Legal Structure of the Pakistani Power Sector

Update 2024: Since 2014, the legal structure of the Pakistani power sector has undergone significant changes, driven by a series of reforms aimed at addressing chronic energy shortages, attracting foreign investment, and diversifying the energy mix.

One of the major changes occurred in 2015 with the commencement of the China-Pakistan Economic Corridor (CPEC) projects. Under CPEC, Pakistan signed agreements with China to develop numerous energy projects, which significantly boosted power generation capacity. These projects, primarily based on coal and LNG, helped diversify Pakistan’s energy sources, which had previously relied heavily on furnace oil and gas. By 2023, the country’s total power generation capacity was projected to more than double, reaching over 53,000 MW.

In 2019, Pakistan introduced the Alternative and Renewable Energy Policy to increase the share of renewable energy in the country’s energy mix. The policy set ambitious targets to achieve 20% of energy from renewable sources by 2025 and 30% by 2030. This move aimed to reduce the carbon footprint and dependence on imported fuels.

Another significant reform involved the restructuring of the Water and Power Development Authority (WAPDA). WAPDA’s functions were split, creating separate entities for power generation and distribution. This restructuring was intended to improve efficiency and promote competition within the sector. Additionally, the regulatory framework saw enhancements, with the National Electric Power Regulatory Authority (NEPRA) playing a more active role in overseeing the sector’s operations and tariff settings .

Despite these efforts, the power sector faced challenges related to financial sustainability. The increase in power generation capacity led to a rise in capacity payments, which strained fiscal resources. By 2019, capacity payments had increased significantly, highlighting the need for better financial planning and management within the sector .

These reforms and developments indicate a shift towards a more diversified and regulated power sector in Pakistan, aiming to ensure long-term energy security and sustainability while addressing the immediate needs of the population and the economy.

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Incentives for foreign and local investment in the Power Sector of Pakistan

Exemption from Corporate Income Tax, Turnover Tax and Withholding Tax, no Sales Tax, only 5% concessionary Import Duty on plant & equipment not manufactured locally
GOP Guarantees obligations of power purchaser and provinces
GOP provides protection against Political Force Majeure, change in law and Change in duties & taxes
Power Purchaser to bear hydrological risk for hydropower projects
Payment of compensation in case of termination due to GOP Event of Default
Tariff adjustments for variation in currency exchange rates and fuel prices
Tariff indexation for inflation (US CPI & Pak WPI)
Government ensures conversion of Pak Rupee & remittance of foreign exchange for project-related payments

Barriers to entry and foreign investment in the Pakistan Power Sector

Pakistan is facing difficulties in attracting new investments in power sector due to Circular Debt.
Fuel choice for new power generation projects
Gas supply to existing IPPs uncertain on long-term basis (beyond June 2011)
Oil Logistics and Transportation Issues
Furnace oil prices soaring high, entering into the realm of unaffordability for the overall economy of Pakistan
Huge infrastructure requirements to support coal and hydro projects.
IPPs facing problems due to frequent tripping’s in the transmission system
Security (Law & Order) issues
Difficulties in arranging local & foreign financing for new private power projects

Legal Framework

Pursuant to Article 70(4) of the Constitution of Pakistan 1973 read with Fourth Schedule attached thereto, Electricity was on the Concurrent Legislative list of the Constitution, therefore, both the federal and the provincial governments had the power to legislate and thereby regulate the electricity sector. However, no provincial law on the subject can be made which was in conﬂict with the federal law. Overall national policy and legislation is controlled and determined by the federal government whereas the powers of the provincial governments remain restricted to their respective provincial territories under the Electricity Act, 1910 which was the ﬁrst legislation through which provisions to regulate this sector were provided. Electricity Rules 1937, which stem out of the Electricity Act, 1910, were adopted by Pakistan. Under the Eighteen Amendment effective from 19 April 2010 the Concurrent Legislative List has been abolished and the subjects in the List have been assigned exclusively to the federal government or the provincial government so as to give more autonomy and independence to provinces.

