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~ EtECTR!CIT'I Rf:Gl 'l.ATOR'i
30 October 2015
Chief Executive Officer
Electricity Regulatory Authority ~ \ \ t 'T\ \OiUT\
Plot 15, Shimoni Road, Nakasero
Kampala i.... OOC1 201~
Uganda
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"T''"' ~ srraY
RECEIVED DY it"·~-1- -
Dear Dr. Mutambi:
L--------·
RE: ANNUAL TARIFF REVIEW FOR 2016
Pursuant to the provisions of section 3.3.2 of the License for Supply of Electricity, Umeme hereby
submits its tariff review appl ication for the year 2016 which includes details of its Revenue
Requirement, Distribution Energy Price (Appendix) and schedu le of charges outside of the energy
tariff to recover its costs.
The above information is intended to support the Tariff review, determination and approval by the
Electricity Regulatory Authority (ERA) as mandated by the Electricity Act, 1999.
1 Summary
Umeme has computed it's Revenue Requirement for its 2016 operations amounting to shs
741 ,355 million as shown in the table below;
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www.umeme .co.ug
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2 Introduction
Section 3.3.2 of the Supply Licence requires Umeme to submit to the Authority, its tariff
computation prior to the tariff period to enable the Authority review and approve the applicable
tariff rates.
2.1.1 Methodology
In com puting the Revenue Requirement and Distribution Energy Price, Umeme has referred
to the methodology outlined in Annex A- Tariff Methodology within its Supply License, the
prevailing macroeconomic variables as required by the Automatic Tariff Adjustment
Methodology of 2014 and also taken into consideration the performance targets agreed with
the Authority for the seven year period 2012 to 2018. The resulting Distribution Energy Price
per customer category is included in the Appendix 1.
Tariff Year
Symbol Units
2012 2013 2014 2015 2016 2017 2018
Net Operating Costs DOMC USD x 106 42.5 44.1 44.6 46.2 47.7 49.3 51.1
Distribution Efficiency DEF % 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Target Uncollected
TUCF % 2.90% 2.70% 2.50% 2.30% 2.10% 1.80% 1.50%
Debt Factors
High Voltages
Technical Loss HVTLF % 8.00% 8.00% 7.50% 7.50% 6.00% 5.70% 5.20%
Factor
Overall Distribution
Loss Factor LF % 25. 50% 23. 00% 20. 00% 18.30% 16.90% 15.70% 14.70%
For purposes of the computing the Distribution Energy Price for 2016, the targets have been
adjusted for the periods 3 months in 2015 and 9 months in 2016 and the resultant applicable
tariff inputs are shown in the table below;
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Tariff Parameter Agreed Target Adjusted Tariff Input
2015 2016 2016
Overall Distribution 18.30% 16.90% 17.10%
Losses
Uncollected debt 2.30% 2.10% 2.10%
factor
DOMC (USD' Million) 46.2 47.7 47.5
The Tariff Methodology requires that for purposes of adjusting the revenue requirement for
movements in macroeconomic variables, the reference date will be the last date of the month
before the commencement of a quarter. For purposes of determination of the Q 1 2016 base
tariff the reference date would be 30 November 2015. Given that such a date has not been
reached, the tariff application for 2016 will consider the reference date to be 30 September
2015 as the full set of available indices as provided by the Bank of Uganda and the United
States Bureau of Labor Statistics as shown in the table below;
From the above analysis, Umeme has applied a split of 46% DOMC in foreign currency and 54% in
local currency to reflect the actual changes in the expenditure pattern.
The breakdown of other revenues for the period 1 October 2014 to 30 September 2015 is
shown below;
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Table 5c: Other Revenues
In the 2015 tariff determination, other revenues netted off the OOMC was shs 5,557 million, however
the out turn is shs 4,425 million. Therefore, Umeme has taken into consideration the difference of shs
1,132 as an under recovery and applied it as a recoverable amount in the computation of 201 6
revenue requirement.
It is expected that the more than the full allocation will be utilized in the remaining term of the
year 2015.
Included in the 2016 investment plan submitted to the Authority is an amount of USO 17.5
million in relation to non-network assets required to improve business operational efficiency.
However, for the purposes of computing the Revenue Requirement, a provisional amount of
USO 5.0 million has been included to cater for priority areas and a detailed analysis will be
provided due course.
