UMEME Cost of Service Study

June 2008

Umeme Limited

Cost of Service Study Phase 1

Methodology to Calculate Charges not included in the Retail Tariff

Final Report

Umeme Limited Cost of Service Study Phase 1 Final Report 2 June 2008 01.07.2008/20254

LIST OF ABBREVIATIONS USED IN THE REPORT ....................................................................4

EXECUTIVE SUMMARY ....................................................................................................................5

1 INTRODUCTION.........................................................................................................................7

2 AVAILABILITY OF INFORMATION AND DATA................................................................8 2.1 SITE VISIT ..............................................................................................................................8 2.2 DATA COLLECTED..................................................................................................................8

3 CURRENT METHODOLOGY AND CHARGES.....................................................................9 3.1 INTRODUCTION.......................................................................................................................9 3.2 BACKGROUND TO CURRENT CHARGES...................................................................................9 3.3 CONNECTION CHARGES .......................................................................................................10

3.3.1 No-pole and one-pole Connection Charges....................................................................10 3.3.2 Multi-pole Connection Charges and Schemes ................................................................11

3.4 INSPECTION FEES .................................................................................................................11 3.5 METER TESTING FEES...........................................................................................................12 3.6 TRANSFORMER TESTING FEES..............................................................................................12 3.7 DISCONNECTION/RECONNECTION FEES................................................................................12 3.8 PENALTY CHARGES ..............................................................................................................12

3.8.1 Illegal connections..........................................................................................................12 3.8.2 Meter tampering .............................................................................................................13 3.8.3 Lost energy billing ..........................................................................................................13 3.8.4 Bounced cheques ............................................................................................................13

3.9 SECURITY DEPOSITS.............................................................................................................13 4 COST ALLOCATION METHODOLOGY AND ESTIMATION OF CHARGES ..............14

4.1 INTRODUCTION.....................................................................................................................14 4.2 LABOUR COSTS ....................................................................................................................15 4.3 MATERIAL COSTS ................................................................................................................15 4.4 TRANSPORT COSTS...............................................................................................................15 4.5 OVERHEADS .........................................................................................................................16 4.6 CONNECTION CHARGES .......................................................................................................16

4.6.1 No-pole connections .......................................................................................................16 4.6.2 One-pole connections .....................................................................................................20 4.6.3 Multi-pole connections and commercial schemes .............Error! Bookmark not defined.

4.7 INSPECTION CHARGES..........................................................................................................24 4.8 METER AND TRANSFORMER TESTING CHARGES ..................................................................24

4.8.1 Meter Testing..................................................................................................................24 4.8.2 Transformer Testing .......................................................................................................27

4.9 RECONNECTION CHARGES ...................................................................................................27 4.10 PENALTY CHARGES ..............................................................................................................28 4.11 BOUNCED CHEQUES .............................................................................................................31 4.12 SECURITY DEPOSITS .............................................................................................................31

5 BENCHMARKING OF CHARGES AGAINST OTHER UTILITIES .................................32 5.1 INTRODUCTION.....................................................................................................................32 5.2 DISTRIBUTION COMPANIES IN UGANDA ...............................................................................32

5.2.1 Ferdsult...........................................................................................................................32 5.2.2 WENRECo ......................................................................................................................34


5.3 UTILITIES IN THE REGION.....................................................................................................35 5.3.1 Status ..............................................................................................................................35 5.3.2 Connection charges ........................................................................................................35 5.3.3 Inspection fees ................................................................................................................36 5.3.4 Meter testing fees............................................................................................................37 5.3.5 Reconnection fees ...........................................................................................................37 5.3.6 Security deposits .............................................................................................................38

5.4 PENALTY CHARGES ..............................................................................................................39 6 COMPARATIVE ANALYSIS OF OTHER CHARGES ........................................................40

6.1 BASIS FOR THE ANALYSIS.....................................................................................................40 6.2 ANALYSIS OF 2007 REVENUE...............................................................................................40

APPENDIX 1 TERMS OF REFERENCE ......................................................................................43

APPENDIX 2 LIST OF DATA COLLECTED...............................................................................45

APPENDIX 3 CALCULATION OF TRANSPORT COSTS.........................................................48


List of Abbreviations used in the Report

billion one thousand million

BPC Botswana Power Corporation

CPI Consumer Price Index

ERA Electricity Regulatory Authority

ERC Energy Regulatory Commission, Kenya

DOMC Distribution Operation and Maintenance Charge

HR Human resources

HT high tension (normally 11 kV or 33 kV)

km kilometre

KPLC Kenya Power and Lighting Company Limited

kVA kilovolt Ampere

LV low voltage

NERSA National Energy Regulator of South Africa

PPA Power Planning Associates Limited

ROI Return on Investment

STO Senior Technical Officer

TOU Time of use

UEB Uganda Electricity Board

UEDCL Uganda Electricity Distribution Company Limited

UETCL Uganda Electricity Transmission Company Limited

USh Uganda shilling

VAT Value Added Tax (currently 18% in Uganda)

ZESCO Zambian Electricity Supply Corporation


Executive Summary

Under the terms of the concession agreement Umeme Limited (Umeme) is required to develop a Service Cost Calculation Methodology. Power Planning Associates Limited (PPA) was appointed by Umeme in January 2008 to undertake this work. The assignment is divided into two phases: Phase 1, which is covered in this report, included the development of a methodology and calculation of other charges that are not included in the retail tariff. These include charges for new connections, installation inspection fees, meter and transformer testing fees, reconnection fees, penalty charges for illegal connections and theft of electricity, fees for bounced cheques and security deposits.

Methodologies have been developed for each of these categories of charges based on material, labour and transport costs, plus an allowance for overheads that are directly attributable to the charges, and profit where appropriate.

An exercise has been carried out to benchmark the charges covered in this study against other distribution concessions in Uganda and utilities in the region. Charges that are currently levied by Umeme are generally the lowest amongst the countries in the region for which we were able to obtain data. The proposed charges are summarised in the following table.

Item: Proposed charge (USh)

Connection charges: Single phase: - No-pole - One-pole Three phase: - No-pole - One-pole

197,000 1,244,000

Up to 60 kVA 941,000

2,307,000

61 to 100 kVA

1,197,000 2,563,000

101 to 120 kVA

1,541,000 2,907,000

Meter testing fees: - Single phase - Three phase - kVA/HT

24,500 32,000 96,600

Reconnection fee: 25,200 Inspection fees: No change Penalty charges: Illegal connections and theft of electricity

12 months estimates consumption with minimum of USh 250,000 for domestic and USh 700,000 for non-TOU commercial

Bounced cheques: Bank charges plus 10% of value of the cheque. Security deposits: Three months estimated electricity consumption.

Bank guarantees for large customers.


Finally, an analysis has been made to estimate the loss of revenue to Umeme in 2007 resulting from levels of charges for the other charges that are not cost reflective. A conservative estimate of this loss of revenue is approximately USh 4.9 billion in 2007. This estimate excludes penalty charges and connection costs for larger customers and schemes, which it was not possible to estimate on the basis of the available data.

The Terms of Reference for the Phase 1 work are presented in Appendix 1 to the Report. The Phase 2 work will cover the cost allocation methodology for the retail tariff.


1 Introduction

This cost of service study was commissioned by Umeme Limited (Umeme) in January 2008 following a request for a proposal from Power Planning Associates Ltd. (PPA) in November 2007.

The study is divided into two Phases. Phase 1, which is the subject of this report, covers the development of a methodology and the calculation of charges for items that are not included in the retail tariff. These charges include new connections, inspection fees, meter and transformer testing fees, reconnection fees, security deposits, penalty charges for cheques that are not honoured by the bank and penalty charges for illegal connections and theft of electricity. Under the terms of its Concession Agreement Umeme is required to develop a Service Cost Methodology to justify the level of these charges. The present levels of these fees/charges were set during the time of UEDCL, and in some cases UEB, and these were adopted by Umeme until new charges could be agreed with ERA.

Phase 2 includes for calculation of the prescribed revenue requirement in the tariff formula, including studies to justify the time of use estimates and load profiles. The Phase 2 work is subject to a separate proposal.

