Seychelles Electricity, Water & Sewage Tariff Study

Transcription

1 Seychelles Electricity, Water & Sewage Tariff Study July 2012 Study Draft Results Victoria, July 27-31, 2012

2 Table of Content 1. Institutional & Regulatory Framework 2. Tariff System 1. Objectives and Instruments 2. Regime 3. Level 4. Structure 5. Indexation & Adjustment mechanism 3. Conclusions and Recommendations

3 1.Institutional & Regulatory Framework RECAP of main findings (intermediary report) New Energy Bill (last A.G. project) Global architecture of the Law not clear Information clauses / dispute resolution should be improved Tariff determination methodology not appropriate (cash flow needs approach; no remuneration of capital) Regulation SEC powers restricted to energy sector: only part of PUC business regulated?

4 1.Institutional & Regulatory Framework SEC Strengths : powers quite large Weaknesses: funding; commissioners dismissal; (public) employees policy; maybe too many responsibilities (strategy; implementation; monitoring; etc.) SEC in infancy stage: need to define its organization model according to the size of the country and sector and in terms of required in house expertise, tools, methodologies, regulatory procedures and processes

5 2.Tariff System Regulatory Objectives Regulatory Instruments Tariff regime Tariff level Tariff Structure

6 2.Tariff System - Objectives 4 substantial objectives Sustainability Allocative Efficiency Productive Efficiency Equity

7 2.Tariff System - Objectives SUSTAINABILITY Revenues generated by the regulated company should cover economic costs of providing the service: O&M Depreciation Taxes Return on investment

8 2.Tariff System - Objectives SUSTAINABILITY Economic Tariffs should give the service provider the opportunity to cover economic costs, including a fair and reasonable return on investment. Financial Tariffs should produce enough cash flow to allow the normal development of the service in each period of time

9 2.Tariff System - Objectives ALLOCATIVE EFFICIENCY Efficient allocation of resources requires prices to reflect marginal costs of production For users to choose an efficient level of consumption For firms to choose an efficient level of investment

10 2.Tariff System - Objectives PRODUCTIVE EFFICIENCY A firm is productively efficient if it minimizes the cost of producing a certain amount or maximizes the output for a given level of inputs. Creating incentives for productive efficiency is one of the key challenges of regulation

11 2.Tariff System - Objectives EQUITY/FAIRNESS Basic dimensions Access Universal Service Obligations Affordability Tariffs which are in line with ability to pay of poor customers Problems Which customers and services should be subsidised? How do we pay for the subsidies?

12 2.Tariff System - Objectives TRADE-OFFS BETWEEN OBJECTIVES Allocative Efficiency vs. Sustainability Under a natural monopoly, marginal costs are lower than average costs Allocative Efficiency vs. Productive Efficiency The leveling of tariffs and costs can reduce incentives to minimize costs Sustainability vs. Fairness Social tariffs or subsidies to certain services can challenge service sustainability

13 2.Tariff System - Objectives OBJECTIVES & INSTRUMENTS Objectives Sustainability Allocative efficiency Fairness Productive Efficiency Instruments Tariff Level Tariff Structure Tariff Regime

14 2.Tariff System - Objectives FORMAL OBJECTIVES Simplicity, public acceptance, noncontroversiality, price stability It should be taken into account while designing the tariff structure and the tariff revision/indexation/adjustment mechanisms and processes

15 2.Tariff System - Regime Set of rules by which tariffs are adjusted and modified over time Regimes Cost of Service (also know as Rate of Return) Price Cap Hybrid Determines the incentives the regulated firm has to increase productive efficiency

16 2.Tariff System - Regime We recommend the adoption of an hybrid regime: Price cap for controllable costs Set for a specific period (5 years) then revised at the end of the period on the basis of: Allowed return (cost of capital) OPEX CAPEX Pass through for non controllable costs Within the period, non controllable costs will be adjusted every year except for exceptional events impacting substantially the tariff equilibrium previously computed): mechanism detailed further

