Tariff Review Application 2017/18. Submitted to LEWA Board of Directors. Corporate Planning 1/3/17 Lesotho Electricity Company

Transcription

1 Tariff Review Application 2017/18 Submitted to LEWA Board of Directors Corporate Planning 1/3/17 Lesotho Electricity Company

2 Table of Contents Introduction... 2 Achievements... 2 Challenges... 5 Way forward... 7 Tariff application 2017/ Methodology... 8 Cost drivers... 8 Revenue Requirement Recommendation Page 1 of 12

3 Introduction This document and the attachments comprise of tariff adjustment proposal to the Lesotho Electricity and Water Authority (LEWA) for the period starting April 2017 and ending March It also sets out the revenue that the Lesotho Electricity Company (LEC) considers adequate to manage daily errands in an efficient and reliable manner for the customers and to meet the company s performance obligations. Lesotho Electricity Company was established in It is wholly owned by the government of Lesotho. Its business includes transmission, distribution and supply of electricity to the country. This tariff review application closely follows the format set forth by the LEWA namely Minimum Information Requirement for Tariff Application (MIRTA) and this is the tenth tariff review application since the introduction of regulation in the electricity sector. Achievements In the current financial year the company has experienced a significant absorptive capacity in terms of utilizing the 2016/17 allowed revenue. As of December 2016, the company had already utilized 72% of allocated revenue as opposed to 68% of the previous financial year. Reasonable number of strategic activities that were requested to be financed by the last financial year s tariff application have reached their final stage while some are still in progress. They are therefore considered to be achievements as most of them will be at their final stage at the end of the current financial year. Enterprise Analysis The project aims to review the organization s ways of working, identify areas of improvement and develop a plan of how LEC will function in the future. The key vision is to enable the organization to more effectively fulfil its mandate to reliably transmit, distribute and supply electricity to all its customers in Lesotho. The project is being undertaken in phases and costed the company M 5.9 Million. The work is being carried out in four work streams, namely Business Capability and Process Review; IT and Applications Review; Organizational Design and Change Page 2 of 12

4 Management; and Enterprise Risk Management. The project has reached its final stage where the consultant is currently working on the future structure of the company. The outcome of the project is expected to be a regulation compliant structure based on efficient business processes. Network upgrading and improvement In a quest to address ailing network, the company made strides in the systems improvement and upgrading. The progress is as follows; The company undertook maintenance on Transformer 1 Mazenod 132/33kV 40MVA. The transformer was approximately 26 years old and had to be loaded on low bed truck to be transported to the factory in Johannesburg for re-winding and other repairs in order to maintain continuous power supply at Mazenod 132kV substation. The whole process costed LEC M 4.3 Million. Mazenod 132kV supply power to Maseru central up to Thaba Tseka and also covering the southern districts up to Quthing. The substation had to be upgraded to address load growth and curb frequent trips caused by overloading. The scope included civil & structural works, connection of second 132kV line between Mabote & Mazenod, 132/33kV 40MVA transformer at Mazenod and 132kV and 33kV electrical equipment. The project cost was M 30.9 Million The area supplied by Maputsoe (132/33kV) substation has recently realized a phenomenal growth as a result of current socio economic trends and future developmental activities riparian to the grid. Resultantly, the system is currently running at full capacity and there is no room to cater for future demand. In a view of addressing such a challenge the company in the current financial year, will retire 2 transformers on the same substation. Before the end of the financial year, 2 transformers which are expected to double capacity will be installed. The contract for this project has already been allocated at an estimate of M16 Million. The city of Maseru has recently realized growing trend in the construction sector. Construction activities like Vodacom park, Royal Palace, new state house and expansion of CBL, are examples of building establishments that require electricity supply both during and after construction. To cater for such a growth the company Page 3 of 12

5 is in a process of replacing mini sub stations in Maseru town (Likonyaneng opposite CBL, New Europa, Maseru West, Palace of justice and industrial area) and the project has already consumed M 3.2 Million of the budget. Further to boost reliability of supply, the company has made significant strides. A project at a cost of M5.4 Million namely, specialized services on the maintenance of circuit breakers which is envisaged to cover the whole of the country is in progress. On the same issue of system reliability, there are 2 sub stations (Ha Lejone and Pitseng) which have over the years caused nuisance trips for Letseng and Liqhobong mines. In the current financial years the company will utilize M5 Million to replace 132kV circuit breakers on both sub stations. The amount of M 3.8 Million was used to upgrade conductors and replace decayed poles in Butha Buthe, Leribe, Mafeteng, Mohale s hoek and Quthing. Page 4 of 12

