ZESCO LIMITED TARIFF APPLICATION 2012/13

Transcription

1 ZESCO LIMITED TARIFF APPLICATION 2012/13 06 TH JULY 2012 [This document was prepared according to the Energy Regulation Board Electricity Tariff Filing Guidelines of March 2011.] 1

2 TABLE OF CONTENTS ZESCO LIMITED... 5 TARIFF FILING FOR THE 2012/13 FINANCIAL YEAR... 5 SCHEDULE A: SUMMARY OF FILLING INTRODUCTION REASONS FOR APPLICATION FACTORS CONSIDERED IN TARIFF APPLICATION PREVAILING ECONOMIC CONDITIONS RISING COST OF GENERATING, TRANSMITTING AND SUPPLYING ELECTRICITY SYSTEM AND CUSTOMER BASE EXPANSION RISING COST OF ELECTRICITY IMPORTS SUMMARY OF PROJECTED PERFORMANCE PROPOSED TARIFFS TOTAL NUMBER OF CUSTOMERS SERVED EFFECT OF TARIFF CHANGES ON QUALITY OF SERVICE DELIVERY...17 SCHEDULE B: STUDIES UNDERTAKEN BEFORE APPLICATION WAS DRAFTED PRICING MODEL INPUTS...19 SCHEDULE C- GENERAL DESCRIPTION OF ZESCO LIMITED S OPERATIONS GENERATION DATA INSTALLED CAPACITY DEPENDABLE CAPACITY PLANT CAPACITY FACTORS PLANT OPERATING EXPENDITURE SCHEDULED AND UNSCHEDULED OUTAGES SCHEDULE OF PLANNED OUTAGES FOR THE YEAR 2012/ PROJECTION OF CAPACITY ADDITIONS AND RETIREMENTS...31 SCHEDULE D FINANCIAL STATEMENTS AUDITED BALANCE SHEET FOR THE PERIOD ENDED 31 ST MARCH AUDITED OPERATING INCOME STATEMENT AS AT 31 ST MARCH CHANGES IN THE OPERATING OR FINANCIAL CONDITION OF UTILITY DETAILED CASH FLOW STATEMENT FOR THE FINANCIAL YEAR ENDED 31 ST MARCH SCHEDULE E ASSETS FIXED ASSET SUMMARY DEPRECIATION METHODS CHANGES IN DEPRECIATION METHODS...37 SCHEDULE F BUDGET BUDGET FOR THE YEAR 2012/ BUDGET APPROACH KEY ASSUMPTIONS Collections Rates Exchange Rates Economic Assumptions

3 Tariff Assumptions Labour Losses Fibrecom Revenues BUDGETED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 ST MARCH BUDGETED STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 31 ST MARCH BUDGETED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 ST MARCH FIVE YEAR CAPITAL BUDGET PER PRICING MODEL NOTES ON THE BUDGETED STATEMENT OF COMPREHENSIVE INCOME Turnover Cost of Sales Other Income Depreciation Staff Costs Operations & Maintenance Costs Other Operating Expenses Finance Costs SCHEDULE G RATE OF RETURN SCHEDULE H CUSTOMER SERVICE PROGRESS REPORT ON THE KEY PERFORMANCE INDICATORS PROGRESS REPORT ON METERING GENERAL OVERVIEW LUSAKA DIVISION (PHASE IV): METER INSTALLATION NORTHERN DIVISION (PHASE V) COPPERBELT DIVISION (PHASE VI): METER INSTALLATION SOUTHERN DIVISION (PHASE VII): METER INSTALLATION FIVE TO TEN YEAR METERING PLAN PROGRESS REPORT ON DEMAND SIDE MANAGEMENT...56 SCHEDULE I DEBT MANAGEMENT TRADE RECEIVABLES AGE ANALYSIS REPORT ON MANAGEMENT OF TRADE RECEIVABLES TRADE AND OTHER PAYABLES...59 SCHEDULE J LOAN MANAGEMENT DEBT REPAYMENT SCHEDULES ANALYSIS OF FINANCE CHARGES FOR YEAR ENDED 31 ST MARCH 2011 AND QUARTERS ENDED 30 TH JUNE AND 30 TH SEPTEMBER SCHEDULE K SYSTEM LOSSES BREAK DOWN OF ANNUAL SYSTEM LOSSES PROGRESS REPORT ON POWER FACTOR IMPROVEMENT PROGRAMS

