An Overview of the Electricity Tariff Approval Process in Zambia

Wed, 21 Feb 2018 13:10:30 +0000

By CHIPAMBESO KASESE

OVER the years, electricity tariff adjustments by the Energy Regulation Board (ERB) have tended to attract sharp reactions from electricity consumers and the public. Regular comments include: “as consumers we were not involved in the process;” “whenever ZESCO apply for electricity tariff adjustment, they are always approved.”

It could be argued that many electricity consumers are not clear on the important role (guaranteed by law) they can play in the tariff setting process. Therefore, this article will focus on the tariff setting and approval process for electricity in Zambia. The article will also address some common misconceptions associated with electricity tariffs.

The Legal Basis for Tariff Review

The ERB is mandated to review electricity tariffs by the Electricity Act, Cap 433 Section 8 of the Laws of Zambia, which among other things outlines the following:

1. Subsection (2)

If an operator of an undertaking that supplies electricity to the public considers it expedient to vary or alter charges in respect of any supply of electricity, the operator shall give notice to the consumer of the proposal to vary or alter those charges, as the case may be;

2. Subsection (3)

If the consumer does not make any application under subsection (04) within thirty days of the date of notice referred to in sub-section (02), the variation or alteration, as the case may be, shall, unless the operator of the undertaking and the consumer otherwise agree, come into effect thirty days after the date of that notice or from such a later date as the operator may in that notice fix;

3. Any consumer who makes an application under subsection (4), or the operator of any undertaking who objects to such an application, may, either by themselves or by their legal practitioner, appear before the Board and lead evidence in support of the application or objection, as the case may be; and
4. The Board shall, on an application by a consumer, review a proposal referred to in subsection (02), taking into consideration any submissions made by the consumer.

Further, subsection (7) provides that after considering the application referred to in subsection (4) and any objection thereto, the Board may:-

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1. a) Confirm the proposed variation or alteration, as the case may be, to which the application relates;
2. b) Order that the proposed variation or alteration, as the case may be, to which the application relates shall not be made; or
3. c) Order the operator of the undertaking to make such other variation or alteration, as the case may be, as the Board considers fit.

The Board may, if it considers it appropriate, on its own motion review a notice by an operator of the undertaking to vary or alter charges in respect of any supply of electricity.

5. Any application made under subsection (04), together with any objection of the operator to that application, shall be submitted to the Board. Any consumer who makes an application under subsection (04), or the operator of any undertaking who objects to such an application, may, either by themselves or by their legal practitioner, appear before the Board and give evidence in support of the application or objection, as the case may be.
6. After considering the application referred to in subsection (04) and any objection thereto, the Board may:
7. Confirm the proposed variation or alteration, as the case may be, to which the application relates;
8. Order that the proposed variation or alteration, as the case may be, to which the application relates shall not be made; or

iii.        Order the operator of the undertaking to make such other variation or alteration, as the case may be, as the Board considers fit.

From this excerpt, most readers will agree that the whole tariff setting process is complex. However, this was done deliberately by the framers of the Electricity Act and the Energy Regulation Act, to protect electricity consumers from exploitation. Imagine what would happen if electricity tariffs were altered at the whims of service providers.

Who initiates a tariff adjustment?

As the extract from the Electricity Act shows, a tariff adjustment can be triggered when a service provider, such as ZESCO Limited makes an application to the ERB to alter or vary electricity tariffs.  The ERB has developed Tariff Filing Guidelines (TFG) that outline what ought to be contained in a duly lodged tariff application.

Tariff application before the Board

Let us now look at the process followed when an application has been dully lodged with the ERB. The service provider will submit an application to the ERB for a tariff adjustment, ideally six months before the start of its financial year. Thereafter, the ERB has to respond to the utility within 14 days receipt of the application notifying  the utility as to whether or not the application was duly lodged or not.

In the event that a tariff application has not been duly lodged as prescribed in the tariff setting guidelines, the ERB will reject the application and notify the service provider within 14 days from receipt of the application. The utility is however at liberty to resubmit a fresh application provided this is within 21 days after receipt of the notification of the rejected application.

Focus on ZESCO

Since ZESCO is the largest supplier of electricity in the country, this article would be incomplete without discussing pertinent issues related to ZESCO tariffs.

Whenever ZESCO submits an application for a tariff adjustment to the ERB, there are a number of variables that the utility includes in the submission. For the 2017 application, the following fundamentals were highlighted as necessitating an increase in ZESCO tariffs:

1. To meet the cost of power importation. As a result of the loadshedding experienced in 2017, ZESCO had to import power which cost more than the prevailing market rates in the country;
2. To encourage more investment in power generation to help diversify the energy mix; and
3. To address the depreciation of the Zambian Kwacha against major trading world currencies coupled with high interest rates.

When assessing ZESCO (or any other operator’s) application to increase tariffs, the ERB looks at the performance of the operator (licencee) especially with regard to the agreed performance benchmarks/indicators. For ZESCO, Key Performance Indicators (KPIs) include the following:

Metering of customers;

Proper cash management;

Staff productivity;

Quality of service of supply;

System losses;

Power generation;

Safety; and

Consumer complaints.

It is worth noting that the objective of the KPIs is to evaluate the performance of ZESCO and this narrows down to customer service, technical and financial operations. Therefore the performance of the service provider has a bearing on the tariff awarded whenever an application is made.

In addition to this, the ERB has over the years assessed tariff applications bearing in mind the following best practice tariff determination principles:

Recovery of prudent costs by utility;

Recognition of used and useful assets of the utility;

Financial sustainability of the utility;

Attainment of cost reflectivity in the  tariff;

Delivery of quality service; and

Social considerations for indigent customers – life line for the poor.

Public Consultation

It is also a legal requirement that the service provider issues a notice to its customers as well as the public in both print and electronic media of its intention to vary the tariffs. Specifically, the notice should cover the following:

The tariff adjustment applied for stating the percentage per customer category;

The current tariffs and proposed tariffs in monetary terms per customer category;

The reasons that necessitated the  application to be made;

Latest audited statements of revenue, profit/loss and proposed revenue, profit/loss after adjustment; and

Projects that will benefit from revenue if proposed tariffs are awarded.

It should be noted that the notice can only be issued once the ERB has advised that the tariff application had been successfully (duly) lodged. Furthermore, in addition to the utility’s public notice, the ERB will issue a Public Consultation Paper (PCP) and subsequently invite interested parties and the general public to submit written comments to the ERB. Submissions are generally expected from consumer protection bodies, individual consumers, cooperatives, industry groupings and chambers of trade and commerce. The PCP will highlight key points included in the utility’s application. Comments are expected to be submitted to the ERB within thirty (30) days of receipt of the duly lodged application by the ERB.