My response to Electricity Regulatory Authority (ERA) – Jannette Mugisha

My response to Electricity Regulatory Authority (ERA) – Jannette Mugisha

Dear Electricity Regulatory Authority (ERA), I am Jannette Mugisha, an electricity consumer and kin energy issues follower. I am also a social media person that responds and raises social economic issues including energy. I am responding to the comments to raise on different social media issues. I must admit that my responses can only be complete if you didn’t abdicate your statutory responsibility of publishing all information regarding the electricity value chain tariff. It too social media for you to finally but definitely with a possible reluctance, to reveal the Weighted Average Distribution Tariff. We now want you to break it down up to the lowest component of the tariff adjustment formula. Social Media Issues

  1. That Umeme charges customers for connection poles, cables and even transformers but lists them as its own assets and investments – for which the consumer tariff is then hiked to sustain the guaranteed ROI . That this unreasonably raises tariffs by approximately 18%. ERA Comment: Investment in the Electricity Supply Industry are managed in accordance with the Investment approval and verification guidelines. Every year, Umeme submits investment plans to the Electricity Regulatory Authority for approval. Upon approval, Umeme executes the approved investments and submits them to the Authority for verification and incorporation into the Asset base. It is not until investments are executed that they qualify to earn a return on investment. Any investment executions that may be found non-compliant with the Investment approval and verification guidelines issued by the Authority are struck of the Rate Base and any amounts earned by Umeme in respect of those assets are clawed back(reconciled and taken away from the company revenue). Investment verifications are undertaken by joint teams from ERA, Umeme andUEDCL. There is, therefore, a proper framework for approving and verifying investments to ensure among others; (1) electricity consumers are deriving benefit from the executed investments, and (2) investments funded by consumers are not included in the Assets Base for computation of the return on investment due to the utility. It is important to note that investments range from extension and construction of medium voltage and low voltage lines, injection of transformers, construction of substations among others. It should be noted that whereas some consumers pay for mostly non-shared lines and transformers, most of the line extensions, transformers and all substations are not consumer financed. In addition, Umeme also invests into customer connections. Currently, domestic consumers on the Umeme network pay only Ush 98,000 for a no-pole connection compared to the actual cost of Ush 332,525. This means that for every no-pole connection executed by Umeme at Ush 98,000, the company injects Ush 234,525 as an investment. Once again, for emphasis, a utility does not and can never earn from an investment paid for by the consumer. The investment verification reports showing executed and verified investments undertaken by Umeme are shown on the ERA website. Sample Investment reports showinginvestmentsundertakenbyUmeme;a) reportb) 2015c) 2.  My response to ERAI agree with you that yes, both the Electricity Act (1999) and the Lease and Assignment Agreement (LAA) between UEDCL and Umeme provide for ERA receiving investment plans and conducting joint verification of investments. Where your response falls short is to inform your readers that the Umeme long identified the weakness in the LAA; that all the 3 parties in the joint verification must agree. Even ERA is toothless whenever Umeme doesn’t agree on the truthfulness of an alleged investment because that’s what the LAA says. For avoidance of doubt, in a Saturday Monitor article of 8th September, 2017, ERA was quoted as claiming the cumulative total Umeme investments as US$371 million. The Umeme2016 annual report that is available on the company website says that as at end December, 2016, Umeme had invested US$ 500 million. If indeed as you allege that you conduct joint/tripartite investment verifications and you are competent enough, what brings the significant divergence between US$ 371 and 500 million? You want the consumer to entrust such an “investment verification committee”? Is it also your evidence that your joint verification has exclusive ability to establish that internally generated revenues are not part of the “investments”. Do you really have that capacity or you leave it to Umeme to laugh at your negative efforts? I want to put it to you that Umeme against the provisions of the concession agreement, uses customer generated revenue to invest and earn a return on investment. If you have contrary evidence, please prove how you arrived at that evidence.ERA, you lost your ability to monitor spending on investments when you impotently watched economic hit men suspend the INVESTMENTS ESCOW Account at Bank of Uganda. You are aware that the concession agreement had given you the authority to determine the level of investment spending by being a signatory to the BOU account. Today, the account has zero balances and that joint “verification” committee doesn’t know any movement of money to pay for investments. I should also add that the illegality of that verification is rooted in the unconstitutionality of that practice. The effect of noncompliance with article 163(3)b of the Constitution of Uganda where all acquisition and disposal of public assets should be externally audited by the Auditor General has led to exaggerated investments and return on such investments and recovery in the tariff. In fact, that weakness has led to double counting DOMC to reflect such procurements as replacement of transformers as “investment”.   Only the Auditor General has the mandate to assure Ugandans of the status of public assets, not the inconclusive committee. Many issues surround new connections costs. I will just respond to your claim of Umeme subsidizing such new connections, especially on no pole service. Surely, why should a new customer, lucky not to require a pole, be charged of any money? Why Umeme should be paid to inspect premises of new applicants when that should be part of their routine and Umeme receives a provision for those costs in the Operations and Maintenance. Most importantly, you say the actual cost of no-pole service is Ush 332,525. My question is; what is there to cost Umeme apart from the Yaka whose cost has been put at Ush98,000/=.Lastly, where were you when Act is and indeed Umeme sold more than51% of its shares against the provisions of the distribution license issued by yourself? Would it not be fair to put your officials to question on how Act is damped future questions on to the Ugandan middle class who believed in your ability to regulate the sector? You allowed Ugandan money on the stock exchange to be raised not for investment in the network but for purposes of an exit? Really?

