UMEME’s tariffs woes

By Agather Atuhaire

Why the economy is the main loser

The government announcement of a new electricity tariff regime on Jan.12 could still backfire but, on paper, it looks like a perfect stroke. Part of the problem is that the tariff regime does not address the real problems in Uganda’s electricity sector.

The sector is plagued by three main challenges: blackouts due to low supply marked by a widening gap as demand rises annually and supply shrinks, high tariffs attributed to sector inefficiency and corruption, and recently, government failure to meet its financial obligations to the thermal power generation companies due to a fiscal squeeze.

The planning behind the new tariffs could have been influenced by practices in other electricity-starved countries and an analysis of Uganda’s current financial indicators, including the nominal household incomes, purchasing power of the shilling and Consumer Price Index, the Gross Domestic Product and its variants like the per capita GDP and GDP deflector.

In 2005 when the previous tariff was set, a litre of diesel cost less than Shs 2000. It now costs Shs 3800. The dollar was at Shs 1600 but during last year alone, it kissed the Shs 3000 mark and inflation hit an all time annual 30% high. Energy sector officials say a unit of thermal electricity which cost Shs 500 to produce in 2005 now costs Shs 800.

In an interesting spin on the new tariffs, Benon Mutambi, the acting executive director of the Uganda Electricity Regulatory Authority (ERA) which regulates electricity told The Independent that tariffs did in fact not increase but reduced.

He said: “If government is no longer paying part of the money it was spending on power and the consumers are to pay the whole tariff alone, they (consumers) would now pay Shs 800 which has been the cost of electricity per unit. But consumers will now pay Shs 525, 488, 313 and 459 depending on their consumption because the tariff has reduced.”

Despite Mutambi’s spin, the new tariffs are on average 42% higher but Large Industrial consumers took the biggest raise of 69% to Shs312.8 per Kwh (Aprrox. 0.127 $/Kwh). According to the official statement, the new rate is the second lowest for this category in the East African region. The lowest, Tanzania, charges this category 0.088 $/Kwh and the highest, Kenya, charges it 0.175 $/Kwh.

The chairman of the Uganda Manufacturers Association Sebagala Kigozi says the new tariff will automatically increase the costs of production.

“Manufacturers naturally depend on 99% power so any increment means an increase in the costs of production,” Kigozi said. He adds, however, that the new tariffs would be bearable if supply was reliable.

Sam Watasa, the executive director of the Uganda Consumer Protection Association also says the problems in the power sector are not about tariffs but about its quality and quantity.

“The new tariffs could be the cause of more unrest because as the consumers now pay the full cost,” he said, “they will be keener on the quality now that they pay more.”

Tariffs not fixed

But, in an overlooked innovation with potential to spark trouble, the ERA boss Mutambi adds that Uganda’s tariffs will no longer be fixed and will vary from month to month depending on the financial indicators of the economy.

“The tariff we announced is just a base tariff,” he told The Independent adding that the authority will release a mechanism formula in March so that even consumers will know how and what had affected the tariff.

Kenya has a varying tariff but when the Kenya Power Managing Director, Joseph Njoroge, announced that there had been a 9% drop in the cost of electricity after fuel cost charges and forex dropped in November and December 2011 and consumer lobby said its members had not experienced the reduction. They are now pushing a Bill to require the energy regulator to obtain parliamentary approval before adjusting electricity tariffs.  Uganda is instead removing the requirement for parliamentary approval to raise the tariff. ERA’s announcing the tariff without a ready formula is one of many indicators that the tariff regime was hurried and not clearly thought out.

Observers have also noted that despite the brave face by the government, the new tariff regime is plan “B” after the much anticipated first turbine of the 250 MW Bujagali Hydro-power Dam failed to bring the 50MW in the last quarter of 2011 as promised. The government had hoped the 50MW relief would allow it decommission some of the thermal electricity generation plants blamed for the tariffs which, even then, were the second highest in the region.

Uganda’s electricity sector is an opaque monolith and official information is often confusing. Officially, Uganda has an installed generation capacity of 590MW and an operational capacity of 361MW. ERA had hoped to raise its generation capacity to 747MW by end of 2011 but Bujagali failed to come upstream.