4 TABLE OF FIGURES FIGURE 1: INFLATION RATE...7 FIGURE 2: INTEREST RATES...9 FIGURE 3 EXCHANGE RATE...10 TABLE 1: TOTAL OPERATING EXPENSES FROM 2008/09 TO 2010/ TABLE 2: PROJECTED INVESTMENT IN ASSETS BY STRATEGIC BUSINESS UNIT (ZMK' MILL)...14 TABLE 3: ZESCO PROPOSED TARIFF PATH...15 TABLE 4: AUDITED AND PROPOSED REVENUE AND NET OPERATING INCOME (ZMK'MILL)...16 TABLE 5: CUSTOMERS TO BE AFFECTED BY CHANGE IN TARIFFS...16 TABLE 6: PRICING MODEL INPUT DATA TABLE 7: INSTALLED GENERATION CAPACITY...21 TABLE 8: DEPENDABLE CAPACITY...21 TABLE 9: CAPACITY FACTORS...22 TABLE 10: OPERATIONS AND MAINTENANCE EXPENDITURE BY STATION...22 TABLE 11: PLANNED OUTAGES FOR THE PERIOD FROM APRIL 2009 TO DECEMBER TABLE 12: UN-PLANNED OUTAGES FOR THE PERIOD FROM APRIL 2009 TO DECEMBER TABLE 13: PLANNED OUTAGES FOR THE YEAR 2012/ TABLE 14: FIXED ASSET SUMMARY AND DEPRECIATION SCHEDULE FOR THE FINANCIAL YEAR ENDED 31ST MARCH TABLE 15: ASSET USEFUL LIFE AND DEPRECIATION RATES TABLE 17: 2012/13 BUDGETED TURNOVER ANALYSIS...44 TABLE 18: EXPECTED INCREASE IN CUSTOMER NUMBERS TABLE 19: BREAK DOWN OF 2012/13 BUDGETED COST OF SALES...45 TABLE 20: 2012/13 BUDGETED PURCHASES OF ELECTRICITY...45 TABLE 21: BREAKDOWN OF 2012/13 BUDGETED OTHER INCOME...45 TABLE 22: DETAILED 2012/13 BUDGETED DEPRECIATION SCHEDULE...46 TABLE 23: BREAKDOWN OF 2012/13 BUDGETED STAFF COSTS...46 TABLE 24: BREAKDOWN OF OPERATIONS AND MAINTENANCE COSTS...47 TABLE 25: BREAKDOWN OF 2012/13 BUDGETED OPERATING EXPENSES (OVERHEADS)...47 TABLE 26: DETAILED 2012/13 BUDGETED FINANCE COSTS...48 TABLE 27: KPI SUMMARY...49 TABLE 28: KPI SCORES FOR QUARTERS ENDED 30TH JUNE AND 30TH SEPTEMBER TABLE 29: METERED AND UNMETERED CUSTOMER BASE...53 TABLE 30: METERING PLAN...55 TABLE 31: SUMMARY OF DSM ACTIVITIES...56 TABLE 32: RECEIVABLES AGED ANALYSIS FOR THE YEAR ENDED TABLE 33: CHANGES IN RETAIL ACTIVE DEBT...58 TABLE 34: BREAKDOWN OF TRADE AND OTHER PAYABLES TABLE 35: PAYABLES AGE ANALYSIS FOR THE FINANCIAL YEAR ENDED 31ST MARCH TABLE 36: PROJECTED PRINCIPAL REPAYMENT SCHEDULE (ZMK MILLION)...59 TABLE 37: PROJECTED INTEREST REPAYMENT SCHEDULE (ZMK MILLION) TABLE 38: FINANCE CHARGES FOR THE YEARS ENDED 31ST MARCH 2011, MARCH 2012, AND MARCH 2013 (ZMK MILLION).60 TABLE 39: SYSTEM LOSSES

5 ZESCO LIMITED TARIFF FILING FOR THE 2012/13 FINANCIAL YEAR SCHEDULE A: SUMMARY OF FILLING 1 INTRODUCTION Following the requirement in the Electricity Act Cap 433 of the Laws of Zambia that ZESCO Limited should apply for annual tariff adjustments, ZESCO Limited has taken the opportunity to apply for tariff adjustment for the year 2012 that takes into account the impact of the previous adjustment and any changes in the variables that affect the cost of producing electricity in Zambia. This document is an application for tariff review for the year 2012 from ZESCO Limited to the Energy Regulation Board (ERB) and is based on the ERB s Filling Requirements for Electric Utilities and the Licensing requirements as exemplified in the Key Performance Indicators (KPIs) of February 2007 including variations made to the KPIs in REASONS FOR APPLICATION Having made all the required and necessary adjustments to the Pricing Model (as indicated in section 10 below), ZESCO is applying for a weighted average retail tariff adjustment (excluding Mining and Exports) of 26% in the year 2012 with possible adjustments of 31%, 34% and 13% in the years following. These adjustments will enable ZESCO Limited to maintain cost reflective tariffs in every customer category for the next five years. This adjustment is expected to generate revenue of up to K 3, 338 billion in the first full year of its implementation. The company will thus be able to fulfil its Key Performance Indicators, and implement its capital investment portfolio. 5

6 1.2 FACTORS CONSIDERED IN TARIFF APPLICATION In seeking a tariff adjustment the following factors have been taken into consideration; Prevailing Economic Conditions Changes in the Cost of Generating, Transmitting, Distributing and Supplying Electricity System and Customer Base Expansion Rising Cost of Electricity Imports These factors were selected due to the impact that they have on the performance of the company and are discussed in detail below: PREVAILING ECONOMIC CONDITIONS Overview of changes in the global and local economic environment Changes in the economic environment are an important determinant of a viable tariff and therefore are the major driver for this application for tariff adjustment. Both the global and domestic economy experienced significant changes since the last tariff application in The year 2010 showed an increase in both international commodity prices for both oil and non- oil commodities. This was in response to a combination of strong global demand in emerging economies and low inventories for some selected commodities (BOZ Annual Report: 2010). In 2011, the global economy continued to recover from the global economic crisis of The global economy grew by 5% in 2010 compared to a contraction of 0.6% in Even though economic growth was strong in the emerging and developing countries, growth in advanced economies continued to be sluggish due to unsustainable sovereign debts in some Euro zone countries and weak demand in the United States of America. The Zambian economy has remained quite resilient to the effects of the global financial crisis although the country posted an economic growth rate of 6.5% in 2011 marginally surpassing the revised projected growth of 6.4%, according to the Central Statistical Office (CSO). The 2011 economic growth rate is less than what was achieved in 2010 when the economy grew by 7.6%, far more than the 6.6% by which it was projected to grow then. This growth is attributed mainly to the increased output in agriculture, construction and trade sectors of the economy. The mining sector, which is still the largest consumer of ZESCO s power, was evidently missing from the sectors that helped the economy perform well in 2011 after posting a record 6

