Net-hydel profits

CONSECRATED in the Constitution of Pakistan is the edict decreeing payment of ‘net-hydel profits’ to the provinces according to a formula as simple as ‘Newton’s first law of motion’. Disdainfully, the constitutional decree is diffused in two ways; firstly, by grounding the computation of ‘net-hydel profits’ in a flawed legal theory, and secondly, by impeding the implementation of even this faulty alternative.

Article 161 (2) of the Constitution proclaims: “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.”

The framers of the 1973 Constitution, predicting a potential quagmire over the calculations of ‘net-hydel profits’, and in an effort to quell it, purposefully inserted an ‘explanation’ in Article 161. It declaims: “For the purposes of this clause ‘net profits’ shall be computed by deducting from the revenues accruing from the bulk supply of power from the bus-bars of a hydroelectric station at a rate to be determined by the Council of Common Interests [CCI], the operating expenses of the station, which shall include any sums payable as taxes, duties, interest or return on investment, and depreciations and element of obsolescence, and overheads, and provision for reserves”.

From 1973 to 1992, the payment of ‘net hydel profits’ was completely withheld. After remonstration by the then government of NWFP, the National Finance Commission eventually constituted a committee for the calculation of ‘net hydel profits’ which conceived the famous ‘AGN Kazi methodology’, ultimately approved by the CCI in 1991.

Net-hydel profits remain largely unrealised in practice.

Here lies the first issue. In the constitutional scheme, ‘net hydel profits’ are to be calculated by taking the total revenue of each hydro station, and subtracting therefrom, the expenses directly attributable to that hydro station. The AGN Kazi methodology deviates from this constitutional paradigm by abandoning the hydro station, and replacing it with the national grid, and founding upon the economics of the latter, the basis for calculating ‘net hydel profits’.

This substitution is extra-constitutional, because as per Article 161 (2), only the economics of the hydro station at the ‘bus-bar’ is to be take into account in calculating ‘net-hydel profits’. Economics beyond the ‘bus-bar’ and founded upon the national grid, ie, costs of thermal generation, national grid equalisation, pooled generation costs, transmission inefficiencies, subsidies etc. cannot be factored in.

The effect of factoring in extra-constitutional economics is momentous. For instance, 1 kWh of electricity can be produced by a large hydro station at a cost of around 1.5 cents, whereas a thermal station pushes the cost of production to as high as 35 cents. Therefore, the AGN Kazi methodology for calculating net hydel profits is not a reflection but a dilution of Article 161 (2).

The methodology has never been legally assailed. It’s endorsement multiple times by the CCI since 1991, and the ‘tacit approval’ accorded to it by the Supreme Court in cases where it was not directly challenged, such as ‘Gadoon Textile Mills vs Wapda’ (1997) and ‘Pesco vs S.S. Polypropylene’ (2023), represents at best a ‘constitutional settlement’, much like the issue surrounding the War Power Clause in the US constitution (Article I, section 8, clause 11). Since 1951, multiple American presidents have deployed the US military extensively without seeking formal Cong­re­ssional approval pu­­­-

rsuant to the War Powers Clause or the War Powers Reso­lution of 1973; yet the US supreme cou­­rt and Congress have historically re­­treated with indifference, indicating a ‘constitutional settlement’.

Then comes the second issue. The federal government has been frugal even while paying the outstanding ‘net-hydel profits’ according to the AGN Kazi methodology, leading an arbitration tribunal headed by former chief justice Ajmal Mian to award Rs110 billion to the then NWFP government in 2005.

Since then, outstanding arrears have accumulated to around Rs2.3 trillion to be paid to the ‘hydro-rich’ govern-ment of Khyber Pakhtunkhwa which is browbeaten primarily by the constitutional delict.

The Constitution prescribes a simple formula like ‘Newton’s first law of motion’ to calculate ‘net hydel profits’; lamentably, in practice, this formula has been rendered as confounding as the Schrödinger equation dealing with quantum mechanics by introducing a multitude of extra-constitutional variables unaccounted for in the constitutional scheme. n

The writer is a practising barrister.

asadulmulk@legalparameter.com

Published in Dawn, August 11th, 2026

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