  1. That Umeme claims back Corporation Tax paid this year as lost revenue next year, as a result of having failed to acquire an investment license waiver for corporation tax, for which the tariff is increased annually. And that this unreasonably raises tariffs.3% of the tariff is Corporation Tax refund for prior year.

ERA Comment: It is not true that Umeme claims back Corporation Tax paid because it failed to acquire a tax waiver. Whereas it is true that Umeme is allowed costs for actual taxes paid, it is a global practice for regulated enterprises. Globally, regulated enterprises are allowed recovery of all reasonable costs including; costs of operation and maintenance, return on invested equity and taxes. There are specific references from the Public Utilities Research Centre (PURC) (Page 4 to 6): f50f57793c83ea000000/RATE-OF-RETURN-REGULATION.pdf  and the Pwc report on Guide to Accounting for utilities and power companies (Page 19-2 or 642 of 766)  which lend credence to this regulatory practice (of allowing costs of actual taxes paid). It is important to note that, for utilities that have only O&M service contracts, only recovery of approved of costs is allowed and is based on efficiency targets. Under such contracts, companies can only make any profit (cost saving) on account of efficiency gains but no funds are allowed as mere profits or mark-up. However, under incentive-based regulation, companies may make efficiency gains and/or cost savings and therefore make a profit. In this circumstance, the company would pay applicable income taxes on its profit made. On the other hand, for investing utilities, it is common for companies to require that the return on investment is protected since the reflects a reasonable cost of capital (reasonable cost of capital varies from industry to industry, country to country and reflects risks prevailing at a point in time). For contracts where utilities are allowed to invest and earn a return, the rates of return are negotiated as either net of tax or otherwise. Therefore being allowed a rate of return that is net of tax is not unreasonable and is a global best practice for regulated utilities. Under the current tariff methodology, the Electricity Regulatory Authority (ERA) undertakes a reconciliation between the Corporation Tax allowances used in determination of the tariffs and the actual taxes paid by Umeme Limited to URA during the Tariff Year. My response to ERAAm surprised that ERA that is empowered by Sections 11 and 17 of the Electricity Act to protect the consumer is the same institution defending the indefensible. In your comment above, you conveniently write that “Under the current tariff methodology, the Electricity Regulatory Authority (ERA) undertakes a reconciliation between the Corporation Tax allowances used in determination of the tariffs and the actual taxes paid by Umeme Limited to URA during the Tariff Year”. My first question you is which office in Uganda introduced that part of reconciling Umeme’s corporation tax obligations in the tariff methodology. Please explain to Ugandans whether that provision for Ugandan electricity consumers were supposed to pay Umeme’s corporation tax according to the Umeme concession agreement signed in May 2004. Is it your evidence that ERA amended the concession agreement in line with section 11 of the Electricity Act to provide for Ugandans taking on the Umeme tax obligations? Would I be right to state that if it’s finally established that the said section of the law was never followed, Ugandans would be entitled to a claw back off all tax revenues fed into the tariff for the last 11 of the 13 years when this illegality has applied? Is it also an opinion of a competent authority in matters electricity like ERA that a 20% Return on Investment given to Umeme was not sufficient for the company to meet its own corporation tax obligations on top of other related efficiency gains. We are also supposed to remind ourselves that, 1) All energy losses are compensated for, 2)UEDCL that operates in 53 districts of Uganda pays its share of corporation taxes and absorbs it like all other companies in Uganda. Other