7 800,000 metric tonnes in Zambia s economic outlook and prospects for 2012 remain positive. This is underpinned by expected strengthening of the kwacha in the world economy and robust domestic performance driven by the mining, agriculture, construction and tourism sectors. The mining sector is the largest consumer of ZESCO s power, consuming about 50%, followed by the industrial and commercial sector consuming 20%, and the other sectors continued growth continue to increase the demand for electricity and thereby exerting pressure on the already existing power deficit in the economy. The need for a cost reflective tariff that will guarantee adequate financial resources to maintain existing infrastructure, replace depreciated equipment, and invest in new power generating stations and other infrastructure cannot be over-emphasized. This is cardinal as the economy has performed exceptionally well in recent years. Overlooking the role of electricity may reverse the gains already achieved and constrain growth Analysis of Economic Factors Key economic indicators included for the analysis include inflation rate, exchange rate and interest rates. The following figure shows the trend of the inflation rate from December 2009 to December Inflation Rate Figure 1 below shows the trend in inflation rates from December 2009 to December Figure 1: Inflation rate Inflation Rate Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Inflation Rate Source: BOZ and CSO 7

8 As shown in the figure above, the overall annual inflation rate continued to reduce from 9.9 % in December 2009 to 7.9 % in December 2010 and 7.2% in December This was attributed to the decline in both the food and non-food inflation, following the improved food supply and strengthening of the Zambian Kwacha. It should however be noted that there was a sharp increase of non-food inflation peaking at 13.4% in August 2010 mainly due to pass through effects of the exchange rate depreciation and upward adjustment in the electricity tariffs by an average of 25.6%. Since the previous tariff adjustment, overall annual inflation rose from 8.2 % in August 2010 to 8.8 % in August 2011 and reduced to 7.2 % in December 2011 which is slightly above the projected end of 2011 inflation of 7 %. The reduction in the inflation rate between August and December 2011 was attributed to the reduction in fuel and food prices while the non-food inflation remained constant. The country faced the following challenges in the achievement of a single digit inflation rate during the period under review: Lower than expected copper output from the mining sector in 2011 compared to Upward adjustment of fuel prices by 13.2% on average in February 2011 following the increases in global oil prices and a depreciation of the kwacha exchange rate against the US dollar. However, the reduction of fuel prices at an average of K400 in October 2011 is expected to bring a slight reduction in overall inflation. Liquidity overhang arising from higher than planned Government borrowing and spending, specially to finance maize purchases in the second half of 2010; Higher production costs due to the upward adjustment in electricity tariffs in August 2010 of an average of 25.6%; Higher than planned growth in reserve money and broad money on account of higher Government borrowing and spending largely to finance maize purchases following the bumper harvest; and Seasonal price increases of beef products, kapenta, fresh fish and fresh vegetables due to low seasonal supply. 8

9 During the period under review, the ZESCO budget was adjusted for 10% inflation which was above the average inflation in the period under review and is still above the 7.2% posted 2011 inflation. A cost reflective tariff is therefore necessary for ZESCO to have enough financing to safeguard against any inflationary effects that may occur. Interest Rates The following figure shows the trend in interest rates measured by the commercial Bank Weighted Average Base Rate (WABR) from December 2009 to December Figure 2: Interest Rates 25 Interest Rates % Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Interest Rates % Source: BOZ and CSO The Commercial Banks Weighted Average Lending Base rate shows a downward reduction by 18% from 22.7% in December 2009 to 18.6% in December The gradual reduction of interest rates since 2010 was mainly due to prudent macroeconomic management that the Bank of Zambia put in place. In the second half of 2011 Bank of Zambia lowered commercial Banks reserve ratios and this further pushed interest rates downwards. It is important to note that 98% of ZESCO loans are external and denominated in foreign currency and are therefore not affected by local interest rates. However, the reduction in the local interest rates provides an opportunity for the company to borrow locally. ZESCO needs cost reflective tariffs that will improve the financial viability of the company and therefore take advantage of the existing opportunity. 9

10 Exchange Rates The following figure shows the behaviour of the exchange rate since December 2009 to December Figure 3 Exchange Rate Exchange rate (ZMK/USD) Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Exchange rate Source: BOZ and CSO As shown in the figure, the exchange rate fluctuated between December 2009 and December It recorded ZMK/USD 4, in August 2010 and depreciated to ZMK/USD 5, in December A significant amount of ZESCO transactions are denominated in foreign currency, as such, currency exchange rate fluctuations resulted in exchange rate losses over the period. It is therefore important for ZESCO to have at least cost reflective tariffs that will enable ZESCO to cushion itself from unavoidable losses. 10

11 1.2.2 RISING COST OF GENERATING, TRANSMITTING AND SUPPLYING ELECTRICITY Table 1: Total Operating Expenses from 2008/09 to 2010/11 below shows the movement in operating costs since the last tariff application. This table is an extract from the accounting model ( Sum Overall sheet). The table shows increases in primary and auxiliary plant maintenance costs as well as machinery maintenance costs. This is indicative of the rising cost of the materials required to perform the required maintenance of infrastructure. Staff costs have also risen over the period under consideration mainly due to the increase in the payment of retirement and group life assurance benefits to employees, and the payment of gratuity to employees that had been converted to, or employed on, contract. The general upward movement of staff costs was also brought about by the increase in the total number of employees over the last two years from about 4,300 in 2009 to about 4800 by September2011. The table shows that the cost of External services has risen significantly over the last two years. This is due to the legal advice that ZESCO has had to procure for the drafting and negotiation of major financing and construction contracts. Table 1: Total Operating Expenses from 2008/09 to 2010/11 Year on Year % K Million Change Cost of Sales 2008/ / / /09 to 2009/ /10 to 2010/11 Electricity Import Costs 0 10,375 14, % 37% Electricity Purchase Costs 57,775 81, ,803 41% 24% Primary Plant Maintenance 81,810 98, ,840 21% 41% Costs Auxiliary Plant Maintenance 43,693 52,608 58,358 20% 11% Costs Kariba Complex Costs 39,210 41,222 42,015 5% 2% Total Cost of Sales 222, , ,270 28% 25% Other Operating Costs Staff Costs 503, , ,885 37% 27% Depreciation 177, , ,435 23% -8% Plant Operating Costs 21,563 19,678 29,827-9% 52% Machinery Maintenance Costs 4,069 6,478 7,605 59% 17% Building Maintenance Costs 9,790 10,607 23,982 8% 126% Administration Costs 46,730 43,548 50,488-7% 16% Transport Costs 31,211 35,298 48,820 13% 38% External Services Costs 26,286 51,486 98,563 96% 91% 11

