Provision of Adequate, Reliable and Affordable Electricity for Development: A Case for Robust and Independent Regulation

Provision of Adequate, Reliable and Affordable Electricity for Development: A Case for Robust and Independent Regulation

Mark J.  MWANDOSYA

General Situation

In 2012, Sub-Saharan Africa (48 countries) had a total power generation capacity of 83 GW. Exclude South Africa the rest of Sub-Saharan Africa had a combined capacity of 36 GW. A mere 13 countries had power systems greater than 1 GW, while 27 had grid connections of less than 500 MW and 14 have systems less than 100 MW[Anton Eberhard et al, World Bank Publication 2016]. About 600 Million Sub-Saharan Africans or 2/3 of the population have no access to electricity.

South Korea produces as much electricity as all of Sub-Saharan Africa.  In 2011 the World Bank estimated that Sub-Saharan Africa would need to add approximately 8 GW of new generation annually through 2015. However over the last decade an average of a mere 1 to 2 GW had been added annually.

In one year a refrigerator in the US uses six times more electricity than an average Tanzanian. It takes an average Ethiopian two years to consume electricity used by an average American in 3 days [Power Africa Annual Report 2016] Tanzania’s total generation capacity is 1450 MW. The overall electricity connection level as of March 2017 is 32.8 %. The urban electricity connection level is 65.3 %, while the rural electricity connection level is 16.9% [National Bureau of Statistics]. By March 2017, the overall electricity access level had reached 67.5% compared to 40% reached in April 2016. Urban electricity access level had reached 97.3 % compared to 63.5 % reached in 2015. Rural electricity access level had reached 49.5 % compared to 21 % reached in 2015. By June 2016, electricity had been connected to a total of 4,395 villages out of 12,268 villages in Mainland Tanzania [2017/2018 Budget Speech of the Minister for Energy and Minerals in Parliament of the United Republic of Tanzania, and Rural Energy Agency Annual Report for 2015-2016]

Urban electricity use includes use in cities and municipalities, usually provincial/ regional headquarters. District Headquarters, small towns, trading centers, and rural areas, are all classified as rural areas for electricity access level  and electricity connection level. The drive to increase rural electricity connection and access levels is spearheaded by the Rural Energy Agency (REA).

Expansion and Densification of Rural Electricity Access

The Rural Energy Agency has been established pursuant to The Rural Energy Act No 8 of 2005 as an autonomous entity in order to promote and facilitate access to modern energy services in rural areas through the provision of grants, subsidies, technical assistance training and capacity building to rural energy project developers. These endeavors are facilitated by the existence of the Rural Energy Fund (REF). Specifically REF has been established under the Rural Energy Act for:

(i)              Training and capacity building;

(ii)            Capital investments of projects implemented by qualified developers;

(iii)           Investments in innovative pilot and demonstration projects; and

(iv)           Provision of technical assistance to qualified project developers.

Oversight of REF is entrusted statutorily to the Rural Energy Board (REB) which is also the Board of the Rural Energy Agency. Although administered by REA, the disbursement from REB are made through a Trust Agent appointed by the REB in accordance with Section 23 (1) of the Rural Energy Act, 2005. Currently the Trust Agent is a consortium of CRDB Bank Ltd and INTERFINI [Rural Energy Agency (REA): Annual Report for the Financial Year ended June 30^th 2016].

Contributions to the Rural Energy Fund include: (a) Monies provided by the Government in annual budgetary allocations; (b) contributions from development partners; (c) levies of up to 5 % on commercial generation of electricity to be deposited in the account of the Fund at the end of every month; (d) levies of up to 5 % on generation of electricity from specified isolated systems including systems for private consumption [Rural Energy Act No. 8 of 2005].

The population is increasing at a rate of 2.3 %. The economy has been growing steadily at 7 % per year over the last 15 years, the demand for electricity has outstripped supply. A growing middle and educated class demands more electricity. The attainment of development vision 2025 with the aim of attaining middle income status requires an electricity generation increase of the order predicted by national and international financial institutions.

Funds for electricity development are scarce. When available they are fungible, at national and international level. Competition for scarce resources requires putting our house in order. It is also common sense. Efficient public utilities are a prerequisite for supply and delivery of public services. Efficiency of public utilities does and should exist within the context of a national policy, planning and oversight capacity, and a stable and predictable regulatory environment. Having been involved in oversight of the electricity sector at a national level the Author wishes to share with the reader, some perspectives and observations.