The Phase 1 work commenced with a visit to Kampala by the consultant for discussions with Umeme staff and to collect the data required for development of the methodology and the calculation of the other charges. This was followed by a period of analysis, the results of which were presented in a Draft Report. The report was presented to Umeme in Kampala in early-March. Agreed amendments have been incorporated. The amended report was then presented to ERA on 28th May 2008. This Final Report incorporates comments received from ERA.


2 Availability of Information and Data

2.1 Site Visit

The PPA Team, comprising Peter Beard, Team Leader and Cost of Supply specialist, and Yese Mubangizi, local counterpart and electricity utility consultant, held meetings with Umeme and carried out data collection during the period 14 22 January 2008. We would like to express our thanks to Sam Zimbe and other members of Umeme staff for the assistance extended to us during the visit. There was extensive follow-up by our local counterpart and by correspondence following the visit as the analysis progressed.

2.2 Data Collected

A copy of the schedule of data collected is presented in Appendix 2 to the report.


3 Current Methodology and Charges

3.1 Introduction

The charges that are levied for the provision of services by Umeme that are outside the present retail tariff fall into three basic groups: charges related to the connection of new customers; charges to existing customers relating to their supply; and charges to existing customers relating to theft or irregular usage of, or payment for, electricity.

The first group includes connection charges, which are presently divided into four types of connection:

Connections where no extension to the LV network is required, designated no-pole connections;

Connections where an additional pole is required to be added to the LV network in order to connect the new customer, designated one-pole connections;

Connections requiring more than one additional pole to be added to the LV network, designated multi-pole connections; and

Schemes for the connection of a number of new customers which may require extensions to both HV and LV networks.

No-pole and one-pole connections are subject to standard connection charges whereas multi-pole connections and schemes are charged by Umeme at cost.

There are two other charges relating to new connections: these are the inspection fee, which is required before a new connection is made, and the security deposit, which is payable by a new customer and refundable in the event that the customer no longer requires a connection.

The second group of charges relates to customers that are already connected. This group includes meter testing fees and disconnection/reconnection fees for non-payment.

The third group of charges covers penalty charges for illegal connections, meter tampering or by-passing. This group should include both the cost to Umeme, including the recovery of the lost energy consumed, and also a deterrent element. This group also includes charges for bounced cheques.

3.2 Background to Current Charges

Most of the current charges which fall outside the retail tariff were carried over from UEDCL or, in some cases, UEB. The charges have not been


updated regularly and therefore do not reflect the cost to Umeme of providing the service or, in case of penalty charges, do not reflect adequately the cost imposed on Umemes business operations nor do they provide an adequate deterrent.

The proposed methodology for the calculation of the charges outside the retail tariff is set out in the following paragraphs. The principles guiding the methodology are that the costs should be transparent and should reflect the costs incurred by, or imposed on, Umeme. In addition, Umemes Lease and Assignment Agreement allows the Licensee to: ..recover its reasonable operating and investment costs, including a profit (at the same ROI as the one used to calculate the Retail Tariff) for providing such services.

All the charges quoted in this section are exclusive of VAT which is levied on all charges except security deposits.

3.3 Connection Charges

3.3.1 No-pole and one-pole Connection Charges

A standard costing sheet has been developed by Umeme for no-pole and one-pole connections charges. This includes the following components:

Material costs Labour costs Transport costs Overhead charge The material costs are based on the latest actual costs taken from Umemes materials database1, which is updated every month to reflect market prices for materials and other factors, such as changes in exchange rates.

The present methodology, which is carried over from UEDCL, is to cost the labour and transport elements as fixed percentages of the material cost. The percentages used are 10% for labour and 7.5% for transport. In addition an overhead charge of 7.5% of the total material, labour and transport cost is levied.

The present costs for no-pole and one-pole connections calculated using this methodology are shown in Table 3-1. The standard charges that apply at present are also provided for comparison:

1 SUN logistics and stores system.


Table 3-1: No-pole and one-pole connection charges

Present charges USh

Umeme costing USh

No-pole connection:

0-20m

20-30m

>30m

79,900

80,500

83,000

170,2232

One-pole connection 276,200 1,116,000

Multi-pole & schemes Full cost Full cost Note: the above charges exclude VAT which is levied on connection charges at the current rate of 18%.

The above figures indicate that, on the basis of the Umeme costing model, only about 50% of the cost is covered for no-pole connections and 25% for one-pole connections.

3.3.2 Multi-pole Connection Charges and Schemes

A standard costing sheet, similar to that described in the previous section, is used by Umeme for multi-pole connections charges and charges for schemes. The basis for these charges allows Umeme to recover the full cost from the customer.

3.4 Inspection Fees

Umeme is required to inspect all new customer premises before making a connection. The current inspection fees for the various types of customer are as follows:

Domestic USh 35,000

Commercial USh 40,000

Three-phase USh 75,000

Maximum demand USh 100,000

VAT is charged on the above fees at the current rate of 18%. These fees were inherited from UEDCL.

2 Based on 30m connection.


3.5 Meter testing Fees

The fee for a meter test at the request of a customer is USh 5,000. Currently VAT is not charged for meter testing. The fee is refunded to the customer if the meter is found to be faulty, or inaccurate.

3.6 Transformer Testing Fees

Umeme has not carried out many transformer tests in recent times. Tests that have been made for customers are subject to individual quotations, based on the materials required, labour and transport costs, plus an overhead charge of 7.5%, using a similar methodology to that adopted for the multi-pole connection and scheme charges.

3.7 Disconnection/Reconnection Fees

Customers are not charged for disconnection for non-payment or other irregularities. The costs of disconnection are rolled into the fee which is levied for reconnection of customers once their accounts have been regularised. The present fees for reconnection are USh 3,600 for single phase customers and USh 11,800 for three phase customers, including VAT at 18%. The present fees were inherited from UEDCL.

3.8 Penalty charges

The Electricity Act, 1999 provides for penalties to be levied on conviction for dishonest usage of electricity, by whatever means. These penalties include a fine not exceeding USh 600,0003 or imprisonment for three years, or both. The penalty charges that are currently levied, and other measures applied by Umeme, are discussed in the following paragraphs. The rates were determined prior to the commencement of Umeme in 2005.

3.8.1 Illegal connections

Penalty charges are levied by Umeme for illegal connections; the present rates are:

Domestic USh 295,000


Three-phase USh 590,000

Maximum demand USh 1,180,000

3 30 currency units; one currency unit is equal to 20,000 Shillings.


3.8.2 Meter tampering

The customer is charged with the cost of the new meter, plus the installation cost.

3.8.3 Lost energy billing

In addition to the penalty charges, Umeme charges customers found stealing electricity with the cost of the lost energy that would have been billed. This is based on the customers consumption history and the time period of the illegal consumption, but limited to a maximum of 12 months.

3.8.4 Bounced cheques

Cheques that are not honoured by the banks on which they are drawn, are subject to a penalty charge of USh 5,900 plus 10% of the value of the cheque.

3.9 Security Deposits

The Grid Code4 provides for Umeme to obtain a security deposit from customers before connection to supply. For customers on a monthly billing cycle, the deposit should not be greater than three times the estimated monthly bill and should be calculated with reference to a schedule of the type of customer and type of business. For larger customers, Umeme prefers to take a bank guarantee in lieu of a security deposit. This is provided for in the Grid Code. Likewise Umeme does not charge interest on arrears on customers electricity accounts.

The Grid Code also stipulates that the licensee should pay the consumer interest on the deposit at a rate and on terms and conditions approved by ERA. It is understood that the Umeme does not currently pay interest on security deposits.

The current levels of security deposits charged by Umeme are as follows:

Domestic USh 100,000


Small/medium industrial USh 1 million

Large Industrial USh 2 million

4 The Electricity (Primary Grid Code) Regulations, 2003; Statutory Instrument No. 24.


4 Cost Allocation Methodology and Estimation of Charges

4.1 Introduction

The methodology for the calculation of charges for services outside the present retail tariff should be based on the principle of reflecting the costs to Umeme of providing the services. The costs are divided into the following elements:

Labour costs Material costs Transport costs Overhead costs. In addition the charges that involve payment for a service, as opposed to capital contributions (for new connections) and penalty charges, include a 20% profit in line with the ROI prescribed in the Retail Tariff.

