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Opinions of Wednesday, 2 October 2013

Columnist: Adams, Mohammed

Higher tariffs for poor quality service or ...


Mohammed Amin Adam
Executive Director
Africa Centre for Energy Policy (ACEP)

Tariff increases have been announced by the Public Utilities Regulatory Commission (PURC). The date was 25th September 2013, three clear years since the last tariff increases. The anger of the electricity consumer has been expressed in many ways – “the PURC is Useless”, “We pay higher tariffs but receive poor quality service” and “We receive poor quality service but we are asked to pay more”. These expressions summarize the dilemma of Ghanaian electricity consumers.

The Public Utilities Regulatory Commission (PURC) announced a 78.9 per cent increase in electricity and 52 per cent in water tariffs effective October 1, this year. The increments fall short of the 166 per cent and 112 per cent requested by the electricity and water providers respectively.
When I attended the PURC organized stakeholders forum in Accra during consultations leading to the current hikes in electricity tariffs, I was convinced after listening to the VRA and ECG that the increases were inevitable, as failure to do that meant another postponement of investments to improve on the system. Certainly, with a growing demand for electricity, estimated at 10% annually and against over-dependence on the more expensive light crude oil for generation by VRA, compounded by the high distribution losses of ECG at 22%, the economics favoured increase in tariffs.
But this is what introduces the dilemma. The utility companies have argued that until Ghana got a cheaper but reliable source of fuel (natural gas) and until the distribution network was expanded, consumers would continue to be confronted with the tariff ritual. If these arguments were upheld, then all consumers must tighten their belts for in the foreseeable medium term, Ghana would neither achieve security of cheap fuel supply notwithstanding the near completion of the Atuabo Gas infrastructure project that will bring jubilee gas on stream, nor reduce the distribution losses to a competitive level of about 15% (not the PURC’s benchmark of 21%). My reasons are not farfetched:
First, demand for electricity at 10% annually is further widened by lack of a reserve margin. Even at current levels of investment as well as planned investments in generation, we are unlikely to add an annual capacity of more than 600MW to meet demand growth and a reserve margin of 20%.
Second, security of gas supply is seriously under threat as restored gas supply from the West Africa Gas Pipeline does not seem to be moving near the promised relief with average gas supply still astonishingly put at 70mmscfd. Expected jubilee gas at a peak of 120mmscfd will only take supply levels to around 200mmscfd. This by far falls short of our demand for gas for electricity generation put at 380mmscfd and is expected to increase further when planned thermal projects are completed and brought on stream.
Third, the annual investment of US$200 million required by ECG to maintain and or improve on its distribution network cannot be guaranteed by the current levels of inefficiency in tariff collection by ECG including government and private debts. In spite of the broad use of prepaid meters by government agencies, there are still leakages arising from power theft and illegal connection exacerbating the distribution loss profile. More than US$100 million in revenues is lost to the high distribution losses of ECG.
Based on the above reasons, the argument that consumers pay higher tariffs for improved quality service might be a mirage as serious challenges remain in the entire energy sector which cannot be resolved over the medium term. Thus, the consumer dilemma resurfaces again - higher tariffs for poor quality service or poor quality service for higher tariffs. In other words are consumers going to be asked to pay more even when services remain poor?
But why do we blame the PURC, the referee?
The PURC has the legal mandate to ensure that the utilities achieve a reasonable rate of return on their investments. It has responsibility to ensure that consumers also get quality service. This double responsibility of the referee is near impossibility. It neither has control over the quality of investments of the utilities nor the quality of service. If the system is not improved as a result of low investments or poor quality investments, the utilities cannot achieve both the desired rate of return and improvement in service quality, a situation that sends the PURC only increasing tariffs to stabilize the market at the expense of consumers.
The failure of the Commission to hold the utilities to standard costs of capital and operational investments is because the Commission itself does not have authorized costs levels for certain equipments or activities. Even though the law that established the Commission empowers it to “assess the cost of production of any service by a public utility” and may “investigate and determine whether any expenditure incurred by the public utility is justified or reasonable”, there is no evidence that it (PURC) conducts its own due diligence on the integrity of the costs presented to it by the utilities for the purpose of justifying tariff increases. The lack of authorized standard costs even makes this more difficult for the Commission. Consequently, the only option opened to the Commission is to ask the utilities to “comply with prudent cost control measures as a means of ensuring fair returns on investments” but does not have a mechanism to monitor the extent of compliance by the utilities. This indeed is mere window dressing.