Article 153 of the Constitution contains another important provision regarding electricity, as it provides for the composition of the Council of Common Interests (Council) and its responsibilities. The Council is to be appointed by the President. The members of the Council are the Chief Ministers of the provinces and an equal number of members from the federal government nominated by the Prime Minister from time to time. The Prime Minister, if he is a member of the Council, is the Chairman of the Council, but if at any time he is not a member, the President may nominate a federal minister who is a member of the Council to be its Chair- man. The Council is responsible to Parliament.

Article 154 of the Constitution stipulates the functions and rules of procedure of the Council. The key functions of the Council with respect to the electricity and water include exercise of supervision and control over related institutions. The decisions of the Council are expressed in term of majority opinion; it seeks directions from the Parliament and any complaints from the provincial government against the decision of the Council are referred to Parliament in a joint sitting; its decision is ﬁnal.

Article 157 relates to electricity and empowers the federal government to construct or cause to be constructed hydroelectric or thermal power installations or grid stations for the generation of electricity and to lay or cause to be laid inter-provincial transmission lines in any province. The government of a province may to the extent that electricity is supplied to that province from the national grid, require supply to be made in bulk for transmission and distribution within the province. Any provincial government may levy tax on consumption of electricity within the province; construct powerhouses and grid stations and lay transmission lines for use within the province; and ﬁnally determine the tariff for distribution of electricity within the province.

The Eighteenth Amendment in the Constitution (via amendment Article 157(3) of the 1973 Constitution – electricity speciﬁc dispute resolution has been added under Eighteenth Amendment) also provides for the resolution of any dispute between the federal government and a provincial government in respect of any above-mentioned matter (construction of hydro or thermal power or grid stations for generation of electricity or inter-provincial transmission lines) by Council of Common Interests, a constitutional body.

The ﬁscal incentives and priority has been ensured to the people of that province where the electric power is being generated utilizing the natural potential of that province. Such a protection is provided under Article 161(2) of the Constitution reads as under:

The net proﬁts earned by the Federal Government, or any undertaking established or administered by the Federal Government from the bulk generation of power at a hydroelectric station shall be paid to the Province in which the hydroelectric station is situated.

To remove the ambiguity in respect of the ‘net proﬁts’ an explanation has been provided in the 1973 Constitution of Pakistan that net proﬁt shall be computed by deducting from the revenues accruing from the bulk supply of power from bus-bars of a hydroelectric station at a rate to be determined by the Council of Common Interests. The operating expenses of the station shall include any sums payable as taxes, duties, interest or return on investment, depreciation, element of obsolescence and over-heads and provision for reserves.

The Ministry of Water and Power is responsible for formulating Pakistan’s power policies. In 1992, the Pakistan power sector was restructured due to the shortages of electricity in the country. A new energy law adopted in 1994 known as Policy Framework and Package of Incentives for Private Sector Power Generation Projects in Pakistan which aims to attract private investment in the power sector and which culminated into the introduction of ﬁrst ever IPPs. A new state-owned independent institution was established in 1994 – the PPIB which is primarily dedicated to serving as a one window facilitator to investors in Pakistan’s private power sec- tor. The NEPRA was created under the NEPRA Act in 1997. NEPRA’s main purpose is to ensure fair competition and consumer protection along with to regulate and determine a number of other strategic matters like licensing and tariff. Vertical unbundling process of WAPDA was completed in 2002 to initiate the process of privatization of public sector electric generation and distribution companies. A new power law was enacted in 2002 known as Policy for Power Generation Projects – Year 2002, which was similar to power policy 1994, but its scope was broader as the new power law applies both to private investment projects and to public-private partnerships and public sector power plant projects which was lacking in 9 of the WAPDA Act 1958 stipulates the mechanism to handle schemes framed by an agency in any province other than the WAPDA. The section empowers the WAPDA to take up any project proposed by any province if beyond a certain value (as may be prescribed by the federal government) as it may deem appropriate.

Section 11 of the WAPDA Act 1958 empowers WAPDA to acquire control over underground water resources, operations of power houses and grids in any region in a province, make recommendation for prescribed standards for operation and maintenance of irrigation works. Section 12 clariﬁes that WAPDA is deemed to be a licensee under the Electricity Act 1910. It also exempts WAPDA from certain duties and obligations of a licensee as stipulated in sections 3 to 11, sub-sections (2) and (3) of section 21 and sections 22, 23 and 27 or in clauses I to XII of the Schedule to the Electricity Act 1910.

The Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997

As noted above, the Regulation of Generation, Transmission and Distribution of Electric Power Act, 1997 (NEPRA Act) is the current legislation for regulation of Generation, Transmission and Distribution of Electric Power in Pakistan.

A single but efficient power regulatory authority that is, NEPRA came into being under section 3 of NEPRA Act. The NEPRA is an independent body which regulates electric power sector with exclusive powers to grant licenses for generation, trans- mission and distribution of electric power; determine tariffs, take measures to ensure efficient supply of services, and protect the interests of all the stakeholders, mainly consumers and companies providing electric power services. The NEPRA has the mandate to enact enabling regulations to carry out its functions and promote foreign direct investment and create competitive market environment. The NEPRA Act also envisages the creation of a National Grid and Dispatch Company – NTDC, which have exclusive rights to provide electric transmission service in the entire territory of Pakistan except for the territory served by the KESC. Section 19 enables the authority to grant a special purpose transmission license to a company other than National Grid Company in accordance with the stipulations prescribed therein. Sec- tion 20 provides for grant of an electric distribution license and the description of major conditions to be associated therewith. Under section 25, the Authority is empowered to grant generation, transmission and distribution licenses in the terri- tory served by KESC and to other companies, as it may deem appropriate. Section 31 provides guidelines and prescribes the procedure for determination of the tariff. Under sections 46 and 47, the authority is empowered to make rules with the approval of federal government, and regulations, as it may deem appropriate for the carrying out of its functions under this Act.

National Electric Power Regulatory Authority Licensing (Generation) Rules, 2000

These rules have been framed by the NEPRA with the approval of the federal government pursuant to the NEPRA Act 1997, and came into force on 17 April 2000. They specify the terms and conditions for the grant of a power generation license as detailed at Rule 3 thereof. The license fee is stipulated in the NEPRA (Fee) Rules 2000. The duration of a generation license is commensurate with the maximum expected useful life of the units comprised in the generation facility demonstrated to the satisfaction of the Authority. The generation company can only charge the tariff for the electric power and/or the Authority pursuant to the provisions in Rule 6 specifying the ancillary services. The Authority can revoke the generation license if it contravenes the provisions of the generation license and the rules provided, for under Rule 8 hereof. Rule 9 places an obligation on the licensee to be prudent in expenditure and to obtain project ﬁnancing on prudent and commercially reasonable terms. The licensee is obliged to make available the net capacity of its generation facilities for economic dispatch by the national grid company consistent with the grid code and any applicable distribution code subject to the terms of Rule 10. Provisions regarding the regulation of ancillary services are given in Rule 12. Discriminatory treatment between the purchasers of electricity is prohibited under Rule 13. Regulatory provisions concerning the ﬁnancial and organizational affairs of the licensees are given in Rules 14 and 15. Licensees are obliged to prepare and ﬁle with the authority the operating procedures manual pursuant to the provisions given under Rule 16. Rule 20 obliges the licensees to provide information regarding the activity of the licensee to the authority. Rule 21 empowers the authority to impose ﬁnes and penalties in addition to its powers to revoke a generation license or appoint an administrator over the generation business pursuant to Rule 8. Authority is mandated by Rule 22 to resolve disputes.

National Electric Power Regulatory Authority (Tariff Standards and Procedure) Rules, 1998

As the title indicates, these Rules are meant for the regulation of tariff and matters concerning thereto. Rules 3–8 speciﬁes the procedure for ﬁling of tariff petitions and the procedure until placement of the petition for hearing by the authority. Rule 9 speciﬁes the procedure for hearing of the tariff application by the authority. During the course of a hearing, the presiding officer may make rulings or may require further examination of the record, or take time to review the rulings if announced during the hearing, as per the procedure more speciﬁcally provided for under Rule 12. There is a provision for a tentative opinion of the authority and a record thereof to provide stakeholders with an opportunity to appraise the prospects of their case in the proceedings and consider settlement or withdrawal of their case or to modify the evidence proposed to be presented (Rule 14). Procedure regarding submission of the evidences is given in Rule 15. The decision of the authority, time frame and procedure thereto is stipulated in Rule 16. The authority has the right to require the licensees to modify or revise the basis for the tariff determination or the information requirement as per Rule 17. The tariffs once approved by the authority are to be ﬁled with the authority and the authority, if the tariff is not already approved, may require the licensee to ﬁle a petition for the purpose of approval of the tariffs of such licensee (Rule 18). Rule 19 provides the guidelines concerning format of the tariff. Rule 21 provides for the dissemination of the information concerning tariff for the information of customers. Rules 22–26 contain certain general provisions such as seal of the authority, effect of irregularity in proceedings, inspection by public, conﬁdentiality, extension of time, and so forth. Rule 27 provides for the authority’s power to impose penalties in case of contravention of these rules.