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Table 7: Computation of Investment Related Costs
There are investments completed pre- 2012 and 2012-2013 period for which the Authority has
unrecognized as legitimate additions to the company's rate base. The company's asset base
from which investment costs have been derived is shown in the table below;
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Table 9: Schedule of 2015 Investments
ERA Category Project Category ERA Budget Projected Comments
Approved 2015
2015 Completion
Western Uganda -New Feeders 2.000 2.000 2.00 To close end of Nov 2015
(Bushenyi, Mityana, Kabale &
Kisoro)
Kawanda (UETCL) - Bom bo 0.500 0.50 To be completed 04 201 5
Industrial Park (China Gold
Phase II)
New Connections(92,000) 10.304 10.000 12.00 To close more than 100% by
year end
Others 2014 B/F
Sub Total 40.26 42.04 25.74
LOSS Mukono -Seeta Zone 1 1.720 1.72 to close end of Oct 201 5
REDUCTION
Mukono -Seeta Zone 2 2.090 2.09 to close end of Oct 201 5
Mukono -Seeta Zone 3 1.200 1.20 to close end of Oct 2015
Mukono -Seeta Zone 4 0.880 0.88 to close end of Oct 2015
Entebbe- Airport feeder 0.100 0.10
Mbarara- Ntungamo 0.900 0.73
ABC Lugogo-Kibu li 11 kV 1.835 1.835 0.46 At procurement phase
Feeder
MV Technical Loss Reduction 0.553 1.990 0.15 At procurement phase
(Gaba-Kansanga, & Kireka -
Kvambo,io)
CESI 0.288 0.400 0.43 To close end of Dec 2015.
CLR
AMR 0.000 8.000 6.80
Page 7 of 22
ERA Category Project Category ERA Budget Projected Comments
Approved 2015
2015 Completion
Page 8 of 22
ERA Category Project Category ERA Budget Projected Comments
Approved 2015
2015 Completion
Furthermore, it should be noted that these assets exist on the network and benefits have
accrued to the consumers. And therefore , Umeme requests that these investments are
rightfully included in the company's asset base for purposes of computing the return on
investment and that the associated loss of revenues for the periods is recognized .
(USD million)
Closing Work in 3.38 Amount relates to an error in the 2010 tariff review,
Progress relating to closing work in progress. This was corrected ,
and approved in the 01 2011 tariff review (refer to
ERA 's letter dated 21 December 2010) . However, the
same amount was erroneously removed in the 04 2011
tariff review.
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Item Value Issue
(USO million)
Umeme 2011 1.90 The amount relates to the investments not yet
Investments recognized for ROI in the year 2011 , but which Umeme
provided adequate clarification and documentation to
the Authority. The details of the investments are
illustrated in the section below.
TOTAL 8.78
Umeme submitted documentation to support the balance of USO 15.4 million via the letter
dated 19 March 2015 Ref: ERA/2015.3/61. It took the Authority 2 months to review the
submission and only responded via letter dated 10 June 2015 Ref: FIN/9/11/2, in which the
recognized investment was reduced to USO 59.5 million only. The amount disallowed is USO
27 million. This action came at a time when the foreign exchange rate had escalated from shs
2,780 allowed in 01 2015 to a potential 3,054 for 03 2015 determination.
The amount of USO 27 million disallowed represents 30% of the initial investment of USO
85.6 million made in 2012 and 2013 period.
The above issues notwithstanding, Umeme responded and provided additional information to
support its investments via letter dated 24 July 2015 Ref: ERA/2015. 7/152 to which the
Authority has not provided feedback and response.
Umeme reiterates that the above behavior is inconsistent with the fact that the investments
have been completed and benefits have accrued to the respective customers and that this
undermines the company's investment program and ability to raise internally generated funds
to improve the reliability and meet the growth requirements of the distribution network.
Umeme therefore requests the Authority to review the above investments and include them in
the company's rate base.
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Table 11 b: Disallowed Investments for 2012 and 2013
Page 11 of 22
3.3 Lease Payments
Umeme's Lease and Assignment Agreement specified pass through payment as prescribed in
the payment schedules to meet UEDCL's rent and administration costs as well as replenish the
Escrow Account. The sum prescribed amounts to USD 16.307 million for the year 2016, to be
recovered through the tariff.