17 2.Tariff System Level Tariff METHOD Average tariff level should generate enough revenues to cover: All efficient operational costs i.e. fuel, materials, personnel Investment in expansion, replacement and maintenance of the facilities Taxes on operational profit does not apply to PUC for the moment Remuneration of capital invested (RRA t) = OPEX t + D t + T t + (r*k t)

18 2.Tariff System Level Tariff METHOD This accounting approach can be converted into the classic discounted cash flows or economic approach: Both are equivalent from an economic perspective (yielding same net present value of revenues) Cash-Flow equilibrium formula: 0 RR O & ( M T N K i n 1 1 n r ) 1 I K r N f N

19 2.Tariff System Tariff Level TOOL In order to compute the equilibrium, we have developed an economic-financial modeling tool Inputs Instruments Database Parameters Economic Forecasts Cash Flow estimation Financial Closure Income Statement Balance Sheet Secondary Spreadsheets Indicators Economic Financial Operating Economic Closure NO NPV = 0 (IRR = CoC) YES Revenue = Required Revenue

20 2.Tariff System Tariff Level MAIN HYPOTHESIS Modeling period: Cost of capital Discount rate : 7.1% (real) = est. of fair and reasonable rate of return Base year December 2011 Tariff Grid Values in Rupees of December 2011 Fuel Cost 2.93 Rupees/kWh

21 2.Tariff System Tariff Level MAIN HYPOTHESIS Main components of equilibrium formula : Revenues : f(physical demand forecast, losses; price) Asset base: initial (question of valuation; how it was financed) CAPEX: exogenous (should be least cost option) OPEX: efficient costs: f(different drivers such as: physical demand, assets, # customers, etc.)

22 2.Tariff System Tariff Level MAIN HYPOTHESIS Demand forecast Energy (kwh) Domestic demand Demand growth rate * 5% 3% 2%

23 2.Tariff System Tariff Level MAIN HYPOTHESIS Demand forecast Water Demand Demand growth rate Domestic 1.5% 1.1% Commercial 5% 3% Government - - Total 1 2.5% - 2.6% 1.7% - 1.8% Sewerage Demand growth rate Domestic 24.5% 4.5% 2.9% 1.9% Commercial 2% Government 0.2% Total % 3% 2.2% 1.7% - 1.8%

24 2.Tariff System Tariff Level MAIN HYPOTHESIS Initial Asset base = 0 as historical assets have been financed by Government subsidies => not to be taken into account into the tariff determination calculations In the future, regulatory issue to address : valuation of assets (historical vs. economic value) to be taken into account in tariff determination

25 2.Tariff System Tariff Level MAIN HYPOTHESIS CAPEX over period Electricity Water Sewerage Administration Total Investments (SR) Total 4,575,744,025 2,193,236, ,181,876 35,000,000 7,502,162,098 61% 29% 9% 0%

26 2.Tariff System Tariff Level MAIN HYPOTHESIS OPEX+DEPRECIATION: different drivers used still, main factor to take into account is fuel cost projection as shown in table: relative importance of Costs in total required revenue (actualized value) over the whole calculation period ( ) Activity Weight COST SHARE IN TOTAL RR PUC CONS (100%) ELEC (87.3%) (*) 18.8% materials/maintenance costs for water WATER (10.6%) SEWERAGE (2.0%) Energy 74.4% 83.1% 18.7% 19.9% Asset Depreciation 12.7% 9.2% 30.8% 49.8% Personnel 3.5% 2.1% 12.8% 10.5% Others 9.5% 5.5% 37.8%* 19.9%

27 2.Tariff System Results : Required Revenue Required Increase of PUC Required Revenue (RR) REVENUES PUC Average RR Increase 28.5% This does NOT include the impact of the 2012 tariff increase: this increase should then be deduced from the figures here above. Still as we will see, the main problem is a tariff structure one: existing structure should not be maintained

28 Tariff System Results: Tariff Adjustments Required Increase of PUC Tariffs per sector ELEC WATER SEWERAGE Average Tariff Adjustment 21.7% 69.4% 159.8% This does NOT include the impact of the 2012 tariff increase: this increase should then be deduced from the figures here above. These are average figures for each sector. There is also a need of rebalancing between user categories