All estimates are expressed in current prices (May 2008), based on a US dollar exchange rate5 of USh 1625, and do not include any allowance for future price rises.

To the extent that the data is available, account has been taken of the costs of providing the services both in the Greater Kampala area and in the up-country districts. However, the costs have been aggregated to arrive at a uniform charge throughout the Umeme franchise area.

The treatment of overheads has been to only allocate those overhead costs that are identifiable as directly applicable to the cost to Umeme of providing the particular service. This is to avoid possible double counting for costs that should be included already within the DOMC.

The methodology does not include any explicit subsidy between classes of customer or location. However, there are implicit subsidies in some of the charges where, for example the transport costs are built up from data for vehicles based both in Greater Kampala and in the country districts. Also, some of the services are carried out by dedicated teams in Kampala, whereas in country districts the same service is provided by the district offices by staff who also perform other duties. Disaggregated data is not available to enable an assessment to be made of the quantum of the cross subsidy between urban and rural customers for the services covered in this study. In any event the differences in costs are likely not to be significant in relative terms.

5 Bank of Uganda, average of buying and selling rates, in late-May 2008.


Details of the methodology developed for each of the charges is described in the following paragraphs.

The figures quoted are all exclusive of VAT which should be levied on all the charges at the current rate of 18%, with the exception of security deposits.

4.2 Labour Costs

Labour costs for the Umeme staff involved in the provision of the services covered by the other charges are based on current average salaries per grade, plus direct on-costs, including 10% of the basic salary for employers NSSF contributions, plus USh 175,705 per month for medical cover, and leave travelling allowance of either USh 250,000, or USh 350,000, per year depending on the staff grade.

Umeme has indicated that, in 2007, the average time lost from sick leave was approximately 2 hrs per staff member for the year. This level of lost working hours is not material in terms of the estimation of the other charges in this study. The analysis presented in the following paragraphs does not therefore include any allowance for sick leave.

4.3 Material Costs

Material costs should be based on the current (May 2008) costs of materials used to provide the service, including allowances for tools and equipment. Umeme has developed a detailed materials and job costing system, known as VITAL. The materials database is updated on a monthly basis to reflect price increases and exchange rate fluctuations. The VITAL software has been used as the source for the material costs presented in this report. Details of the make-up of the materials costs used in deriving the other charges are shown in Appendix 3. The materials costs for single phase connections include for a meter box, as per the new installation guidelines.

4.4 Transport Costs

Information was collected from Umeme on the current costs of operating the vehicles in its transport fleet, focussing on the vehicles used in the provision of the services covered in this study. Both fixed and variable costs were calculated for the three types of vehicle that are used to provide the services:

Motor cycles, used for disconnections/reconnections; Pick-ups, used for inspections, meter testing and some construction

activities; and

Trucks used for construction involving bulky/heavy materials, i.e. wood poles.


The costs are based on current fuel prices prevailing in late-May 2008, actual maintenance costs incurred in 2007 for each type of vehicle and insurance costs. Umeme advised that insurance costs should be based on a percentage of the replacement cost of the vehicles; the percentages adopted were 4% for motor cycles and 5% for both pick-ups and trucks. Vehicle depreciation costs are excluded as they are covered within the retail tariff methodology.

Details of the calculation of the vehicle costs are set out in Appendix 4.

In summary, the current operating costs per working day6 for the three types of vehicle are:

Motor cycles USh 10,600 (US$ 6.2) Pick-ups USh 63,000 (US$ 39) Trucks USh 146,000 (US$ 90)

4.5 Overheads

As discussed in Section 4.1, overheads have been included only to the extent that it can be clearly demonstrated that the costs are wholly and exclusively incurred by Umeme in the provision of the services included under the other charges. Overheads are limited therefore to the labour costs incurred in the direct supervision of the activities, plus associated transport costs. A small overhead charge has been added to cover consumable items such a printing of reports, telephone calls directly related to the service provision, and an allowance for utilities. Note: no allowance has been included for any costs associated with central services such as finance and HR as it is felt that such costs would be difficult to justify. Neither have any accommodation costs been included. Details of the overheads charged are itemised in the calculations of the other charges presented in the following paragraphs.

4.6 Connection Charges

4.6.1 No-pole connections

(i) Single phase no-pole connections

No-pole connections are installed by the Field Services group in Greater Kampala and by district office staff in the country areas. The connections are made by two person teams, comprising a linesman/driver and a linesman. The costs are based on Umemes target connection rate of 12 per working day.

6 Based on 236 working days per year: 365 days less 104 weekend days, 13 public holidays and 12 days (1 per month on average) for maintenance.


The installation teams each operate with a pick-up vehicle. Materials are based on detailed itemised materials schedule and unit costs taken from Umemes SUN materials database and VITAL job costing software. Costs are updated on a monthly basis to reflect current market prices. The installation teams are managed by the Senior Technical Officer (STO) responsible for installation and inspections. The costs include for the 45% of the STOs time that is estimated to be devoted to managing the one-pole connections.

The connection cost is based on a connection distance of 30 m from the nearest pole, which is the average connection distance according to Umemes experience. The estimated cost of a single phase no-pole connection is USh 197,000 (US$ 121). Details of the calculation are set out in Table 4-1, and the supporting materials costing in Appendix 3 Table 1.

(ii) Three phase no-pole connections

The Umeme standard is for undergrounding of three phase connections. The trenching work is carried out by casual workers. The standard costs include for connections of up to 30 m. which do not involve any reparation works, other than the back-filling of the cable trench. The cost of such making good works should be passed through to the customer. Connections greater than 30 m, and/or involving excavation of roads/pavements, should be subject to individual quotations.

The direct overhead costs include for 5% of the Senior Technical officers time spent managing the three phase no-pole connections.

Three standard connection charges for service connections based on the average connection distance of 30 m have been developed based on the following supply capacities:

up to 60 kVA (using 35 sq mm aluminium cable) 61 to 100 kVA (using 70 sq mm aluminium cable) 101 to 120 kVA (using 95 sq mm cable)

The proposed charges are as follows:

Up to 60 kVA: USh 941,000 (US$ 579) 61 to 100 kVA: USh 1,197,000 (US$ 737) 101 to 120 kVA USh 1,541,000 (US$ 948)

Details of the calculations are set out in Table 4-2, and the supporting materials costing in Appendix 3 Tables 2, 3 and 4.


Table 4-1: Single phase no-pole connections (average 30 m)

Cost items per team Explanation USh/month

Labour costs:Salaries Monthly salaries for two linesmen 912,000 NSSF contribution 10% of salary cost 91,000 Medical cover Monthly cost for staff in team 29,000 Leave allowance Monthly cost for staff in team 42,000 Total labour 1,074,000 Transport costs:Pick-up 3/ Daily cost x working days per month 1,323,000 Material costs & tools:Connection materials 4/ Unit cost x connections per month 46,011,577 Climbing irons & tools Monthly cost 177,000 Total materials 46,188,577 Direct overhead costs:Senior Technical Officer 1/ 45% of STO monthly salary 183,000 Transport (pick-up) 45% of monthly pick-up operating cost 103,000 Other direct overheads 6/ See Basic Data table below 51,000 Total overhead 337,000

Total cost 48,922,577

Connections per team No. per month 248

Cost per connection (USh) 197,000 plus VAT at 18%

Basic data:

Salary - linesman/driver (AAA) per month 456,000 Salary - STO (CCU) 1/ per month 2,186,000 Medical cover per year 175,750 Leave allowance - linesman per year 250,000 Leave allowance - supervisor per year 350,000 No. of staff 2/ per team 2 Pick-up cost 3/ per day 63,000 Connection materials 4/ per connection 185,531 Connections per team per month 248 Climbing irons & tools 5/ set 4,250,000 Overheads per team 6/ per month 51,000

Notes:1. Estimate 45% of time spent managing 6 teams.2. One linesman, one linesman/driver.3. For details of costing, see Appendix 4.4. As per Umeme's detailed materials schedule, see Appendix 3.5. Depreciated over 24 months.6. Includes telephone, utilities, stationery.


