Monday, 12 March 2018

30% electricity tariff reduction higher than expectations…but experts raise questions

Adnan Adams Mohammed

The Public Utility Regulatory Commission (PURC), announced last week that, starting March 15, residential and non-residential customers will enjoy 17.5 percent and 30 percent electricity tariff reduction respectively.

The announcement was made following extensive consultations with stakeholders including the government, Volta River Authority, Independent Power Producers (IPP) and civil society organisations.
However, these reductions are twice as much as the expectations of industry and other consumers.
Member Associations of the Trades Union Congress (TUC), as reported in an earlier edition of the Economy Times, demanded for 20 percent tariffs cut and expressed their appreciation of the government’s intention to reduce electricity tariffs this year as captured in the 2018 budget.
The various member labour unions of TUC said, given the negative impact of the existing high tariffs on economic activities and on the living standards of households, a significant reduction is in the right direction.

 “We think a significant reduction in tariffs is justified when we take into consideration the generally low incomes in the country,” TUC said in proposals for tariff review submitted to the Public Utilities and Regulatory Commission (PURC).
The PURC, was initially against any tariff reduction due to the fact that the power utility companies had called for increase in tariffs, but surprisingly has announced such a high reduction for all categories of users. The utility companies cited foreign exchange losses as reason for seeking the increment, as most of their inputs are imported, while bills are paid in cedis as well as the effects of inflation. Indeed they claim they have been incurring financial losses.
This has kept some energy experts and general public conjecturing and asking, if there is something  somewhere along the power supply chain that the public is not been informed about, or if PURC simply acted under undue pressure from government to tow its line as it had promise in the 2018 budget that it wanted to reduce tariffs. However, the PURC has come out to clear such doubts that, they acted under undue pressure to announce the reduction.
PURC, in pursuance of section 3a and 16 of the PURC Act 1997 (Act 538) and in line with its electricity rates setting guidelines, in February 2018, held a series of consultations with stakeholders in the sector during which some of the service providers pushed for an increased in their allocations and received tariff proposals from the Volta River Authority (VRA), the Ghana Grid Company Limited (GRIDCo), Electricity Company of Ghana (ECG), Northern Electricity Distribution Company Limited ((NEDCo), and Enclave Power Company Limited.
The VRA request was in respect of 128.4% upward adjustment in the Bulk Generation Tariff (BGT). On the other hand GRIDCo suggested a 62.9% increase in the Transmission Service Charge (TSC). ECG and NEDCo proposed a 64.9% and 204% respective increase in the Distribution Service Charge (DSC).

Economy Times information gathered reveals that, PURC’s review and analysis of the tariff proposal submitted by the Utility Service Providers (USPs) indicated a total revenue requirement of GHC 58.138 billion to be recovered from the regulated electricity market.

The overall effect of the requested BGT, TSC and DSC increases is that there should be a 27.4% increase in Average End User Tariff – from GHp 63.7694/kWh to GHp 81.2309/kWh.
Notwithstanding the proposals by the Utility Service Providers, PURC indicates that based on the results of their own analysis and review, a 12.54% reduction in tariffs across board for all categories of consumers is possible. The parties contemplated achieving this, by first removing the 5% PURC benchmark provision for uncollectibles which has been part of the revenue requirements for the Distribution Utilities and second, by taking into consideration a 31.5% growth in customer population between 2015 and 2018.
Moreover, the African Centre for Energy Policy (ACEP) and Industrial and Commercial Workers Union (ICU) have lauded the Public Utilities Regulatory Commission (PURC) over the reduction of electricity tariff.

Describing the action as the best news ever in recent years, the two organisations said it will bring relief to Ghanaians and bolster businesses.

But, a member of Parliament’s Committee on Mines and Energy, Edward Bawa believes the PURC was pressured by government to reduce tariffs beyond realistic margins.

Mr. Bawa advised the PURC to withstand what he termed as “bullying” from government and put the interest of the country ahead of political interest with regards to the adjustment of utility tariffs.

“I appreciate the enormity of the task before the PURC. Particularly as the Government, led by no less a person than the President of the republic, has been breathing down the Commission’s neck to ensure that an electoral promise is fulfilled even if it is at the peril of the Power Sector. The Commission must be bold and stand up to the bullying government and place the long-term interest of the state above a political party’s interest,” he said in a statement.

He pointed out that, had reported that PURC may not be able to reduce tariffs by the 14% margin for industrial and residential users promised by President Nana Akufo-Addo, arguing that documents sighted by indicate that the PURC was instead pushing for a 12.54% reduction in the tariffs for businesses instead.

Although Mr. Bawa, said he is not against a reduction in the tariffs, he stated that it would be unfortunate for the government to mount undue pressure on the PURC in order to fulfill political promises.

He however admonished government to remove the taxes on utilities if they want to drive the costs for Ghanaians down, instead of putting the PURC in a tight corner.

“I believe in tariff reduction. This is because many Ghanaians are either receiving low incomes or are without any regular income. However, it is wrong for government to subject the utility sector to profiteering. My proposal is that government must scrap all levies and taxes on electricity as a means of improving access and making it affordable to all Ghanaians. This is the way to go instead of the attempt to eat into the revenues of the Utility Service Providers,” he added.

