Cost of Service study was never concluded-ERB

THE Energy Regulation Board says the Cost of Service Study was never concluded.
In a statement, ERB public relations manager Kwali Mfuni said what was published by The Mast some two weeks ago was just but Draft Benchmarking Report excerpts.
She said what was published and was seemingly thought to represent the comprehensive study report was in fact just but a component of one of the eleven deliverables of the study.

“This is totally incorrect and could easily have been verified if you had sought our comment in your query. The Cost of Service study was never concluded as a decision was made to not extend the contract on 12th July 2018 at a Steering Committee meeting attended by the financier of the study African Development Bank and the Consultant Economic Consulting Associates (ECA) and other stakeholders,” Mfuni said.
She said the Mast should independently confirm the status quo with ECA or Utilink (who were contracted for COS study).
“The Steering Committee that made the decision to accept the proposal by ECA to not extend the contract included government and private sector players,” she said. “Secondly, the Draft Benchmarking Report whose excerpts you published and was seemingly thought to represent the comprehensive study report by yourselves was just but a component of one of the eleven deliverables of the study. Specifically, the said report was merely an input into Task 6.”
Mfuni added that among other requirements, Task 6 entailed that the consultant “Carry out a detailed review of Zesco’s cost structure benchmarking with cost structure of efficient utilities of similar technical structure as Zesco, indicating areas of improvements to accepted efficient utility performance standards, and recommend a realistic time frame for reaching the performance standards.”
“Clearly, such a report could not be the Cost of Service Study which was meant to be sector-wide. It ought to be emphasized that while various drafts were reviewed by the client (ERB), only the Inception Report had been formally agreed upon and finalised as of 12th July 2018. In that regard, the said Benchmarking report would hardly qualify to be referenced as a Cost of Service Study in any context,” Mfuni said. “It is therefore inexcusable to insinuate that the Cost of Service Study Report was submitted based on information sourced from a draft report. Even more alarming would be to conclude that the study report displeased the client hence the decision to re-tender the consultancy.”
She said the Cost of Service Study provided for a highly consultative process and was not only limited to the ERB and government officials.
“There were two key structures overseeing this process namely the Steering Committee and Technical Committee. Both deliberately had representation not only from ERB, government and Zesco but also from the private sector, industry and civil society. Some of the organisations integral to the study were Zambia Chamber of Mines, Copperbelt Energy Corporation, Policy Monitoring Research and Centre, Zambia Association of Manufacturers and Consumer Unity Trust Society Zambia, among others.”
Mfuni agreed that the Cost of Service Study was funded by the African Development Bank (AfDB) as a bilateral partner.
“Therefore, it goes without saying that as financiers AfDB provided technical checks and balances to ensure prudent and efficient use of their resources. Further, note that the same financing arrangement is what is envisaged to support the study when it recommences after identification of a suitable consultant, purely on the basis that resources so set aside are still available to complete the study. Therefore, the integrity of the process is assured by the fact that AfDB has committed to funding completion of the study,” said Mfuni.
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 draft study report states in part.
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.”

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