12 Training Costs 6,987 11,008 7,106 58% -35% Travel and Accommodation 14,808 17,431 22,420 18% 29% Costs Insurance Costs 17,834 16,505 33,553-7% 103% Bad Debt Provision 54, ,807 24, % -79% Other Operating Costs 3,812 6,568 6,399 72% -3% Total Other Operating Costs 918,717 1,243,911 1,431,041 35% 15% Total Operating Costs 1,141,205 1,528,244 1,785,311 34% 17% SYSTEM AND CUSTOMER BASE EXPANSION The government of the republic of Zambia has continued to grapple with the challenge of poverty reduction. The benefits of the macro economic growth that the country has recorded over the past few years have continued to elude the majority of Zambians. More than 80 % of the Zambian population remains poor, has inadequate access to social services and is faced with high unemployment rates. The government has begun to make some changes aimed at enabling them to make progress toward the achievement of the Millennium Development Goal (MDG) of halving poverty by the year The government s efforts to spread the benefits of the steady economic growth of the past few years to the general populace are evidenced by the changes in the tax regime during the latter part of the year 2011, which included; The raising of the Pay As You Earn tax free threshold by one million Kwacha The increase of mining royalty tax from 3 % to 6 % for base metals, and 5 % to 6 % for precious metals. The reduction of the corporate income tax in the agricultural sector, from 15 % to 10 %; The abolishment of the 40 % corporate tax rate for the banking sector (the sector will now pay corporate taxes at the standard rate of 35 %). The reduction of export duty to 10 % (this has been extended to all unprocessed or semi-processed mineral ores). 12

13 The measures listed above are expected to increase demand for electricity in the coming year as the disposable income of the citizens in formal employment increases, and access to finance is made easier for individual and corporate investors as banks pass on the benefit of their lowered tax obligations to their customers through a reduction in lending rates. The Zambian government has further increased its commitment toward infrastructure development in the agricultural, health and education sectors and plans to carry out several projects in the year 2012 including; The improvement of production and marketing infrastructure for crops, livestock, and fisheries. The construction of more than 2,000 classroom blocks The construction of 9, and the rehabilitation of 12 Technical Training Institutes The completion of eight district hospitals and construction of five new district hospitals, including housing for medical personnel. In addition to the projects listed above, the recent establishment of the new Muchinga Province and the movement of the headquarters of the Southern Province from Livingstone to Choma are also expected to result in the construction, rehabilitation, and expansion of roads and other infrastructure in those two areas of the country. Access to electricity is a prerequisite to the achievement of the MDG on poverty reduction because the developmental infrastructure necessary for the improvement in the lives of the general population can only be effectively established in places with access to electricity. Increasing access to electricity in the country is therefore of the utmost importance and entails the construction of additional power generation capacity, as well as associated transmission and distribution power system expansion and reinforcement. ZESCO plans to contribute toward increasing access to electricity services by keeping electricity affordable for the majority of the populace. This will be done through maintaining the life line tariff for the first 100kWh of residential customer category at its current level for the coming year, with minimal inflationary increases in the years following. 13

14 In order to ensure that all residential customers benefit from the life line tariff, ZESCO intends to reintroduce step tariffs to prepaid customers during the financial year 2012/13. The company has also decided to delay the implementation of Volume Differentiated Tariffs (VDT) until a higher access rate has been achieved. In addition, ZESCO plans to continue with its system expansion and reinforcement plan, which will enable the company to improve the quality of its service, and meet the anticipated increase in demand for electricity from existing and new customers. The company will continue to place emphasis on ensuring that the transmission paths for new generation are ready in time, and that the distribution network is able to handle the growth in the consumption of the company s various customer categories. On the generation front, the expansion of the Kariba North Bank Power Station is well under way with works set to be completed by the end of year 2013, and works on the Itezhi-Tezhi power station have begun. ZESCO has also entered into thermal agreements with independent power producers (Maamba and Ndola Energy) for the purchase of up to 350MW beginning in 2014 and is in the process of discussing an additional 300MW thermal power agreement. These independent power producers will also enable the country to improve its generation mix from being 99% hydro based to just over 60% hydro based by The amounts ZESCO anticipates spending on its asset base as indicated in the Pricing Model are shown in Table 2 below; Table 2: Projected Investment in Assets by Strategic Business Unit (ZMK' Mill) New Assets Generation 695,478 1,026, , , ,720 Transmission 123,992 2,309,594 4,774,868 2,812,631 1,230,265 Distribution 613,477 1,039, , , ,534 Supply ,395 23,952 23, Total 1,433,587 4,515,390 6,411,267 3,893,867 1,889,176 The government has contributed toward meeting the need for increased generation capacity by allocating their equity funds toward the construction of the Kafue Gorge Lower generation facility in the 2012 national budget. The Rural Electrification Authority has also had their national budgetary allocation increased by 28%. These budgetary allocations are expected to result in an increase of over 600MW in Zambia s total Electricity generation capacity by 2017, and the connection of more far flung areas of the country to the national grid within the year