 PURC Director of Operations, Abubakar Jabaru however has explained that the renegotiation of some energy deals and the customer growth rate of the utility companies informed the decision.

"We looked at their presentations and [decided] to revise the benchmark from 4 percent to 3.8 percent," he said of the companies in a discussion with Joy News' Evans Mensah.

He said the government has shown the commitment to reduce tariffs and as utility regulator, the PURC believes it is time the benchmark is revised.

Although shocked by the reduction, ACEP Executive Director Benjamin Boakye said it will spur industrial growth and make Ghana competitive in the sub-region.

"It's good for competitiveness [and] we can expect many consumers coming onto the grid but what I do hope is that the utilities will pick up and up their game and be efficient in delivering their services," he said.

Welcoming the announcement as the best news in recent times, ICU General Secretary, Solomon Kotei said the cost of living in the country will go down as a result of the reduction.

But Ghanaians are going to take their calculators to keenly monitor how much would be knocked off their bills when implementation starts, he said.

"It is a huge relief to the society...we will not experience dumsor," he said, but he could not confirm whether their members will reduce the price of their commodities.
Mr Bawa, aware of initiat deliberations between the utility services providers and PURC, said notwithstanding the possible areas where the reduction will come from, a few questions need to be answered. Below are the questions: “Is this an attempt by PURC not to contradict the President who jumped the gun to announce reductions in tariffs for categories of customers?

“Without an appreciable shift in other variables, any reduction in tariffs can threaten the sustainability of the Utility Service Providers and has PURC, also taken into account the increasing dominance of thermal power generation in the overall generation mix?

“There are new thermal plants being introduced onto the grid, so  has PURC considered a possibility of increased distribution losses that must be accounted for?

He further asked, “How will a proposed reduction cater for a further strengthening of the Transmission network and send signals to customers to improve efficiency. And how will this reduction minimise GRIDCo’s risk exposure to energy volume variations?

“There is excess capacity comprising AKSA Karpowership and CENIT totalling 780MW. This translates to a total energy of 6287GWh. In monetary terms this constitutes about GHC 2.364 billion idle capacity payments. The consequence of not utilising this excess capacity is that government risks pilling debt as the guarantor of all the plants’ production capacity that will be available in excess of demand unless, this is absorbed in the tariff. Has this been considered in the PURC proposal of tariff reduction?
“Has the Commission equally factored in the increasing natural gas requirements?. PURC must pay attention to the fact that LNG price is going to vary depending on Brent Crude oil removing the element of price stability associated with gas.”
In their proposal to PURC before the recent review of tariffs and subsequent announcement of the new tariffs, the workers’ union explained that the review should fulfill objectives such as access to reliable and affordable electricity and water, improvement in the quality of service of utility companies, and ensure that utility tariffs reflect prudent cost.

TUC observed that one major challenge for the growth of the private sector in Ghana has to do with high utility tariffs, adding that it is important that the review takes into account the plight of the domestic private sector, particularly the SMEs.

“The utility companies are demanding cost-reflective tariffs. We expect PURC to ensure that unjustifiable costs are not passed on to consumers.

“The resistance to tariff is due, partly, to the fact that consumers are paying for inefficiencies of utility companies, especially costs arising from political decisions that had only served the interest of some political elites,” it added.

“ The review process resulted in reductions in key utility cost. The reductions, which are based on PURC’s 2015 Gazetted Electricity Tariffs, are only on the energy charges and range from 10% to 30%. Maximum Demand and Service Charges remain the same as that of the 2015 gazetted tariffs,” a statement from PURC said.

It captured the market-driven and macroeconomic issues like price of crude oil, heavy fuel oil, distillate fuel oil, price of natural gas (from indigenous market and from WAPCo), Ghana cedi to US dollar exchange rate and inflation.

Further, it said that the basis for the reduction were the “removal of 5% PURC Benchmark Provision for Uncollectible, which over the years has been allowed as part of the overall revenue requirements for the distribution utilities, and also a 31.5% growth in customer population from 3,575,733 in 2015 to 4,702,735, by 2018, which would have an adverse effect on cost of production.

The PURC said it also took into consideration the impending Private Sector Participation (PSP) concession within the Electricity Distribution Sector.

The commission said the decision was arrived at after extensive consultations with stakeholders in the sector, as well as detailed analyses of proposals tendered in by companies in the power distribution chain.

“The PURC, after extensive stakeholders’ consultations, detailed technical analysis of utility tariff proposals and consideration of inputs and concerns of consumers, has approved tariff reductions for various electricity consumer categories, effective 15th March, 2018,” the statement said.

The commission, however, failed to reduce water tariffs.

“Review of water tariffs requires further consultations, and the commission is unable to announce a decision at this time. Water tariffs, therefore, remain the same and a decision will be taken in the coming weeks,” the statement said.

The commission received tariff proposals from the utility service providers in the electricity sectors; namely, Ghana Grid Company Limited (GRIDCo), Electricity Company of Ghana (ECG), Northern Electricity Distribution Company (NEDCo), Enclave Power Company Limited (EPCL), and the Ghana Water Company Limited (GWCL).