Electricity Tariff Management

In January 1985, the then President of Tanzania, Mwalimu Julius Kambarage Nyerere appointed the Author Commissioner for Petroleum Affairs, a post that had been vacant since the enactment of the Petroleum (Exploration and Production) Act of 1980. Apart from being the regulator and overseer of petroleum exploration and production, the Commissioner was given the responsibility of administration of the entire energy sector which until then had no department to which it could report. He therefore had, from scratch to found the Department of Energy, crafting divisions of policy and planning; petroleum development; electricity development; and New and Renewable Energy Development. Capacity development was my main area of concern and a challenge. Coming, as the Author did, from the University, he happily took the challenge head-on such that by the time he was promoted, five years later,  a robust department of 30 plus, each with a minimum of a  postgraduate degree, had been established. Out of this early team two became Permanent Secretaries, One became Deputy Permanent Secretary, two founded the Rural Energy Agency and became successive Directors General, one joined UNEP, another joined the Commonwealth Secretariat, and two of them founded successful energy consultancies.

Despite these efforts, our shortcomings with respect to electricity planning were very apparent. Much of the work in this respect was done in Canada by a firm, Acres International, and funded by the World Bank. This gave whatever output that came from it, a certificate of respectability and a good chance of funding the next generation of electricity supply. Yet the electricity utility has not been able to cope with the demand for electricity. Shortages have been critical, disruptions the order of the day, brownouts common, project completion time always behind schedule, and our economies have suffered as a consequence. African countries have continued to plan in isolation of each other. Until now Tanzania continues to plan as if Kenya, Uganda, Rwanda, and Burundi did not have similar plans or ambitions. The same is true of other countries. The so called least-cost supply options have been most costly, with recourse to rather costly Independent Power Projects (IPPs) and hastily tendered Emergency Power Projects (EPPs).

No issue has been more controversial and emotive as that of tariff management. Granted, public utilities cannot, on the basis of tariffs meet the capital costs of large national projects. The need for public utilities to meet, at the very least, running or operational costs,  cannot be overemphasized.The foregoing notwithstanding, tariff setting, tariff adjustments and tariff reviews continue to entertained as “political’’. When the Author joined the civil service in 1985, The Cabinet was the final decision maker in respect of tariff management. TANESCO would propose a request for a tariff increase, say. Justification would accompany the request. Invariably such a request would be a a condition precedent to the start of negotiations for a soft loan from the World Bank or the African Development Bank and grants from development partners. The request would then be submitted to the Ministry of Water, Energy and Minerals then and the process of determination would begin in the Department of Energy. Intensive technical discussions would take place under the guidance of the Commissioner. TANESCO operatives would be heavily involved in the process. With some minor revisions the request would be submitted to the Permanent Secretary who would ordinarily make a recommendation to the Minister, upon being satisfied with the observations and recommendations of the Department of Energy. This exercise took on the average at most two weeks. Another week would be spent by the Department to draft a Cabinet Paper. After submission of a Cabinet Paper to the Cabinet Secretariat, the process would then be outside the control of the Ministry. The Cabinet Secretariat would discuss the Paper internally and then hold intensive discussions with officials of the Ministry and TANESCO and other Ministries representing main stakeholders such as industries and trade, planning, and agriculture. Once the Chief Secretary, who doubles as Cabinet Secretary is convinced that the Paper is in the form acceptable for eventual submission to Cabinet it would be put in the agenda for a meeting of the Inter-ministerial Technical Committee of Permanent Secretaries. This would be the last but one stage before the Cabinet (Council of Ministers) makes a final decision. The entire process would take at least 6 months and sometimes 9 to 12 months. One could imagine the financial burden that would be inflicted upon the Utility on two fronts: a deteriorating financial situation; and delays in project implementation.

A proposal was made by the Department of Energy that the Board of Directors of the Tanzania Electric Supply Company Limited(TANESCO) be mandated to make adjustments to tariffs to the amount of 5% within a minimum period of 6 months. The Minister responsible for Energy would also have the mandate to adjust tariffs by a maximum of 10% within a period of 6 months. A request for an adjustment greater than 10% would be submitted to Cabinet and thus follow the route elaborated above. The proposal itself was the subject of a Cabinet Memorandum submitted by the Minister responsible for Energy and was approved as a tariff management policy direction.  Although this decision eased somehoe TANESCO’s financial ills, the deterioration of its situation was so dire that adjustments of tariffs of the order of 20% to 70% were commonplace and final decisions were taken by Cabinet taking into account the social, economic, and political situation obtaining then.