The PURC promises sanctions against the utilities if they do not meet set standards of quality, but what sanctions? To refuse to give them tariffs only to accumulate them in the long-term for consumers to pay citing same reasons as expensive fuel and distribution losses? To impose a fine on the utilities only for the fine to be passed into operational costs which consumers are compelled to eventually absorb through another tariff adjustment? To sack the Chief Executive Officer when the Commission does to have that power? To go to the High Court to force the utilities to comply with its decisions, when the courts cannot provide the utilities with funds to finance improvements? Or recommend to the Energy Commission to withdraw the licenses of the utilities, a sanction that is impossible to carry out in an energy deficit country. So what sanctions?
Is Government, the owner of the utilities to blame?
Government has the onerous responsibility of managing the utilities as owner and the appointing authority. As owner of the utilities, Government must also be concerned about the investment requirements for improving their operations. Recently, I heard that except ECG, Government does not owe the utilities in unpaid tariffs for the consumption of electricity by public sector agencies. The agencies have also switched on to pre-paid meters to eliminate tariff based debts. Good move isn’t it?
What government has not done is to recapitalize the utilities. The funds that have been allocated to the utilities have mainly been used to settle government indebtedness through the clearing house system, but not recapitalization. Therefore equipment breakdown and other short term financial obligations have been met with short-term financing which have proven to be very expensive for the utilities, hence reducing their rate of return.
Recently I got relieved when the Deputy Minister of Energy, my brother John Jinapor, said in an interview with a radio station that Government “will put pressure on power producers in the country to deliver quality service” but my relief was short-lived when he said again that “the Energy Ministry is independent of the PURC, we do not set tariffs, we only make input just like the Electricity Companies make their input but ultimately, it is PURC that set the tariffs”. How the government can ensure that the utilities offered quality service if not done through the legally mandated PURC beats my imagination. The only options left for Government in this apparent regulatory confusion is recapitalization or appointment of competent people to the Board and management of the utilities and sack same when they are not delivering.
What about customers, the consumers of utility service?
Private consumers have played our part too in this milieu. As major contributors to ECG’s non-technical losses through illegal connection, power theft, meter tampering, etc, private consumers have been giving ECG the justification to request tariff adjustments to cover its inefficiency. In addition, a utility provider is required by regulation to “prepare and make available to its customers, a customer charter summarizing the rights and responsibilities of its customers as well as the level of service customers are to expect”. But which customer has seen this charter? Which customer has invoked this charter in any court of law if we do not have confidence in the PURC? Or worse still, which customers have marched in protest to the offices of the utilities to demand “justice” in what has become known in Ghanaian lexicon as “positive defiance”? Thus, there are many legal and institutional options opened to consumers to hold the utilities to account beyond the PURC and government.
So there is a collective responsibility in the tariff politics; yet we spend all the time blaming each other, whilst the system deteriorates. The utilities blaming consumers for the quality of their poor service, consumers blaming the utilities for paying higher tariffs and yet receiving poor service. The PURC, the referee, blamed by both the utilities and consumers for delaying tariff adjustments and always increasing tariffs without commensurate quality of service respectively.

So Ghana, are we coming or we are going?
There is no doubt that the PURC needs to do damage control if consumers of electricity are to regain its confidence. The PURC and other stakeholders should particularly consider the following recommendations:
First, consider the integrity of the costs of the utilities – both capital and operational costs, since inefficient investments and poor value for money consideration in the procurement practices of the utilities put undue burden on tariffs and the rate of return on investments of the utilities.
Second, reintroduce the automatic adjustments formula.
Third, Promote transparency in the tariff setting process - not just consultations, but publishing its evaluation of the costs of the utilities and the factors that rigger tariff adjustments – crude oil/ natural gas price, the exchange rate and the generation mix to make the automatic adjustment process open, predictable and credible.
Fourth, publishing of the standards of performance set for the utilities and the extent of compliance by the utilities is also essential.
Fifth, the sanctions regime should be coordinated between the PURC and Government such that Government could use the PURC’s performance benchmarks as basis for signing performance contracts with Board and management members of the utilities.
Sixth, Government must recapitalize the utilities as the sole shareholder and sack appointees who are not meeting the terms of their performance contracts.
Seventh, rather than rely on a few dedicated agents, the ECG register more agents, publish their names and addresses especially those responsible for connection and reconnection, metering, meter reading, fault detection and repair; and give consumers the option to use any of the agents closer to their locations. This will introduce competition in the ECG’s service agents as consumers will prioritize agents who are responsive and efficient. This will further reduce the long waiting periods by consumers when they make complaints to the ECG.
Eight and last but not least, there is a saying that “the price of freedom is perpetual vigilance”. Consumers must begin to bark and bite by taking the consumer charter more serious and using a combination of measures to hold the utilities accountable to the terms of the charter. This includes exposing to law enforcement bodies fellow consumers who are embarking on illegal connection, power theft and meter tampering.