29 2.Tariff System Tariff Structure PRINCIPLES Tariff Structure designed to accomplish two objectives Equity: affordability for poor customers Allocative efficiency: tariffs reflecting costs Main Considerations: No variable charge should be below the short run marginal cost (fuel cost) Guidelines: In the long run the tariff structure should: Reflect relative costs of service Limit subsidies to low income residential consumers Finance subsidy within residential category

30 2.Tariff System Tariff Structure ELECTRICITY 2011 Variable Charge 2012 Tariff Min Max Cost Fuel Other Dom < 2.4 kva Dom > 2.4 kva Com< 4.8 kva Com >4.8 kva Bulk BBC EOI Government Indian Tuna NPO PUC Street Lighting Total

31 2. Tariff System Tariff Structure Impact on Electricity Bills Impact on bills (considering average consumption per user category) varies widely: Domestic Commercial >4.8kVA Bulk kwh KVA Tariff Costs Difference 209% 25% -27%

32 2. Tariff System Tariff Structure Impact Social Tariff Cost kwh 90 Actual invoice Minimum Wage 4224 % 6.2% 2.8%

33 2. Tariff System Tariff Structure Domestic Tariff ELEC SR/KVA SR/kWh KVA < > <9.6 > kwh KVA <2.4 >

34 2. Tariff System Tariff Structure Commercial Tariff ELEC SR/KVA SR/kWh kwh < 200 > kwh KVA <4.8 >

35 2.Tariff System Tariff Structure Proposal / WATER Water (SR /m3) Sewerage (SR/m3) Actual 2012 Cost Actual 2012 Cost Commercial Domestic Government Indian Tuna Stepped Tariff Untreated Metered Borehole

36 2. Tariff System Tariff Structure Impact on Water Bills Impact on bills (considering average consumption per user category) varies widely: Domestic Commercial m Tariff Costs Difference 91% 67%

37 2. Tariff System Tariff Structure Impact Social Tariff Cost m3 7 Actual invoice Minimum Wage 4224 % 3.1% 1.2%

38 2.Tariff System Tariff Structure Proposal / Domestic tariff WATER Fix Charges SR Free Consumption m3 SR/m M

39 2.Tariff System Tariff Structure Proposal / Commercial tariff WATER Fix Charges SR Free Consumption m3 SR/m M

40 2. Tariff system - Indexation & Cost Adjustment Once the equilibrium tariff is set up, it has to be preserved dynamically (on an annual or bi-annual basis) over the review period - using in practice an indexation and adjustment mechanism The basis of the mechanism is the differentiation between the controllable costs and the non-controllable costs Controllable costs have to indexed: following the formal objective of simplicity, we recommend the use of a CPI/RPI index Non controllable costs (mainly fuel costs) have to be adjusted : in function of the fluctuations of fuel int l prices

41 2. Tariff system - Indexation & Cost Adjustment Each year t for example in March total controllable costs and non controllable cost for the year are estimated: Controllable costs will be the ones resulting from the modeling and to which RPI/CPI index (index value at end of year t-1) will be applied Non-controllable costs for the year will be forecasted on the basis of expected fuel consumption for the year and expected price (Platts estimate or suppliers price) Forecasted Controllable and Non-Controllable costs are then added = Forecasted Required Revenue (RR) for year t

42 2. Tariff system - Indexation & Cost Adjustment This new Required Revenue (RR) for year t will then be compared to the one calculated in the model The ratio between them will give the amount of the tariff increase required in year t to maintain the tariff equilibrium reached in the model At end of year t, real fuel costs of year t are calculated and the difference between the latter and the one forecasted is computed (included) for the next calculations of tariff adjustment as a correction factor (recuperation of difference)

43 3. Conclusions PUC is NOT in economic equilibrium Even considering a null asset base, current tariffs do not cover total costs Main imbalance is in terms of relative tariffs across sectors across user categories Need for a transition period to rebalance tariffs between domestic and non domestic users Once equilibrium is attained there is a need for periodic and automatic adjustments Indexation of controllable costs Pass through of non controllable costs