utility companies like National Water and Sewerage Corporation, ESCOM, UETCL are good examples of other utility companies that pay corporation tax and never go back to put the burden on the already overburdened consumer. Why Umeme?3. That with commercial losses at 1% and technical losses at18%, totaling 19%, a whole 24% of Umeme’s sales tariff is loss refunds. Just 1% = $4 million.ERA Comment: At a time when Umeme inherited the electricity distribution grid, energy losses were in the upward of 38%. The electricity industry was also faced with other challenges including; limited investment in generation, transmission and distribution infrastructure, low levels of revenue collection and high debts including debts for public installations and institutions. The inefficiency challenges greatly informed the decision to unbundle the sector (form different separate entities for distribution, generation and transmission) and instituting the regulator under the Electricity Act, 1999. In addition, the low levels of investment coupled with treasury constraints to address investment needs greatly informed the decision to concession generation and distribution segments. Therefore, concenssioning of the industry was purely an investment decision. Having concessioned the segments, there was a need to set targets for loss reduction and revenue collection among others. Umeme has, therefore, been operating against a loss targeting framework whereby the consumers pay only for target losses as opposed to actual energy losses. The loss target for 2018 is at 14.7%. This loss target compares very well with benchmark networks in the region. For example, loss targets for Kenya and Tanzania remain above 16%. It may be important to emphasize that all utility networks incur network losses and reasonable commercial losses (from thefts, leakages) and loss targeting is a prudent practice in electricity networks. This based on the understanding that, globally, even a perfect network will have losses and therefore in is not unreasonable to allow reasonable energy loss levels. My response to ERA First of all, we need to write the correct history, not lopsided allegations on the historical energy loss profile. The last Auditor General’s report before Umeme took over was in 2004 and it put energy losses at 28%. I find no reason to doubt the opinion of the Auditor General. In the Parliamentary Ad-hoc Committee hearing on Umeme, the 1st ERA Executive Director, Dr. Frank Ssebowa was express in showing that the false 38% that you now allege was a figure illegally agreed upon between Umeme and other officials(Especially from Privatization Unit) in Washington DC. It’s also on record that at the time of releasing the Saleh Report in September, 2009, the magical 38% energy losses were still applying. Fortunately, a month later in October, 2009, Umeme possibly out of shame and pressure reported a reduction of losses to 28% and according you ERA, in the tariff adjustment application of 2010 by Umeme used 28%. I refer you also to the video of the submission of Engineer Frank Ssebowa in parliament. He said that it was extremely difficult to establish actual loses. Lastly on this point, UEDCL and any other utilities make losses too. Such losses are never fed back into the tariff like you who have illegally abdicated your statutory duty bestowed upon you by sections 11 and 17 of the electricity Act. Energy losses or water losses in the case of water utilities are supposed to be reflected in the balance sheet such that computation of corporation tax can net such loses out.4. That the contract is therefore bad for Uganda because Umeme therefore has only a limited interest in lowering technical losses to zero since the consumer refunds this inefficiency in the tariff. That instead of making the technical investments to wipe out the technical losses, Umeme claims customer-funded poles and cables as investments for tariff-increase-compensated ROI protection. This excess ROI is driven by unreasonable claim of losses as revenue, instead of investing adequately to further lower the losses – and to stop claiming Corporation Tax as are fundable expense.

