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From Mfuwe with Love – A story of ZESCO tariffs

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Christopher Yaluma

Christopher Yaluma

The events at ZESCO have been moving fast. Too fast, writes Zambian Eye Special Correspondent.

Just as the nation was, after the initial euphoria, trying to interrogate ZESCO management on the full implications of ZESCO’s voluntary decision to freeze domestic electricity tariffs for the next two years, Energy Minister Christopher Yaluma, dissolved the Board of Directors of ZESCO.

Not that a Board which counted a disc jockey among its members inspired much confidence. But before the ink on his letter dissolving the ZESCO Board was even dry, the Minister treated the nation to yet another seismic jolt by firing the ZESCO MD Mr Cyprian Chitundu.

Chitundu

Chitundu

And then today Yaluma tells us that, in fact, Mr Cyprian Chitundu has not been fired but simply redeployed to the Ministry of Energy at the same salary (like being paid more for less work really). Minister Yaluma must be a Hollywood junkie – otherwise why is he treating us to all this roller coaster suspense? Should he carry on in the same fashion when it comes to TAZAMA, INDENI, and the Rural Electrification Authority all which fall under his portfolio, he could be in line for an Oscar.

Let us get back to ZESCO’s decision to freeze electricity tariffs for domestic customers for the next two years, shall we.
The classical caveat ‘beware of Greeks bearing gifts’ instinctively insinuates itself into the narrative . How can a company which has always demanded increases in tariffs suddenly turn around and tell us that, it doesn’t need all that money after all? Could it be that ZESCO has been overly compensated in tariffs by the ERB over the years? Or is ZESCO being sacrificed to fulfill some election promises given those outlandish campaign promises by our politicians , some of whom had promised to reduce electricity tariffs ? And did this proposal really come from ZESCO or was ZESCO merely made to present the ‘proposal’? We may never know unless Mr Chitundu decides to write his memoirs.

A lot of Zambians will recall how ZESCO has , with unfailing regularity, demanded increases in tariffs , citing the need for cost-reflective tariffs, blaming the poor exchange rate, inflation, the need to finance new generating capacity , cost of dollar denominated loans, on-going projects, escalating costs of spares etc, etc to justify its demands for increases in electricity tariffs . It is unlikely that all these factors will remain constant in the next 24 months just because ZESCO has decided not to increase tariffs.

The argument that domestic customers have been paying higher tariffs than mining companies has been cited by stakeholders in numerous objections to ZESCO tariff increases – only to be dismissed by ZESCO’s refrain that (kilowatt for kilowatt) it costs more to supply a domestic customer than it does to supply a mining customer. It would seem, therefore, that ZESCO’s decision to freeze tariffs for the next 24 months is motivated by factors other than ZESCO’s newly discovered compassion for the long-suffering Zambian electricity customers.

While it is acknowledged that ZESCO has issues with the tariffs paid by mining companies who consume about 50% of the electricity, ZESCO’s decision to forego any possible income from its other customers for the next 24 months is baffling and does not make commercial sense. And suppose the mining companies refuse to pay increased tariffs over the next two years ( which is a possibility considering the agreements some of the mines have with ZESCO), where will ZESCO find the money to meet its operating costs having closed the door on domestic tariffs which constitute the other 50% of its revenue source ? Now if that is not sloppy, tell me what is. As the saying goes, a bird in hand is worthy two in the bush. Asked as to what would be the impact of this decision on cash flows, ZESCO’s management gave very vague and non – numbered based answers. Clearly ZESCO Management seem to have been just as surprised as everyone else. Was this a one man decision or what?

Now, don’t get me wrong- I am not advocating for increases in electricity tariffs – all I am trying to say is that there is a real danger which could result from reckless and short -sighted management decisions . As South Africa is learning the hard –way, the decisions to defer maintenance of the Eskom network so as to keep the lights on at all costs especially and during the Soccer World Cup is partly responsible for the acute electricity crisis gripping South Africa today.

While a majority of our society are undoubtedly celebrating the decision to freeze domestic tariffs for the next 24 months , very few have bothered to inquire as to what has informed that decision, and the full implications of that decision on the future of this country’s electricity industry and the economy. The matter of electricity tariffs , domestic or otherwise , in this country is too serious to be determined at a briefing by the MD of ZESCO to a President (who at the time was only about 14 days in office) in the exclusive presidential retreat of Mfuwe.