However, at the commencement of 2012 period, the Authority has allowed amounts less than
the prescribed contractual obligation (USO 3.7 million for 2012, USO 1.2 million for 2013, USO
2.2 million for 2014 and USO 1.9 million for 2015)
For the purposes of this tariff application, Umeme has applied the full contractual amount of
USO 16.307 million as prescribed by the Lease and Assignment Agreement
Umeme restates its preposition to draw the Authority's attention to a letter from the Ministry of
Finance and Economic Development, in connection with the above matter, which gave
confirmation that conversion of Government debt did not eliminate Umeme's contractual
obligation to make lease payments to UEDCL and urgently requested the Authority to address
the matter.
3.4 Reconciliations
For avoidance of doubt and confirm the company's interpretation of the same, the Tariff
Methodology in the Supply Licence signed between Umeme and ERA, defines the reconciliation
amount (Rq) as;
"The cumulative amount required to reconcile power supply costs and related revenues equal to; (a)
power supply costs incurred by the Licensee from UETC or any other suppliers and self-generation
(including related wheeling charges) less {b} the revenues billed to retail customers by applying the
Power Supply Price to retail kWh sales as such amounts recorded in the Licensee's accounts over the
period commencing on the Transfer Date and ending on the last day of the month for which actual
data is available to any quarter q".
The intention of the above reconciling amount is to ensure that Umeme's commercial obligation to
UETCL is not jeopardized and that the revenues billed for purposes of power purchase are
adequate irrespective of increase in actual purchases over and above the target purchases,
undesirable energy loss performance or distorted load factors against target parameters used in
setting the retail tariff and Bulk Supply Tariff rates.
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Where;
BST is the bulk supply tariff used on UETCL invoice, unadjusted for energy losses and collection
target
For purposes of this tariff application, the amount has not been included in the Revenue
Requirement however Umeme requests that the Authority concludes its review exercise to make
a decision on the quantum of the same and agree a framework for future treatment and
determination of the reconciliation .
In the month of January 2015, the new rates were implemented on 16 January 2015 and
therefore Umeme charged the first 15 days of January 2015 at the lower tariff regime of Q4
2014. The company is computing the amount of revenue shortage due to this event and will
provide detailed schedule for consideration by the Authority.
During the 2015 base tariff determination, the Authority maintained the demand charges as
approved in 2012 as shs 16,644 per kVA per month for medium industrials, shs 11 ,096 per kVA
per month up to 2000 kW and shs 5,548 per kVA per month for large industrials. It should be
noted that the above rates have remained the same irrespective of escalation in macroeconomic
variables that may affect the same.
That fact notwithstanding, Umeme has applied the same rates as approved by the Authority to
compute the distribution energy price based on the kVA units sold.
For the period 1 October 2014 to 30 September 2015, Umeme's sold 1,922,689 kVA units for
medium industrial and 3, 753, 115 kVA units for large industrials.
TOU/ non TOU Domestic Commercial Medium Large Street Light Total
Prepaid 202,677,840 12,831 ,326 215,509, 165
Post paid -
Non-TOU 364 ,800,391 59,757,995 1,287,311 - 1,788,058 427,633,755
-
Peak 58 ,241 , 179 96,293,094 271 ,734,008 426,268,281
Shoulder 129,049,206 234,057,814 601 ,520,620 964 ,627,640
Off peak 45,285,269 70,634,948 273,382,839 389,303,056
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5 Impact of Reactive Power Tariff
The Authority approved a reactive energy charge of shs 40 per kVArh per month and reactive
energy reward of shs 20 per kVArh per month to incentivize efficient energy utilization and
reactive power compensation for medium and large industrial consumers .
Table 15: Summary reactive energy rewards and penalty per month
Umeme is in the process of concluding in the study to review the adequacy of the rates and
presumed impact on customer behavior after which the company will provide findings and
recommendations to the Authority. However for purposes computing the Revenue
Requirement, Umeme has considered the net reward of shs 356 million.