Table 4-2: Three phase no-pole connections (average 30 m)

Cost per team Explanation up to 60 kVA 61 to 100 kVA 101 to 120 kVA

USh/month USh/month USh/monthLabour costs:Salaries Monthly salaries for two linesmen 913,000 913,000 913,000 NSSF contribution 10% of salary cost 91,000 91,000 91,000 Medical cover Monthly cost for staff in team 29,000 29,000 29,000 Leave allowance Monthly cost for staff in team 42,000 42,000 42,000 Casual workers Three per team 441,000 441,000 441,000 Total labour 1,516,000 1,516,000 1,516,000 Transport costs:Pick-up 4/ Daily cost x working days per month 1,323,000 1,323,000 1,323,000 Material costs & tools:Connection materials 5/ Unit cost x connections per month 55,242,000 71,114,000 92,442,000 Climbing irons & tools Monthly cost 177,000 177,000 177,000 Total materials 55,419,000 71,291,000 92,619,000 Overhead costs:Senior Technical Officer 1/ 5% of STO monthly salary 20,000 20,000 20,000 Transport (pick-up) 5% of monthly pick-up operating cost 11,000 11,000 11,000 Other direct overheads 7/ See Basic Data table below 51,000 51,000 51,000 Total overhead 82,000 82,000 82,000

Total cost 2/ 58,340,000 74,212,000 95,540,000

Connections per team No. per month 62 62 62

Cost per connection (USh) 941,000 1,197,000 1,541,000 plus VAT at 18%

Basic data:

Salary - linesman/driver (AAA) per month 456,307 Salary - STO (CCU) per month 2,185,860 Casual worker per day 7,000 Medical cover per year 175,750 Leave allowance - linesman per year 250,000 Leave allowance - supervisor per year 350,000 No. of staff 3/ per team 2 No. of casual workers per team 3 Pick-up cost 4/ per day 63,000 Connection materials 5/ per connection - up to 60 kVA (35mm2) 891,000 - 61 to 100 kVA (70 mm2) 1,147,000 - 101 to 120 kVA (95 mm2) 1,491,000 Connections per team per month 62 Climbing irons & tools 6/ set 4,250,000 Overheads per team 7/ per month 51,000

Notes:1. Assumes 5% of time spent managing 6 teams.2. Plus costs of making good roads, pavements, etc.3. One linesman, one linesman/driver.4. For details of costing, see Appendix 4.5. As per Umeme's detailed materials schedule, see Appendix 3.6. Depreciated over 24 months.7. Includes telephone, utilities, stationery.


4.6.2 One-pole connections

(i) Single phase one-pole connections

One-pole connections are installed by the Major Engineering Works construction group. This group is also responsible for multi-pole connections and schemes. There are six construction teams each comprising 11 staff a supervisor, 9 linesmen and a driver. Based on data for 2007 provided by Umeme, each construction team makes, on average, 2 one-pole connections per working day, or 42 per month7.

Each team uses a single truck for the transport of the staff, materials and tools. The construction teams are managed by a Major Engineering Works Manager. It is estimated that single phase one-pole services take up 45% of the managers time; this cost is included as a direct overhead. Material costs are taken from Umemes detailed costing schedule.

The estimated cost of a single phase one-pole connection is USh 1,244,000 (US$ 765). Details of the calculation are set out in

Table 4-3, and the supporting materials costing in Appendix 3 Table 1.

(ii) Three phase one pole connections

Three phase one-pole connections are also undertaken by the construction group using the same teams. The costing methodology is similar to the three phase no-pole connection. Again the standard costs include for a service connection based on the average distance of 30 m from the nearest pole and no special reparation works.

Three standard connection charges have been calculated based on the following supply capacities:

Up to 60 kVA: USh 2,307,000 (US$ 1,420) 61 to 100 kVA: USh 2,563,000 (US$ 1,577) 101 to 120 kVA USh 2,907,000 (US$ 1,789)

Details of the calculations are set out in

Table 4-4, and the supporting materials costing in Appendix 3 Tables 2, 3 and 4.

7 The Umeme data includes both one-pole and multi-pole connections (both single phase and three phase). It is estimated that 5% of connections are multi-pole and the balance one-pole. Assuming the multi-pole connections take twice as long to construct, this implies that 90% of the time spent by construction teams on connections (as opposed to schemes) is devoted to one-pole connections.


Table 4-3: One-pole connections single phase (average 30 m from pole)


Cost items per team Explanation USh/month

Labour costs:Monthly salaries Nine linesmen, one driver, one supervisor 6,041,000 NSSF contribution 10% of salary cost 604,000 Medical cover Monthly cost for staff in team 161,000 Leave allowance Monthly cost for staff in team 238,000 Total labour 7,044,000 Transport costs:Truck 5/ Daily cost x working days per month 3,066,000 Material costs & tools:Connection materials 2/ Unit cost x connections per month 40,150,393 Climbing irons Monthly cost for team 861,000 Tools & equipment Monthly cost for team 191,000 Total materials 41,202,393 Direct overhead costs:Manager 1/ 45% of manger monthly salary 183,000 Transport (pick-up) 45% of monthly operating cost 103,000 Other direct overheads 7/ See Basic Data table below 51,000 Total overhead 337,000


Connections per team No. per month 42

Cost per connection (USh)Construction 1,229,000 Field Services 3/ 15,000 Total 1,244,000 plus VAT at 18%

Basic data:

Salary - linesman (AAA) per month 456,307 Salary - driver per month 456,307 Salary - supervisor (CCL) per month 1,478,268 Salary - manager (CCU) per month 2,185,860 Medical cover per year 175,750 Leave allowance - linesman per year 250,000 Leave allowance - supervisor per year 350,000 No. of staff 4/ per team 11 Pick-up cost 5/ per day 63,000 Truck cost 5/ per day 146,000 Connection materials 2/ per connection 955,962 Climbing irons 6/ per set 2,550,000 Connections per team per working day 2 Tools & equipment 6/ per team 5,100,000 Overheads per team 7/ per month 51,000

Notes:1. Assumes 45% of time spent managing 6 teams.2. As per Umeme's detailed materials schedule, see Appendix 3.3. Cost for Field Services to energise the customer.4. One supervisor, one driver and 9 linesmen5. For details of costing, see Appendix 4.6. Depreciated over 24 months.7. Includes telephone, utilities, stationery.


Table 4-4: One-pole connections three phase (average 30 m from pole)

Cost items per team Explanation up to 60 kVA 61 to 100 kVA 101 to 120 kVAUSh/month USh/month USh/month

Labour costs:Salaries Nine linesmen, one driver, one supervisor 6,041,000 6,041,000 6,041,000 NSSF contribution 10% of salary cost 604,000 604,000 604,000 Medical cover Monthly cost for staff in team 161,000 161,000 161,000 Leave allowance Monthly cost for staff in team 258,000 258,000 258,000 Casual workers Three per team 441,000 441,000 441,000 Total labour 7,505,000 7,505,000 7,505,000 Transport costs:Truck 4/ Daily cost x working days per month 3,066,000 3,066,000 3,066,000 Material costs & tools:Connection materials 5/ Unit cost x connections per month 62,528,000 70,720,000 81,728,000 Climbing irons & tools Monthly cost for team 177,000 177,000 177,000 Total materials 62,705,000 70,897,000 81,905,000 Overhead costs:Manager 1/ 5% of manger monthly salary 20,000 20,000 20,000 Transport (pick-up) 5% of monthly operating cost 11,000 11,000 11,000 Other direct overheads 7/ See Basic Data table below 50,000 50,000 50,000 Total overhead 81,000 81,000 81,000

Total cost 2/ 73,357,000 81,549,000 92,557,000

Connections per team No. per month 32 32 32

Cost per connection (USh)Construction 2,292,000 2,548,000 2,892,000 Field Services 3/ 15,000 15,000 15,000 Total 2,307,000 2,563,000 2,907,000 plus VAT at 18%

Basic data:

Salary - linesman/driver (AAA) per month 456,307 Salary supervisor (CCL) 1,478,268 Salary - manager (CCU) per month 2,185,860 Casual worker per day 7,000 Medical cover per year 175,750 Leave allowance - linesman per year 250,000 Leave allowance - supervisor per year 350,000 No. of staff 4/ per team 11 No. of casual workers per team 3 Pick-up cost 5/ per day 63,000 Truck cost 5/ per day 146,000 Connection materials 6/ per connection - up to 60 kVA 1,954,000 - 61 to 100 kVA 2,210,000 - 101 to 120 kVA 2,554,000 Connections per team per working day 1.5 Climbing irons & tools 7/ set 4,250,000 Overheads per team 8/ per month 51,000

Notes:1. Assumes 5% of time spent managing 6 teams.2. Plus costs of making good roads, pavements, etc.3. Cost for Field Services to energise the customer.4. Nine linesmen, one driver and one supervisor.5. For details of costing, see Appendix 4.6. As per Umeme's detailed materials schedule, see Appendix 3.7. Depreciated over 24 months.8. Includes telephone, utilities, stationery.


