COVER STORY (Spotlight Weekly)

NEW ELECTRICITY TARIFF
Consumers Paying For Inefficiency

Burdened by overstaffing, political intervention, financial mismanagement and growing electricity leakage, Nepal Electricity Authority (NEA) is gradually heading towards bankruptcy. To recover losses accumulating from bad practices, the NEA sees revision in the power tariff structure as the best way to keep the organization afloat. It has revised the tariff seven times in the last decade, raising the per-unit electricity price more than four hundred times. Although the NEA has revised power tariffs many times, revenue collections have not been able to meet its requirements. The recent decision to raise tariffs will further increase the leakage. How, then, does the tariff revision make economic sense?

By KESHAB POUDEL

If the annual report of the Auditor General 2000 is a guide, the revenue generated by Nepal Electricity Authority (NEA) by revising power tariffs will barely cover the losses caused by mismanagement, irregularities and leakage.

Power grid : Supply unaffordable

Misuse of vehicles, equipment, property and uncollected revenue alone amount to billion of rupees. If the NEA can plug those holes, it would not have to increase tariffs every few years. From politicians to industrialists and government offices to the municipalities, almost every quarter owes money to the utility monopoly. Had the NEA made serious efforts to recover its debts from industries and institutions, it could have easily collected billions of rupees. But who would want to take the difficult road when the pliant consumers are around. Whenever the NEA needs additional resources, it just sends the people a heftier bill.

Although the Attorney-General’s report directed the NEA to collect its debts, the organization has taken a few half-hearted steps. The NEA collected only a fraction of its debt from various organizations last year, amounting to less than Rs10 million.

Will increasing tariffs alone help make the NEA an economically strong and viable organization? Or does it have to institute radical internal reforms? As a resourceful organization, no political party wants to even think about reforming the NEA. Whenever the NEA management tries to trim down the number of employees, political leaders from all fronts raise their voice in opposition. The cost of overstaffing is passed over to the consumers.

Power house : Heigh construction cost

The situation is hardly different when comes to recovering debts. Whenever the NEA tries to crack the whip on industries and hotels, the organization confront almost instant resistance. In the rural and urban areas, political leaders stop the NEA from cutting power supply in areas where people are known to openly steal electricity.

"We know that increasing tariffs is not an enduring solution. But we don’t have another option in a situation where nobody wants to support the NEA," said a senior official of the utility. "I don’t want to mention their names, but some MPs who are so vocal in parliament against the tariff increases create obstructions when we start efforts to control leakage."

The NEA has remained a profitable organization from the Panchayat days. Whoever is appointed the minister in charge of the NEA, his or her first task is to grab a few vehicles and place supporters on the organization’s payroll. The recent list released by the House of Representatives State Affairs Committee also points to how the NEA has become an easy source of vehicles for politicians of all parties.

This rampant mismanagement raises the overall cost of the NEA. Lacking any other option, it raises the tariffs. "Whether people pay or not and whether it is economically right or wrong, the NEA has to go for revising tariffs whenever it needs matching funds to seek foreign loans in electricity extension programs," said another NEA official.

Economically Unjustified

The latest decision by the NEA to raise tariffs is economically unjustified. At a time when the prices of all commodities are coming down, nothing can justify tariff increases. How can a farmer who sells his product for the prices of four years ago pay more for electricity?

The argument that increased tariffs help raise revenue deposits is a myth. Despite new projects and more customers, there has been no matching rise in revenues. In 1992, the NEA collected a gross revenue of Rs1,440.620 million with energy supply of 737.352 GWh. In 2000 it sold 1269.274 GWh and collected Rs7012.806 million.

In the area of rural electrification, the NEA has been unable to increase the percentage of consumers in the last 10 years. Barely 15 percent of the total population of the country has access to electricity. If revenues do not increase and transmission lines are not extended, what justification is there to raise the price?

"Increasing tariff does not necessarily increase the annual revenue of the NEA. If it attempts to produce more electricity and supply it reasonably, the NEA would have a much better income," says an economist.

