Tuesday March 18 2014

Umeme Vs ERA: Protecting electricity users or corporate greed?

 

By NELSON WESONGA & ISAAC IMAKA

There was once a man named Ananias, who, with his wife Sapphira, sold their property.

But with his wife’s permission, he kept part of the proceeds for himself and handed the rest to the apostles.
Peter said to him, “Ananias, why did you let Satan take control of you and make you lie to the Holy Spirit by keeping part of the money you received for the property?”

So goes the story of Ananias and Sapphira according to Acts 5:1 – 3.
It is a story that in away captures what is happening between Uganda’s power distributor Umeme and the Electricity Regulatory Authority (ERA).
At the beginning of every year, ERA makes a projection of how much electricity Umeme will buy from the transmission company and sell to the power consumers.

It is based on the previous year’s energy purchases and sales.
Many times, however, Umeme sells more power than had been envisaged. And it keeps the free extra cash.
Now ERA has started reconciling Umeme’s sales projections with the actual sales.

ERA argues that since Umeme is having a bumper power supply, it should reduce the cost of the tariff because it is not investing a penny in the ensuring enough power generation. That same spirit was used when there was low power generation and the government stepped in with subsidies to Umeme to prevent the tariff cost from skyrocketing.

The money, which is between Shs16 billion and Shs37 billion that Umeme makes from excess power sales, is, according to ERA, supposed to be ploughed back to the Ugandan electricity user through reduced power costs, instead of being taken by the power distributor as an incentive.

The reconciliation is a result of the ERA’s amendment in 2012 of Umeme’s Power Supply License. Uganda’s 1999 Electricity Act gives the regulator the power to amend the license.

For 2012, though ERA had projected Umeme would sell 1, 735 giga watt-hours (GWh) of electricity; which is what Umeme sold in 2011, the company actually sold 1, 937 GWh - according to the utility’s 2012 Annual Report.

Umeme attributed the increase in the units sold to the commissioning of the Bujagali Hydroelectric power plant in October 2012, which “eliminated power supply deficits and increased electricity supply by 10 per cent during the year”.

Partly because of the reconciliation, power consumers now pay between Shs2.4 and Shs13.2, less for each unit of electricity they use.

Umeme cries foul
However, much as ERA’s decision to reconcile Umeme’s actual energy sales with the sales projections led to the reduction of end-user tariffs, it has led to Shs37.8 billion-reduction in Umeme’s revenues.

This, Umeme says, has deprived it of cash to pay for either the connection of 50,000 customers to prepayment or the upgrade of three sub-stations.
“ A total 70, 000 to 80, 000 customers will be affected,” Mr Sam Zimbe, Umeme’s general manager for Corporate and Regulatory Affairs, told the Daily Monitor recently.

Mr Zimbe said the company has had to borrow from the International Finance Corporation (IFC) and Stanbic Bank, among other financial institutions, to bridge the shortfall.

He did not say how much it had borrowed. With the free cash flows gone, it would affect Umeme’s ability to pay its debts.
But the reason Umeme, a private distributor, was hired is because Uganda wanted a company that would operate efficiently and would be capable of funding its operations without looking to government for subsidies.

Mr Zimbe further said the reconciliation would undermine investor confidence in Uganda by marking out Uganda as a place where contracts are changed anyhow.

Umeme also argues that the reconciliation removes the incentive to over perform and that it would lead to additional generation costs and higher tariffs.

Tariff adjustment
To get over the claw back, Umeme in February this year proposed that ERA adjusts the tariffs [upwards] so that Umeme can “recover the Shs37.8 billion”.

We are yet to establish what the company wants each of its 540, 000 customers to pay for it to raise the Shs37.8 billion.
In December 2013, it had proposed that each domestic consumer pays Shs576.69 for each unit they use, up from the Shs524.5 per unit each that was paying then.

But the regulator in January 2014 instead reduced the end-user tariffs by Shs2.4-Shs13.2 for each unit of electricity the different categories of consumers used.

That was the first time since 2009 ERA had reduced the tariffs though in 2009 it reduced the tariffs by between Shs2 and Shs41 on the account of increased power generation.

ERA attributed the reduction in 2014 to the commitment by the government to pay the remaining two heavy fuel oil plants, Electromaxx and Jacobsen, capacity charges.

It was also because the debts of the electricity generation, transmission and distribution companies would not from then be embedded in the end-user tariffs.

Also, the money that shall go to the Karuma and the Isimba Hydro Power Projects transmission lines will be got from the Energy Fund. The appreciation of the Shilling against the Dollar from Shs2, 688 (2013) to Shs2, 524 (2014), and a reduction of the energy distribution losses from 28 percent (2005) to 24 per cent (2013), too, contributed.