4.6.3 Multi-pole connections and commercial schemes

Multi-pole connections and schemes are charged to the customer at cost. It is proposed that the methodology adopted in estimating the costs should be similar to that proposed for one-pole connections, as set out in Section 4.6.2.

4.7 Inspection Charges

Inspection of the wiring of customers premises prior to connection is a statutory requirement in Uganda. This activity was previously undertaken by the Ministry of Public Works but was taken over by UEB/UEDCL and subsequently was passed through to Umeme under the distribution licence granted by ERA. In Greater Kampala, inspections are carried out by the Technical Services group within the Field Services department. In the up-country areas, this service is provided by the district offices.

Umeme feels strongly that the inspections and certification of the wiring of customers premises prior to connection should be carried out by independent inspectors licensed by ERA. This activity is closely related to the local electrical contracting market for which ERA already issues licences to qualified practitioners. The licensing of qualified inspectors is a logical progression of this process and would assist in strengthening the local market for wiring of electrical installations and raising quality standards.

It is proposed that Umeme should continue to carry out inspections of customers wiring installations until such time as ERA has licensed a sufficient number of inspectors to undertake this work. During this interim period, Umeme will continue to levy inspection fees based on the current Schedule of charges filed with ERA. These charges are summarised in Table 4-5.

Table 4-5: ERA Schedule of Charges for Inspection of Customers Premises

Type of customer Inspection fee (USh)

Domestic 35,000

Commercial 40,000

Three phase 75,000

Maximum demand 100,000 Subject to VAT at 18%.

4.8 Meter and Transformer Testing Charges

4.8.1 Meter Testing

With the introduction of the Call Centre and the activation of the 185 public telephone access number, Umeme has been receiving a very large number of


requests for meter tests. In order to address this demand, Umeme has introduced a new section comprising four teams of specialised meter technicians who travel out and test customers meters in situ. Ten portable meter testing units have been procured and staff trained to operate them. Although the initial deployment only covers the nine districts of Greater Kampala, Umeme is in the process of rolling out the programme to cover the whole of its licensed area.

For single phase installations, the tests are conducted by a single meter technician. The target rate of testing is 8 meters per day on average. For three phase installations, the target rate is also 8 meter tests per day, with teams comprising two meter technicians. For large customers supplied at HT under a kVA tariff, the target rate is 4 meters per day with a team comprising three staff a metering engineer, a meter technician and an operations technician (to perform switching).

The teams use pick-ups for transport. The transport costs are based on average km distances recorded by pick-ups operating on Field Services duties.

The estimated cost of meter testing is as follows:

Single phase customers: USh 24,500 (US$ 15.1) Three phase customers: USh 32,000 (US$ 19.7) kVA/HT customers USh 96,600 (US$ 59.4)

Where meters are found to have a fault, the customer is refunded the meter testing fee.

Details of the calculations are set out in Table 4-6. Umeme does not currently charge VAT on meter testing charges, although it is understood the regulations state that the meter testing fees should be subject to VAT.


Table 4-6: Meter testing Fees

Item Explanation Single phase Three phase kVA/HT

USh/month USh/month USh/month

Labour costs:Salaries 2/ 3/ Monthly salary for team 999,000 1,998,000 4,184,000 NSSF contribution 10% of salary cost 100,000 200,000 418,000 Medical cover Monthly cost for staff in team 14,000 28,000 42,000 Leave allowance Monthly cost for staff in team 21,000 42,000 71,000 Total labour 1,134,000 2,268,000 4,715,000 Transport costs:Pick-up Daily cost x working days per month 1,323,000 1,323,000 1,323,000 Material costs & tools:Seals See Basic Data table below 90,000 90,000 45,000 Meter testing equipment 1/ See Basic Data table below 398,000 398,000 467,000 Total material 488,000 488,000 512,000 Overhead costs:Supervisor 4/ Share of monthly salary 49,000 6,000 6,000 Transport (pick-up) Share of pick-up operating cost 26,000 3,000 3,000 Other direct overheads 6/ See Basic Data table below 405,000 405,000 202,000 Total overhead 480,000 414,000 211,000

Total cost 3,425,000 4,493,000 6,761,000

Meters tested per team No. per month 168 168 84

Cost per test 20,400 26,700 80,500 Profit @ 20% 4,100 5,300 16,100 Fee per meter test (USh) 24,500 32,000 96,600 plus VAT at 18%

Basic data:

Salary - metering engineer (CCU) per month 2,186,000 Salary - meter technician (BBU) per month 999,000 Salary - supervisor (CCU) per month 2,186,000 Medical cover per year 175,750 Leave allowance - technician per year 250,000 Leave allowance - engineer per year 350,000 No. of staff per team 2/ 1 phase 1 No. of staff per team 2/ 3 phase 2 No. of staff per team 3/ kVA/HT 3 Pick-up cost 5/ per working day 63,000 Seals each 510 Portable test meter 1/ each 9,547,200 Portable test meter (kVA) 1/ each 11,216,600 Meter tests per team per day - single & three phase 8 - kVA/HT 4 Overheads 6/ per test 2,300

Notes:1. Depreciated over 24 months2. Meter technicians3. Two meter technicians & one metering engineer4. 10% of time spent supervising 4 teams; 80% for 1-ph, 10% each for 3-ph & HT/kVA5. For details of costing, see Appendix 4.6. Includes telephone (Call Centre), reports, stationery


4.8.2 Transformer Testing

Recently, Umeme has carried out very few tests on customers transformers. Tests that are carried out are subject to individual quotations based on the cost to Umeme of providing the services. It is proposed that charges for this service are based on individual quotations with the costs estimated using a similar methodology to that described in the previous sub-section for meter testing.

4.9 Reconnection Charges

In 2007, Umeme carried out over 210,000 disconnections/reconnections of customers for non-payment or other irregularities. The details are shown in Table 4-7. Customers receive electricity bills monthly and are given 14 days to pay, after which time they are liable for disconnection. The number of reconnections is only 38% of the number of disconnections, indicating that in many cases customers reconnect themselves illegally. As this level of disconnections is not sustainable, it is therefore proposed that the reconnection charge is based on a 90% ratio of reconnections to disconnections, plus a penalty charge of USh 17,000 (US$10).

Table 4-7: Disconnections/Reconnections in 2007

Disconnections: Reconnections: Ratio (%)Kampala 88,440 Kampala 37,827 Up-country 65,286 Up-country 20,329 Total 153,726 Total 58,156 38%

The unit responsible for these activities is part of Umemes Field Services group. Most of the disconnection/reconnections are carried out by a central group based in the Commercial department in Kampala. Some disconnections/reconnections in the up-country districts are also carried out by the Kampala-based teams during a 15-day period every three months. The charges therefore include for the additional travel time and expenses. The balance of the disconnections/reconnections in the up-country areas are carried out by Umemes district office staff.

The current legislation states that disconnections are not permitted on Fridays which gives only 17 working days per month on average for the disconnection teams, after allowing for public holidays. The Kampala group includes 22 teams, each comprising two linesmen. Each team carries out 25


disconnections per day on average8. The groups are supervised by a Senior Technical Officer. The teams use motor cycles for transport, one per team.

The proposed reconnection fee is USh 25,200 (US$ 15.5). Details of the calculation are set out in Table 4-8.

4.10 Penalty charges

As discussed in Section 3.8, penalty charges are levied by Umeme in respect of illegal usage of electricity and also for cheques which are not honoured by the banks on which they are drawn (so called bounced cheques). There are two aspects to the determination of appropriate level of penalty charges for illegal use of electricity the cost to Umeme and the deterrent signal it sends.

