Labour rejects 17.27% hike in EFL tariff as totally unwarranted

  • 3rd July 2019
  • 2019
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Energy Fiji Ltd’s (EFL) bid for a 17.27% increase in electricity rates is unwarranted and must be strongly resisted. Such a substantial increase will have a debilitating impact on the economy. It will further fuel inflation and raise the cost of all goods and services across the board, says Labour Leader Mahendra Chaudhry .

None of the ten reasons (objectives) advanced in EFL’s submission to the Fiji Competition and Consumer Commission (FCCC) can withstand scrutiny in light of the profits it has been making.

EFL’s after tax profit for the three years to 2017 were: $40m (2015), $60m (2016) and $67m in 2017 – 2018 report is yet to be released. Is an increase in tariff justified given the profits it has been making? 

As it is, the people are going through very hard times. Businesses are experiencing a worrying down turn. Energy costs constitute a large part of business as well as household expenditure. Businesses will not be able to absorb the increased costs and will be forced to pass it on to their customers, pushing the cost of living even further.

EFL must realize that it is the provider of an essential service. It has a role to play in society, and the economy. It should not look at itself as a private profit-making company. Its role is to provide affordable and reliable energy to households and businesses.

EFL paid $29m to government this year as dividend. A similar payment of $20m was made last year. We reject the premise that government must get a return on its investment and was therefore entitled to part of its profits.

There is negligible government investment in EFL. Its customers are its rightful owners, not the government. Profits must therefore be passed on to the consumer through tariff reductions,  after making due provisions for asset renewal reserve and other long term commitments and contingencies. .

Labour suspects that this bid for a tariff hike is a first step in the FF government’s plan to prepare EFL for privatization. We believe that the tariff hike being sought is driven by the government. Faced with the critical state of government finances, and the possibility of a continuing downturn in the economy, it needs to raise quick cash to survive.

But before it can get the private sector to take a serious look at acquiring shares in EFL, the government must satisfy their expectation for an attractive tariff structure which guarantees them good returns. It will also add to its share value at the time of sale, culminating in an inflated sale price.

EFL’s 10-point objectives for commercial tariff rates does not stand up to scrutiny.

  • Enable entry of Private Investors

Its first objective states that it is to enable the entry of private investors to assist in the successful implementation of the optimum 10 year Power Development Plan (PDP). In other words, to provide an attractive tariff structure which guarantees private investors’ handsome profits.

There are a number of issues which must be considered here as they stand in contradiction of the declared objectives of the EFL under the Electricity Act 13 of 2017 (the Act). The relevant part of the Act is s4 subsection (d):

“Create opportunities for independent power producers to provide electricity if economical and, from a system integrity perspective, more beneficial to Fiji and the consumers of electricity.”   (emphasis ours).

The intention here seems to be that the supply of electricity from private sector producers (IPPs) must be at rates economical and more beneficial to Fiji and the consumers.

An important fact to be considered is that IPPs can sell the electricity they generate only to EFL which holds exclusivity in the transmission and supply of electricity services as the licensed retail seller of electricity in Fiji: s4(b), (d) of the Act.

IPPs cannot compete with EFL in the transmission and retail sectors. It, therefore, makes little sense for EFL to argue that (punitive) commercial electricity tariff rates are necessary to attract private investors.

Fiji is too small a market for any worthwhile private investor to consider large scale investment in the electricity sector, particularly when all they can do is to generate power to sell to the State monopoly at rates determined by it and not the market.

Let us look at the prevailing situation in the area of IPPs. There are only two remaining entities which sell electricity to EFL – the Fiji Sugar Corporation and Tropik Woods Ltd. Both generate electricity for their core operations and sell the surplus to EFL – the quantity being insignificant.

A $70m biomass facility (Nabou Green Energy) – a initial joint venture between Tropik Woods/Fiji Pine and three Korean companies Gimco, GS Power and Mirae Asset Daewoo, ceased operations in early December 2018 within 17 months after it was commissioned in July 2017. EFL should take a lesson from this failed venture.

We believe that there are no serious private investors of any worth interested in setting up a facility to supply power to EFL and that the issue should be discarded as a red herring. We say more on this later on.

