ISLAMABAD: Pakistan's Privatization Commission has proposed a major restructuring of the country's power distribution sector that would separate electricity distribution networks from competitive supply businesses and shift legacy generation contracts to the private sector, according to a policy paper released by the commission.
The paper, titled "Post-Privatization Regime for Power Distribution Companies," envisions dividing the electricity value chain into four functions: Distribution Network Operators, Competitive Suppliers, a Supplier of Last Resort, and ring-fenced ancillary businesses.
The proposal aims to retain distribution networks as regulated natural monopolies while gradually opening electricity supply to licensed competitive suppliers, with the goal of introducing competition, improving service delivery and creating opportunities to reduce tariffs.
The commission emphasized that privatizing distribution companies alone would not resolve the power sector's structural problems, and that sector-wide reforms must precede or accompany ownership transfers.
Sector Struggles Despite Three Decades of Reform
Pakistan's power sector has long faced persistent circular debt, high tariffs, declining grid demand and substantial capacity-payment obligations under long-term generation contracts. Despite three decades of reforms — including the unbundling of WAPDA, the creation of the National Electric Power Regulatory Authority and the introduction of the Competitive Trading Bilateral Contract Market — many problems remain unresolved.
Network Operators Would Face Performance-Based Returns
Under the proposed model, Distribution Network Operators would own and operate distribution networks under NEPRA oversight, with returns shifting from an asset-based model toward performance-oriented regulation that rewards efficiency, reliability and consumer service. The commission argued the current tariff structure rewards asset ownership and approved investment rather than demonstrable performance, creating a bias toward capital expenditure.
Legacy Contracts Would Shift to Private Suppliers
Competitive Suppliers would handle electricity procurement, customer management, billing and collections. A key feature of the proposal is the transfer of legacy generation contracts and their capacity-payment obligations from the Central Power Purchasing Agency-Guarantee to private suppliers, along with corresponding customer portfolios. The paper acknowledged that existing power purchase agreements would continue to be honored during the transition and that protected consumers would retain regulated tariff protection.
Each distribution region would have a designated Supplier of Last Resort, performed by the network operator within its territory, to ensure continuity of supply when competitive arrangements fail. Limited ancillary activities would remain within the regulated network operator, while broader commercial and energy-transition activities would be handled by separately licensed, ring-fenced affiliates.
Seven Principles Would Guide Transition
The commission proposed seven design principles to guide the transition, including functional unbundling, network neutrality, a regulated last-resort supply mechanism, gradual market opening and performance-based regulation. Competitive supply would be phased in line with privatization, regulatory preparedness and market capacity.
Demand Erosion Threatens Financial Sustainability
The paper identified demand erosion as a major challenge, citing high tariffs, energy conservation, self-generation and rapid adoption of distributed solar, particularly among higher-paying consumers. As grid demand declines, fixed costs must be recovered from a smaller consumption base, raising per-unit tariffs and encouraging further migration away from the grid — a negative cycle threatening the sector's financial sustainability.
Consumer Complaints Mount as Service Lags
The commission also highlighted consumer-service deficiencies, citing NEPRA's State of Industry Report 2025, which recorded 5.7 million consumer complaints in fiscal 2025 and 106,895 consumers awaiting new connections despite paying application fees, representing more than 1,021 megawatts of unserved load. It proposed linking utility returns and penalties to measurable service-quality indicators such as interruption duration and frequency, complaint-resolution times and connection timelines.
Subsidy Leakage Concerns Raised
The paper also raised concerns about the protected-consumer framework, noting that only about 2.2% of roughly 34.3 million domestic consumers are on Time-of-Use tariffs. It said the low proportion warrants examination of whether multiple single-phase connections allow some households to split consumption across meters and remain within protected-consumer thresholds.
Regulator Overhaul, Phased Rollout Urged
The commission called for strengthening NEPRA's governance, autonomy and technical capabilities, and urged that essential elements of the future regulatory regime be settled before ownership transfers to allow investors to make informed assessments. It cautioned that reforms must be implemented in phases, and noted that certain datasets and system-planning tools, including detailed PLEXOS outputs, were unavailable during preparation, meaning key parameters would need validation by relevant institutions before implementation.
