Justification of 2023 2nd quarter tariff adjustment - PURC

The Public Utilities Regulatory Commission sits between utility service providers and consumers.

While PURC ensures that the utilities are financially viable to provide adequate services (by approving adequate revenue requirements for them), the Commission also ensures that consumers get access to reliable and competitively priced services. This means, the Commission must balance the interest of both utilities and consumers.

As part of the steps to perform this balancing act, the Commission approves major tariffs, which are applicable over a regulatory period. The Commission also undertakes quarterly adjustments of the tariffs, performs regulatory audits, monitors the performance of the utilities, educates the public, receives and resolves complaints.

The PURC in September 2022, undertook a major tariff review (2022-2025) in which, it considered the cost of operation for regulated utilities, exchange rate, inflation, cost of fuel, and other factors.

Since the exchange rate, inflation, and cost of fuel are neither under the control of the utilities nor the Commission, variations in these variables are considered as pass-through costs.

Additionally, the energy mix, which is subject to the hydrology of the dam and other climatic factors are beyond the reach of the Commission, thereby necessitating its consideration in any quarterly tariff adjustment.

To this end, the Commission per its guidelines considers these four factors (exchange rate, inflation, energy mix, and cost of fuel) and adjusts electricity tariffs on a quarterly basis to restore the value of the tariffs and to meet the revenue requirements of the utility service providers.

This is what is referred to as the Quarterly Tariff Adjustment. A similar approach is applied to water tariffs.

Explanation of the June 1st, 2023 Quarterly Tariff Adjustment

Some detailed explanations on the 2nd Quarter Tariff Decision of the Commission, which is expected to take effect from June 1, 2023, is given below.

With the recently announced quarterly tariff decision, the electricity utilities are to recoup an amount of GHS1.3149 billion over the next quarter. This is to help purchase fuel to generate power, transmit, distribute, and continuously serve consumers.

To recover the full amount, electricity tariffs should have been increased by 27.51%. However, given the approved tariff of 18.36%, an amount of GHS877.70 million will be recovered, leaving a balance of GHS437.22 million to be recovered. On the other hand, the amount to be recovered through the water tariff is GHS 650,267,161 million.

This brings us to the reasons for the recoveries. In other words, what and why are we recovering?

The first is the price of natural gas

In the first quarter tariff decision, Jubilee Oil Field contributed 32.7% of gas, Sankofa contributed approximately 51.8%, while Nigeria Gas (N-Gas) contributed 15.1%. Gas from the Jubilee Field was priced at USD 0.5/mmbtu, Sankofa was at USD 6.6272/mmbtu, while N-Gas was priced at USD 8.1510/MMBtu in the weighted average cost of gas (WACOG).

For the second quarter tariff decision, the contribution of Jubilee Field reduced marginally to 32.2%, whiles Sankofa increased to 53.9%. This reflects changes in the quantity of Natural Gas received from both fields.

The price of N-Gas on the other hand, increased from USD 8.1510/mmbtu to USD 8.6641/mmbtu, reflecting an upward change in price.

The overall implication is that the weighted average cost of gas which was USD 6.0952/mmbtu in the first quarter now increased to USD 6.5165/mmbtu in the second quarter. representing an increase of 6.9%.

Since gas prices are a pass-through cost, it is imperative that we should pay the gas price differential to enable the power producers to generate enough power for consumption. Thus, the percentage increase of 6.9% had to be passed through the tariff.

The second variable is the Exchange Rate

The projected exchange rate used for the first quarter tariff decision (that is February to April) was GHS 8.6816 to the USDollar. Meanwhile, the actual exchange rate for that same period was GHS 10.9507 to the US Dollar. This led to an exchange rate under-recovery of GHS 2.2690.

It is important to note that all Power Purchase Agreements (PPAs) are denominated in US Dollars. This means ECG buys power in US Dollars, but sells in Ghana Cedis. The implication is that any under-recoveries with the exchange rate threatens the utility’s ability to procure and sell power. This also threatens the ability of the power generators to procure fuel for generation. Thus, the exchange rate has to be recovered.

Additionally, the Commission only passed on 75% of the exchange rate under-recovery, which was experienced between September 2022 and January 2023 in the first quarter tariff decision. The remaining 25% which is equivalent to GHS 0.6202 had to be recovered. This means that for the second quarter tariff decision, that 25% equivalent to GHS 0.6202 from September 2022 to January 2023 period plus the previous quarter under-recovery of GHS 2.2690 has to be recovered.

The Commission however, considered the present economic circumstances of Ghanaians and Industry, and decided to recover the GHS 0.6202 under-recovery from September 2022 to January 2023 period, plus 50% of the GHS 2.2690, which is GHS1.1345 under-recovery of the previous quarter, which comes up to GHS 1.7547 (1.1345+0.6202) to be recovered.

Finally, the projected exchange rate for the next quarter (June to August) is GHS 10.9571 to the US Dollar. If the under-recovery of GHS 1.7547 of the previous quarter is added to the projected exchange rate of GHS 10.9571, the applicable exchange rate amounts to GHS 12.7118 to the US Dollar. Since only 50% of the exchange rate effect is being recovered, it means, an equivalent of GHS 437 million has been effectively passed on to the next quarter.

The third variable for consideration is the Hydro-Thermal mix

The hydro-thermal mix used for the second quarter is 29.01% for hydro, and 70.99% for thermal; as against 26.11% for hydro and 73.89% for thermal used for the first quarter tariff decision. The increased hydro allocation of 29.01% helped to reduce the potential tariff by about 2.5%. This means that without the increased hydro allocation, the tariff would have gone up by an additional 2.5%.

The final variable is Inflation

The projected inflation figure for the year, was 42.63%. If this figure is divided into four quarters, that amounts to an inflation rate of 10.66% per quarter.

The average actual inflation for the first quarter was 50.47%. Again, if this is divided by four, we get an inflation figure of 12.62%. This means that the inflation effect for the second quarter will be 12.62% - 10.66% which is 1.96. This figure is that which was considered in the second quarter tariff decision.

In a nutshell, the 2nd quarter tariff decision of 18.36% for electricity helps to fully recover (i)100% of the inflationary effect, (ii)100% of the gas price effect and (iii)50% of the exchange rate effect.