Over the last 10 years, tariffs were increased by more than 400 percent, but the number of consumers remains stagnant at 15 percent. Increasing tariffs is easiest way for officials to collect matching funds required to get foreign loans. "As long as there is leakage and mismanagement on the part of the management, tariff increases alone would not be able to meet the loss," says Hari Om Shrestha, a former senior executive officer of the NEA.

Massive Leakage

If leakage alone is reduced by 10 percent by the NEA, it would accumulate much more in revenue than it would get through the tariff hike. This year, the NEA generated 1500 GwH with a loss of 25 percent, equivalent to 350 GWH or 350.5 million unit. At an average price of Rs. 7.30 per unit, the total loss of the NEA is equivalent to the output of a project like Khimti. If the loss is converted in terms of money, it will be about Rs3 billion. "If the NEA reduces 10 percent of the current leakage, it would accumulate an additional one billion rupees. Then the NEA would have no need to increase tariffs," says Rajendra Dahal, editor of Himal fortnightly magazine, who writes on energy issues.

Instead of choosing other options, the NEA has once again raised electricity tariffs, citing the same reasons: to expand the power grid, to increase number of consumers and to raise the annual revenue to make the NEA self-reliant in carrying out electricity expansion and maintenance projects. The NEA claims that it needs additional revenue to expand the network, but no one likes to talk about what it did with the resources generated in the early days of Nepal’s power generation program.

In the last 10 years, the annual leakage, including system losses, has continued to go up. Power theft occurs primarily in rural households and in industrial sectors. That is why the NEA needs to pay more attention to improving the system and technical capability of reducing the losses, instead of raising prices.

Electricity on generation : Unaffordable

"In the short term, the NEA’s path towards commercialization and corporatization and profit-centered approach is correct. What is probably needed is a set of time-bound action plans to make the NEA leaner and fitter so that its performance per employee on the MWh and consumer number fronts become more acceptable. Through cost control on its 15 distribution project centers and the handing over the rural areas though the bulk sales to the local VDCs and cooperatives, the NEA can made substantial savings in its overhead costs (meter reading, billing, collecting, operations and maintenance costs) and, most important, on the unaccountable T&D losses. The NEA has high rural losses and the involvement of the stakeholders will automatically purge the defaulters," says S.B. Pun, a former executive director of the NEA, in a paper published in the Water and Energy Commission’s Annual Report 1999.

In comparison to other countries, Nepal’s performance in electricity supply is very different. Nepal is one of countries that generates the lowest per capita kWh of power, which stands 55 kWh, whereas Sri Lanka has 218 kWh and Bangladesh has 95 kWh. The energy loss in Nepal is about 24 percent. Average retail tariff is about 8 US cents. An institution that employees 9,000 people, the NEA incurs a system loss of 25 percent and more than Rs1 billion rupees in recoverables from various organizations.

The NEA’s total peak demand in the year 2000 was 351.86 MW and available energy was 1701.45 GWh. In 2001, it was much higher.

Tariff Increase

This is not first timing the NEA has revised its tariffs. Following the restoration of multi-party democracy in 1990, electricity tariffs have been repeatedly raised in the year 2048, 2049, 2050, 2053, 2056 and 2058 B.S., respectively. In the last revision, which became effective from 1st of Marga 2056, the average selling price of electricity was increased from Rs.5.07 per kWh to 6.32 per kWh. The recent rise in the price makes Nepal’s electricity one of the most expensive in the region. The present average price of electricity in Nepal amounts to US 10 cents per kWh while this price in other developing countries that are close in size of Nepal is much lower as Sri Lanka 6.24, Bangladesh 8.53, Panama 1.2, Honduras 5.39 and Bolivia 7.67.

NEA officials, however, say they usually take into account certain modalities while evaluating the electricity tariff and prices of other related services such as operational and maintenance cost, depreciation of the system, and recovery for repayment of short- and long-term loan.

"Clause 17 of the Electricity Tariff Fixation Rules 2050 has empowered an independent Tariff Fixation Commission of the government to approve the electricity tariff and rate of other related services. According to Clause 6 of the rules, the electricity tariff has to be evaluated based upon the system’s depreciation, reasonable profit, operating process, change in consumer’s price index, royalty and government policies relating to power development. In addition to this, the rule has also guided considering the marginal cost, exchange rate of convertible currencies, fuel price for power generation and financial covenants imposed by the donors," says Shree Prakash Jung Rana in his article "Electricity Tariff in Nepal", published in Vidut issue of 2000.