Electricity Tariff Regulation

The rather ad-hoc nature of tariff adjustment lasted until the advent of economic reforms and the introduction of public utility regulation in the early 2000s. The Energy and Water Utilities Regulatory Authority (EWURA) was established under the EWURA Act Cap. 414 of the Laws of Tanzania. In Section 7(b) (iv) it is stated that one of the functions of EWURA is to regulate rates and charges of electricity in the country. This function is further clarified in the Electricity Act 2008 thus: to approve and enforce tariffs and fees charged by licensees. The Electricity Act is thorough in the sense that it provides guidelines for tariff regulation as elaborated in Section 23 thus:

(1)   The Authority may regulate:-

(a)   Tariffs for the sale of electricity by licensees unless the electricity is sold in markets to be determined by the Authority to be competitive;

(b)   Tariffs  for the sale of electricity by licensees to customers other than eligible customers;

(c)    Charges for connection to, and use of any transmission system;

(d)   Charges for connection to, and use of any distribution system;

(e)   Prices and charges in respect of goods and services provided by the licensees determined by the Authority to be subject to tariff regulation.

In elaborating guidelines for the regulation of electricity tariffs, clarity and transparency in the process of tariff determination is essential. Further clarity and transparency is provided in Section 23(2) of the Electricity Act 2008 through the setting forth of principles to guide the Regulator, that:-

(a)   Tariffs should reflect the cost of efficient business operation;

(b)   Tariffs should allow licensees to recover a fair return on their investments, provided that such investments have been approved by the Authority;

(c)    Costs covered by subsidies or grants provided by the Government or donor agencies shall not be reflected in the costs of business operation;

(d)   Tariff adjustments shall, to the extent possible, ensure price stability;

(e)   Access charges for use of transmission or distribution system shall be based upon comparable charges for comparable use;

(f)     No customer class should pay more to a licensee than is justifiable by the costs it imposes upon such a licensee;

(g)    Tariffs should enhance efficiency in electricity consumption and should encourage adequate supply to satisfy demand.

Section 23(3) of the Act elaborates the application of the principle of automaticity in tariff adjustments. The Regulator is empowered to approve tariffs and charges to reflect: the cost of fuel; the cost of power purchases or the inflation rate; and the currency fluctuation. Needless to state, the application of the principle of automaticity is rare. Economists and politicians argue that it would set a precedent for all other sectors of the economy that are similarly affected and thus cause a domino effect in consumer price adjustments. Interesting also in the Act as an important guideline to licensees and the Regulator is the requirement that the public must be given a ninety day notice by the licensee of his intention to seek tariff adjustment; and that the Regulator can make amendments or review regulated tariffs once in every 3 years.

EWURA is bound by the  Electricity Act to regulate tariffs in accordance with the direction set forth in the foregoing paragraphs. Apart from being guided by the provisions of the sector legislation, the Regulator, EWURA is also guided by the relevant provisions of the EWURA Act, Cap. 414 of the Laws of Tanzania. In particular, and with regard to rate setting, the Regulator is required, in accordance with Section 17(1) which gives the Regulator powers to carry out regular reviews of rates and charges, and Section 17(2) to take account of the following  factors:-

(a)   The costs of producing and supplying electricity;

(b)   The return on assets of the electricity sector;

(c)    Any relevant benchmarks, including international benchmarks for tariffs, cots and return on assets in comparable industries;

(d)   The financial implications of the determination;

(e)   Consumer and investor interest; and the desirability of promoting competitive rates to attract investment.

The Regulator is required by law (Section 19 of the EWURA Act) to conduct an inquiry for the purpose of regulation of electricity tariffs and charges.  In exercising this power, the Regulator has to give public notice of the inquiry through the Government Gazette and in daily newspapers that circulate widely in Tanzania which will specify, among other things, the purpose, the time and nature of submissions, and the manner in which the Regulator shall deal with the submissions. Written notices of the inquiry shall be sent to relevant stakeholders such as industry consumer and consumer organizations, and to the Minister responsible for Electricity.

Case Study on Electricity Tariff Regulation

On 31 December, 2016 the then Minister for Energy and Minerals, Sospeter Muhongo, wrote to the Director General of EWURA, Felix Ngamlagosi, stating that “….In accordance to the Electricity Act, 2008 and to the responsibilities of the Minister of Energy and Minerals, EWURA is today, Saturday, 31^st December, 2016, Ordered to stop the utilization of the new tariff structure that was announced by, by EWURA, yesterday, 30^th December. 2016 till when the Government has thoroughly and carefully considered the formal report it will receive from EWURA’’….

