AN application by the Tanzania Electric Supply Company Limited (TANESCO) for a multi-year tariff increase of 67.87 per cent from the government's energy regulator, the Energy and Water Utilities Regulatory Authority (EWURA) has been received with mixed feelings by Tanzanians from all walks of life.
Following the application made in October this year for a review of existing power tariffs, EWURA held a series of public hearing meetings last month in Shinyanga, Iringa, Bagamoyo and Dar es Salaam to get views from stakeholders.
The Confederation of Tanzania Industries (CTI), in its presentation at the public hearing in Dar es Salaam, proposed a reasonable tariff increase that would take care of the prevailing inflation rate and/or depreciation of the shilling, whichever was higher.
Later, CTI was co-opted into a task force of the Tanzania National Business Council (TNBC) and recommended cent, following detailed analysis of TANESCO's application to EWURA.
Furthermore, the task force recommended that the government should exempt duties and taxes on fuel used by power generators.
TANESCO's key argument supporting the proposed power tariffs increase is that the current electricity prices in Tanzania, which are the lowest in East Africa, are below actual power generation costs.
In November 2011, the lossmaking TANESCO submitted an emergency tariff application for an urgent tariff increase averaging 155 per cent across all customer categories, to be effective on 1 January 2012.
Recognizing TANESCO's difficult financial situation, EWURA's Board of Directors approved an emergency electricity tariff increase of 40.29 per cent pending determination of the final tariff.
EWURA opted to carry out a Cost of Service study which could be the basis for multi-year tariff increases for TANESCO for the period between 2013 and 2015.
A consultant, AF-MECADOS EMI from Spain, was engaged to develop a rate setting methodology (RSM) for the electricity sub-sector in Tanzania and a cost of service study (COSS) for TANESCO.
The study assumed average hydrology in Tanzania (as opposed to the current situation of prolonged dry hydrology) and recommended cost reflective tariff with increases of 33.8 per cent for year 2013; followed by small increase of 0.85 per cent in 2014 and 15.14 per cent in year 2015.
It was expected that an order of a multi-year tariff would be issued and come into effect from 15 January 2013. However, before issuing the order, the Ministry of Energy and Minerals (MEM) advised TANESCO to withdraw the tariff application.
Inevitably, TANESCO through advice given by MEM, requested EWURA to suspend implementation of the cost of service study results and be allowed to continue using the existing tariff.
EWURA considered the matter and issued an order in January 2013 maintaining the tariff rates as approved by the TANESCO emergency tariff adjustment order of 2012.
"TANESCO respectfully requests that EWURA approve a multi-year tariff adjustment for three years from October 1, 2013.
The proposed average adjustments are 67.87 per cent effective from October 1, 2013, 12.74 per cent effective from January 1, 2014 and 9.17 per cent effective from January 1, 2015," the company said in its application.
The 2014 and 2015 proposed tariff is exclusive of inflation, currency fluctuation and change in fuel prices.
"Automatic adjustments to cater for inflation, currency fluctuation and change in fuel prices have been proposed to take place in quarterly basis and the effect to be applied across all customer categories."
These adjustments will enable TANESCO to fund its operational costs, capital investment programme, to demonstrate its bankability to donors offering concessionary loans and grants, to increase capacity needed to meet system peak demand and to adequately fund repair and maintenance to ensure a consistent and stable supply of electricity.
The current tariff regime yields average revenue of 197.81 Tanzanian shillings per kilo-watt hour (TShs/kWh), yet the revenue requirement target for TANESCO in 2013 is 332.06 TShs /kWh.
The shortfall of 134.25 TShs/kWh (67.87%) severely restricts the ability of the company to provide the services required to meet its obligations to both its lenders and its customers.
"Without such a tariff increase, TANESCO will be unable to provide the quality of service that our customers deserve and which TANESCO wants to provide," said the company.
It is therefore, reasonable to consider what steps TANESCO would take in the event that a tariff increase is not granted as requested.
TANESCO receives grants and subsidies from the Tanzanian government and from development partners.
For example, the government has been providing direct subsidy support of 18 billion shillings, equivalent to just 40 per cent of total annual capacity charges for the IPTL power plant alone.
The government also has been providing subsidy to cover fuel costs for emergency power plants (EPPs) and independent power producers (IPPs) and outstanding energy creditors amounting to 450 billion shillings from March 2012 to May 2013.
Due to the fact that TANESCO is applying for a multi-year tariff adjustment, it is recommended that a tariff indexation mechanism be used to appropriately adjust changes in costs that are outside of TANESCO's control.
Electricity utilities throughout the world use indexation to ensure that tariff revenues keep pace with rising costs during periods between formal regulatory reviews.
The goal of indexation is to permit utilities to achieve their financial performance targets while at the same time freeing regulators from the need to assess frequent requests for rate adjustment.
In order to ensure that TANESCO's revenues keep pace with its costs over the period, the utility proposed indexation of two types: Fuel cost adjustment (FAC) -- Fuel costs are more significant variable cost component in TANESCO's operations.
The FAC is charged to recover the increased costs resulted from change in hydrological conditions outside of TANESCO's control.
Furthermore, the cost of fuel depends on international markets which are highly volatile and equally outside of TANESCO's control.
Macroeconomic price adjustment -- Local inflation results in increased cost of domestic goods (such as domestic construction materials). Similarly, foreign inflation and the foreign exchange fluctuations impact the cost of foreign goods.
The level of these price adjustments is completely outside of TANESCO's control. The proposed tariff increase comes with a specific set of performance targets on the part of TANESCO.
In return for the tariff increases, TANESCO commits to provide its customers with benefits in various areas, including investment in the rehabilitation/maintenance of existing distribution systems.
If the Tariff Application is not approved and TANESCO were to make no compensatory adjustments in its operations, the company would be projected to incur a financial loss in each of the next three years:
Furthermore, TANESCO will not be able to meet its operational expenses, invest on its infrastructure and consequently failing to deliver quality services to its customers.
If the Capital Investment Plan (CIP) expenditure is reduced, the 250,000 customer connections goal is unlikely to be achieved and Tanzania's household electrification rate will not reach national target of 30 per cent.
"The principal motivation for this tariff application is to cover TANESCO's cost of operations while complying with the government's policy of making sure that the population with access to electricity reaches 30 per cent by 2015," the power utility said in its application to EWURA.
"Without such a tariff increase, TANESCO will be unable connect more customers and to provide the quality of service that customers deserve and which TANESCO seeks to provide."
Less than 20 per cent of the population in Tanzania currently has access to electricity, equivalent to less than 10 million people out of a population of around 45 million.
The unavoidable reality is that no enterprise can provide the service that its customers seek if it loses money on every unit of output that it sells, said TANESCO.