The Bujagali delay follows another major set-back in Uganda’s electricity sector; the 2005 failure by the Kiira Dam, an extension to the old Nalubaale (Owen Falls) Dam, which was to produce 200MW but became a white elephant. The biggest supplier, ESKOM which manages the Owen Fall Complex, produces 138MW which is 67% of supply. The next highest supplier is Aggreko with 21% from three thermal plants (Mutundwe 3%, Kiira 12%, and Lugogo 6%). As a result, Uganda remains stuck with a 275MW electricity supply deficit. Demand stands at 580MW.

UMEME wins

Since the announcement, focus has been on the perceived “tariff increase”. This is partially because the Minister of Energy, Irene Muloni, and the ERA Chairman Richard Apire, who jointly announced the new tariff regime, “sneaked in” the three main innovations in the new tariff regime that could makes the situation worse. All three innovations are designed to favour and entrench UMEME’s stranglehold on the power sector despite a public outcry for its contract to be cancelled.

UMEME, the national electricity distribution arm of the sector, has recently faced widespread public outcry, demonstrations, and a court case calling for its contract to be cancelled.

UMEME is accused of high and inflated charges, improper billing, failure to lower grid power losses, and surviving on subsidies from the government to power consumers amounting to Shs 1.5 trillion (Approx. US$600m) in the last five years.

Just two years ago, in October 2009, Gen. Salim Saleh chaired an Interim Review of the Electricity Tariff Committee that proposed a $5 reduction in the tariff from Shs426per unit to Shs 188.

Saleh’s report, presented to then-minister of Energy Hilary Onek accused UMEME of defrauding government of Shs 452billion in four years using various shenanigans.

A major point of contention is the losses of power on the grid. According to its contract with government, UMEME gets compensated for the losses but the actual figures are disputed.  The Saleh report said when Umeme took the distribution concession from Uganda Electricity Distribution Company Limited (UEDCL), total electricity losses were at 28%.  Umeme said they are 40% but an arbiter, NORCONSULT, put it 38% and UMEME gets compensated up to Shs 100 billion per year according to Saleh’s figures. The agreement said the losses should fall to 28% by 2012. They are now officially 27.7%.

Another area of contention is the amount of investment UMEME has made. Umeme was supposed to invest US$ 65m over five years. By 2009, it claimed to have invested US$ 67m but the report said the claims had inconsistencies.

Getting a true figure of the investment is important because UMEME gets a return on investment of 20% embed in the tariff. Therefore, if it claims a higher investment, it can justifiably demand a higher tariff. Under UMEME, customers are made to pay directly for installation equipment like meters, poles, and transformers although the cost of such investment is embedded in the tariff. Latest information places UMEME’s investment by 2011 at US$ 85 million up from US$ 65.3 million in 2010.
It’s unclear how UMEME will deal with its other fat cow, the system power losses. Under the agreed system, UMEME calculates its system losses by deducting the energy it bills from the energy it buys (Energy bought minus Energy Billed). The government then compensates it 99% for the loss. Remember, UMEME has one of the most inefficient billing systems in the world. It has virtually failed to install pre-paid meters and instead imported meters that over invoice customers.

Based on evidence in the Saleh report, of 301,000 meters on the grid in 2009, only 260,000 meters were read at least once each quarter. Out of these only 157,000 meters were reported to have been billed. UMEME effectively allows 50% of its customers to use power without billing them. Some of the system losses are also attributable to UMEME’s poor maintenance of its infrastructure.  Are these losses intentional? Has there been a racket to inflate the losses? Will it persist?

To reduce the tariff, the Saleh Committee proposed reducing the tariff, removal of an Income Tax Allowance that is embedded in the UMEME tariff, reduction of UMEME losses, and a check on ESKOM’s claimed costs.

But under the new regime, the government is to continue the subsidies (spending up to Shs 522 billion – Approx. US$200 million – between January and June 2012 alone).

According to ERA’s Mutambi, during the 2011/2012 financial budget, Shs 417 billion was allocated to power subsidies, but because of the upward change in the factors that affect power generation, government had to pay more money on subsidies for the tariff to remain fixed.

“The 522bn that government is going to pay is what it has so far spent on financing the subsidy this financial year because the cost of subsidizing power has been going up,” Mutambi told The Independent.

Sam Watasa of the Consumer Protection Association told The Independent that the tariff subsidy does not make sense and the government should have instead considered an investment subsidy or a connection subsidy.

“When you subsidise new connections, more people will get connected, consumption will go up and the tariffs will consequently fall,” Watasa said.

Watasa says it is logical that consumers pay for what they consume.

He said subsidies also make power generation companies push up costs because they know that the government can pay.