6 Customer Numbers
Umeme has connected over 107,000 customers between the January 2015 and 30 September
2015, compared to 77,000 customers connected in the 2014 period. The company projects that it
will connect an additional 39,000 customers between October and December 2015, going by an
average monthly addition of 13,000 customers. For purposes of computing the distribution
energy price, the actual customer number as at September 2015 and the projected number of
customers as at 31 December 2015 are shown in the table below;
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Customer Category Actual 30 Average Forecast 31
Sep 2015 Monthly Dec 2015
Connections
Large Industrial 492 1 495
Street lighting 324 (2) 317
Totals 770,676 13,416 810,923
That fact notwithstanding, Umeme has applied the monthly fee rates approved by the Authority
in the 2015 base tariffs to compute standing service fee revenues.
Pursuant to Section 3.2 of the Distribution Supply License, in May 2008, Umeme Ltd engaged a
firm "Power Planning Associates Ltd" (PPA), to carry out a cost of services study. The study
was to develop a methodology to calculate charges not included in the Retail Tariff which would
form the basis for review of the Service Cost Charges. The charges include; inspection fee,
connection cost, disconnection/ reconnection, penalty charges , transformer and meter testing
fees .
The PPA report was thoroughly discussed at our various joint meetings between the Electricity
Regulatory Authority (ERA) technical team, Power Planning Associates and UMEME.
Umeme made a formal application to the Authority, on 13 August 2008, to review the service
cost charges not provided in the retail tariff. However, on ly reconnection charges were revised
in the 2012 tariff review.
As indicated in the letter Ref: ECR/25/1 dated 20 February 2015, the Authority stated that it is
undertaking a study to harmonize the methodology for all charges in force for all licensees
including the cost of service for; one-pole connection, two-pole connection , inspection for
connection as well the different fines and financial penalties in force by licensees. The results
of this study have not yet been shared with the company.
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7.2 Penalty Charges for Power Theft
The Authority approved new penalty charges for power theft during the 2015 tariff determination
to prohibit power theft by customers and reduce commercial energy losses as follows;
• Shs 350,000 plus estimated unbilled consumption for domestic and commercial single phase
customers
• Shs 700,000 plus estimated unbilled consumption for commercial three phase customers
• Shs 1,400,000 plus estimated unbilled consumption for three phase medium and large
industrial customers
A review and analysis of the impact of the new penalty rates will be provided to the Authority in
due course.
8.2 Investments
As covered under section 3.2 of this letter, Umeme has projected to add investments worth
USO 74.61 million onto the distribution network in 2015. Umeme request the Authority to review
the disallowed investments as highlighted in section 3.2.3 and 3.2.4 of this application.
Page 17 of 22
through a reduction the end user tariff and Umeme's performance against the targets has
provided the electricity sector with efficiencies.
Similar to the energy losses and collection rates, growth in customer numbers provides a buffer
and purchases base to absorb sector revenues and thereby in effect reducing the resultant end
user tariffs irrespective of the fact that the incentive mechanism envisaged at the onset of the
concession period has been unilaterally revoked by the Authority and in effect removed growth
factor revenues from the company's revenue basket.
The Authority approved separate connection charges with respect to new connections made
by company under the OBA scheme as per letter dated 10 March 2015 Ref: ECR/38/39/1 of
shs 411 ,500 for split- pole with communication cable no pole new connections . However, it
should be noted that these costs are sufficient to recover only the cost of material and not the
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component of labor and transport. Umeme requests the Authority to review and approve costs
that cater recovery of the labor and transport component of new connection.
As at end of September 2015, over 50,000 connections had been effected under the OBA
Program against a target of 30,000. The target for 2016 is 30,000 connections and Umeme is
required to pre-finance these (as provided in the grant agreement) .
The above customer numbers are still low to meet the universal access and Umeme is
exploring initiatives to scale up the connection rate in the year 2016 and these are covered in
the section 9.2 below.
9.1 Investments
Umeme is aware of the expected growth in generation capacity and has in fact taken part in
discussions and agreements with the private investors undertaking the construction of both
Karuma (600 MW) and lsimba (180 MW) Hydro power dams expected to be commissioned in
2019-2020. Umeme is also aware of the expected growth in other renewable energy sources
upstream. These developments will more than double the current available capacity.
Similarly, Umeme is also cognizant of the national aspirations to grow electricity access from
15% in 2014 to universal access by 2040 in line with the millennial goals.
From the above developments, Umeme is committed to enhancing the distribution end of the
sector in preparation for expected growth, improve supply reliability and to meet a steep
reduction in the energy loss targets.