"The recent decision of the Tariff Fixation Commission does not abide by these terms. Electricity generation projects should be selected strictly based on price of low-generation-cost priority basis and there should be a justifiable limit in share of investment for infrastructure facilities," says an expert.

As pointed out in the Auditor-General’s Annual Report 2000, the NEA can easily collect additional money through regularization of the expenditure and by developing an effective technical system. The tariff increases, experts argue, is not a long lasting solution.

Despite its claim, neither the NEA has achieved its target of expanding electricity consumers beyond 15 percent, nor has it been able to accumulate revenue adequate to sustain expansion and maintenance of projects on its own. The available energy was 981.105 GWh and peak demand was 216 MW in 1992. The NEA collected the revenue of Rs1,440.620 million. This was the highest revenue collected from domestic sector, which amounted Rs490.642 million. In 2000, the NEA generated the Rs7012.806 million with available electricity of 17701.41 GWh. Peak demand was 351.86MW. The number of consumer increased from 355,993 in 1992 to 670,000 in 2000.

These figures show that the NEA has increased the tariff by ten times but the increase revenue is lower than forecast in terms of percentage. Interestingly, the consumer base remains at 15 percent of the population. Even after raising tariffs, why are things so stagnant?

At a time when the prices of the all commodities are going down, there is justification for raising electricity tariffs. If consumers cannot afford to pay the higher tariffs, they will start stealing electricity. This means leakage will grow.

"Because of poor planning, the NEA is now wasting energy at the river. If all the water available in the monsoon is utilized, the NEA can generate additional billions of rupees in revenues," says a former senior executive of the NEA."

Donors’ Role

Increases in electricity tariffs are attributable to mismanagement within the NEA rather than to any pressure from donor agencies like the World Bank and the Asian Development Bank. The international organizations definitely put certain demands to ensure that the NEA would be in a position to repay the loans, but they do not dictate details such as the percentage by which the utility needs to increase tariffs.

Nepal’s politicians are criticizing donors to cover up their inefficiency. Had politicians shown even basic concern for the misuse of the NEA’s property and supported the organizations leakage-control efforts, the tariffs would not have had to be increased so sharply.

"I am frustrated to see the double standard of our politicians who always walk on two ropes," says a former senior official of the NEA. "When the NEA starts to trim down employees, the politicians are the first to disrupt the parliament. When the NEA seeks to punish those responsible for electricity theft, politicians begin leading an agitation. When the NEA asks politicians to return vehicles requisitioned from the organization, they are the first to call for the removal of officials who make the demand," the official says. "Unless politicians start showing some honesty, no one can stop tariff increases. If we are honest enough and capable to generate resources, donors would be in no position to tell us what to do."

Revenue Status

There are other grounds to believe that tariff increases would not lead to an increase in annual revenue of the NEA. If the electricity tariff goes up, consumers start to reduce consumption. That means the revenue will automatically be reduced. Nepalese consumers will have to pay an additional 25 percent for power from next month.

According to the NEA’s decision, a consumer has to pay between Rs80 for minimum use of electricity for 5 ampere and up to Rs. 9.90 per unit. Industrial units will have to pay higher prices in three phases. A study has revealed that Nepal’s per capita consumption per annum is about 48 KWh compare to 11,636 kWh of United States.

After a space of three years, the Electricity Tariff Fixation Commission awarded the NEA with a tariff rise. The tariff rise averaged 26 percent for the industrial consumers and 27 percent for the other category of consumers.

NEA officials argue that the tariff increase was aimed to secure financial indicators such as the rates of return and the capability to self-finance a fixed portion of its investment following reduction that further adjustments would also be required. The NEA made a study to assess the level of capital available for lending in the domestic market and the merits of resorting such loans to bolster NEA financial performance and dampen effects of tariff escalation.

