Regulating Umeme power tariffs

By Job A. Kahigwa

Time to base the domestic electricity consumers charge on Time of Use formula

Once again, the Uganda Electricity Regulatory Authority (ERA) board of directors is considering a power tariff increment.  A power price rise is being considered just after huge increments of 69% and 36% for large scale and domestic consumers respectively early last year. That followed a trend of tariff increments registered in the previous years. In 2005, prices increased by 24%, and in 2006, increased by 35% in June and 41% in November of the same year.

These tariffs have been increasing since the unbundling and the establishment of ERA as the sector’s ombudsman. Contrary to its major aim of lowering prices for customers or at least ensure minimum price rises, ERA has presided over unprecedented tariff hikes.

Even if ERA’s regulatory success or failure in the electricity market cannot only be measured by price levels because of the market’s operation complexities, it can at least be measured against pre-determined criteria like the general price determination methodology.

For fairness, which is provided for in the regulations of section 120 of the Electricity Act, 1999, any proposed changes to the tariffs require extensive stakeholder consultation for purposes of transparency and accountability.

ERA has undermined this principle, leading to legislative and judicial intervention every time sanctions on new tariff regimes are made. The Parliamentary Ad hoc Committee stayed the implementation of new tariffs early last year after authentic minutes of the board meeting that had made the decision could not be produced.

Consumers under the Uganda Electricity Users Association have gone to court to protest. This time it is the Uganda Manufacturing Association in court seeking redress. The Uganda Electricity Users Association unsuccessfully sought court intervention over alleged non-transparency in the price determination procedure. But who, if not ERA, can consumers go to, to curb this steadily rising price trend?

On a global scale, the barometer for power sector regulatory failure has always been judicial involvement in regulated activities and constant prices raises which is being manifested here as well.

It is thus apparent that ERA is in a form of “regulatory capture”; meaning it makes decisions unduly influenced by other parties. Effectively it has become a surrogate of the power transmitter; the Uganda Electricity Transmission Company Ltd and the distributor; Umeme, at the expense of consumers.

The pursuit of liberalised electricity market in the Uganda paved way for the establishment of ERA and provided a legal basis for the unbundling of the previously vertically integrated monopoly, the Uganda Electricity Board. It led to the forming of segmented value chain monopolies at generation, transmission and distribution stages.

Much as monopoly elements remain in the system, it is ERA’s key role to ensure that those elements reflect public interest in their conduct; a public service ethos of ensuring adequate, affordable and reliably efficient power supply.

So why is a further tariff hike being considered at this point in time? Could it be an attempt by the power sector to transfer the cost for insufficient demand or excess power supply to the consumer?

Transferring costs

Before the Bujagali Hydropower Dam was commissioned last year, aggregate power demand at peak hour (18:00 – 24:00 hrs) was about 443Mw and 302Mw at off-peak (24:00 – 6:00 hrs). The available electricity capacity then, was 330Mw, causing a capacity (supply) shortfall of 113Mw at peak hour.

The excess demand over and above supply was paid for by consumers through a price hike due to the use of a diesel generator that supplemented supply. Customers also paid for the power sector currency exchange rate and inflation risks incorporated in the power tariffs.

When the 250MW Bujagali capacity was added to the grid, total available capacity is 580Mw. And since electricity cannot be stored once it is generated, it means that, there is capacity excess (power supply is greater than demand) of 137Mw and 278Mw at peak and off-peak hours respectively if last year’s figures are to go by.

Even if ERA’s forecasted 10% annual demand growth is applied now (6 months after Bujagali’s commissioning), aggregate demand would be 487.3Mw and still be less than the available capacity. One is thus left wondering if the current tariff hike plan is due to this excess power supply. Who pays for insufficient demand or redundant capacity?

Two things are evident. The diesel generator supplementing capacity should not be on the grid. Thus no cost for fuel should be met by end-users. Secondly, under the current tariff structure, the cost of redundant capacity is being passed through to the consumer tariff.

The current tariff structure comprises a fixed charge per month (for services like metering and meter services, customer billing and customer information and service expenses), a capacity charge (for accessing the power grid or demanding electricity), and an energy charge (per Kwh for units consumed).     From the above tariff structure; the consumer is already bearing the cost of redundant capacity, paying for deriving a demand for power (capacity charge), and paying a fixed charge for services they sometimes do not get (like disconnecting power at ones house before a utility bill or a disconnecting notice is priory served). Above all, consumers also pay for the losses, operating and maintenance costs and bad debts incurred by the power distributor, Umeme, under the Cost of Service price mechanism ERA uses in setting price.

This means consumers suffer when there is a power shortage, and pay heavily when there is an over-supply of it. To show that it does not suffer from a general regulatory malaise, ERA needs to furnish the public with a price raise justification.

Power Tariff hikes over time

Power Losses

Distribution losses

The benchmarking of power tariffs to losses, operating and maintenance costs and bad debts incurred by the operators to determine revenue required at a rate of return (known as the Rate of Return regulation), is where the tariff Trojan horse lies. Umeme Ltd is a profit maximising company that has no interest in doing ‘cheap’ business.   Using last year figures, Umeme’s distribution losses stood at 26.1%, each per cent loss costing government Shs12 billion in rebates (refunds on losses) or Shs 314 billion.  In comparison, Kenya and Tanzania’s electricity distributors’ losses were 16% and 17.76% respectively. Uganda’s being the highest in the region.

Apart from the rebates government provides to the power sector operators, end-user tariffs have been increasing as Umeme’s revenues rise handsomely. Last year its total revenue increased by 88.06% and profit after tax jumped from $9.22 million in 2011 to $21.26 million (more than twice). Such an outstanding financial performance is not bad, but it should not be at the expense of the customers.

Before introducing the automated tariff billing system (a system that incorporate inflation, depreciation of the Shilling against the Dollar and increasing fuel prices) as ERA proposes, fundamental changes in the tariff determination structure need to be made first.

Let domestic consumers be charged based on Time of Use (applying different charges to usage of electricity in different time periods to reflect underlying cost differences). This is done for other consumer categories like commercial, medium scale, and large scale industry consumers.

Such a mechanism would relieve domestic consumers from high costs incurred in hours when electricity usage is low, during off-peak and shoulder hours (24:00-6:00 hrs and 6:00-18:00 hrs respectively) because of the fixed charges in the tariffs.

With intent to have a lower energy bill, domestic consumers would adopt electricity usage means that are efficient in hours (peak hrs), when load growth (increase in electricity demand) is likely to require additional capacity, or when high cost generators must be dispatched to meet load (demand).

Consumers need this Time of Use tariff determination method in place with its respective reading meters urgently; much before an Automatic Tariff Billing system is rolled in.  Educating electricity consumers on how these tariffs are determined and adjusted is necessary to show why even if one left his/her house for a whole month (assuming no electricity is used), he/she would still be billed for the period.

Like the U.S.’s Federal Energy Regulatory Commission, ERA should even consider basing its pricing decisions on the total return to the company (operators). ERA should decide the allowable profit rate (the return) for the operators (UEGCL, UETCL, and UEDCL/Umeme) since the current pricing structure does not incentivise cost effectiveness amongst operators.

Otherwise, creating a liberalised electricity market with a level of competition is in order to ensure that the remaining monopoly elements in the power market reflect public interest and pursue reduction in end-user tariffs. That should be ERA’s lock, stock and barrel mandate.

Job Kahigwa is an Extractive Industry & Energy Specialist and a Scholar of the Association of International Petroleum Negotiators (AIPN). Contact via jobkahigwa@gmail.com