ENERGY Regulation Board and government are saying Zambia is still in the process of procuring a consultant to undertake the Electricity Cost of Service Study having cancelled the earlier one launched in 2017.
But The Mast has come to learn that in fact, in January 2018, Economic Consulting Associates of London, United Kingdom submitted their report, entitled “Economic Cost of Service Study to determination of economic cost reflective tariffs, Zesco benchmarking Report to the Energy Regulation Board.”
Throughout its report, ECA/Utilink commented on various problems with the data.
“We have observed that Zesco’s financial and statistical data are disorganised and inconsistent, and different information is often provided from different sources within the company or even from the same source. Benchmarking with other utilities (in Africa and worldwide) and with other entities in Zambia and the region show that Zesco’s staff numbers (permanent and temporary/casual) are clearly excessive and that Zesco’s costs per employee are also clearly excessive,” the so-called discontinued study report states in part. Industry sources contend “ERB cannot discontinue a study which has been completed and submitted. ERB is being disingenuous and are misleading the public. The fact is probably they didn’t like the findings.”
The study says, “If Zesco were a private company, there would be a strong and unequivocal argument that a substantial part of the company’s costs should be disallowed by ERB so that Zesco would be forced to become more cost efficient.”
“However, Zesco is not a private company, it is 100 per cent state-owned. Many of the practices adopted by Zesco that have led to higher costs are likely to have been imposed on the company by GRZ [Government of the Republic of Zambia]. We cannot say this definitively in all cases, but this seems to be the case,” it states. “For example, Zesco was instructed by GRZ to convert its temporary staff to permanent employment in 2011 and 2012 and Zesco’s unsolicited contracts to purchase power from some IPPs appear to have been instructions from GRZ.
“The higher costs imposed by GRZ policies on Zesco can be considered as equivalent to a tax on electricity consumers. If GRZ wished to achieve the same goals (e.g., employment generation) through more transparent means, it could do so by raising direct or indirect taxes such as VAT and income tax and using the revenues to invest in employment generation projects or programmes of various forms. Employment generation policies might be questioned by the electorate and by lenders but they could be legitimate policies that would need to be recognised by ERB.
“Electricity consumers might dispute the payment of higher prices to cover the cost of these policies, but they have no legal powers to prevent it unless Zesco or GRZ can be shown to have been in breach of legislation or agreements. And if such costs are to be disallowed from Zesco’s allowed revenues, Zesco would make losses and would be unable to finance necessary investment, which would be worse for electricity consumers than higher tariffs. It could therefore be argued that a reduction in Zesco’s staff numbers and remuneration should be considered a GRZ policy and until a cost reduction policy is introduced by GRZ, the higher costs should be allowed by ERB. Nevertheless, ERB should make these high costs transparent to stakeholders and should urge GRZ as Zesco’s sole shareholder to allow Zesco reduce those costs as quickly as possible.
“Some components of Zesco’s higher costs are more questionable. Particularly those relating to generation investment decisions and particularly the potentially high price that Zesco paid for electricity from Itezhi-Tezhi hydropower plant in 2016 and which may have a substantial impact on Zesco’s revenue requirement despite a relatively modest contribution to electricity supply. The reason for this high cost is unclear – possibilities include: 2016 had atypical production levels, the selection of the developer was not competitively tendered, cost escalation was outside the control of the developer, or water/energy availability was lower than forecast. We can only comment that the investment decision would not have been justified based on the costs and energy availability. But can these costs be disallowed by ERB from Zesco’s allowed revenues? It would not be in the interests of Zambia or consumers to force Zesco to absorb the losses. Ultimately these costs would then be passed to GRZ, or Zesco would find itself unable to finance necessary investment. Again, we recommend that ERB should seek to encourage GRZ to step-in to ensure that in future all investment decisions and procurement policies and regulations are properly followed and that power plants contracted to Zesco are competitively tendered.
But responding to a press query, ERB said the Cost of Service Study (CoSS) had been re-tendered in December 2018.
“As you may be aware the initial contract awarded in 2017 in respect of the Cost of Service Study (CoSS) was discontinued in 2018 after contractual disagreements on the conduct of the study. In that regard, the consultancy had to be retendered internationally in December 2018. The Energy Regulation Board (ERB) then issued a Request for Proposals to six international consulting firms with a view to choosing the best bidder,” stated ERB manager, Public Relations Kwali Mfuni. “ERB has made efforts to engage a new consultant to complete the study. To that end, the process of identification of a new consultant to conduct the CoSS is in the final stages. Currently, the ERB is in the process of finalizing the selection process to identify the successful bidder to undertake the study. The study period is envisaged to be one year, but could take a shorter period subject to negotiations with the consultant.”
Earlier, energy minister Mathews Nkhuwa said a consultant was being procured.
“The Cost of Service Study, they are procuring a consultant to do a cost of service study, it’s in an advanced position. This is being done by ERB. It’s ERB that are doing it,” he said.