This terse order was in reaction to THE TANZANIA ELECTRIC SUPPLY COMPANY LIMITED (‘’TANESCO’’) (TARIFF ADJUSTMENT) ORDER, 2016, ORDER NO.16 – 026 Made under Section 23(1) of the ELECTRICITY ACT (CAP 131) issued by EWURA on 29 December, 2016 in order to become effective on 1^st January, 2017.  The Order, issued by EWURA, was a culmination of a process which essentially began in April, 2016 when TANESCO applied for a tariff decrease of 1.1% and in September 2016 when TANESCO applied for a tariff adjustment of 18.19% to become effective on 1^st January, 2017. After a thorough review of the latter request, submitted by TANESCO in September 2016, EWURA awarded TANESCO an adjustment of an average of 8.5% increase effective January 1, 2017.  The deferment of the implementation of the EWURA Order by the Minister for Energy was followed by the sacking of the managing Director of TANESCO, Eng. Felchesmi Mramba, and the demotion of Eng. Decklan Mhaiki who was Deputy Managing Director (Transmission), Eng. Sophia Mgonja, Deputy Managing Director (Distribution), and Nazir Kachwamba, Deputy Managing Director (Generation). The sacking and demotion of the top brass of TANESCO management followed a statement by the President that increasing electricity charges at that time was tantamount to sabotaging government’s move towards industrialization. Praising the Minister for Energy for annulling the electricity price adjustment, he stated that neither he nor the Ministry of Energy and Minerals had been consulted by EWURA or TANESCO in advance of the announcement of the annulled tariffs.

The above case raises interesting lessons in utility rate management and public utility regulation. The following questions are pertinent:

(a)   Did TANESCO follow the required procedure in applying for a tariff adjustment?

(b)   Does EWURA have the authority or legal powers to regulate electricity tariffs?

(c)    Did EWURA follow the required procedure in assessing and finally awarding the tariff adjustment to TANESCO?

(d)   Were important stakeholders including the government informed about the request by TANESCO for an increase in electricity charges?

(e)   Did the stakeholders participate as required by the procedures set forth in the relevant EWURA regulations?

(f)     Does the Minister have legal powers to order EWURA to stop the implementation of a Tariff Order?

(g)    What lessons could be drawn from this case study?

The internal process of tariff review in TANESCO would necessarily start with an assessment of the financial viability of the company, its ability to meet its operational costs and the capital investment program (including debt servicing, and to implement current and planned projects). The assessment starts with an internal exercise and in some cases it would be complemented by an external consultancy. In an unusual step, on 24^th February 2016 TANESCO submitted a request to EWURA for a decrease of electricity charges by an average of 1.1%. This was a result of an order issued by the Minister of Energy to TANESCO for a reduction of tariff levels. The order by the Minister was unusual in the sense that TANESCO was, and continues to be,  financially unviable. Investment was, and is  required for the rehabilitation and extension of its system. EWURA awarded TANESCO a reduction of between 1.5% and 2.4% effective 1 April 2016 with a proviso that it monitors the effect of the Tariff reduction and comes up with an application for a review of tariffs within 6 months. This was a prudent move on the part of EWURA, made in the knowledge that a reduction in electricity rates would be unsustainable. On 30^th September 2016, TANESCO duly submitted the required tariff adjustment application for the year 2017. It is instructive to note that the application was copied to the Permanent Secretary for Energy and Minerals. The acceptance of the application for continued examination by EWURA is indicative of the fact that the application was in line with the EWURA (Rates and Charges Applications) Rules 2009 and the EWURA Tariff Application Guidelines of 2009.

Without doubt EWURA as the electricity utility regulator has exclusive powers to regulate electricity tariffs and charges. These powers are derived from the EWURA Act Cap. 414, Section 7(1)(iv), and from the Electricity Act Cap. 131 Section 5 (b) and in the manner outlined in Section 23 and 24 of the Electricity Act.