15 1.2.4 RISING COST OF ELECTRICITY IMPORTS The cost of importing power expected to rise in the medium term whilst demand for power is high and new generation is still under construction. It must also be noted that the cost of imports may not reduce in the long term despite the projected increases in the availability of power on the market. The cost of power from new plants will be higher than that from existing plants as it must incorporate the repayment of financing procured for the construction of the plant. 2 SUMMARY OF PROJECTED PERFORMANCE 2.1 PROPOSED TARIFFS The tariff path derived using the pricing model after all the required and necessary adjustments were made (as indicated in schedule B below) was as follows; Table 3: ZESCO proposed tariff path Average price - ZMK/kWh 2010/ / / / / /16 Residential % change % % % % Large power % change % % % % Small power % change % % % % Commercial % change % % % % Services % change Weighted Average % change 18% % 29% % 37% % 14% % 15

16 According to the pricing model, the approval of the proposed tariffs would enable ZESCO to achieve an operating profit of K 917 billion in the first twelve months after implementation as shown in Table 4 below; Table 4: Audited and Proposed Revenue and Net Operating Income (ZMK'Mill) Description Audited Financial Statements as at 31 st March 2011 Management Accounts as at 31 st March 2012 Projected as at 31 st March 2013 (Pricing model) Revenue 2,106,895 2,616,037 3,338,343 Operating Profit 398, , ,083 3 TOTAL NUMBER OF CUSTOMERS SERVED The current and projected number of customers to be served as extracted from the Pricing Model is as shown in Table 5 below; Table 5: Customers to be affected by Change in Tariffs Customer category 2010/11 (Audited) 2011/ / / / /16 Mining Residential 374, , , , , ,231 Large Power Small Power 6,460 6,949 7,296 7,661 8,044 8,446 Commercial 32,904 28,731 30,168 31,676 33,260 34,923 Services 5,147 4,807 4,903 5,001 5,101 5,203 High Voltage Exports Low Voltage Exports Total 418, , , , , ,895 16

17 4 EFFECT OF TARIFF CHANGES ON QUALITY OF SERVICE DELIVERY The effect of the tariff changes on service delivery is expected to be felt most in the acceleration of the customer metering and distribution system rehabilitation and reinforcement programmes The customer metering programme which was set to be completed by 2011 but has been delayed due to the unavailability of meters is now expected to be completed by 31 st March The completion of the metering program is expected to put an end to the existence of long term un-metered customers, drastically reduce debtor days, and improve the monthly collection rate. The metering of all customers is also expected to bring about a reduction in the level of non-technical losses per annum as ZESCO will be better able to monitor the consumption of its product and promptly deal with problem areas. The rehabilitation and reinforcement of the distribution networks is an on-going programme meant to improve the quality of service in most parts of the country. Whilst ZESCO has been working on reducing its fault response and resolution times, it would be more beneficial to ZESCO s customers to have fewer faults to report due to the acceleration of the system rehabilitation and reinforcement. ZESCO s current management is also focussed on the development of new generation but the impact of this investment will only begin to be felt when the first of the new generating plants comes on line in

18 SCHEDULE B: STUDIES UNDERTAKEN BEFORE APPLICATION WAS DRAFTED This tariff application is based on the cost of service study and load forecast carried out by IPA and PB Power in 2005 and subsequently updated with actual information from the year ended 31 st March 2006 to the year ended 31 st March 2011, and the pre-audited data for the year ended 31 st march A review of the Pricing Model was carried out in the year 2011 and the following modifications were made; A provision was made to take into account the impact of Load Shedding on energy sales. Distribution projects were included in the capital expenditure assumptions. The calculation of the capital expenditure on existing assets was adjusted to take into account the changes in the asset base from year to year. The export customer category was split between bulk and retail export customers. The calculation of distribution and transmission losses was corrected and is now done on the gross demand thus correctly reflecting the total power requirement. The remaining challenges in the Pricing model following the review are; The entry of total customer numbers in the customer growth calculations causes overstatement of monthly charge revenues as it includes inactive customers in the calculation. Once tariffs are entered in the model it is assumed those tariffs apply for the entire year regardless of when in the year they were approved 18

19 5 PRICING MODEL INPUTS The following table outlines any additional changes and inputs that were made to the pricing model for this year s tariff application. Table 6: Pricing Model Input Data INPUT SHEET ENTRY CELL ADDRESS A Fin Zambian Inflation Rate 7% for the year 2012/13 and 9% from 2012 onwards Row 11 Row - 19 K/$ Exchange rate set at K 5,000 for 2012 and at lower rates in the years following in line with the expectation of continued economic growth for Zambia and fiscal discipline from the Government. PPI escalation rates as forecast from current trends and US Bureau of Labour Statistics Rows -15 General Existing loans are as per last audited ZESCO Treasury Department loan schedule. (amounts procured have been entered and not balances as at 31 st March) Rows & 185 A Tariffs Base tariffs of all customers have been adjusted to current levels. General A Dem A Cust Group New loads have been added and the projections of the existing loads have been adjusted according to their consumption patterns. Loads with low probability have been switched off while others have had their commencement date delayed. Additional metering per annum due to customer base expansion and prepayment roll out takes into account the expected performance on the metering KPI s Actual customer numbers and consumption per tariff category for 2009/10, 2010/11 and 2011/12 (un-audited) were entered General General General A - Capex Detail The costs and scheduling of all Generation, Transmission and Distribution projects have been updated. Rows - 23 to 77 A - Assets Sum The asset values for the years 2009/10 and 2010/11 have been entered for each SBU General 19

