The elusive power bill mystery

By Macharia Kamau

For many years, paying for electricity has been one headache after another thanks to the frequent adjustments in tariff rates, mostly upward movement.

First there is the question relating to fuel adjustment costs that mostly tend to inflate the bills and linked to frequently changing international crude prices. Then there are foreign exchange losses that are factored in the bills, making the customers dig deeper into their pocket to settle their monthly electricity bills.

According to industry insiders, the unstable power billing system is largely as a result of a huge loan incurred by local power generators and rising price of oil.

Total debt of Sh93 billion by both Kenya Power and KenGen factored in the bill and a regular fuel adjustment costs brought about by changing international crude prices has left customers with the headache of guessing how much they should pay for power every month.

Power utility firms are allowed to alter fuel and foreign exchange costs monthly. This has, however, left their customers not sure how much they should pay for power.

Kenya Power long-term loans stood at Sh24.5 billion as at June 30 2011, out of which Sh14 billion is from international lenders.

While in the case of KenGen, the long-term borrowings stood at Sh68.6 billion, as of June last year, of which Sh43 billion is foreign currency denominated. In the 2010/2011 financial year, the firm realised Sh315 million in foreign exchange losses that are recovered by passing them on to consumers as per the Power Purchase Agreement (PPA), with Kenya Power.

The loans are taken mostly for development of power projects that include transmission and new power generating projects.

Adjustment cost

The two cost components, foreign exchange losses due to currency fluctuation and volatile fuel prices, account for a substantial fraction of the electricity bill, sometimes as much as 50 per cent of the amount that a consumer pays for power.

Kenya Power and other power utilities have in the past argued that these elements are not within their control. The Power Purchase Agreements (PPA) between the power producers and Kenya Power allows them to pass over additional costs incurred due to foreign exchange losses and increases in cost of crude oil in the international markets to retail customers.

But this hard-line stance where all the operation risks is passed on to the customers has come under close scrutiny with accusing finger pointed at power utility firms for failing to employ modern mechanisms that could otherwise stabilise power bills.

Ironically, these unpopular adjustments guarantee power companies, both state-owned and private, to shield their profit margins, while exposing the consumer to price fluctuation risks.

While electricity generation, transmission and distribution companies earn a regulated return on their assets, they have a perverse incentive not to take up any operation risks, which is wholly transferred to the retail clients as demonstrated in their monthly bills.

“These changes have been driven by one over-riding factor: price. Power bills are too high and consumers are now more mindful as the bill take a substantial amount of their monthly income. They switch off their lights and their appliances to save energy. But the blunt instrument of price has done the real work of inhibiting demand,” explained Andrew Ochieng, a customers disappointed by frequent changes in his bill.

Monopoly

This mode of billing is, however, under scrutiny with the monopoly enjoyed by Kenya Power and KenGen blamed for a billing regime that has refused to change with times and still embodies a business model that seemingly overburdens customers. The Energy Regulatory Commission is also under criticism for leaving consumers exposed to a traditional billing regime by failing to crack the whip on the operators to adopt these modern ways that could help ease the customers pains.  Analysts say there are mechanisms available to the power companies that would have resulted in predictable forex and fuel adjustment costs and in turn a predictable billing regime.

These include borrowing locally and reducing the dollar denominated debts whose obligations go up when the shilling weakens, having huge reserves of fuel, which would minimise price shocks experienced whenever the price of crude oil goes up and hedging against high fuel prices and currency fluctuations.

Local financing

“The biggest issue is how the power utilities firms can access financing in shillings rather than dollars. If they can raise more long-term financing from the local debt and equity markets, then the shilling revenues will match the shilling liabilities,” explained Amish Gupta, a director with Standard Investment Bank (SIB), an investment banking institution.

“It means, there will be much more predictability in their debt repayment and less volatility in the pricing of electricity. It is something that is all in their control, unlike the foreign exchange that is unpredictable.”

“KenGen did a bond issue recently and there is more room for power companies to raise capital  locally.”

He added that utilities generating electricity using diesel – popular as thermal generators – can stock up fuel that can go months to guard against price increases in the international markets. He also noted that hedging could play a significant role, especially in acquisition of fuel stocks.

ERC, which has the powers to order the firms to re-look their pricing model, however, argues that it allows flexibility on certain components in the bill as fixing the frequently changing elements might drive some of the power utilities out of business, noting that fixed rates have seen power companies collapse in other markets.

“Three components vary in your bill and these are costs associated with foreign exchange, fuel and rate of inflation because we realise the pressure that fixed rates would put on the power utilities,” said Kaburu Mwirichia, director-general ERC.

“We acknowledge the frequent change in these fees is not very comfortable for consumers but also note that there are limited options as to how to handle the situation.”

“The Kenyan approach to electricity pricing is good for both the consumer and the producer. There have been instances in other markets where there are fixed price regimes and power utilities end up collapsing.”

He noted that, while hedging on fuel prices and foreign exchange fluctuation might be a good idea, there are instances where utilities might incur losses and these too will be passed on to consumers.

“These are tools that also have risks within them... we have seen firms hedge and make losses. There are no quick solutions to these issues.”

He added that there is little room to manoeuvre when it comes re-negotiating the PPA to ensure that the producers are made to absorb some of the costs. He, however, said ERC audits the formulas to ensure that the consumer does not get the raw deal from these agreements.

 “Future generation plans are heavily tilted towards green energy, especially geothermal, and expect the commissioning of the 284-megawatt plant by KenGen to have a good impact on reducing dependency on fuel based thermal generators.”

But contrary to ERC’s views, analysts argue that hedging is a risk management tool, where for instance, a power producer can contract a supplier to provide fuel at an agreed price for a given period.

This means the supplier will bear the costs in case the market price increases during the agreed period and hence, cushion the producer from the increased costs. Airlines have used the tool to minimise against exposure to volatile oil prices.

“I think the power companies would do well to at least build hedging capacity in their organisations, in order to manage price spikes and smooth the end price to the consumer,” said Aly Khan Satchu an independent investment analyst.

“Typically, companies have not been the best readers of the price landscape, as evidenced by KenolKobil recently and therefore, some companies might have taken the strategic decision not to hedge. I think it would be wise to revisit this.”

Kenya Power plays a central role in billing customers, being the company that heavily interacts with the consumers on behalf of the other players, mostly generating firms.

It is in fact the one that effects the changes of these components, albeit with an approval from the Energy Regulatory Commission (ERC).

It is on the back of this that one would expect a prudent approach to the billing procedures, including negotiation of PPAs with the generators.

The firm is, however, non-committal on putting in place mechanisms that would cushion consumers from the monthly distress of guessing what their power bill will amount to. Instead the firm directed our query to ERC.

“ERC is the one that sets the policies and guidelines on pricing and relationships between generators, the distributor and customers,” read an e-mail response from Kenya Power, adding that the regulator would be best suited to put in place such mechanisms.

The firm says that its take from the electricity bill charged to consumers only amounts to between 25 and 30 per cent, with the rest passed on to the other players along the value chain.