June 3 | Kuensel
By Tshering Dorji

Electricity tariff has always been higher: ABI
…asks BEA to use prudence in reviewing

The Association of Bhutanese Industries (ABI), in its assessment of the electricity tariff revision proposals submitted by the two power companies, claimed that tariff has always been on the higher side.

The ABI appealed to the Bhutan Electricity Authority (BEA) to review some of the variables used by the Bhutan Power Corporation (BPC) and Druk Green Power Corporation (DGPC).

“The tariff determination model is based on a forecast model wherein a projection is made on the level of capital investments, operation and maintenance costs, inventories, energy purchases and sales, technical and commercial losses,” ABI’s review report stated. Based on these projected values, it stated that a tariff rate is determined for a period of three years.

“There is no way to look into the future and be precise and exact with these projections,” it states. However, the ABI pointed out that based on empirical evidence and comparison of projected values to actual values achieved, the approved tariff has always been on the higher side.

On the DGPC’s proposal, the ABI found that the 15 percent royalty energy is excluded to determine the cost of generation.

Technically, the total permissible cost along with some markup profit is divided by the total generation to deter-mine the cost per unit. This is that rate at which DGPC sells power to BPC. The ABI is of the view that if the royalty energy is excluded, the denominator gets smaller as the royalty energy is subtracted from the total generation. In this case, the ABI deduced that the royalty energy is being charged to the end users and is not being given “free of charge”.

The domestic electricity tariff policy states that “all existing generation plants fully owned by the government have to provide 15 percent of the annual generation as royalty energy to the government free of charge”.

In the current tariff model, the ABI’s report stated that the entity harnessing the water re-sources do not actually compensate the government for using the water resources, but passes on this cost to the end users.

The ABI felt that this methodology of calculating the generation cost has to be amended and the generation cost of a plant should be deter-mined by considering the total costs incurred to generate the electricity and the total volume of energy generated, including the royalty energy. “This will reflect the true cost of generation of a plant.”

The ABI also stated that current tariff cycle of three years should be made at least 8 to 10 years to make prudent investment decisions for the energy and capital intensive industries given the high degree of risk it takes without any idea of costs of one of their primary inputs (electricity comprises almost 30% of their overall production costs).

On certain variables, the ABI stated, it is extremely difficult to precisely quantify the input parameters. For instance, the lending rates fluctuate, investment plans of the companies change and inflation figures are based on historical values. The ABI claims that despite using the figures on the upper limit, the tariff they deduced is lower than those proposed by DGPC and BPC. It is even lower than the existing tariff across all consumers.

For instance, the DGPC has proposed a cost of debt to be at 11.68 percent for new investments, as they have assumed the average lending rate of the industrial/manufacturing sector of four financial institutions. However, DGPC assumed that all new investments will be taken up through 100 percent loan financing, which is not in keeping with the tariff policy. The policy al-lows only 70 percent of the pro-posed new investments to be considered for debt financing.

Further, the ABI stated that based on historical data, DGPC has been able to actually achieve only 57 percent of the proposed investment targets in the earlier tariff cycles.

DGPC has proposed to make a total capital investment of Nu 3.95B over the three years of the tariff period (2019 to 2021). However, based on historical data, the following capital investments for the last tariff period (2016-2018), DGPC was able to capitalize only Nu 1.37B of the proposed investment of more than Nu 2B.

The cost of the total investment has already been passed to the consumers.

“It must also be noted that DGPC was able to secure a loan of Nu 2B from NPPF in 2018 at an interest rate of 8.85 percent per annum. As the minimum lending rate (MLR) as pre-scribed by the Royal Monetary Authority (RMA) was reduced in March 2019, it should be possible for DGPC to secure loans from NPPF at a rate much lower than 8.85 percent annually,” the ABI report stated.

While the DGPC proposed for a tariff of Nu 1.70 a unit, an increase from Nu 1.59 in the last cycle, the ABI’s calculation revealed a generation tariff for DGPC as Nu. 1.38 a unit.

“It has to be noted that the final generation tariff is expected to be much lower than Nu. 1.38 a unit as many other parameters that determine the final tariff have not been reviewed due to unavailability of information,” the report stated.

On the BPC’s proposal, the ABI stated that BPC has proposed an interest rate of 10 percent per annum for new investments. However, the actual interest for the existing loans has been considered. ABI recommended that the cost of debt for new investments should be lower than 8.85 percent per annum and not 10 percent per annum as proposed by BPC.

Based on historical data, the ABI’s report stated that BPC has been able to actually achieve only 75 percent of the proposed investment targets.

BPC has proposed to make a total capital investment of Nu 15.30B over the three years of the tariff period (2019 to 2021). However, ABI claimed that capital investments for the last tariff period (2016-2018) for BPC was only Nu 7.3B of the proposed Nu 9.9B.

During the 2013 tariff re-view, BPC’s actual capital expenditure for 2010 to 2013 was 55 percent of the proposed investment figure. During the 2016 tariff review, BPC’s actual capitalized amount for 2013 to 2016 was 53 percent of the proposed investment. “As evident, BPC has never been able to achieve its proposed capital investment targets,” ABI claimed. But the cost has been passed to the consumers.

The ABI’s 20-page comments on the tariff revision proposals of the two power companies, submitted to the BEA contain all the technicalities and parameters used in the tariff determination rules and regulations.

The ABI also reviewed the amount of subsidies used in the LV and MV consumers and deduced that even the LV consumers should be charged on an average Nu 1.23 a unit which is even lower than the existing tariff.

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