20 A - Gen & Im Generation for IPP s Maamba, EMCO, ITT and Ndola Energy included from General A Costs Updated by Cost & Income Model and the Management Accounts for the year ended 31 st March 2012 (using the same expense classification as the cost and income model). Staff numbers increased by 5% to take into account reorganisation of establishment as indicated in 2012/13 Budget General Rows 325 & 304 Rows 317 & % Rise in staff costs per 2012/13 budgeted salary adjustment for both permanent and temporal staff. A Alloc Allocation of costs to customer groups according to system utilization General done. Demand Up dated with actual Energy sold in the years ended 31 st March 2010, General 2011, and 2012 General Losses calculated from grossed up demand figures. Cust Groups Updated with actual consumption and customer numbers for the General years to 31 st March 2010, 2011 and 2012 (un-audited) Cust Nums No changes General Gen & Im Actual Generation for the years to March 2010, 2011 and 2012 Rows 1 entered 23 Assets Changes due to new projects and schedules in A Capex and A-Asset General Sum Loans Changes due to new projects and schedules in A-Capex, customer General numbers in A-Cust Groups, and the update of the Loan schedule in A- Fin RR Updated with actual costs from A-Costs for the year ended 31 st March General 2010, 2011, and 2012 (Management Accounts) Alloc No changes General RR Alloc No changes General Revenues Revenues reduced by portion of unmet demand allocated to each General customer and customer group by adjusting their consumption figures. General All MD customer groups have peak and off peak tariffs. It is assumed 20% of all MD customers will take up the Time of Use option by Consumption is allocated to the tariffs using the number of hours in the day to estimate revenues. 20

21 SCHEDULE C- GENERAL DESCRIPTION OF ZESCO LIMITED S OPERATIONS 6 GENERATION DATA 6.1 INSTALLED CAPACITY Table 7 below shows the capacity of ZESCO s major generation plant. Table 7: Installed Generation Capacity Generating Station Units 2010/ / / /14 Kafue George MW Kariba North MW Victoria Falls MW Lusiwasi MW Musonda Falls MW Chishimba Falls MW Lunzua River MW DEPENDABLE CAPACITY The dependable capacity of ZESCO s major generation plant is shown in Table 8 below Table 8: Dependable Capacity Generating Station Units 2010/ / / /14 Kafue George MW Kariba North MW Victoria Falls MW Lusiwasi MW Musonda Falls MW Chishimba Falls MW Lunzua River MW

22 6.3 PLANT CAPACITY FACTORS Table 9 below shows the capacity factor of the major generating plants. Table 9: Capacity Factors Generating Station 2010/ / / /14 Kafue George 64.9% 79.4% 79.4% 79.4% Kariba North 67.2% 74.4% 74.4% 74.4% Victoria Falls 81.9% 86.7% 86.7% 86.7% Lusiwasi 60.0% 60.0% 60.0% 60.0% Musonda Falls 40.0% 40.0% 40.0% 40.0% Chishimba Falls 49.5% 49.5% 49.5% 49.5% Lunzua River 45.7% 45.7% 45.7% 45.7% 6.4 PLANT OPERATING EXPENDITURE The total operating expenditure of each station as extracted from the Cost and Income Model, the 2012 Management accounts, and the 2013 Budget estimates, is outlined in Table 10 below; Table 10: Operations and Maintenance Expenditure by Station Generating Station Units 2009/ / /12 (Management Accounts) 2012/13 (Budget) Kafue George ZMK 128,739,986, ,969,746, ,388,893, ,081,397,124 Kariba North ZMK 167,506,165, ,176,794, ,369,257, ,146,447,518 Victoria Falls ZMK 23,676,780,703 29,157,250,435 40,004,217,555 43,719,992,497 Lusiwasi ZMK 5,216,470,997 6,193,798,172 8,497,990,924 13,368,195,545 Musonda Falls ZMK 4,955,807,023 6,027,368,941 8,269,647,336 13,148,218,768 Chishimba Falls ZMK 5,421,755,456 6,165,114,361 8,458,636,273 13,330,282,900 Lunzua River ZMK 2,955,488,437 3,479,509,191 4,773,942,693 6,363,679,503 22

23 6.5 SCHEDULED AND UNSCHEDULED OUTAGES The Scheduled and unscheduled outages lasting over 48 hours that took place during the last three financial years are shown in the tables below; Table 11: Planned Outages for the period from April 2009 to December Financial Year - Station Date Unit(s) Outage duration (Days) Outage Type Comments Kariba Kafue Gorge North Bank G3 2 Planned Replacing excitation power circuit cables-prp G5 3 Planned Sealing oil leakages on upper guide bearing and water leakage on guide vane G2 2 Planned Turbine and braking system maintenance works G4 365 Planned Rehabilitation works G3 3.9 Planned Rehabilitation works Financial Year - Station Date Unit(s) Outage duration (Days) Outage Type Comments Kariba North Victoria Falls Bank Kafue Gorge G5 16 Planned Annual Maintenance G6 11 Planned Annual Maintenance G3 20 Planned Annual Maintenance G4 14 Planned Annual Maintenance G4 365 Planned Rehabilitation works B5 720 Planned Due to burnt rotor winding and damaged stator B5 744 Planned Due to burnt rotor winding and damaged stator B5 744 Planned The unit remained off bars due to burnt rotor and starter windings. Repair works are still going on. 23

24 B5 720 Planned Rebuilding of the new stator and now awaiting rebuilding of the governor, turbine and control system A Planned A and C- station units were A Planned shutdown to facilitate annual A Planned maintenance and de-silting of A Planned 48MW head pond and 8MW A station settling basin. C C Planned machine stayed off bars for the C Planned rest of the month for the failed C Planned exciter pole to be replaced. A C Planned stayed off bars for the rest of the month due to oil leakage on turbine bearing B5 744 Planned Awaiting commissioning of the generator B Planned Maintenance C Planned Shut down for annual maintenance works and desilting of the 48MW scheme water ways B Planned Shutdown respectively to facilitate annual maintenance B Planned Shut down respectively to B Planned facilitate uncoupling of B4m/c MIV which was stuck in open position and carry out annual maintenance on the units B Planned Shut down to facilitate annual maintenance on the machine April Dec 2011 Station Date Unit(s) Outage duration (Days) Victoria Kariba North Bank Falls 24 Outage Type Comments G4 275 Planned Rehabilitation works G Planned Defect resolution of high combined bearing temperatures by PRP G Planned Annual maintenance and penstock lining repair works B Planned Shut down for annual maintenance B Planned Shut down for annual