National Electric Power Regulatory Authority Licensing (Application and Modiﬁcation Procedure) Regulations, 1999

These regulations were enforced on 1 March 1999 by SRO No. 142(1)/99 and describe the procedure for ﬁling of license application and modiﬁcation thereto. Rule 3 stipulates the requirement and information, which is to be ﬁled along with the license application. Rule 4 enables the submission of application by companies that are not registered under the Companies Ordinance 1984.

Eligibility criteria are spelt out in Rule 5. Acceptance of application by the Registrar and its handling and grant procedure is given under Rules 6, 7 and 8. Rule 10 provides in detail the right of the authority to modify any or more of the terms of the licenses at any time during the term of the license. Under Rule 12, the authority reserves the right to amend these regulations. Schedule I speciﬁes the format of the application. Schedule II speciﬁes the license fee for different types of licenses, which is linked with the size of the project. Schedule III illustrates the technical, ﬁnancial and other information required to be submitted along with the application; the list is, however, not exhaustive.

Sarhad Hydel Development Organization Ordinance, 1993

SHYDO Ordinance was promulgated and made effective on 16 January 1993 under the authority of the Governor, Khyber-Pakhtunkhwa conferred upon him by Article 128 of the Constitution of the Islamic Republic of Pakistan. Section 3 of the Ordinance provides for the establishment of SHYDO with its head office at provincial capital Peshawar and with operating jurisdiction within the province of Khyber-Pakhtunkhwa. Sections 4–9 deal with the organizational and administrative matters of SHYDO. The powers and duties of the organization and framing of schemes by SHYDO are identical to those of WAPDA and the WAPDA is deﬁned as authority under the SHYDO Ordinance, which is a subordinate law and operates only if it is not in conﬂict with the other laws in force. SHYDO is responsible to the provincial government of the Khyber-Pakhtunkhwa.

REFORMS IN THE ELECTRICITY SECTOR

Previously, the whole power sector was a State monopoly as the only public-sector utilities; WAPDA and KESC were authorized for the generation, trans- mission and distribution of power in the country. In furtherance of the similar pursuits being followed by other countries in the global village, Pakistan initiated restructuring and reform process in the electricity sector in 1986 when the government encouraged the setting up of private sector power projects on BOO basis as a matter of policy, but the response was not very encouraging. A concrete step in this direction was taken in 1994 when an ambitious power policy was announced and the Act of country’s giant and monopoly utility (WAPDA) was amended to pave the way for its restructuring, unbundling, and for ultimate corporatization and privatization of the sector. Another key step towards reform in the electricity sector was the creation of NEPRA in 1997, which is fully functional. Notable progress has been made in restructuring and reforms of WAPDA. WAPDA has been unbundled into eight distribution companies (DISCOs), four thermal generation companies (GEN- COs), one Hydel generation company and a NTDC. These entities have been registered with the Securities and Exchange Commission of Pakistan under the Companies Ordinance 1984 and are currently managed by PEPCO, but ultimately the DISCOs and GENCOs are planned to be privatized. KESC has recently been privatized, and efforts are being made to privatize, GENCO-1 (Jamshoro), FESCO, and PESCO.

In parallel, various power policies were announced in the years 1994, 1995, 1998 and then in 2002. As a result of the conducive power policies, over four- teen thermal power generation plants installed by the IPPs are already operational whereas a few more are in pipeline. All hydropower projects remain with the

The PPIB were created in 1994 to facilitate private sector participation in power generation in Pakistan. PPIB provides ‘one-window’ facilities to private sec- tor investors in matters concerning establishment of power projects and related infrastructure. Since its establishment, the PPIB has played a key role in facilitating the IPPs in resolving various issues in an efficient manner and providing guarantees on behalf of the government.