In any event, why should the people be required to pay unjustified rates for electricity simply to accommodate private investors, to the detriment of the Fijian economy generally.

  • The second objective mentioned in the EFL submissions is to:

ensure a long term reliable and continuous power supply to Fiji to eliminate power supply shortages and power outages

As the holder of exclusivity rights in the transmission and supply of electricity, it is EFL’s corporate responsibility to ensure that it remains a reliable, efficient and economic supplier of electricity, an essential service which is a lifeline to householders and businesses alike and, indeed, to the national economy. It has discharged this responsibility successfully over the last 53 years and is capable of doing so in the future.

However, EFL must learn to carry out its corporate responsibility without becoming a burden on its customers. It is making good profits after tariff rates were increased in 2010. The average electricity tariff currently is 37.43 c/u (VEP), sufficient enough to generate a high return of 9% on shareholder funds (ROSF).

  • Objectives 3,4,5

We deal with the above in the following paragraphs and quote here from the EFL chief Executive Officer’s Report as appended in its latest 2017 Annual Report (pps 22 and 23):

FEA (EFL) balance sheet for 2017 remains in a strong position as a result of our consecutive years of profitable performance in 2016 and 2017.  

Our  gearing ratio as measured by debt to debt plus capital and reserves, excluding cash in hand, was 15.63% as at 31 December 2017,down from 22.07% at the end of 2016. In both years, FEA was well within the industry benchmark of maximum 45%.          

Our low gearing level in 2017 is owed primarily to the profits recorded by FEA (EFL) this year that led to an increase in shareholder value and a reduction in our debt level by $21.85 million compared to 2016. This was achieved without the authority (EFL) defaulting on any of its debt covenants signed with lenders ANZ Bank and FNPF or defaulting on its loan repayments.

 This achievement ensured that the Fijian Government, being the sovereign  guarantor of FEA (EFL’s ) loans, was not exposed. Our positive gearing level will grant us greater opportunities to borrow in the future particularly in funding our long term Power Development Plan.

The shareholder value of FEA was $751.3 million at the end of 2017 compared to $706.3 million at the end of 2016. FEA’s total asset value rose from $1.22 billion at the end of 2016 to $1.29b at the end of 2017, with our total loans and bonds amounting to $298million as at 31 December 2017, down by $21.9m compared to 2016. . . 

We submit that no argument could be stronger or more convincing than the statement above to deny EFL’s application for an increase of 17.27%  to the current electricity tariff.  The facts speak for themselves – the words are those of its chief executive officer and they demolish the entire argument in its 15-page submission calling for an increase. Indeed, one can make a good case for a reduction in the tariff based on the escalating profits of  EFL.

The EFL Balance Sheet as at 31 December 2017 and its CEO’s Report themselves argue strongly against objectives 1-5 (bullet points) of its submission.

FEA/EFL has had no problem meeting its debt covenants in the last 53 years. Its gearing ratio is quite healthy as enunciated in its 2017 Annual Report and it does not have a credit rating problem. They have always met their debt commitments so there is no question of lenders knocking on their doors. Refer to the quote above from the CEO’s 2017 Report.

  • Objectives 6,7,8,9,10

 We deal with the arguments in the above in the paragraphs that follow:

Private Investors vs Public Interest

 We are not privy to who the authors of EFL’s submissions are but are disturbed by the unending stream of unsubstantiated and misleading assumptions made therein.

At paragraph 4.1 of its submission EFL says:

“The extremely low electricity tariff rates in Fiji …is the real reason for the lack of entry of private investors and IPPs into Fiji’s electricity generation industry.”

What absolute nonsense! How can the current tariff be described as “extremely low” when EFL has been making huge profits riding on its back. It’s 9% return on shareholders funds speaks for itself.

The examples of entities it has signed PPAs with, as mentioned in paras 4.3 and 4.4 of its submission, do not stand up to scrutiny. The NZ company it cited was just a $2 paper company without any assets and/or experience in the field of power generation. Its intentions and motives were suspect.

The Nabou Green Energy Ltd (NGEL)  facility was shut down less than 18 months after it was commissioned because it was unable to source enough fuel (biomass) to operate the plant. It did not shut down because of low tariff. It was a bad investment, doomed to fail because of its flawed strategy and business plan

The Hydro VL Pte Ltd’s project has upset the landowners of Namosi who have rejected it as harmful to their environment. The company failed to follow proper environmental impact assessment procedures.