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ERA Comment: The tariff is determined based on Target energy loss factor and not actual energy loss factor. Under the incentive based economic regulation framework, a utility takes a financial loss when the actual loss is higher than the target loss factor used in tariff determination. A utility, therefore, has an incentive to reduce energy losses. Electricity consumers do not refund a utility for failure to achieve the target energy loss as set by the regulator. The framework for managing investments in the Electricity Supply Industry has already been discussed above. My response to ERAI agree with you on the incentive based economic regulation framework which you are applying at ERA. However, I blame youtotally and completely, not just Umeme on the inconsistence and failure to achieve a lower losses level. In 2012, you commissioned a DOMC study by a South African energy firm, Parsons Brinckerhoff Africa (PTY) LTD also called BP, which established a reasonable loss reduction profile reaching 10% by 2018. As I write this, Parliament has just received the National Budget Framework Paper which has put FY 2017/18 ACTUAL losses at 18.5%. This shows a very slow path to loss reduction than was envisaged when Umeme got the concession almost 13 years ago. I recommend that you ERA stops wasting time on social media and do your job. Read your very own commissioned study and energy losses will be gone significantly. Let me quote from the BP study (in your library gathering dust) verbatim; “The main discrepancy between the loss trajectory proposed by Umeme and that tabled in the BP loss study relates to Technical loss reduction only. BP had proposed a 1 percentage technical loss reduction per annum. The Umeme DOMC and Capex submission to ERA is mainly focused on non-technical loss reduction. BP considers that in the absence of a loss measurement study, the most effective means of reducing technical losses is to reduce the length of the LV networks by introducing more distribution transformers. BP estimated that 800 transformers of 25 KVA capacity along with Umeme’s reinforcement and restoration program would be sufficient to support the reduction of technical losses from current estimated levels of 2012of 15% to around 10%.” The million dollar question is; why are technical losses stuck at 15%annually despite the called “investments” Why don’t you do Ugandans a favor to commission a real loss measurement study? Next time we debate these issues, you should have done a study that establishes the actual distribution network infrastructure needs of the country. How do you deliver on your mandate without refereeing to such studies in your social media comments?

  1. That the contract with GOU provides for planned revenue but Umeme has been claiming excess revenue from sales surplus to plan, as its income (this matter as in litigation further to ERA waking up to disallow the practice).ERA Comment:In 2012, the ERA amended Umeme Limited License for Supply of Electricity and provided for among others; reconciliation between the projected energy purchases by Umeme Limited (used for tariff setting), and the actual energy purchases by the company during any given Tariff Year. This was done based on the fact that revenues accruing from the energy purchased (and therefore sold) by the company beyond what was used for tariff determination should benefit the consumer and not the company since sales level does not constitute a performance incentive in the licence. Following the amendment of the Licence, Umeme Limited appealed the decision of ERA (to amend the Licence) at the Electricity Disputes Tribunal. Following the hearings at the Electricity Disputes Tribunal, in 2016 the parties settled the matter out of court through a consent judgement. The consent judgement provided that the ERA will continue to implement the reconciliations as provided in the amendment to the Licence. The excess energy purchased (and sold) by Umeme Limited arising from the reconciliation is invested by the company, on behalf of the consumer, in projects approved the ERA. Investments so executed attract no return to the company. Given that industry development and balancing of consumer, investor and public interests remains a major pre-occupation of Government through the regulatory authority, Licence modifications take place as and when protecting the consumer or any other stakeholder is required to promote sustainable electricity supply. My response to ERA On behalf of other electricity consumers, I applaud you ERA for the strong stand you put on Umeme leading to declaration of a “loss” in the 1st half of 2017. Please keep pushing including a claw back of all those earlier monies recovered through the tariff illegally. Illegality on account of including items that were never originally in the concession agreement and whose inclusion was outside the Electricity Act. You must be aware that your tariff adjustment formula is not a mere mathematical computation or identity. That formula is a creation of the law as earlier explained. 6. That subsequent to the above and a generally bad contract, Umeme buys power from UETCL at an average weighted Bulk Sales UETCL Tariff of Shs 260.9 and makes an exorbitant markup by selling at Shs 800+. The purchase price of Shs 260 is one of the four lowest in Africa but the sales price of Shs 800 is one of the 10 highest in the world. That this massive markup far exceeds the 10-15% gross markup that most utilities charge, worldwide.