ZESCO should have allowed President Lungu the benefit of hearing from other stakeholders on the matter before shepherding him into approving ZESCO’s proposals. At any rate, and as one energy consultant has already observed, the matter of whether or not ZESCO tariffs should be increased is by law supposed to be dealt with by the ERB. ZESCO might therefore have misled the President into making a pronouncement on a matter which is reserved for a statutory body. Or was the ensuing credit for this decision too tempting for our new PF administration?

We are all familiar with ZESCO’s story that tariffs in Zambia are not cost reflective. Whenever applying for tariffs to be increased ZESCO has always stated that domestic tariffs were not cost-reflective and that unless there was an increase in tariffs, Zambians should brace themselves for more load shedding. This scare- mongering has always worked, and ZESCO has always been awarded tariff increases by the ERB despite protests from electricity customers.

If tariffs for domestic customers were not cost-reflective in 2013, what has suddenly changed to render them cost-reflective in 2015? Clearly ZESCO’s story suggesting that domestic tariffs are now cost –reflective does not add up. Even if this were the case, ZESCO would still need additional money to compensate for inflation. And who said cost-reflectivity is a static point? Tariffs which are cost reflective this year may, on account of changed circumstances and cost –profiles, cease to be so next year. And this exactly why the Ministry of Energy is also wondering where Chitundu thought he was going to find money to finance the gap.

As a principle, tariffs for each customer category should be cost-reflective without reference to other customer categories. In other words, the tariffs to be paid by domestic consumers should be determined by the strain imposed on the system by domestic customers, irrespective of what the mining companies or other customer categories are doing. Otherwise, what happens if mining tariffs become cost-reflective while domestic tariffs are not? Wouldn’t ZESCO in that case be justified to increase domestic tariffs?

I have also observed that the distinction between commercial customers and mining customers has been blurred in the on-going discussion. The blurring of this distinction may have been due to lack of appreciation of the difference between these different customer categories by some commentators. While tariffs for mining companies are negotiated and agreed between ZESCO and the mines, tariffs for commercial customers are fixed by the ERB.

According to the only credible and comprehensive study of tariffs undertaken in Zambia so far, tariffs for domestic customers needed to be increased by 147%, Commercial tariffs needed to go up by only 2.4 %, while mining tariffs needed to go up by 28% in 2008 to reach cost reflective levels. Since that time, domestic tariffs have gone up by more than 155 %. By comparison, commercial tariffs which only needed to go up by 2.4 % (assuming cost-reflectivity was constant) have gone up by over 65% during the same period.

From this information, it would not be correct to suggest that commercial tariffs have been lagging behind domestic tariffs. It is the other way round. Tariffs for Commercial customers have always been near cost –reflective than all other customer categories. And let us credit the Parliamentarians for pointing out the unintended consequence of ZESCOs proposal; increases in commercial tariffs will invariably lead to increases in prices which will adversely affect the same poor people ZESCO says it seeks to protect.

As earlier pointed out ,in the on-going national discourse there appears to be instances of confusing and interchanging commercial tariffs and mining tariffs – an understandable error because in ordinary parlance mining is a commercial activity . A fundamental error when talking about electricity tariffs. It is important therefore that the distinction between these customer categories is respected at all times.

ZESCO needs to clarify whether, as it alleged to have said, tariffs for commercial customers are also not cost-reflective. Tariffs for this customer category have, without fail, been progressively increased over the last ten years, in tandem to tariffs for domestic consumers. It would therefore be strange if ZESCO granted a moratorium on domestic tariffs without applying the same moratorium on commercial customers. Unless the consideration to grant the moratorium was driven by the number of voters in each customer category- in which case ZESCO should not cite cost-reflectivity as the reason for affording domestic customers the 2 year tariff freeze.

The nation needs to appreciate that ZESCO’s decision has serious and far reaching implications. Firstly it might jeorpadise on-going electricity generation projects by private developers. All new power generation projects are structured so as to sell power to ZESCO. Unless they sell power at an appropriate price to ZESCO, these projects risk losing money- and at the time of their conception none of these projects ever envisaged a situation where ZESCO would self- impose a 2 year tariff freeze. In the event ZESCO has already signed agreements to buy power from such private investors at a higher price, it means that ZESCO would sell this power to the public at a loss – a cost which will ultimately be borne by the Zambian economy.