“It is said that only one company was supplying diesel to the thermal generators, there could have been price fixing between this company and the thermal generators to extort money from the government,” he said.

Debts cancelled

Under the new arrangement, the government has also wiped away debts owed to international lenders by UMEME and ESKOM as “successor companies” to the defunct Uganda Electricity Board (UEB).

UMEME and ESKOM have been paying US$ 30 million (Approx. Shs75 billion) per year to the government to service the debt. The government statement said it was converting the debt into equity.

When Uganda Electricity Board (UEB), the government parastatal, was disbanded in 2001, three companies of Uganda Electricity Generation Company Limited (UEGCL), Uganda Electricity Transmission Company Limited (UETCL) and Uganda Electricity Distribution Company Limited (UEDCL) were formed which makes them the successor companies of UEB. In 2001, UEDCL and UEGCL handed their roles to private entities, UMEME and ESKOM. The three shared out UEB’s debt with UEDCL required to pay US$16 million per year, UEGCL was required to pay $8.4 m per year while UETCL was to pay 5.5 m per year.

UEGCL has been servicing the debt through the lease fees it collected from Eskom for renting Owen Falls Complex, while UETCL got money from selling power to Umeme.

Finally, UMEME no longer has to seek permission from ERA and endure public scrutiny as happened recently in order to raise the tariff. The tariff will no longer be fixed and UMEME will vary it from month to month depending on financial indicators like inflation and value of the Shilling.

Protests feared

While announcing the new tariff regime, the government, ERA, and UMEME were aware of its unpopularity and potential for causing angry reactions.

The day before it was announced, on Jan. 11, the government had abruptly cancelled a press conference where the tariff regime was to be announced. The government feared that anger over UMEME would spill into a three-day traders’ strike over high commercial bank interest rates that started that day.

The UMEME Safety Manager Phil Ball sent out the following message: “The Inspector General of Police has been requested to ensure all Umeme facilities are protected and that local police are on standby to react to any disturbance reported to them. Security personnel at our offices and substations have been alerted to the increased risk.”

He went on: “District Managers (DM) and Heads of Department (HoDs) please act on the following: All Umeme branding is removed from district vehicles. Make contact with the local police post to ensure you have the correct contact details if assistance is required. Report any acts of aggression directed towards Umeme to Phil Ball 0772 222 300. Brief all staff and contractors, especially disconnection teams and debt collectors that: They are not to engage in debates with customers on the increase, politely explain that further information will be communicated. They avoid large gatherings as they travel. Always have their phones fully charged. Report any concerns to their DM or HoDs. Umeme T-shirts are not to be worn until advised. Staff should remove their IDs while out of office but keeping their IDs with them. Anyone loitering around Umeme offices should be asked to leave.”

The timing of the announcement, at the peak of a traders strike over high interest rates on bank loans, is significant shows, however, that the decision could not be postponed in spite of its anticipated negative political consequences and further inflammation of a volatile situation. Why was it so urgent? Would it have been so urgent if the government was sure a cheaper line of electricity would start in February from Bujagali?

Shadow Finance minister Geofrey Ekanya says government should have first addressed the most critical problems in the power sector.

He says they should have waited for the Adhoc committee which is investigating the high power tariffs to release its report.

“Even the Saleh’s report indicated that power tariffs could be lowered by 40 percent, so the ministry should have considered the management of the sector first,” Ekanya told The Independent.

Bujagali fails

While announcing that the government is maintaining the subsidies, Energy Minister Irene Muloni said the government would eliminate them when Bujagali Hydropower Project is “fully in production”.

Muloni added: “I wish to assure Ugandans that the electricity supply situation will gradually improve starting from next month (February) as the Bujagali generation units get commissioned. By the end of July 2012, when the last Bujagali unit will be commissioned, load shedding will be eliminated altogether.”

Based on past failed promises on Bujagali whose commissioning was to be in 2010, highly placed sources in the Bujagali Hydropower Project have told The Independent that the first unit of electricity is unlikely to be produced until July at the earliest. In Uganda-speak that means expect no power from Bujagali this year.

If that is true, then the government’s plan appears to be to curtail demand by ratcheting up tariffs since it cannot increase supply. The move could succeed if it knocks off some users and, effectively, frees more units of electricity available to those who can afford it, including big industrial users who are currently chocking from the cost of using diesel generators because of constant power outages. However, it could backfire if it spurs power thefts. If this happens, apart from increase consumption and reduced revenues, UMEME and government would have to incur a higher policing bill.