According to EWURA, the TANESCO Tariff Review Application from TANESCO, requesting an increase in tariff by 18.19% was received and accepted for further processing in accordance with the Tariff Application Guidelines of 2009. Under Section 19(2) (b) of the EWURA Act, the regulation of rates and charges requires an inquiry. To this end public hearings were conducted in Mwanza, Mbeya, Arusha, Dodoma and Dar es Salaam in November 2016. Section 19 of the Act requires the Regulator to publish a notice in the Government Gazette and in at least one newspaper in circulation in Tanzania. The Regulator is furthermore required to notify, in writing, all important stakeholders, including the Minister responsible for electricity. EWURA implemented this legal requirement and, in addition, published the notice of inquiry on its website. EWURA received comments and advice from the Zanzibar Electricity Corporation (ZECO), EWURA Consumer Consultative Council (EWURA CCC), several industries, IPPs, the Government Consultative Council (GCC) and the general public. As required by the Guidelines, an Exit Meeting with stakeholders is in such cases arranged in order to consolidate all the comments and for EWURA to give an initial direction of its assessment. The Exit Meeting was attended by main stakeholders including the Ministry of Energy and Minerals, the Fair Competition Commission (FCC), ZECO, TANESCO, GCC, and others.

An Exit Meeting would usually be followed by further internal deliberations within EWURA and consultations with the Ministry responsible for energy. The official communication between EWURA and the Ministry takes place between the Director General and the Permanent Secretary. These consultations were done and the Ministry would usually be advised of the outcome prior to final approval by the Board of EWURA, as was done in this particular case. It is clear from the foregoing that the all the important stakeholders were notified about the application by TANESCO for a review of electricity rates and did participate in the subsequent inquiry.

Before issuing an order or a directive to the Regulator the Minister would usually be reminded to seek advice as to the powers he has under the EWURA Act or the sector legislation. Under Section 7(4) of the EWURA Act Cap. 414, the Minister has wide ranging powers in relation to the securing the effective performance of the Regulator. These powers, however, DO NOT involve the discharge by the Authority of its regulatory functions. Rate setting is clearly a regulatory function. Furthermore, the Minister referred to above is the Minister responsible for the Regulator. In the case of EWURA the Minister responsible is the Minister responsible for Water. The Minister, in accordance with Section 19(3) and (4) direct the Regulator to conduct an inquiry. In doing so the Minister will stipulate the terms of reference and the timeframe for such an inquiry to be carried out.

Observations and Lessons

From this interesting and challenging case study a few observations and lessons can be learnt and it is best to differentiate these in three categories: administrative; regulatory; and political. The Minister for Energy informed EWURA and the public in general that he and therefore the President were not notified of the process and the result of the tariff revision exercise. Officials from the Ministry of Energy and Minerals did fully participate in the process from the beginning to the end.  The The Government Consultative Council (GCC) was involved. Official communication took place between EWURA and the Ministry of Energy and Minerals. Under normal circumstances, once the Ministry of Energy and Minerals is informed, the Minister and all relevant organs of Government are supposed to be informed accordingly. For the sector Minister to publicly admit he and the President were not informed of what was going on, is an indication of intra and inter-ministerial communication shortcomings, way beyond the purview of the regulator, is a situation that deserves redress.

From the foregoing, there are no pressing reasons to interfere with, or to suggest a review of the regulatory powers of EWURA or the regulations and rules. The Regulator has performed as well as could be expected under the circumstances. Since the main excuse for the ‘’suspension’’ of the Tariff Review Order is lack of communication or poor communication, a review of the efficacy of communication from the beginning to the end of the process could be essential. The independence of the Regulator is enshrined in legislation. It is essential for an economy to function well. The Regulator, however, needs to appreciate the limits of that independence in a situation where Ministers change from time to time, and Permanent secretaries are not so permanent. In circumstances such as these, institutional memory at government level is usually lost.  The relevant legislation gives the Regulator a quasi-judiciary status, which necessitates esteem by, and independence from utility suppliers, consumers and the general public. This independence is an anathema to some politicians. Ideally an efficient, independent and respected Regulator should ease the burden on politicians who in the final analysis get credit for an economy that grows steadily.

To all Regulators, the following succinct opinion is pertinent: No less an authority than Karen Douglas of the Energy Commission of California, in a remark made to the author on 5^th May 2011, observed that, “While independent, in order to succeed, it is important that the regulator be politically smart’’.

This paper is based on the  Address delivered by the Author at the 19^th Congress of the Association of Power Utilities in Africa (APUA), held 10^th-14^th July 2017, Livingstone, Zambia.

©Mark Mwandosya

Copyright© 2017 Mark Mwandosya. All rights reserved