6 Number of Incidents Challenges Vandalism The company continues to encounter a soaring unfortunate incidents of vandalism. The impact of such occurrences can be associated to loss in material, business, lives and damage in electrical property. At the end of the previous financial year, the cost associated to vandalism was estimated at M 1.3 Million Trend in Vandalism Cases Months 2012/ / / /16 In a view to address the said losses, the company has aggressively engaged in awareness and sensitization campaigns. Workshops meant to develop strategies to curb such activities will continue to be hosted to all relevant stakeholders Extreme weather conditions The climate and topography of the country remain a challenge to the reliability of electricity supply in the country. For instance, the inclement weather condition of heavy snow and strong winds affected the 88kV line from Mahlasela Substation to Letseng Substation to the extent that the steel towers collapsed and conductors broke leaving the whole Mokhotlong district, Letseng mine and other firms in the vicinity of Letseng mine without power for 2 weeks (from 25 th July to 10 th Aug 2016). The inspections of the line had to be done using specialized helicopter as it was not possible to drive due to heavy snow. The restoration costs amounted to M2.5 million. This is one of many cases which usually come unexpectedly thereby disturb resource allocation of the company. Page 5 of 12

7 Security of Supply The electricity production capability of the country currently cover 66% energy requirement while 44% percent is imported from Eskom Republic of South Africa and Electricity De Mozambique (EDM). The latter has over the years pushed the electricity prices over the roof as a result of power shortage in the Southern African region. The situation is envisaged to remain the same until such time that the region has invested enough in the generation of power. This brings about an urgent need to embark on local generation to protect Lesotho from high imported energy costs. Exchange rate exposure Electricity Bulk purchase from EDM is denominated in United States of America dollar (USD). In the last financial year, LEC like its counterparts in the Common Monetary Area (CMA) has experienced a significant increase in prices of imports as a result of Rand losing value against major currencies in the world market. Inherently, the company s bulk imports from EDM were adversely affected by such an economic shock. The bar chart below illustrates EDM purchases at the exchange rate that was prevailing in the financial year 2015/16 as opposed to the projected 1USD=11. In the process the total revenue loss for the company was M17 Million. LEC Exposure to USD 2015/16 FY 20,000,000 15,000,000 10,000,000 5,000,000 - (5,000,000) Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar EDM Purchases (EX=11) EDM Purchases (EX=Mkt Rate) Loss of revenue per Month In a quest to curb against such a risk, the company has made strides to engage in negotiations with other future providers which are perceived to be cheaper in a medium to long term. Eskom on the other hand has shown interest to come into party to negotiate competitive prices as it will in a near future have excess capacity once all of its supply initiatives are fully commissioned. Page 6 of 12

8 Way forward The table below summarizes strategic projects which are envisaged to be covered by the following years tariff review requests. These projects and others are perceived by the company to arrest network challenges in the medium to long term. Project Refurbishment of 33kV line from Mazenod to Thaba Tseka and 33kV line from M/Hoek to Quthing. The plan is to upgrade the lines, change the line designs (conductors, insulators and structures) to meet the current environmental conditions and curb frequent power cuts caused by strong winds and other abnormal weather conditions. The projects are financed by AfDB and LEC is going to fund the local contribution. Replacement of dilapidated switchgear at different substations in Maseru and Muela. The old switchgear is no longer safe to operate and impose risk on the lives of the operators and the loss of supply to customers. The substations/switching stations include those that supply power to Thetsane Industry, Police HQ, Maseru Avani, Lesotho High School & bus-stop area and Muela. The projects are financed by AfDB and LEC is going to fund the local contribution Maintenance of Mabote transmission transformers and transmission lines. Replacement of dilapidated switchgear at SW12 that supply Lerotholi Polytechnic, Limkonkwin & surrounding areas. System improvement on Ha Matsooana line in Thaba Tseka, 11kV feeders at Hlotse, Mokhotlong & Butha-Buthe and Moruthoane feeder to upgrade conductor & replace decayed poles is also planned. Maintenance works, critical spares and consumables for entire LEC network is planned to minimize unplanned outages. Cost Awaiting tender M25 million 3.5 million M5 million M12 million M6.5 Million Page 7 of 12

