24 December 2012

Uganda: Electricity Tariff Adjustment Suspended

ELECTRICITY Regulatory Authority has planned to change the electricity price setting mechanism to provide for monthly automatic adjustments to reflect movements of inflation rate, exchange rate and fuel prices.

The new mechanism has caused confusion and uproar as the public fear that the proposal will increase the cost of doing business as well as make life expensive.

Public rejects the plan

"Due to the volatility of the variables (fuel, inflation and exchange rates), any tariff adjustment based on these variable will greatly disadvantage the electricity consumer and will have serious repercussions on the business community and the consumer," Martin Okumu, the communication head of Uganda Chambers of Commerce opined.

"The net effect of the automatic tariff adjustments will be increased consumer tariffs due to the changes in inflation, exchange rates and fuel prices."

He asked the regulator to suspend the whole process to allow for "further and meaningful engagement and consultations with all concerned stakeholders."

High cost of doing business

Gideon Badagawa, the Private Sector Foundation boss, recalled that government withdrew direct subsidies to power consumers with the intention of saving the money for new power plants.

"This prompted a drastic review of power tariffs upwards in February 2012. We understood that we needed more power for industries and value addition," he stated.

"However as the private sector continues to adjust to the drastic increase in power tariffs, the attendant challenges of high interest rates, tariff adjustments and Port Mombasa, transportation challenges, and cost of raw materials have continued to stifle and increase business related costs."

Badagawa noted that it is not only the power companies that are affected by exchange rate, depreciation, high inflation or fuel prices.

"Agreeing that this works for the power sector shall have set a precedent for other utilities like water and fuel companies. This will further constrain doing business (and) will drive overheads and prices even higher," he opined.

"Rent changes were proposed in dollars by some landlords (and) fuel prices have been increased on account of depreciating exchange rates. This is not healthy for the business community and the effects are clear."

Badagawa said that if the automatic adjustments were implemented then government has to provide for a stabilization fund to even out the tariff changes resulting from variations in inflation, fuel prices and exchange rates given the problems facing the business community.

Dison Okumu, an electricity consumer, said that inflation is measured by the composite underlying cnsumer price index which takes care of fuel and utilities, adding that the exchange rate is taken care of by the household and personal goods or imported goods.

"Therefore there no need to adjust for fuel and exchange rate separately on the same variables once inflation is taken care of," he said.

Going to Court to stay the plan

And the Uganda Manufacturers' Association (UMA) has applied to the High Court to stop the regulator from implementing the automatic tariff adjustments.

The industrialists argue that the monthly automatic adjustments of end user tariffs will translate into higher energy costs which will "adversely" affect their competitiveness in the local and regional markets.

"It will impair business planning given the uncertainty in the cost of power (which is) a vital input and causing substantial losses," Mubaraka Nkuutu the UMA chief stated in the plaint.

He said that the decision to provide for automatic tariff adjustment was "not transparent, just and fair" and "is not provided for under the Electricity Act (and) is illegal."

"In our considered opinion, fairness requires that ERA not only hears from the power companies but also hears from the consumers affected by the said change," the manufacturers' said.

"UMA as a key power consumer is opposed to the proposed power tariff review and implementation and hereby notifies ERA to stay the process of power tariff review or adjustments. This will allow wider consultations on the matter given the centrality of power in driving not only industry but overall economic growth and development in the country."

However, it is true that ERA called for a public hearing held on December 11, 2012 where presentations were made explaining how the mechanism will work and the public reacted on the proposal rejecting it.

"The public hearing is part of the efforts to promote transparency, objectivity and participatory approach in decision making on matters of importance and interest to stakeholders in the electricity sector," Benon Mutambi, the ERA chief, said.

"The contracts signed way back in 2004 provide for adjustments of the fuel prices, inflation and exchange rate variables. But the adjustments were done every quarter and because there were subsidies the consumer could not see the changes."

ERA Explains

Mutambi explained that the problem of quarterly adjustments is that there are large increases due to large movement of the variables which cause a shock in the tariffs.

"Any shock is undesirable. You would rather have smooth and gradual movement of the tariffs which the automatic tariff adjustments address. But we have been adjusting tariffs reflecting the movement of the variables and that explains why tariff shocks," he said.

"If you don't do it (automatic tariff adjustment) now and assuming that fuel prices, inflation and the exchange rates are against Uganda's economy it would mean that there will be no revenues generated from the sale of electricity."

And the effect, Mutambi explained, is that Uganda Electricity Transmission Company (UETCL), which is the only public company which buys electricity from all power generators will default its obligation.

"There will be no investment in the power sector to meet the high growth in power demand estimated at over 15% per year. How are we going meet the demand if investors are scared to bring in their money?" he asked.

"Of course there will be load-shedding and what is the cost for this? What is the cost of using small diesel generators and solar power?"

No consumer subsidies

Mutambi said government had to make strategic decision not to continue subsidizing the end-user tariffs but instead use the money to build other cheaper sources of energy like the planned 600 Mw Karuma hydropower project.

He said that in the past seven years, government had injected close to sh1.5 trillion in power subsidies which he said was enough to build a power plant of 250 MW capacity.

"Government has changed strategy of subsidizing the power sector. Instead of subsidizing the end user it is now subsidizing in capital investments by constution of public funder power plants, which will ensure sustainable and affordable electricity supply for longer period," the regulator said.

He recalled that in 2005, the government made a decision to subsidize electricity consumers, driven by affordability concerns. Over the years, the subsidies requirement escalated as end-user tariffs remained unchanged.

Last year, Uganda experienced acute power supply problems when UETCL failed to pay thermal power producers who switched-off their machines.

The industrial sector (small, medium and large) were largely hurt as the production activities depend on power

"Previously changes in costs resulting from fluctuation in macroeconomic factors were being met by the Government through subsidies. So Adjustment is not new. Subsidy escalation accumulated arrears, and eroded investors' confidence in the sector," he said.

"Automatic Tariff adjustment is a cost recovery mechanism was consumers benefit from reductions and allows companies recover increase in costs as a result of fluctuation in macroeconomic factors of inflation, exchange rate and fuel prices.

"Consumers will benefit when costs reduce. Companies/utilities will be allowed to recover additional costs incurred. This will ensure financial sustainability of the utilities."

Mutambi said the intention of the regulator was to have the automatic tariff adjustment mechanism in January subject to the outcome of the consultation but the concept has been misunderstood.

"We have decided to postpone the implementation of automatic tariff adjustment to February for further consultations because we represent the interest of all stakeholders." he said.

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