No power billing in dollars
Sep 16, 2012
There are quite a number of questions that have been raised about the proposal by Electricity Regulatory Authority (ERA) to introduce a monthly automatic tariff adjustment mechanism.
By Julius Wandera
There are quite a number of questions that have been raised about the proposal by Electricity Regulatory Authority (ERA) to introduce a monthly automatic tariff adjustment mechanism.
The automatic tariff adjustment mechanism is not a new phenomenon in utility regulation; it has been used by multiple regulatory bodies as a measure to match the cost of power generation and transmission and the revenue collected by distribution companies.
Tariff regulation has four main economic goals, two of which focus on consumers, that is rent extraction and demand-side efficiency, and the other two focus on operators, that is investment/capital attraction and supply-side efficiency.
From January 15, ERA, the regulator of the electricity sector, and not Umeme; revised the end user tariffs upwards following a Government communication that there would not be further funds to continue directly subsidising end user consumers.
At the time of the tariff increment, the subsidy requirement for the electricity sector stood at more than sh400b for just one calendar year. The reasons for the increase in subsidies at the time were partly due to the depreciation of the shilling, high inflation, and high oil prices.
Before the removal of subsidies, the end user was paying a fixed price per unit of electricity. Any depreciation of the shilling, say from sh2,400 a dollar to sh2,500 a dollar would mean we would need more shillings to buy dollars because most of the sector costs are denominated in a dollar, yet the end users pay their bills in local currency. The shortfall arising out of this depreciation would be met by the Government through subsidies.
In the absence of the Government subsidies under fixed end user tariffs, any negative effect of variations in exchange rates, inflation, and global oil prices would imply Uganda Electricity Transmission Company Ltd (UETCL), the bulk buyer who sells electricity to distribution companies such as Ferdsult Engineering, Umeme Ltd, and other small corporates runs into deficit since the money recovered from consumers would not be sufficient to meet all the sector costs including the payment to generation companies.
Our memories are still fresh with the effects of delayed government remittance of subsidies to cover this financing gap created by an upward movement in exchange rates, inflation and oil prices on the global market.
The period between September 2011 and January 2012 witnessed intermittent power supply caused by generation companies switching off their engines due to delayed payments by the transmission company.
To avoid this problem and to ensure a financially sustainable electricity sector, ERA has come up with the Automatic Tariff Adjustment Mechanism, whereby the end user tariff will vary on a monthly basis to take care of changes in inflation, exchange rate and oil prices.
The reason we call this ‘automatic’ is because the total effect of variations in the three factors positive or negative, upward or downward will be calculated every month following an approved formulae and will be indicated on the consumer bills in a manner that is transparent.
We shall have a base tariff (or a reference price), to which we shall then add the total effect of the three exogenous factors. For example, if the base tariff is sh500/kWh for the domestic consumer, in a given month we could then add say sh4/kWh for inflation, sh15/kWh for exchange rate, and sh5/kWh for fuel (this example is only hypothetical). The total effect of the adjustments will be (4+15+5) =sh24/kWh. The total cost of a unit of electricity will, therefore, be 500+24=sh524/kWh.
In another month, the total effect of the adjustments may be negative, that is, when conditions are favourable.
There has been a misconception that the automatic tariff adjustment mechanism will lead to an increase in tariffs and that the billing by Umeme will be in dollars.
That is not accurate. Our legal tender is shillings and so the distribution companies cannot bill consumers in dollars. In the event that the shilling appreciates and fuel prices fall, the automatic adjustment factor shall be negative and the tariff will reduce.
This mechanism enables the consumers to benefit from improved macroeconomic conditions by a reduction in tariffs, improvement in investor confidence and thus increased generation capacity.
The writer is the senior communications officer, Electricity Regulatory Authority