Secondly, the lack of transparency and consultation in the manner in which the decision to freeze tariffs has been made would leave every investor running for the hills. No investor will put their money in a power generating facility in a country where a CEO of a national utility and the President can, within the confines of a presidential retreat, decree to deny a company its expected cash flows for two years.

Amazingly, this decision comes at a time when ZESCO is reportedly contemplating going to the international market to source for US$ 1.4 bn for the construction of Kafue Gorge Lower. Now you tell me which financier will give a government company which has just decided to freeze tariffs for 2 years such money? Some may, but such a loan will come at a premium.

Dr. Kaunda being welcomed in Mfuwe

Dr. Kaunda being welcomed in Mfuwe

Apart from freezing domestic tariffs for two years, it is reported that President Lungu also approved ZESCO’s proposal to adjust commercial / mining tariffs to make them cost-reflective. ZESCO is reported to have been directed to quickly implement these measures as they are pro-poor. Since mining tariffs in this country are governed by stringent legal agreements which were entered into between ZESCO and the mining companies it will be interesting to see how ZESCO is going to implement the directive it caused the President to issue. Considering that the briefing in Mfuwe was only done by ZESCO, it is likely that the President might not have been made fully aware of the background and other issues surrounding mining tariffs. As a lawyer, it is unlikely that President Lungu would have issued that directive had he been made fully aware of the nature of these agreements. I can only hope that ZESCO did not deliberately mislead the President so as to use the improperly procured Presidential directive to coerce mining companies into accepting higher tariffs.

But now it appears Chitundu’s sojourn to Mfuwe might not have been blessed by either the ZESCO Board or the Ministry of Energy. But then how did he find himself there briefing the President without the Permanent Secretary’s knowledge? Maybe Chitundu didn’t want to be outdone by his engineer colleagues from the Zambia Engineering Institute who presented some laughable and misconceived development road map to President Lungu in Mfuwe.

Lungu with his Wife Esther leaving Mfuwe

Lungu with his Wife Esther leaving Mfuwe

I have always suspected there is something about that Mfuwe place. I once visited the place. There is a haunting loneliness which strips one of all modern sophistication and rationality. The melancholic call of the fish eagle, the mocking laughter of the hyena and the bone- chilling roar of the lion , the owl’s night hoot all make for a very sobering cocktail – stripping one of all pretensions and restoring parity between man and beast . Call it being at one with nature. I guess it is why those khaki –clad tourist are prepared to pay top dollar for those few nights under the African night sky. It does something to your mind. See what it did to those engineers from EIZ. Who could believe that all those fine brains could end up presenting such unresearched proposals to the President? Please don’t blame Chitundu.

There is something about that Mfuwe place. Remember those dreaded announcements each time Super Ken (First President Kenneth Kaunda) came from Mfuwe? Hardly any good came out of there. I would advise President Lungu to avoid that place. Sorry I had to digress.

In what has now turned out to be his last appearance before the Parliamentary Committee on Energy , as ZESCO CEO , a contrite sounding Cyprian Chitundu piously told the Committee last Friday that our poor people had carried the burden of paying a higher tariff than commercial customers and that the freeze on domestic tariffs was therefore meant to help the ordinary people. He spoke like a man who had just stepped out of the bible’s pages. His carefully chosen words had biblical resonance. I was reminded of the repentant tax collector Zacchaeus confessing to the Lord that he was going to repay fourfold to all those he had cheated. If for nothing else, Chitundu will be remembered for his unearthly and logic-defying stand. So perplexed were the parliamentarians that they prophetically asked Chitundu whether he had not shot himself in the foot. Wonder why they didn’t just say the head.

Surprising as Chitundu’s dismissal might have been, perhaps more surprising was the Minister’s decision to immediately appoint a Mr. Victor Mundende as the new CEO for ZESCO. And he didn’t say it was in acting capacity. This move had the tongues of those gathered at a corporate governance conference at Pamodzi Hotel waggling whether it wasn’t the Board which is supposed to recruit the CEO – and as fate would have it, the celebrated Prof Mervin King was in town gracing the corporate governance conference as Chris Yaluma committed one of the most serious breaches of corporate governance.

Well, for those with short memories, the same issue had been raised regarding the manner in which Chitundu was appointed ZESCO CEO by President Michael Sata instead of the Board. It seems the tenets of corporate governance are honored more in the breach in Zambia. The correct and expected thing was for the Minister to first constitute the board, which would in turn recruit a new CEO. It indeed has been a tumultuous week for ZESCO. Fortunately we still have electricity.

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