The cost to Umeme of illegal connections is principally in the lost revenue. For example, Umeme purchases electricity from UETCL at a current average price of 129 USh/kWh. Adding distribution technical losses, estimated at 15%, increases the price of the energy purchased to 152 USh/kWh at the LV customers meter. This excludes the distribution component of the cost which is essentially fixed (i.e. does not vary significantly with marginal kWh sales). This represents an immediate loss to Umeme. Assuming 20% of the energy purchased represents commercial losses, due to theft and other irregularities, the purchase cost for the same energy sales but with zero commercial losses would be approximately USh 53 billion lower. Thus each 1% reduction in commercial losses represents a saving to Umeme in direct energy purchase costs of approximately USh 2.6 billion per year.

8 It should be noted that this gives 9,350 per month on average. This is significantly lower than the 12,810 actual disconnections per month achieved by Umeme in 2007. The difference arises due to disconnections/reconnections which are carried by staff from the up-country district offices.


Table 4-8: Reconnection Fee

Item Explanation USh/month

Labour costs:Salaries Monthly salaries for 44 linesmen 20,064,000 NSSF contribution 10% of salary cost 2,006,000 Medical cover Monthly cost for 44 linesmen 644,000 Leave allowance Monthly cost for 44 linesmen 917,000 Per diems 15 days per 3 months 11,000,000 Total labour 34,631,000 Transport costs:Motor cycles Daily cost x working days per month 5,130,400 Material costs:Seals 9,900,000 Climbing irons See Basic Data table below 2,338,000 Total material 12,238,000 Overhead costs:Supervisor:Salary Monthly salary, plus on-costs 2,448,000 Per diems 1/ 15 days per 3 months 250,000 Transport (pick-up) Monthly pick-up operating cost 1,386,000 Other costs See Basic Data table below 1,000,000 Total overhead 5,084,000


no. per monthDisconnections/reconnections:Disconnections 2/ 9350Reconnections 8415

Cost per reconnection 6,800 Profit @ 20% 1,400 Penalty fee (US$10) 17,000 Fee per reconnection (USh) 25,200 plus VAT at 18%

Basic data:

Salary - linesman (AAA) per month 456,000 Salary - officer/supervisor (CCU) per month 2,186,000 Medical cover per year 175,750 Leave allowance - linesman per year 250,000 Leave allowance - officer per year 350,000 per diems per day 50,000 No. of staff 3/ 44 Motor cycle cost 4/ per day 10,600 Pick-up cost 4/ per day 63,000 Seals each 510 Climbing irons set 2,550,000 Disconnections/team per day 25 Overheads 5/ per month 1,000,000 Ratio: reconnection/disconnection unit 38%

Notes:1. Based on 15 days per quarter travel up-country2. Based on 17 working days per month for disconnections, i.e. excluding Fridays & Public Holidays3. 22 teams each with 2 linesmen.4. For details of costing, see Appendix 4.5. Includes telephone, utilities, stationery


The present penalty charge for an illegal connection is USh 295,000 for a domestic customer which is almost 7 times the average monthly bill, see Table 4-9.

Table 4-9: Umeme billing data for January 2008

Item Units Domestic Commercial Commercial TOU

Medium industrial

Large industrial

Consumption MWh 18,482 5,582 6,740 17,014 45,428 Cost USh'm 11,308 2,661 3,155 7,809 10,631 Billed customers no. 261,500 16,990 4,648 796 146 Specific consumption kWh 71 329 1,450 21,375 311,150 Cost/customer USh/month 43,241 156,643 678,864 9,810,135 72,814,720

On the other hand the present penalty charge for large industrial (kVA) customers is USh 1,180,000 which is equivalent to only 1.6% of the average monthly bill. To provide an effective deterrent, penalties should be set at levels that send the correct signals to customers. A penalty charge which represent the cost of only a few hours electricity consumption provides little disincentive to the customer, whereas a penalty charge that represents many months of electricity customer sends a much stronger signal. Thus, if penalties for illegal connections are to be effective deterrents, they should be set at levels that are linked to the average monthly expenditure on electricity.

In addition, as the law stands today, the level of penalty charges for illegal connections may be limited to USh 1,000,0009. This would potentially make penalty charges substantially in excess of this amount unenforceable. It is recommended that matter should be taken up with ERA and the Ministry of Energy and Minerals Development.

It is proposed therefore that penalties for illegal connections and meter tampering and by-passing should be dealt with by levying a penalty equivalent to 12 months estimated consumption.

For domestic and commercial customers it is recommended that there should be minimum penalties, as follows:

Domestic USh 350,000 Commercial USh 700,000

In addition to the proposed penalties, Umeme also has recourse to the law. A person who tampers with or adjusts any installation is liable on conviction to

9 The Electricity Act, 1999 sets a limit of penalty charges for illegal connections at 50 currency points, which is equivalent to USh 1,000,000 or imprisonment for a period of up to 5 years, or both.


imprisonment for a period of up to five years10. This may be instead of, or in addition to, a penalty charge.

4.11 Bounced cheques

It is understood that the current charge of USh 5,000 for a cheque that is not honoured by the bank does not cover the bank charges. It is recommended that Umeme should pass onto the customer the actual charge levied by the bank for the bounced cheque plus a penalty charge of 10% of the value of the cheque.

4.12 Security deposits

The current Umeme policy is to limit security deposits to three months estimated electricity consumption in line with the provisions of the Grid Code. Accordingly it is proposed that the level of security deposits for small consumers should be retained at the current levels of:

Domestic USh 100,000 Commercial (non-TOU) USh 200,000

All other customers, including commercial time-of-use customers, should be required to provide a deposit equal to 3 months estimated consumption or provide a bank guarantee for that amount.

All existing customers who are disconnected for non-payment will have their security deposits reviewed and set at a sum equal to three months estimated consumption.

Accruing interest on security deposits would require a major administrative effort and additional costs. Few utilities in the region are believed to accrue interest on security deposits.

10 It is interesting to note that in Zambia there has been a change in policy recently; from now on all persons who are found with illegal connections or meter-bypassing will be prosecuted as a matter of course.


5 Benchmarking of Charges against Other Utilities

5.1 Introduction

At the initial meeting in Kampala, ERA requested that the study should include some benchmarking of the charges being considered against other utilities in the region. Requests for information were sent to the following countries in the region:

Kenya; Rwanda; Malawi; Tanzania; Zambia; South Africa; and Botswana. We also considered approaching the authorities in Zimbabwe but did not do so as we felt that the data would be of limited value given the present hyper-inflation and financial crisis in the country. Responses have been received from Malawi, Rwanda11, Kenya, Zambia and South Africa (for Setseto Municipality and Eskom11) and we have obtained some information from the utility web sites for Tanzania and Botswana.

We also sought information from the two other main distribution licensees in Uganda Ferdsult and WENRECo and have obtained some data on their current charges for the types of services covered in this study. These will be discussed first before the data for other countries in the region are discussed.

5.2 Distribution Companies in Uganda

5.2.1 Ferdsult

Ferdsult has a small concession in Western Uganda. The HV and LV systems were provided under bilateral aid from SIDA, through the REA (Rural Electrification Agency). Ferdsult has a problem with Umeme undercutting them on connection fees. Since Ferdsult operates in rural areas, transport and skilled labour costs are high. Also, as they are not able to buy materials in

11 12 The information on Electrogaz and Eskom has been received since the submission of the Draft Report.


bulk, they have to pay higher unit prices. As a small company, they cannot afford to have money tied up in stock.

Their connection cost is made up of:

Materials Labour (using local unskilled labour where feasible) Transport (differs from area to area) Overhead Profit No-pole connection charge, agreed by ERA is 250,000 USh + 18% VAT.

The actual cost to Ferdsult (USh) is as follows:

Materials, labour, transport 250,000

Inspection fee 20,000

Monthly service fee 2,000

Start-up energy fee 20,000

VAT 60,000

Total 352,000

Thus Ferdsult are under-recovering more than USh 100,000 on each connection.

All Ferdsults customers are fitted with prepayment meters.

Reconnection fees (agreed by ERA) are as follows:

Domestic USh 10,000 Business USh 20,000 Ferdsult advised that they had applied to ERA to increase the reconnection fee to USh 50,000.

