Background
The Public Utilities Regulatory Commission (PURC) sits between utility service providers and consumers. While PURC ensures that the utilities are financially viable to provide adequate services (by approving adequate revenue requirement for them), the Commission also ensures that consumers get access to reliable and competitively priced services.
This means the Commission must balance the interests of both utilities and consumers. As part of steps to perform this balancing act, the Commission approves major tariffs which are applicable over a regulatory period. The Commission also undertakes quarterly adjustments of the tariffs, performs regulatory audits, monitors performance of the utilities, educates the public, and receives and resolves complaints.
The PURC in September 2022 undertook a major tariff review (2022-2025) in which it considered the cost of operation for regulated utilities, exchange rate, inflation, cost of fuel and other factors. Since the exchange rate, inflation and cost of fuel are neither under the control of the utilities or the Commission, variations in these variables are considered as pass-through costs. Additionally, the energy mix, which is subject to hydrology of the dam and other climatic factors, are beyond the Commission’s reach – thereby necessitating its consideration in any quarterly tariff adjustment.
To this end, the Commission per its guidelines considers these four factors (exchange rate, inflation, energy mix and cost of fuel) and adjusts electricity tariffs on a quarterly basis to restore the tariffs’ value and meet the revenue requirements of utility service providers. This is what’s referred to as the Quarterly Tariff Adjustment. A similar approach is applied to water tariffs.
Explanation of the June 1st 2023 Quarterly Tariff Adjustment
Some detailed explanations on the 2nd Quarter Tariff Decision of the Commission, which is expected to take effect from June 1, 2023 are given below.
With the recently announced quarterly tariff decision, the electricity utilities are to recoup an amount of GH¢1.3149billion over the next quarter. This is to help purchase fuel to generate power; transmit, distribute and continuously serve consumers. To recover the full amount, electricity tariffs should have been increased by 27.51 percent. However, given the approved tariff of 18.36 percent an amount of GH¢877.70million will be recovered – leaving a balance of GH¢437.22million to be recovered. On the other hand, the amount to be recovered through the water tariff is GH¢650,267,161million.
This brings us to reasons for the recoveries. In other words, what are we recovering and why?
- The first is price of natural gas
In the first-quarter tariff decision, Jubilee Oil Field contributed 32.7 percent of gas, Sankofa contributed approximately 51.8 percent while Nigeria Gas (N-Gas) contributed 15.1 percent. Gas from the Jubilee Field was priced at United States dollar (US$) 0.5/mmbtu, Sankofa was at US$6.6272/mmbtu, while N-Gas was priced at US$8.1510/mmbtu in the weighted average cost of gas (WACOG).
For the second-quarter tariff decision, the contribution of Jubilee Field reduced marginally to 32.2 percent, while Sankofa increased to 53.9 percent. This reflects changes in the quantity of Natural Gas received from both fields.
The price of N-Gas, on the other hand, increased from US$8.1510/mmbtu to US$ 8.6641/mmbtu, reflecting an upward change in price.
The overall implication is that the weighted average cost of gas which was US$6.0952/mmbtu in the first quarter now increased to US$6.5165/mmbtu in the second quarter, representing an increase of 6.9 percent.
Since gas prices are a pass-through cost, it is imperative that we pay the gas price differential to enable power producers to generate enough power for consumption. Thus, the percentage increase of 6.9 percent had to be passed through the tariff.
- The second variable is exchange rates
The projected exchange rate used for the first quarter tariff decision (that is, February to April) was GH¢8.6816 to the US dollar. Meanwhile, the actual exchange rate for that same period was GH¢10.9507 to the US dollar. This led to an exchange rate under-recovery of GH¢2.2690.
It is important to note that all Power Purchase Agreements (PPAs) are denominated in US dollars. This means ECG buys power in US dollars but sells in cedis. The implication is that any under-recoveries with the exchange rate threatens the utility’s ability to procure and sell power. This also threatens the ability of power generators to procure fuel for generation. Thus, the exchange rate differential has to be recovered.
Additionally, the Commission only passed on 75 percent of the exchange rate under-recovery that was experienced between September 2022 and January 2023 in the first quarter tariff decision. The remaining 25 percent, which is equivalent to GH¢0.6202, had to be recovered. This means that for the second quarter tariff decision, 25 percent – equivalent to GH¢0.6202 from September 2022 to January 2023 period plus the previous quarter under-recovery of GH¢2.2690 – has to be recovered.
The Commission however considered the present economic circumstances of Ghanaians and Industry, and decided to recover the GH¢0.6202 under-recovery from the September 2022 to January 2023 period plus 50 percent of the GH¢2.2690, which is GH¢1.1345 under-recovery of the previous quarter and comes up to GH¢1.7547 (1.1345+0.6202).
Finally, the projected exchange rate for the next quarter (June to August) is GH¢10.9571 to the US dollar. If the under-recovery of GH¢.7547 from the previous quarter is added to the projected exchange rate of GH¢10.9571, the applicable exchange rate amounts to GH¢12.7118 to the US dollar. Since only 50 percent of the exchange rate effect is being recovered, it means an equivalent of GH¢437million has been effectively passed on to the next quarter.
- The third variable for consideration is the hydro-thermal mix
The hydro-thermal mix used for the second quarter is 29.01 percent for hydro and 70.99 percent for thermal, as against 26.11percent for hydro and 73.89 percent for thermal used for the first quarter tariff decision. The increased hydro allocation of 29.01 percent helped to reduce the potential tariff by about 2.5 percent. This means that without the increased hydro allocation, the tariff would have gone up by an additional 2.5 percent.
- The final variable is inflation
The projected inflation figure for the year was 42.63 percent. If this figure is divided into four quarters, it amounts to an inflation rate of 10.66 percent per quarter.
The average actual inflation for the first quarter was 50.47 percent. Again, if this is divided by four we get an inflation figure of 12.62 percent. This means that the inflation effect for the second quarter will be 12.62 percent-10.66 percent, which is 1.96 percent. This figure is that which was considered in the second quarter tariff decision.
Conclusion
In a nutshell, the 2nd quarter tariff decision of 18.36 percent for electricity helps to fully recover (i) 100 percent of the inflationary effect; (ii) 100 percent of the gas price effect; and (iii) 50 percent of the exchange rate effect.