25 maintenance B Planned Shut down for annual maintenance B Planned Shut down for annual maintenance. Table 12: Un-Planned Outages for the period from April 2009 to December Financial Year - Station Date Unit(s) Outage duration (Days) Kafue Gorge Kariba North Bank Outage Type 25 Comments G6 6 Unplanned Excitation Regulator faulty and excitation transformer high current G6 6 Unplanned Low water level at the dam G1 13 Unplanned Turbine guide bearing failure G2 6.8 Unplanned Oil circulation on main transformer G Unplanned Unit tripped on differential protection due to burnt stator winding G3 3.8 Unplanned Defect resolution on 5 brake jacks by Rehabilitation works G2 5.5 Unplanned Loss of auxiliary supply following fire accident G1 3 Unplanned Loss of auxiliary supply following fire accident G3 6.3 Unplanned Loss of auxiliary supply following fire accident G Unplanned Tripped following winding failure of main transformer G3 9.3 Unplanned Defect resolution on thrust pads G Unplanned Defect resolutions by Rehabilitation works Financial Year - Station Date Unit(s) Outage duration (Days) Kariba North Bank Outage Type Comments High combined bearing temperatures G3 3.7 Unplanned defect resolution by PRP G3 20 Unplanned High combined bearing temperatures

26 Victoria Falls defect resolution by PRP G3 3.7 Unplanned High combined bearing temperatures defect resolution by PRP G3 2.9 Unplanned Unit stopped due to excessive combined bearing oil leaks and vibration A unplanned Shut down to rectify heavy oil leakages from the oil cooler A unplanned Shut down to rectify heavy oil leakages from the oil cooler C Unplanned Shut down due to excessive shaft seal water leakage A Unplanned Shutdown due to lubrication oil leakage on the turbine pedestal and shaft seal water leakage A Unplanned Tripped on aqua watch dog. M/c stayed off bars due to exciter bearing failure A3 295 Unplanned Tripped on high generating bearing temperatures due to failure of the lubrication oil system after the oil cooler punctured A Unplanned Shut down due to turbine counter bearing which rose to C A Unplanned Taken out due to high Turbine thrust bearing temperature A Unplanned Shut down for repairs of the eroded sections of channel 60 to 75 of the A station 8MW spill way channel by the contractor Mundial works A Unplanned 220KV Muzuma line CB 105, 33KV 1TOA, A, B and C station machines tripped A Unplanned Shut down for repairs of the eroded sections of channel 60 to 75 of the A station 8MW spill way channel by the contractor Mundial works. The units stayed off bars for the rest of the month A3 744 Unplanned Shut down due to turbine counter bearing temperature which rose to C 26

27 A4 168 Unplanned Shut down for repairs of the eroded sections of channel 60 to 75 of the A station 8MW spill way channel by the contractor Mundial works C Unplanned 220KV Muzuma line CB 105, 33KV C Unplanned 1TOA, A, B and C station machines C Unplanned tripped. 1B earthing transformer C Unplanned earth fault operated after the yellow phase pole of 11KV C station outgoing CB 1TOB shattered. 1B earthing transformer initiated the tripping of 220KV Muzuma line CB 105 and 33KV CB 1TOA and consequently C station machines. The shattering up of 11KV CB 1TOB yellow phase pole suggested that it was the primary cause of the tripping on 1B transformer due to flashover from the shattered CB yellow phase pole A Unplanned The set tripped due to flooding caused by water leakages from the loose bolts on the radiator flange A Unplanned Tripped on spiral casing pressure not reached A Unplanned Shut down due to CB valve water leakages A Unplanned Tripped on low penstock pressure A Unplanned Shut down due to turbine counter bearing temperature which rose to C A Unplanned Shut down for repairs of the eroded sections of channel 60 to 75 of the A station 8MW spill way channel by the contractor Mundial works A Unplanned A station flood after opening of settling basin butterfly valve number 1 for A1 & A Unplanned Tripped on low cooling system bearing water flow B Unplanned Tripped on processor overload A Unplanned Shut down to remove the electronic loop isolator and servo motor position transducer to be used on 27

28 C8m/c governor A1 291 Unplanned Tripped when NAMPOWER synchronized back HVDC link with Vic Falls Power Station A Unplanned Shut down due to high turbine bearing temp (63.1 degrees) and lub oil temp (53.2degrees) A Unplanned Shut down due to high turbine bearing temp (63.1 degrees) and lub oil temp (53.2degrees). April Dec 2011 Station Date Unit(s) Outage duration (Days) Outage Type Comments Kafue Gorge Victoria Falls G6 5 Unplanned Rotor earth fault - Short circuit in the rotor windings A Unplanned Shutdown as a result of high lubrication (64.4degrees) and counter thrust bearing temperatures (65degrees) A Unplanned A1, A2, A3 and A4 machines were shutdown to facilitate repair works on the 8MW A-station spill way channel by CMD A Unplanned Tripped on reverse power due to untimely closure of butterfly valve # A Unplanned Tripped on electrical protection RTD. The unit was back on bars after replacing the thrust Pads B Unplanned Shut down to facilitate sealing of water leakage on the draft tube bend by MMD A Unplanned Tripped on cooling system bearing water flow failure A Unplanned Tripped on RTD (70.1degrees) A Unplanned Shut down due to high turbine bearing thrust pad temperature. The unit stayed off bars for the rest of the month for bearing works 28