According to the NEA, the total number of consumers is 6,700,000. The domestic category accounted for 95.41 percent of the total consumer numbers, 36.80 percent of the sales and contributed 37.90 percent of the revenue. The industrial category formed only 2.39 percent of the total consumers, but accounted for 5.01 percent of the sales and 6.87 percent of the revenue. The commercial category constituted 0.48 percent of the total consumers, accounted for 6.45 percents of the sales and provided 8.77 percent of the revenue.

The NEA system still faces generation shortages. The country saw severe load-shedding in the months of April and May because of the low level of water. The need of the present time is to distribute the available energy to a large proportion of the population. Because of lack of resources, the NEA has been unable to expand the transmission on its own. Meanwhile, the already burdened consumer is always asked to foot the bill.

‘Distribution Should Be Handed Over To The Private Sector’

— DR. ROOP JYOTI

A leading industrialist and Vice President of Jyoti Group, DR. ROOP JYOTI, did his Ph. D. from Harvard University on the consumption pattern of electricity by Nepalese industries. He was recently appointed member of National Assembly by King Gyanendra. The soft spoken industrialist, who practices Vipassana, spoke to BHAGIRATH YOGI at his office at Jyoti Bhavan, on the issue of power price hike and its impact on the Nepalese industries. Excerpts:

What would be the impact of the recent power price hike, especially on the industries?

This hike will affect all the industries. Some rebate have been announced but it is not clear how they will be applied. In Nepal there is a huge problem of pilferage. Up to 40 percent of the power transmitted gets lost, nearly 25 percent due to pilferage. If the present level of pilferage could be reduced by half, there will be a saving of 17.3 percent (in our electricity bill). In other words, it will totally eliminate the need to increase the tariff, and can even permit a reduction in the rates! So, NEA should give top priority to check the pilferage.

How reliable is the supply of power by NEA?

We don't get uninterrupted supply, which is so crucial to run industries. There are frequent breakdowns in power supply. The cost to the industries due to lost production and spoiled material is huge. The quality of power supplied by NEA is also bad, low voltage and occasionally low frequency. These cause serious damage to the plant and machinery.

So, what could be done in such a situation?

I have been saying for the past few years that the NEA should hand over distribution of power to the private sector. This will not only reduce pilferage, private sector can also improve the quality and reliability of power supply to its customers. My research has also shown this. NEA can sell the power at the wholesale rate (at 132 or 66 KV) to the private-sector-managed substation and let them sell it at retail (at 11 KV or lower voltage). The substation and the distribution network should be leased out to them. Private sector would have the right incentive to ensure that all the power consumed is paid for and would collect the dues efficiently. The NEA would get its full payment, thus, automatically ensuring a higher return on its investment. In times of short supply, the private sector can install large generators at the substation that can produce electricity at a much lower cost than that by the consumers themselves. The consumers can save the hassle to install and operate generators at their level. This would benefit the NEA as well as the consumers (except those who pilfer now!). So, the government should introduce this system without further delay. When this idea is not turned into reality, we are bound to suspect that some vested interests are stopping it.

How do you see the scenario of power supply after new projects come in?

Within a couple of years, big projects like Kali Gandaki A will be completed and we will have excess power. The NEA will find difficulty in selling more power at the current high rates. Even in that scenario, transferring distribution part to the private sector would be a right decision. The private sector will not only look for new buyers and create new demands within the country; they can also negotiate selling power to consumers in India across the border. NEA then can reap benefit whether there is shortage of power or even if it has surplus power.

Can our industries absorb the recent hike in power tariff?

The industries that have to compete with imports from India or those who export their products to India will find it quite difficult. But those competing with imports from third countries or those who export their goods to third countries may be able to do so. At a time when new generation,digital equipments are being used by the industries they need dependable supply of good quality power. So, by ensuring good supply, good quality and appropriate tariff, the state would be helping in industrialization in the country. For this, we need to have concrete programs. Handing over the distribution to the private sector would be one of them. It would be easier for industries to absorb recent tariff hike if the quality and reliability of power were also enhanced. The NEA should introduce a system of giving rebates if it fails to provide uninterrupted supply of good quality power. This would make them more responsible and accountable too.