Asked how long the process of engaging the consultant to do the study would take, Nkhuwa responded: “No, no, maybe that…if…I don’t have that answer, maybe the Executive Director at ERB could be able to give you a response to that.”
On tariff charges, Nkhuwa said the mines which consume 50 per cent of power generated in the country are charged more than domestic consumers per kilowatt hour.
“The mines are paying 9.3 cents per kilowatt hour so they are the highest in terms of paying tariffs to Zesco and the domestic is about 5 cents per kilowatt hour…that’s where the money is being lost,” said Nkhuwa. “So the domestic are the ones that are paying less. You know as far as producing right now, I think we are producing electricity at the average cost of production about 8.4 cents per kilowatt hour and you take the independent power producers that are expensive and you put Zesco together, it’s about 8.4 cents per kilowatt hour on the average and that’s what is…you know and then we are selling at 5.5 cents per kilowatt hour to our domestic users and that’s where the loss is being made. We are not making money definitely. We are not making the money but we have to find a way, we need to strategise as Zesco and find a way of how we are going to make Zesco work. We feel that we have to consult a little bit more with all the stakeholders because even the submissions from the companies like mining and individuals and so on were so valid. So such good submissions we feel if we can consult more maybe we can come up with some solution on how to go about it. So we are in a situation of consultation still, we will be consulting the public to see if we can come up with ideas, you never know who has got the ideas.”
On April 13, 2017, then energy minister David Mabumba launched the much-awaited Electricity Cost of Service Study at the Energy Regulations Board (ERB) offices in Lusaka. During the launch, Mabumba said the government is happy that finally the country will have a document that will guide the setting of electrify tariffs based on empirical evidence of the cost of generating, transmitting, and distribution.
He said the Study was going to be carried out by the Economic Consulting Associates of the United Kingdom in partnership with a Zambian firm called Utilink Zambia. The Study was funded by the African Development Bank (ADB) and was expected to be completed within twelve (12) months.
In order to ensure ownership of the study findings, the Minister instructed ERB to ensure that all stakeholders participated at every stage of the study process.
In January 2018, Economic Consulting Associates of London, United Kingdom submitted their report, entitled “Economic Cost of Service Study to determination of economic cost reflective tariffs, Zesco benchmarking Report to the Energy Regulation Board (ERB).
On 14th November 2018, the then Secretary to the Cabinet, Dr Roland Msiska said the government has commenced implementing measures aimed at transforming Zambia Electricity Supply Corporation (Zesco) into a more viable public utility company.
Dr Msiska, who was also chairperson of the Zesco reforms implementation team, explained that in the recent past Zesco has been experiencing serious operational challenges.
He said in 2017, Cabinet commissioned a technical study, which accordingly made recommendations to improve the operational performance of the utility company. (It is not clear whether the technical study referred to, is the same as the ECA Cost of Service study)
Dr Msiska said arising from the study report, Cabinet, at its meeting held on July 16, 2018, approved the recommendations and directed that an implementation team be constituted to carry out the accepted recommendations.
He said in accordance with the Cabinet directive, the implementation team has since begun its work in earnest and will regularly update the public and other stakeholders on the progress made.
On March 9, 2019, Zesco managing director Victor Mundende issued a legal notice of intention to revise retail tariffs in accordance with the electricity Act, Cap 433 under section 1.1.4 Suspension of Cost of Service Study, he said “The electricity supply industry in general, and Zesco in particular, were expecting the Cost of Service Study and its attendant least cost generation, transmission, and distribution plans to be completed by December 2018. It was hoped that with the conclusion of the Cost of Service study, the electricity sector would realise truly cost reflective tariffs. However, the suspension of the Cost of Service Study pending appointment of a new consultant to complete it has resulted in the need for Zesco to make a tariff application in order to enable the company to mitigate the rising cost of its operations, especially the cost of power from new power plants.”
Why did the Zesco managing director Mundende say the Cost of Service study had been suspended, when in fact it was submitted to the Energy Regulation Board in January 2018?
Is it because the ERB, Zesco and government did not like the findings?
Further, Zesco claims that their operational cost has risen from K2.1 billion in 2011 to K13.46 billion on 2018. As Zesco is a government owned company, it is important that they make a full public disclosure of what these operational costs are. Zesco has also rightly claimed that their imports are now more expensive due the foreign exchange rate. Sector sources say, just as an example where Zesco could reduce costs is, “if they either produced or bought only locally concrete electricity poles (we have cement, water, stone) instead of importing at cost of millions of dollars the wooden poles that have to be replaced on a regular basis. Over employment is another cost.”
Recently, President Edgar Lungu cancelled Zesco’s application to adjust electricity tariffs by almost 300 per cent.
The Mast shares the entire Economic Consulting Associates of London report which was submitted to ERB on pages 3,4,5,6 and 7.