9 Tariff application 2017/18 One of the license conditions prescribes that LEC must submit an application to the regulator when it needs to adjust tariffs. The application tables the revenue requirement that LEC needs to provide reliable and safe electricity to the economy, along with the tariff levels proposed per customer category expected to yield the required revenue requirement. This application is driven by the increase in bulk supply tariffs from EDM and Eskom, together with inherent increase in operational cost of the company. Methodology Tariff setting methodology is based on revenue requirement for a single year. The revenue requirement is based on the overall level of costs for the regulated entity. This encompasses the determination of relevant costs incurred by the business, plus an allowed investment return and depreciation. The projected costs are based on a forecast for the financial year under review. Cost drivers Imported Power In the period under review the company is estimated to make a bulk purchases amounting to M 432,792,158. This is a slight increase of 1.6% as compared to the approved bulk figure of M 426, 050, 644 for the current financial year. The pie chart below illustrates percentage contribution of each intake point to the total Bulk. Percentage Contribution Per Intake Point 36% 17% 3% 44% ESKOM Maseru ESKOM Qacha's Nek ESKOM Butha-buthe EDM (Mozambique) Page 8 of 12

10 Energy -Maluti The bar chart below illustrates both energy to purchase and cost associated per intake point. 600,000, ,000, Bulk Purchases Per Intake Point 400,000, ,000, ,000, ,000, MUELA MASERU BULK 88KV CLARENS 22KV QACHA'S NEK Intake Point 132KV EDM Energy Maloti The bar chart illustrates that most of energy consumed in the country is generated from Muela ( kWh) and it comes at a cheaper price (M ) compared to the imported energy. In the financial year under review, Eskom is envisaged to supply kwh of Electricity at a cost of M EDM on the other hand is expected to supply kwh of energy at a cost of M Page 9 of 12

11 Maloti Expenditure Expenditure 162,746, ,951, ,725, ,552, ,800, GENERATION, FUEL AND LUBRICANTS MAINTENANCE & REPAIRS LEWA LICENSE FEE Expenses OPERATING EXPENSES STAFF REMUNERATION Cost The above bar chart illustrates components of expenditure category of the revenue requirement under review. Operating expenses, maintenance and repairs are mostly driven by sales, inflation, increased number of customers and network expansion. As per regulation requirement, salaries have been adjusted by an increase in number of customers and half the inflation figure. However, as a form of retainment strategy, the company in the financial year under review, will embark on an exercise that will benchmark employees salaries with the best practices in the market as a result 10% increase covers both requirements. Depending on the energy anticipated to be sold, LEWA license fee is envisaged to increase by approximately 4%. Return on Assets At the beginning of the current financial year LEC asset base registered M 2.6 Billion compared to the M 2.5 Billion that was registered in the last financial year after asset valuation exercise took place. After deducting all assets that were not financed by LEC and other transmission assets that are considered to be sunk, Regulated Asset Base remained M 1.4 Billion. Given that, the true reflection of return on assets was estimated at M Million. However, it was realized that the figure will be too steep to be passed on to the customer as such, M was deducted and taken off as Page 10 of 12

12 consideration for the economic status given the challenges that are facing customers. Under this revenue requirement category, the company therefore proposes M Million. Depreciation For the financial year under review, depreciation cost is estimated at M The depreciation figure translates into 16% increase as compared to the previous financial year figure of M Revenue Requirement The revenue requirement for the period under review is estimated at M Million. The increment is largely on account of increased power purchase costs following the anticipated increase from both Eskom an EDM. Cost per Component of Revenue Requirement Bulk purchases Expenditure Depreciation Maintenance Costs Diesel for Semonkong Return on Assets Less N. Consideration Return on Assets Revenue Requirement Page 11 of 12

13 This revenue requirement is envisaged to be financed by a nominal increase of 16.9% on energy and 16.9% on maximum demand. Proposed new tariffs are therefore as follows; Energy Customer Category Proposed Tariff Current Tariff Cent Increase Industrial HV Industrial LV Commercial HV Commercial LV General Purpose Domestic Lighting Maximum Demand Customer Category Proposed Tariff Current Tariff Cent Increase Industrial HV Industrial LV Commercial HV Commercial LV Recommendation The management of LEC herein recommend the increase of 16.9% on both energy and demand charges for the next financial year. Page 12 of 12