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Wednesday, 5 September 2012

The Proposed ZESCO tariff increase for 2013

By Ruth Henson

ZESCO is proposing to increase their tariffs by the following amounts:

Social services                         19%
Commercial                             24%
Maximum demand 1 & 2        27%
Maximum demand 3 & 4        32%
Residential                              37%
Mines – up to cost reflective tariffs by 2015

There is perfectly reasonable business logic for increasing the smallest customers by the largest amount. Electricity, like other commodities is cheaper to supply in larger quantities. Also as commercial and MD customers are using electricity as an input rather than an end product they have to increase product prices when this input goes up. However the domestic consumers are the ones who will switch to using charcoal for cooking and heating and seriously degrade the environment and pollute the air.

ZESCO’s stated reasons for increasing the tariffs are as follows;
  1. Rising cost of production.
    1. Inflation.
    2. Exchange rate pressures.
    3. High commodity prices especially copper.
  2. Key performance Indicators have improved.
  3. The need for continued investment in production.
Looking at these arguments one by one, it becomes clear that there are other reasons for the increase that ZESCO prefers not to mention.

Inflation was 10.2% in 2010 and 7.2% in 2011. This would justify, at most, an increase of 18% for the two years combined. It hardly seems right to go back as far as 2007’s inflation levels to justify an increase in 2012.

Exchange rate pressures are always mentioned as a reason for a tariff increase whether the Kwacha gets weaker or stronger. It’s about time that ZESCO learned how to mitigate such pressures. If the Kwacha weakens ZESCO will get more kwacha for its exports but have to pay more for its imports. If the Kwacha strengthens it will be the other way around.

High copper prices as an excuse for increasing tariffs to everyone except the mines seems to me a very provocative and insulting argument. If copper is worth a lot more, thereby increasing the price of transformers, then the producers of copper can well afford to pay a fair price for electricity.

The performance indicators mentioned by ZESCO are Metering, Loss reduction and Staff productivity. All these should improve ZESCO’s profitability considerably. Why they should necessitate a tariff increase I don’t understand. The performance indicators that consumers would be willing to pay more for relate to consistent supply, quick repair of faults and reduced load shedding. For commercial customers improved information would also be useful. If ZESCO can tell me when power will be off and how long for, I can plan production around the outage to some extent. Phoning the faults centre for information about how long the power will be off is a complete waste of time and money.

The need for continued investment in power production is mainly due to increased demand from the mines. Why other consumers should pay for this has never satisfactorily been explained. Also it is normal for a company seeking capital for expansion to issue shares or seek loans for the expansion. If ZESCO wishes their customers to pay for their new investment are we going to be issued shares? Will we get dividends? If it is a loan will we be repaid by lower tariffs later on?

A brief look at the ZESCO cost of service study reveals a different set of issues that ZESCO prefers not to mention.

Highlights from ZESCO’s cost of service study. 2002-2006 (found on the ERB site)

Key issues:
  • Five straight years of losses.
  • Increasing cash flow problems.
  • More than one-third of all its customers were not metered.
  • A very rapid run up of staff costs with the average cost per employee doubling every two years between 1999 and 2004.
  • A significant under pricing of mining loads that, if allowed to continue, will accumulate to an estimated $926 million over the next ten years.
ZESCO’s staff costs are 50% of its total cost basis even though ZESCO was reporting that staff numbers were decreasing.

ZESCO’s average cost per employee reached K115 million in 2005/06, which is the equivalent K9.5 million/month.

The Mines use 50% of the power produced but pay 28% below cost of production.
If domestic consumers have to subsidise the mines, the mine subsidy will be 30% of their bill OR The physical system will continue to degrade for lack of funding, and load shedding  would likely increase substantially because the mines take priority service on a 24/7 basis.

The new power stations needed, are to supply the mining load. Expected non mining load does not need new power stations till at least 2018.

Exported power is sold 15% below cost.

 ZESCO employees do not pay for power

 Administrative costs are high and not necessarily related to power production as seen in the following quote;

“The following administration costs have been disallowed:
i. Donations amounting to K 9.5 billion;
ii. Entertainment costs amounting to K 436 million; and
iii. ZESCO United Football Club costs amounting to K 4.7 billion."
In the current tariff increase application there is a time of use tariff offered for large users. This seems a little irrational when it is the domestic load that causes the peaks necessitating load shedding. It would make more sense to offer time of use tariffs to domestic consumers. There is also no mention of selective load shedding of geysers which used to be a common practice and was very effective and generally unnoticed by the consumer.

There is also no mention of cheaper rates for prepaid. There is a very valid case for cheaper rates for prepaid as it saves ZESCO meter readers, issuing bills, disconnecting for non payment and so on. Prepaid also improves ZESCO's cash flow by receiving the payment before supplying the power rather than after.

We are awaiting the Energy Regulation Board’s Public Consultation Paper which will summarise the tariff application and call for public comments and submissions.

It would have been good to see an update on the cost of service study giving us the current status as regards what the mines are paying, what ZESCO employees are paying (not much) and whether their “improved” performance indicators have met any of the benchmarks set by ERB.

5 comments:

  1. That is a very imformative and educative analysis accentuating the discrepancies in ZESCO.I wonder very much,why should there be an increase in tarrifs when we are walloping in loadshedding almost everyday?Why should we pay more for the service that leaves much to be desired?Why should we subsidize the mines who are crazy profits?ZESCO should improve its service and work on how to reduce the administrative and production costs.We will be more that willing to pay more if we saw improved service from ZESCO.ZESCO should manage its cash flow very well.

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  2. This if just poor financial and economic management,why should a poor Zambian pay for yo,donations, entertainment, shares.......these are not direct production costs for a unit u are trying to increase,they are not relavant costs,u can only give when u have,prioritize your costs and u will see that u have more that enough to deliver a better service.should the need be for the increase let it be proportionate based on the consumption volume of your customer category not what we are seeing ......stop it u will be stealing from us and enriching the already rich mines and other commercial clients.

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  3. The ERB invitation to submit/comment was published today and they have given you up next friday 14th to do so. Please write to ERB if you care. Last time there was an increase only 46 people wrote in. Send it to tariffs@erb.org.zm or erb@erb.org.zm

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  4. Thanks Cho and Henson, very insightful read and indeed thought provoking, but will certainly ensure feedback is directed at the right people/institutions.

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