Umeme has independently carried out preliminary assessments (Asset Master Plan 2016-
2025) of the required investment focusing on the following key areas;
• Growth
• Reliability
• Asset replacement
The master plan has been shared with the technical team at ERA, UEDCL and the Ministry and
the discussions are in progress to review and approval by the respective stakeholders in
preparation of the implementation phase.
Pursuant to the Distribution Licence and the Investment Verification Guidelines, Umeme
submitted the 2016 investment plan to ERA via letter Ref: ERA/ 2015.10/ 210.
In addition, the company will conclude the Phase 2 of the Distribution Loss Study to
disaggregate energy losses by customer category and time of use.
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9.2 Growing Customer Numbers
With the hindsight of the sector growth and national aspirations, Umeme will seek to ramp up
the number of customers connected to the grid to over 200,000 per annum , including both last
mile and existing networks compared to the 90,000 assumed in the tariff review for the period
2012 to 2018. In order to exponentially grow these numbers, a large number of uneconomic
connections will need to be made. Putting the financing costs of these connections as part of
Umeme's revenue requirement will lead to an increase in end user tariffs. Umeme is currently in
discussions with both the World Bank and KfW, and the Ministry of Finance (Uganda),
regarding access to sources of concessionary financing for investment in the customer access
project which include among others;
• World Bank - OBA Programme, ERT 2 and ERT 3 Programme, Kawanda - Masaka 220
kV Transmission Line Corridor
The successful implementation of the above initiatives as indicated in the respective business
plans requires pre-financing and or co-financing mechanism which implies that Umeme will be
tasked to raise sufficient funds to meet the above expectations. Among the sources of internally
generated funds under consideration is the utilization of growth factor revenues which the
Authority has reconciled out of the company's revenue requirement.
The growth factor reconciliation is intended to retain any 'windfall' revenues arising from the purchase
and sale of excess energy above the target used in the determination of the energy tariff.
Umeme states that the windfall revenue includes a component of operating costs incurred by
company, the cost of energy losses, cost of collections and marginal profit.
Therefore, it's considered prudent that the Authority claws back only the portion of this 'windfall'
revenue that relates to marginal profit.
In addition, among the proposals to be presented to the Authority is the reinstatement of the profit
elements of the growth factor revenues to enable the company generate sufficient funds to participate
in the above initiatives together with establishment of annual customer numbers targets to incentivize
the access project.
The above discussions are in progress and expected to be concluded prior to the next period review
of 2019-2025.
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cover the base energy charge, adjustments and service fees . It is presumed that such rate will be
understandable and predictable by customers and reduce on complaints. The implementation of such
flat rate tariff is not expected to materially distort recovery the company's revenue requirement.
11 Conclusion
The Umeme 2016 tariff review application which has been prepared and submitted in accordance
with the provisions of our license, contains market sensitive information and in addition the tariff
review process will involve detailed discussions between the ERA, Umeme and other stakeholders
regarding the same at an appropriate time.
Umeme therefore expressly requests that the Authority takes all necessary and strict
precautions to safeguard the confidentiality of all information contained herein to enable
objective discussion and most importantly protect Umeme's business interests.
Yours sincerely,
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APPENDIX 1- ANNUAL TARIFF REVIEW
Pursuant to section 2.4.5 of the Licence Conditions for the Supply Licence, Umeme would request
that the Authority treats sections below as being private and confidential and therefore not considered
to be public information.
As such Umeme would request that the information provided in the sections below be held by the
Authority on a strictly confidential basis and not disclosed to any third party. Any breach by the
Authority of this condition in the Licence will result in irreparable commercial harm to Umeme, not
justified by any public disclosure purpose.
Umeme hereby applies for Distribution price component adjusted for debt for each customer
category and time of use as shown below:
TARIFF PRICES Domestic Commercial Small Large TX Large Street Weighted
Industrial Industrial Industrial Lighting Average
Umeme is unable to provide for the actual end user tariffs that take into account the full bulk
supply costs since it includes projected upstream costs whose applicable information for
determination of the same is not within the company's domain. Umeme recognizes that the retail
tariff is a summation of both distribution price and the power supply price and consequently, the
end user tariffs will be determined the Authority after taking into account the power purchase
costs for 2016.
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