Penalty charges for meter by-passing are as follows:

20% of estimated energy lost, plus recovery of the estimated cost of the energy lost, plus criminal sanctions.


Penalty charges for meter tampering are the same as those for meter by-passing.

Bounced cheques are not a problem. Ferdsult has an arrangement with business customers who are given a monthly invoice based on meter readings, although they are on prepayment meters.

5.2.2 WENRECo

WENRECo operates a concession in the rural Arua region in the North West of Uganda. The system is isolated from the UETCL grid. Electricity is generated by a diesel power plant burning heavy fuel oil (HFO).

WENRECos tariff and other charges are regulated by ERA. The tariff charges are denominated in US dollars and converted to USh. The exchange rate is adjusted every three months. There are also quarterly adjustments to cover changes in fuel costs and local inflation in Uganda as measured by the CPI. The basic charges are summarised as follows12:

Connection fees:

Domestic (2.5 Amp.) USh 105,332

Domestic/Commercial (1-phase) USh 189,597


Maximum demand (>50 kVA) separately quoted

In addition within the concession area, WENRECo received a subsidy of US$ 100 (USh 170,000) per connection under the Rural Electrification Subsidy Agreement.

Reconnection fees:

All except maximum demand customers USh 29,493

Maximum demand customers USh 126,398

Meter testing fees:

Single phase domestic/commercial USh 21,066

Three phase domestic/commercial USh 105,332

Maximum demand USh 210,663

12 Note: these are current charge for the first quarter of 2008, approved by ERA.


Penalty charges:

Domestic limited to US$ 500 (USh 854,000), plus the extent of the law.

Commercial & Maximum demand 3 times average monthly bill, plus the extent of the law.

Security deposits:

Domestic (2.5 Amp.) nil


Domestic (3-phase) USh 168530

Maximum demand (>50 kVA) two-months average billing

The above charges are all exclusive of VAT.

5.3 Utilities in the Region

5.3.1 Status

Positive feedback has been obtained from the following sources:

Escom, Malawi; ZESCO, Zambia; NESRA, South Africa. KPLC, Kenya; and Electrogaz, Rwanda Good information on BPC, Botswana and to a lesser extent on Tanesco, Tanzania has been obtained from their respective websites. The results obtained to date from the benchmarking exercise carried out against other utilities in the region are summarised in the following paragraphs.

5.3.2 Connection charges

Comparative figures have been obtained for domestic no-pole connection charges for single phase customer connections for Kenya (KPLC), South Africa (Setseto Municipality and Eskom), Malawi (Escom) and Zambia (ZESCO). These are shown in Figure 5-1. The ZESCO charges have been approved very recently by the regulator, i.e. in February 2008. It is reported that Tanesco has applied to the Tanzanian regulator for substantial increases in connection charges US$ 484 for pre-payment customers and US$ 428 for customers with credit meters. However, these have not yet been approved.


On the basis of the data obtained, the present Umeme no-pole connection charge is substantially lower than all the countries in the region for which we have obtained data. In Malawi the charge is 52% higher, in South Africa (Eskom) 145% higher, in Zambia 353% higher and Kenya 775% higher. In South Africa, NERSA recently approved the Homelight 1 (20 Amp) tariff as the base small customer residential tariff with no connection fee, effective from 1 December 2007. The charge shown in Figure 5-1 refers to the Homelight 2 (20 amp) tariff which has a connection charge of Rand 887.19 (US$ 115).

Figure 5-1: Connection charges for single phase domestic consumers (US$)

411

213

115

71

47

88

0 50 100 150 200 250 300 350 400 450

Uganda (Umeme exisiting)

Uganda (Umeme proposed)

Malawi (Escom)

South Africa (Eskom)

Zambia (ZESCO)

Kenya (KPLC)

5.3.3 Inspection fees

ZESCO and Tanesco are the only utilities for which we have managed to obtain data on inspection fees for customers wiring installations. The present ZESCO and Tanesco fees are shown in Table 5-1, together with those Umeme. The fees are similar for all three utilities.

Table 5-1: Inspection fees

Category Tanesco Umeme ZESCO

Domestic 17.2 20.5 13.3Industrial (kVA) 43.0 58.5 53.2

US$


5.3.4 Meter testing fees

Data on meter testing fees has been obtained for all the countries surveyed. The fees for testing of single phase domestic meters are shown in Figure 5-2. Umeme is amongst the lowest, together with Escom, Malawi and Tanesco. Those utilities with higher charges than Umeme are BPC, Botswana (+157%), ZESCO, Zambia (+344%), KPLC, Kenya (+390%) and Setseto Municipality, South Africa (+555%). Note: in South Africa, the meter testing fee for Eskom is even higher than for Setseto Municipality (US$ 26.4 as compared to US$ 19.6).

Figure 5-2: Meter testing fees (single phase) (US$)

0.4

17.3

14.7

19.6

13.3

7.7

2.6

3.0

0 2 4 6 8 10 12 14 16 18 20

Uganda (Umeme existing)


Malawi (Escom)

Tanzania (Tanesco)

Botswana (BPC)

Zambia (ZESCO)

Kenya (KPLC)

South Africa (Eskom)

5.3.5 Reconnection fees

Reconnection fees currently charged by Umeme are by far the lowest of any of the regional utilities for which data has been obtained. The present reconnection fee for Umeme is US$ 1.8 which is only 30% of the next highest (Tanesco at US$ 6.0) and less than 5% of the reconnection fee of US$ 39.3 charged by Setseto Municipality in South Africa. Note: in South Africa, the reconnection fee for Eskom is even higher than for Setseto Municipality (US$ 52.8 as compared to US$ 39.3).

The comparative reconnection fee charges are shown in Figure 5-3.


Figure 5-3: Domestic reconnection fees (US$)

14.9

1.8

6.0

7.3

11.0

13.9

16.0

18.0

52.8

0 10 20 30 40 50 60

Uganda (Umeme existing)


Tanzania

Kenya

Rwanda

Botswana

Zambia

Malawi

South Africa

5.3.6 Security deposits

Data on security deposits for domestic, commercial/business and three phase customers has been obtained for BPC, Botswana, Escom, Malawi, Setseto Municipality, South Africa and ZESCO, Zambia, and domestic only for Rwanda. The level of the deposits levied by all the utilities is relatively similar with the exception of Escom, Malawi where the charges are substantially lower. The current security deposits levied by the utilities from which data was obtained are shown in Figure 5-4.

For domestic customers Escom only requires US$ 5.4 compared to the present Umeme deposit of US$ 59.

The security deposits required by the other utilities are US$ 39.9 for ZESCO, US$ 52.4 for Setseto, US$ 61.7 for BPC and US$ 27.5 for Electrogaz. Deposits for single phase business customers are generally proportionately higher for ZESCO, BPC and Setseto than for Umeme as compared to the domestic deposits. The only data obtained for three phase customers was for Escom and Setseto Municipality where the trend is again for a low figure for Escom (US$ 54) and a high figure for Setseto (US$ 289), compared to US$ 117 currently levied by Umeme.


Figure 5-4: Security deposits

61.7 59.0

5.4

27.5

120 117

10.8

117

54.0

39.9

139

289

0

50

100

150

200

250

300

350

Zambia Botswana Uganda Malawi Rwanda

USD

Domestic (1-phase)Business (1-phase)3-phase

5.4 Penalty charges

Information on penalty charges and other remedies for illegal connections and theft of electricity was collected from ZESCO, KPLC, Escom and Electrogaz.

The policy of ZESCO on illegal connections is to prosecute in every case. Their penalty charges for illegal reconnection vary from US$ 133 for domestic customers to US$ 5,300 for large kVA customers.

KPLC also has a policy to prosecute on illegal connections. However, the utility does not benefit from the fines, although it does back-bill for the energy consumed. For meter tampering, KPLC levies a meter replacement fee of US$ 48 and back-bills for the lost energy.

Escom levies an administration charge of US$ 108 for illegal connections or theft, and also back-bills for the lost energy consumed.

The fine levied by Electrogaz for illegal connections or meter tampering is the highest of the countries surveyed. The fine is US$ 1,835, plus billing for the estimated energy consumed but not paid for.


