B) 0 472, ,000 Total 1,000, ,000 1,472,000 ADB = Asian Development Bank; NEPRA = National Electric Power Regulatory Authority a Funded from Technical Assistance Special Fund. (Reference text: page 4, para. 13)