BUSINESS & ECONOMY

Electricty tariff hike and the electricity pricing: some critical observations

By Shanker M. Singh

When Western aid agencies provide loans and grants for energy projects in developing countries, they usually specify that recipient governments should allow pricing policies that ensure the agency’s financial viability by yielding a positive rate of return on assets, and are conducive to economic efficiency.

It is agreed that electricity tariff policy should be consistent with economic principles and are reflected in the Long- Run Marginal Costing (LRMC). LRMC of supply are both the interconnected and isolated systems in the public sector. It should also ensure the financial viability of the Nepal Electricity Authority and take into account HMG/Nepal’s social objectives.

Recently, a loan agreement of US $ 50 million equivalent to Nepalese Rupees 3.52 billion for Nepal Electricity Authority has reached between the government of Nepal and Asian Development Bank (ADB). According to the loan conditionalities, the government is required to hike the price of electricity by 30 percent immediately and review it every six months. It is stated that amount will be spent on NEA’s Eighth Power Project (2000-2003) which among others includes rural electrification, expansion of transmission line, improving distribution system and construction of computerized billing in Kathmandu.

Electricity tariff in Nepal, which is among the costliest in the world, has so far been hiked by 270 percent in the past ten years. Just to recapitulate, the bank has provided a loan assistance of Rs.2.5 billion for NEA’s Seventh Power Project. The loan amount, agreed will be spent in supplying electricity to 860 thousand individuals of 154 thousand households from 240 villages of the country’s 22 remote districts.

When the ADB loan was sanctioned over two year’s back, the lending agency had demanded that the price of electricity be hiked by 60 percent within July 2000. NEA’s Self-Financing Ratio and the Rate of Return stood at 23 and 2 percent respectively during the fiscal year 1988/1999, while the projection for the fiscal year 1999/2000 has been estimated at 13 and5.6 percent respectively.

Electricity Tariff Fixation Committee, a government formed independent body comprising of the private sector, which includes: the representatives from NEA Ministry Of Water Resources, Nepal Rastra Bank, FNCCI, Consumers Forum and the Expert, to fix the electricity tariff, will. Decide to raise the electricity tariff by 30 percent after the signing of the agreement recently with the Asian Development Bank.

Some multilateral agencies view that NEA should incorporate regular tariff reviews for preparing the corporate development plans. This would also allow for timely signalling to consumers of short term increases in electricity supply costs resulting from the impacts of long dry periods requiring heavy load shedding or thermal generation using expensive oil to meet the demand of fuel price increases. The lack of tariff adjustment to compensate for unexpected short-term increases in electricity supply costs should also worsen NEA’s financial performance.

For private sector schemes, which are limited to isolated micro- hydro power plants of upto 1000 KW capacity, there seems to be no regulation of tariffs. Rather, tariffs seem to be established by the private sector on ad hoc basis and vary from scheme to scheme.

It has been noted that despite strong resistance within the ruling party and uncomfortable timing, it was Asian Development Bank’s constant pressure and the final refusal to extend fund for Eighth Power Project unless the government complied to the agreement it reached with ADB in 1996 that will force the government to raise the electricity tariff. The Eight-Power Project Loan is basically intended for rural electrification and extension of other transmission lines.

Just to recapitulate, in 1996, before acquiring a US $ 160 million loan as a partial funding for 144 MW Kaligandaki "A" Hydro Project government had signed a loan agreement with ADB. Among many others, the government had then agreed to increase NEA’s rate of return to at least 6 percent on average revalued net fixed assets by the fiscal year 1998. The present performance level of NEA is miserably low below the agreed level and stands at 3.5 percent only. Thus the average electricity price at present stands at Rs 6.50 per unit. This price will go upto Rs. 8.11 after the announcement.

Last year, the government hiked the price of electricity by upto 30 percent (25 percent for Industrial purpose and 30 percent for general consumers). At present, a unit of electricity costs Rs.6.50 on an average which even by official admission, makes Nepal’s price the costliest in South Asia and among the costliest in the world.

With the adoption of the project, the population with access to electricity is expected to climb 25 percent from 15 percent on the completion of the project. If the electricity price is hiked by 30 percent once again, as required by the multilateral donor agency, the price will climb to Rs 8.11. In the last ten years, the price of electricity has gone up by 240 percent in Nepal.

Serious thoughts should be given as to whether the consumers of the least developed country like Nepal can afford to pay the ridiculously high amount of Rs 8.11 per unit. For this matter, NEA should begin collecting outstanding dues especially from big defaulters. As such, the tariff due should be equivalent to the income of three months revenue. And the same was also agreed with the donor agencies. The cursory look at the history indicates that in the fiscal year 2049/50, the dues or default was to the tune of six months revenue. Till now the default is to the tune of 4. 18 months revenue. If NEA could raise the arrears due since last many years then the total default amount could be put at 2.5 months revenue. The recent Report released by he NEA reveals that there is 22.95 percent electricity leakage. .

Experts of the Hydropower opine that if NEA functions competitively then the tariff rate could be lowered substantially. They opine that in the name of revaluation of the NEA’s assets, they are increasing the tariff rate of electricity. They are also of the view that donors have valued the price in today’s price which was bought 20 years back, which is fundamentally and principally wrong, hence, the auditors or the related responsible agencies should give serious thought and look into it. They are also of the view that due to the monopoly of the NEA , donor are also investing their money in the form of loan to generate the costlier electricity production- thereby getting the return. So the experts opined that the NEA’s structure should be changed in the total national scenario and the need of the country. Once the competitive structure in the energy sector is introduced then naturally the tariff rate will be reduced. Citing an example, experts say that our planners were ready to build the Arun III at the cost of five thousand dollar per kilowatt. After a heavy resistance that plan was aborted.

The hike in the energy tariff will hit the Nepalese poor. In pursuance to this, effective and efficient management of electricity supply in the country by cutting down leakages, getting rid of unnecessary manpower, increasing the productivity and efficiency of NEA’s staff, and above all breaking the monopoly of the NEA in the power sector and making it as the national transmission centre would have helped bring down the cost of production . Only 15 percent of the country’s over 22 million population have been supplied with electricity till now.