29 A Unplanned A2m/c tripped on Thrust bearing metal very high temperature A2 388 Unplanned The unit tripped on Thrust bearing A Unplanned metal very high temperature A Unplanned A1 (dc current limiter), A3 (dc current limiter) and A4 (dc current limiter) tripped together with 220KV 105 CB at Muzuma towards Kafue town A Unplanned The unit tripped on general shut down A Unplanned A1 (dc current limiter), A4 (differential protection) and C10 (aqua watch dog) tripped together with 3.3KV CB 01JD ( B/B earth fault) and 220KV Muzuma line CB

30 6.6 SCHEDULE OF PLANNED OUTAGES FOR THE YEAR 2012/13 The planned outages scheduled for the year 2012/13 are shown in the table below Table 13: Planned Outages for the Year 2012/13 Station Date Unit(s) Outage duration Kafue Gorge Kariba North Victoria Falls Financial Year - 30 Outage Type Comments Jul-12 G3 344 Hrs Planned Annual Maintenance, Installation of new turbine controllers and commissioning Jul-12 G6 344 Hrs Planned Annual Maintenance, Installation of new turbine controllers and commissioning Aug- 12 G4 344 Hrs Planned Annual Maintenance, Installation of new turbine controllers and commissioning Aug- 12 Sep- 12 Sep- 12 May- 12 Jun- 12 Nov- 12 Mar- 13 G5 344 hrs Planned Annual Maintenance, Installation of new turbine controllers and commissioning G1 345 hrs Planned Annual Maintenance, Installation of new turbine controllers and commissioning G2 346 hrs Planned Annual Maintenance, Installation of new turbine controllers and commissioning G3 4 days Planned Quarterly maintenance and intake gate inspections G1 122 days Planned Replacement of main transformer /annual maintenance G3 14Days Planned Annual maintenance G2 14Days Planned Annual maintenance Sep- 12 A, B & C STN 56HRS/UNIT Sep- 12 B STN UNITS 168HRS/UNIT Oct- 12 C7&C8 336 HRS EACH Nov- 12 B6 336 HRS Oct- 12 A & C STN 14 DAYS(336HRS) Oct- 12 B Stn Units 375hrs/Unit Nov- 12 B Stn 336hrs Planned Planned Planned Planned Planned Planned Planned Intakes Log Boom Maintenance (Station to be shut down for 8hrs/day for one (1) week) GEN REDUCTION DUE TO ZAMBEZI RIVER LOW WATER LEVEL MIV overhaul to be done after desilting MIV overhaul to be done after desilting 48MW HP & 8MW settling basin (T1B tx, T1A TX, 33KV CB1TOB, 220KV CB 105, 20MVAR reactor & Protection annual maintenance works to fall within this period) and 220KV bus bar inspection Gen reduction due to Zambezi river low water level 60mw Fb Desilting (Protection Annual Maintenance Works To Fall Within This Period) Nov- B&C-Stn Units 120hrs/Unit Planned Gen reduction due to Zambezi river low water

31 12 Nov- 12 C Stn Units 240hrs/Unit Dec- 12 B Stn Units 336hrs/Units Jan- 12 C Stn Units 360 Hrs/Unit Planned Planned Planned level Gen reduction due to Zambezi river low water level Gen reduction due to Zambezi river low water level Gen reduction due to Zambezi river low water level 6.7 PROJECTION OF CAPACITY ADDITIONS AND RETIREMENTS There will be no increases in generating capacity coming from new generating plant until 2013 when Kariba North Bank Extension (KNBE) is expected to begin operating. t therefore does not affect the test year in terms of rate base, revenue, expenses, tax, income, or revenue requirement. No reduction in major generation capacity is anticipated for the test year and the four years following. 31

32 SCHEDULE D FINANCIAL STATEMENTS 7 AUDITED BALANCE SHEET FOR THE PERIOD ENDED 31 st MARCH 2011 DESCRIPTION ASSETS Non - Current Assets Property, Plant & Equipment Investment in Joint Ventures Loans due from related party Current Assets Inventories Trade and other receivables Amounts due from related parties Cash and cash equivalents Deferred tax asset Taxation recoverable TOTAL ASSETS EQUITY AND LIABILITIES Capital Reserves Share capital Shares Pending Allotment Revaluation reserve Retained profits Non - Current Liabilities Long term loans Obligations under finance lease Capital grants & contributions Deferred liabilities Current Liabilities Deferred taxation Short term loans Obligations under finance lease Trade & Other Payables Taxation payable TOTAL EQUITY & LIABILITIES K m 4,013,174 11, ,514 4,513, , , , , ,264 2,658 1,577,672 6,091, , ,203 1,474,484 2,485,310 1,055,058 10, , ,256 2,407,082 49, ,987 6,691 1,037, ,199,224 6,091,616 32

33 8 AUDITED OPERATING INCOME STATEMENT AS AT 31 st MARCH 2011 DESCRIPTION REVENUE COST OF SALES GROSS PROFIT Amortized Grants and Capital Contributions Interest Income Rental Income Other Income TOTAL OTHER INCOME TOTAL OPERATING INCOME OPERATING EXPENSES Depreciation Employee Remuneration Other Operating Expenses TOTAL OPERATING EXPENSES PROFIT/LOSS BEFORE INTEREST AND TAXES (EBIT) Exchange Gains/loss FINANCE COSTS Interest Payable on Bank Overdrafts Interest Payable on Borrowings ZMK Million 2,106, ,281 1,784,614 31, ,463 54,055 87,527 1,872, , , ,107 1,474, ,056 (89,657) (1,847) (11,698) PROFIT BEFORE TAXATION Taxation 294,854 38,061 PROFIT/ (LOSS) 332,915 9 CHANGES IN THE OPERATING OR FINANCIAL CONDITION OF UTILITY ZESCO Limited continues to run as a going concern and has had no major changes that would affect this position during the period between 31 st March 2011 and the time this application is being filed. 33