6 Comparative Analysis of Other Charges

6.1 Basis for the analysis

The basis of the analysis presented in this section is the Umeme accounts for 2007 supplemented by information obtained from the Finance, Engineering, Customer Services, Commercial and Field Services departments. A comparative analysis has been made for the other charges showing the revenue that was received by Umeme in 2007 and the revenue that would have been obtained had the charges been based on the costs to Umeme estimated in Section 4 of this Report.

We were not able to obtain information on the total revenue from connection charges from the accounts, so the analysis has been based on data obtained on the numbers of connections and the standard connection charges ruling in 2007. The analysis does not include consideration of the penalty charges for illegal connections and theft as we were unable to obtain a breakdown of income from these sources for 2007.

All the figures presented in this section are exclusive of VAT.

6.2 Analysis of 2007 Revenue

Details of the 2007 revenue from the other charges is shown in Table 6-1. The income under the column headed Existing charges is the actual income received by Umeme in 2007 based on the Financial Statements, except for the connection charges where the income has been estimated from the numbers of connections installed in the year (no-pole and one-pole) and the current standard connection charges. The income for 2007 from multi-pole, three phase and schemes was not readily available. In any event, the potential increase in revenue will be dependent on the make-up of each of the individual quotations. Table 6-1 shows that the estimated loss of revenue to Umeme in 2007 from no-pole and one-pole connections was approximately USh 3.7 billion.

There is assumed to be no net change in the revenue from inspection fees as it is assumed that Umeme will continue to levy the current charges until such time as independent inspectors are licensed by ERA to undertake this work.

The estimated loss of revenues from reconnection and meter test fees are USh 1.2 billion and USh 12 million respectively. The revenue from meter tests is expected to rise substantially in 2008 as the recent policy of testing meters in situ is fully implemented.


Table 6-1: Income from 'other charges' Item No.

Existing charges 1/

Proposed charges

Lost revenue

1. Connections: - No-pole 2/ 15,983 1,278,640 2,477,365 1,198,725 - One-pole 2/ 2,656 733,587 3,192,512 2,458,925 - Other 782 no data no data - - Schemes 22 no data no data - Sub-total 2,012,227 5,669,877 3,657,650

2. Inspection fees 28,966 1,172,032 1,172,032 -

3. Reconnection fees 58,156 232,691 1,465,531 1,232,840

4. Meter test fees 3/ 619 3,095 15,258 12,163

5. Fines 4/ 1,888 1,430,658 - -

6. Bounced cheques 236 60,183 70,803 10,620

7. Security deposits 5/ 25,171 2,802,579 2,802,579 -

Total 4,913,273

Notes:1. Income for 2007 taken from Umeme's Financial Statements.2. Income for no-pole and one-pole connections estimated from numbers of connections installed and current standard connection charge.3. Income for 2007 under 'existing charges' based on current inspection fee of Ush 5,000.4. Not able to estimate change as income from fines is assumed to include back-billing.5. Revenue will increase but not possible to estimate the amount.

Income (USh'000)

The 2007 income from reconnection charges is taken from the Financial Statements and the numbers of reconnections made were provided by Customer Services. On the basis of the cost to Umeme of reconnecting a customer set out in Section 4.9, the estimated loss of revenue to Umeme in 2007 is estimated at USh 1.2 bn, as shown in Table 6-1.

Revenue from meter test fees in 2007 was small as the policy of testing customers meters, rather than replacing them, was only implemented during the final two months of the year. In the absence of detailed information on the make-up of the total revenue in Umemes financial statements, the loss of revenue was estimated from the numbers of meters tested and the proposed meter testing fees set out in Section 4.8.1. The number of meters tested was relatively small; this is reflected in the estimated lost revenue figure of USh 12 million


Cash analysis data for 2007, obtained from the IT department, indicates that there were 1,888 cash receipts for general penalty charges, giving an average income of USh 905,000 per receipt. It is assumed that the income from penalty charges includes back-billing for energy consumed; it was not possible therefore to estimate the increase in revenue to Umeme had the proposed new levels of penalty charges been in effect in 2007.

The estimate of lost revenue from bounced cheques was based on the number of cheques and the difference between the current fee to cover bank charges of USh 5,000 and the proposed fee of USh 50,000; this works out at USh 11 million.

It is proposed that security deposits should be based on three months estimated consumption with deposits for domestic and non-TOU commercial customers retained at the current levels. Whilst the revenue would have been substantially higher had the 3 months consumption rule been rigorously applied for larger customers, it was not possible to estimate by how much.

On the basis of the items for which data has been obtained and the methodologies and costs presented in Section 6, it is estimated that Umeme lost approximately USh 4.9 billion of revenue in 2007. This is considered to be an under-estimate as the additional revenue accruing from the connection charges for multi-pole and large three phase and kVA customers and for schemes is not included in the estimate. The proposed higher levels of fines and application of the three months rule for security deposits would have further increased the revenue accruing to Umeme.


Appendix 1 Terms of Reference

TERMS OF REFERENCE FOR THE CONSULTANCY TO DEVELOP A SERVICE COST CALCULATION METHODOLOGY TO DETERMINE CHARGES NOT INCLUDED IN THE RETAIL TARIFF.

1. Background

The UMEME Licence for Distribution of Electricity Distribution (Sec 3.2 Other Charges) stipulates that the Licensee shall develop a Service Cost Calculation methodology to determine a schedule of charges for services provided by the Licensee that are not included within the costs reflected in the Retail Tariff, such as specific connection charges to provide service to a new consumer and charges to electricity suppliers. Until such Service Cost Calculation Methodology is developed, the charges applied by UEDCL, as at the transfer date, shall remain effective, with such amendments as may be approved by the Electricity Regulatory Authority.

The charges established for the Licensees additional services will allow the Licensee to recover for its reasonable operating and investment costs, including a profit (at the same Rate of Return on Investment (ROI) as the one used to calculate the Retail Tariff) for providing such services.

The Service Cost Calculation Methodology shall be revised or amended from time to time as necessary to ensure that the principles, set out above, are respected and shall become effective only after its approval by the Electricity Regulatory Authority (ERA)

2. Objective of the Assignment

The objective for this assignment is to establish the costs of providing various services to customers such as connection charges, meter reading, meter testing, etc so that the charges reflect the true cost of delivering the service.

3. Proposed Process and Approach

Developing the Service Cost Calculation Methodology would entail the following steps, each of which could be broken down into further sub-categories:

3.1 Develop the cost allocation methodology in principle, based on prescriptions in the UMEME contracts and the Electricity (Tariff Code) Regulations. Consider issues such as prescribed tariff methodology, average vs. marginal pricing, principles of ring fencing and transfer pricing, pay-as-you-go vs. up-front payment, etc. The approach has to comply with International Financial Reporting Standards (IFRS), and any local accounting requirements as may be stipulated.


3.2 Confirm the methodology/approach with UMEME, as well as with ERA.

3.3 Present the refined approach to a stakeholder working group (which may include ERA, key customers, Ministry of Energy and Mineral Development. Ministry of Finance and Economic Development, Rural Electrification Agency (REA) etc), which working group will be used as a periodic soundboard.

3.4 Gather financial (including allowed returns, capital mix, etc. making up revenue requirement), infrastructure, operational (including demand and consumption, TOU, etc.) and performance (including losses, collection rate, etc.) data.

3.5 Carry out any additional studies that may be required (e.g. Time of Use (TOU), load profiles, etc.). The extent of any such studies will have to be determined and agreed based on the findings in 3.4 above.

3.6 Agree cost drivers and allocation method with stakeholder working group.

3.7 Allocate chart of accounts based on principles developed above. Recalibrate charges for services, covering all elements in the category other charges as prescribed in sec 3.2 of the Umeme Licence. It is assumed that there will be no need to be revisit the retail tariff structure

3.8 Develop project documentation.

4. Outputs

The outputs would include the following items

a) Chart of accounts allocated to cost categories

b) Report documenting and explaining cost allocation methodology

c) Last financial year costs allocated

d) Projection of next year/s costs based on operational and financial stats provided by UMEME

e) A formal Service Cost Calculation methodology to determine a schedule of charges for s

UMEME Cost of Service Study

Documents

Transcript of UMEME Cost of Service Study