ERA Comment: It is not true that the energy tariff is above Ush 800. It is important to note that tariffs are levied on the basis of cost causation in line with the Electricity Act and the Tariff Code. For this reason, tariffs defer by customer class (domestic, commercial and industrial customers) and by time-of-use (peak, off peak, shoulder). The highest tariff is for domestic consumers at Ush 718.9 which was until December 2018 at Ush 685.6. The lowest tariff is for extra-large industrial consumers at Ush 246.5 at off-peak time (0000hrs to0559hrs-given that manufactures are able to utilize the night shift).Given that more than 75% of the energy is consumed by industrial consumers who consume at a low tariff, the weighted average tariff is way below the domestic customer tariff (below Ush 718.9).Currently, the weighted average tariff (averaging all customers at all times of the day) is Ush 520.3 The weighted average Bulk Supply Tariff for Q1 2018 is Ush289.6/kWh and not Ush 260/kWh. The weighted average Bulk Supply Tariff is adjusted for Target energy losses and Target revenue un-collection factor thereby increasing to Ush 345.6 /kWh before adjustment for distribution costs. Further, rather than implying that any tariffs above the Bulk Supply Tariff (BST) is a markup, it is prudent to look at it as reasonable costs of distribution. Any costs (and therefore tariff) above the Bulk Supply Tariff are on account of approved distribution costs including: reasonable costs of energy losses as approved, reasonable costs of operation and maintenance, recovery of funds invested into the distribution network and returns on equity invested. It’s important to note that any costs included in the tariff is deemed reasonable and it remains the pre-occupation of regulation to ensure that all approved costs enable the company operate on the efficiency frontier and represent value to the consumer. My response to ERAERA you have abdicated your statutory duty of protecting the consumer and left us to the economic hit men. We all know why billing by period of demand capacity such a peak, off-peak and shoulder was a creation of deficit in supply of power. We also know that current peak demand is significantly lower that dependable power dispatch from Generation plants. Why do you accept Umeme to buy at one rate and then depreciate the tariff significantly, especially among consumers of the same category? I intend to take you on the mark up made by Umeme in my subsequent social media engagement because I may not have enough space here to explain this to the readers in a crowd of so many issues am responding too. That notwithstanding, I want to ask you why you have to wait for asocial media activist to remind you of your statutory responsibility to breakdown the Shs. 520/= Weighted Average Distribution Tariff? Why are you too silent on the breakdown of the Bulk Supply Tariff? Is it so expensive to place a newspaper advert showing the public, the breakdown of the Shs. 520/= such that we establish if indeed its Bujagali that is responsible for the current tariffs that are higher than Rwanda and Tanzania? ERA, what are you hiding in the tariff that you are so shy as to publish it in detail? Aren’t you empowered by the law? Should we recommend amendment of the law in that regard?

  1. That instead of the contractually agreed and protected 20% ROI, Umeme makes a 43% ROI.

ERA Comment: Umeme Limited is licensed under a hybrid of; Rate of Return Regulation and Incentive Based Regulation economic regulation frameworks. Under this framework, Umeme Limited earns a return on investment on the approved, executed and verified investment, and the ERA sets tariff performance parameters of; energy losses, revenue collection, operation & maintenance costs. The return on investment is guaranteed to the extent that Umeme Limited achieves/outperforms set tariff performance parameters (targets). Therefore, the level of actual return on investment may be below 20% or above 20% depending on the performance of the company against the set targets. For example, if the Target energy Loss factor is 14.7% and the actual loss by Umeme Limited is 13%, then the effective return on investment shall be higher than 20% on account of more revenue arising from exceedance of the energy loss target. On the other hand, if Umeme actual loss is 16% (against a Target of 14.7%), then the effective return on investment will be less than 20% because the company will sell less energy (and therefore revenue) than was envisaged at tariff determination. It works similarly with other performance targets. My response to ERA Like I have stated earlier in my response to issue number 6 above, I will be coming back to discuss the tariff and how you ERA have embedded yourself in the same bed with economic hit men. You have accepted to lay your bed. I invite you to better respond to you, I challenge you to publish the breakdown of the tariff including service fee. Please include in your publication, all the fines that consumers pay for energy loses to the company (especially for meter bypass). Please publish details after all, those numbers belong to us the consumers.

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