The major restructuring of the giant WAPDA had been done during 1998–2002 on the following lines:

A uniﬁed power wing of WAPDA comprising generation, transmission and distribution has been restructured into fourteen public limited companies under the corporate law;
Restructuring power sector assets to form autonomous commercially independent entities through the adoption of prudent business practices, enhanced efficiency levels, cost reduction and proﬁt orientation;
Promotion of competition to eventually offer affordable electricity to customers; through the corporatization/commercialization process, promoting commercial viability and enhancing the business value of the assets of each corporate entity;
Enhancing privatization initiatives;
Operationalized the PEPCO as a private limited management company owned by the government to steer, manage and oversee the corporatization/ commercialization reforms programme.

Impressive progress has been made in the implementation of the restructuring and reform programmes of WAPDA. The fourteen distribution companies have been corporatized along with one national transmission and power dispatch company (NTDC), four thermal GENCOS and nine distribution companies (DISCOs).

In addition to the above, following has been achieved:

Induction of directors from the private sector and PEPCO in the Board of Directors of the corporate entities to utilize their experience for formulation of effective corporate policies;
Execution of Business Transfer Agreements (BTA), an Operation and Development Agreement (ODA), Electricity Supply Agreements (ESA), Bulk Supply Agreements (BSA) and Fuel Supply Agreements (FSA) between WAPDA and corporate entities for autonomous commercial operation;
Transfer of WAPDA staff to their respective corporate entities;
Federal tax exemptions for the corporate entities for capital value tax, income tax and wealth tax;
Winning consent of most of the creditors;
Preparation, review, approval and adoption of opening balance sheets for the corporate entities as of 30 June 1998;
Privatization schedule for FESCO ﬁnalized and sent to the Privatization Commission of Pakistan;
Investment plans for distribution power system rehabilitation prepared and ﬁnalized by the distribution companies;
Financial restructuring of WAPDA approved by the government;
Filed applications by all DISCOs for obtaining a license from NEPRA; a public hearing by NEPRA for the processing of applications of the Lahore Electric Power Supply Company (LESCO) and Gujranwala Electric Power Company (GEPCO);
Submission of a proposal to the government for price consideration to be paid or settled by the government with WAPDA so that the share of the corporate entities owned by WAPDA can be transferred to the name of the government. There are two nuclear power projects owned by PAEC. These are the KANUPP, and the Chashma Nuclear Power Plant CHASHNUPP. A third nuclear power plant is planned at the CHASHNUPP site, which will also be owned by PAEC. Nuclear plant safety matters are overseen by the PNRA, which was established on 22 January 2001, whereas the licensing of generation plant and determination of tariff is within the jurisdiction of NEPRA. The PNRA is empowered to devise, adopt, make and enforce regulations and orders for nuclear safety and radiation protection to all types of nuclear installations and nuclear substances.

Though restructuring and reforms in the electricity sector in Pakistan have achieved notable progress, there is still a long way to go until consumers can have choice of supplier, sufficient supplies, competitive price and quality service.

PPIB role and creation

Created in August 1994 to promote private investments in power sector
Acts as One-Window facilitator on behalf of GOP, its Ministries/ Departments
Executes Implementation Agreements and provides GOP Guarantees on behalf of President of Pakistan duly authorized by Prime Minister of Pakistan
Facilitates IPPs in executing PPA, WUA with relevant GOP agencies
Monitoring of IPPs progress
Provides support to Ministry of Water & Power, Provinces / AJ&K technical, financial and legal matters
Coordination/Liaisons with local and multilateral development/ Financial Institutions
PPIB received statutory status on 6th March 2012 through an Act of the Parliament

Achievements of PPIB:

Successfully managed to induct 27 independent private power projects (IPPs) totaling about 6928 MW
Attracted an investment of around US$ 8 billion.
Attracted leading international / local investors and lenders to the Pakistan Power Sector
Contributed in development of domestic capital markets.
Supported economic growth and enhanced power supply

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