It was also due to the “minimal dispatch” of thermal power in to the national power grid. Umeme’s arguments aside, analysts’ say what is at stake is the independence of the regulator.

Critics say Umeme has for long used well connected individuals to dictate to the regulator often times to the disadvantage of the larger public.
It is against this background that Parliament’s Ad Hoc Committee on Energy in October 2012 recommended that, “ERA must rise to challenge to oversee, control and regulate the sub-sector without fear or favour in accordance with the Electricity Act”.

On revenues for investment purposes, the company can raise equity from the shareholders and by borrowing from financial institutions – though of course, it will have to pay interest.

But the bank’s interest could be cancelled out by the 20 per cent annual return on investment, which is one percentage point more Bujagali Energy Ltd’s (19 per cent), that Umeme is entitled to.

In the case of incentives, were Umeme to reduce the distribution losses to levels below what the regulator set, it gains financially.
For example, if Umeme is supposed to reduce power distribution losses from 20 per cent to 18 per cent but it reduces them to 16 per cent, the financial benefit would go to Umeme.

For each percentage loss allowed in the power tariffs, the government “pays Umeme” $3 million.
By beating the target by 2 per centage points, Umeme would make $3 million multiplied by two.

As for the reconciliation keeping away investors from Uganda, one would have to explain why Parliament’s call for the termination of the Umeme concession did not scare the IFC, the National Social Security Fund and individual investors from buying Umeme shares in 2012.

On the issue of excess energy sales, Umeme says it gets the free cash because the government designed it so. It further argues that by building the distribution network, which the electricity generation companies need to wheel power to the electricity users, it contributes to increased power generation.

Because the excess energy sales are a result of increase power generation, why don’t the generation and transmission utilities also get some of it?
Since the Umeme says it uses the revenues from excess energy sales to invest in the network, it means that it is investing “free money” but charging electricity consumers for it – through the tariffs, which already have a return on investment of 20 per cent per annum.

Although Ananias and Sapphira died, Mr Zimbe said Umeme would win this case.

Way Forward
ERA has to organise a public hearing to let the stakeholders – power consumers, civil society organizations, government officials et al -have a say on whether the regulator should clear Umeme’s proposal to increase the tariffs

Mr Zimbe said the regulator, the government, the World Bank and Umeme should meet to sort out the issue.
Mr Andrew Aja Baryayanga, the Member of Parliament for Kabale Municipality, says the regulator should claw back all the money that Umeme has been getting since 2005.

Mr Baryayanga said: “ERA must audit Umeme’s accounts since 2005 and Claw back all the falsified claims of losses and investments. If it does that, it would lead to reduction of the electricity tariffs.”

UMEME’S argument
Reduced revenues. Umeme says ERA’s decision has deprived it of cash to pay for either the connection of 50,000 customers to prepayment or the upgrade of three sub-stations. It says it has led to a Shs37.8 billion reduction in Umeme’s revenues.

Forced borrowing. Mr Zimbe says the company has had to borrow from the International Finance Corporation and Stanbic Bank, among other financial institutions, to bridge the shortfall.

Killing initiative. Umeme also argues that the reconciliation removes the incentive to perform efficiently and that it would lead to additional generation costs and higher tariffs.

Undermining investor confidence. It also argues the reconciliation would undermine investor confidence in Uganda by marking out Uganda as a place where contracts are changed anyhow.

On the issue of excess energy sales, Umeme says it gets the free cash because the government designed it so.

Era’s actions
Annual projections. At the beginning of every year, ERA makes a projection of how much electricity Umeme will buy from the transmission company and sell to the power consumers.

This is based on the previous year’s energy purchases and sales. Many times, however, Umeme sells more power than had been envisaged. And it keeps the free extra cash.

Reconciling sales. Now ERA has started reconciling Umeme’s sales projections with the actual sales. ERA argues that since Umeme is having a bumper power supply, the end-user tariffs should be reduced by the magnitude of the excess energy sales so that the greater public benefits.
Returns to the sector.

The money, which is between Shs16 billion and Shs37 billion that Umeme makes from excess power sales, is, according to ERA, supposed to be ploughed back to the Ugandan electricity user through reduced power costs, instead of being taken by the power distributor as an incentive.

THE impact
In the case of incentives, were Umeme to reduce the distribution losses to levels below what the regulator set, it retains financially. For example, if Umeme is to reduce power distribution losses from 20 to 18 per cent but it reduces them to 16 per cent, the financial benefit would go to Umeme.

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