So, there is absolutely no substance to the assumption made in para4 of EFL’s submission that “Therefore NGEL and Hydro VL Pte Ltd have shown that if the right commercial electricity tariff rate is implemented by the regulator etc… then the development of  renewable energy …can be achieved.” 

It must be made clear to EFL that the interests of our people and the Fijian economy take precedence over the interests of private developers whose bottom line is not our national interest but their own balance sheets. We need to be judicious in our assessment of private investment (foreign) in our key strategic assets.

We understand that our business community is deeply concerned about the negative impact EFL’s shock move ( if approved) will have on their businesses. They will be forced to pass on the increased costs to their customers. Exporters of manufactured goods stand to risk losing their competitive edge in the market, sending the wrong signals to potential investors in the manufacturing sector.

The prevailing economic conditions are fragile to say the least. Moreover, our socal conditions are worsening because of the high cost of living and depressed family incomes. Our businesses are facing difficult times, aggravated by the liquidity crisis. Our exports are down and the productive sectors of our economy remain stagnant.  The national budget just delivered does little to brighten the sombre picture staring us in the face.

Neither  the people nor the economy is in a position to sustain a shock delivered by way of a substantial increase in energy costs. It would be insane to even think of inflicting it on the nation.

While we welcome private investment in our economy, we are of the view that private investment that militates against the interests of our own people and our economy generally, should be soundly rejected.

EFL has, in its submission, made much use of the dubious argument that Fiji’s electricity tariff is among the cheapest in the region, suggesting in veiled fashion, that this constitutes a good reason for reviewing it upwards.

Such warped comparisons are misleading and distorted because they do not take into account the cost structures or the ratio of thermal/renewal/hydro used to generate electricity in the comparator countries cited.

We submit that by no means is electricity cheap in Fiji. The 2010 tariff review did  grave injustice to the poor households by cheating them out of the lifeline tariff, the qualifying criteria for which was reduced from 250kWh to 130kWh.

Further, it introduced several tiers of charges for the commercial/industrial users and a high-end domestic user tariff. It has classified electricity used in our street lights in the same category as high end domestic user tariff, whereas previously the municipalities were given a concessionary rate for the same.

FEA in the past, and now EFL, has demonstrated an insatiable penchant for tariff adjustments even in the years when it made handsome profits. This habit must be discouraged.

We believe that a sufficient case exists for a rationalisation of the electricity tariff structure to correct the anomalies created by past reviews, particularly the 2010 review and that EFL’s profits need to be bench-marked to a level above which it must pass on the benefits to its customers by way of tariff reductions.

The Labour government in 1999 undertook such a review and ordered a reduction of 16% in the tariff then prevailing. Additionally, it directed FEA to light up our highways, beginning with the stretch between Lautoka and Nadi in recognition of its social corporate responsibility to the people.

We are somewhat confounded by the statement at paragraph 8.1 of the EFL submission that “ADB has proposed to revise the electricity tariff structure of  EFL …”. It needs to be clarified whether the ADB had any input in the overall tariff increase of 17.27% now proposed; or is yet another review contemplated after EFL secures the current proposed increase?

Whatever be the case, we warn against depending on international financial institutions for such assignments. These organisations are normally unfamiliar with local conditions and lack an appreciation of the socio-economic considerations that must form an integral part of any such exercise.

In para 7.1 of its submission, EFL has elaborated on what it calls “Benefits from setting Commercial Electricity Tariff Rate”. A critical examination of the reasons advanced in its favour in its five bullet point sub paragraphs are assumptions not worth a second reading. We say this because:

  1. IPP entry into Fiji’s electricity generation industry must be directed from the stand point of its overall benefits to the local community and the national economy – not from the bottom lines on the balance sheets of the IPPs.
  2. . Long term continuous and reliable supply of energy is the responsibility of EFL and not IPPs. They may be brought in, if needed, but on terms fair to our people and our national economy. It is a responsibility which the State must share with EFL.
  3.  Our past governments, beginning with the post-independence Alliance Government set the policies for attaining renewable energy targets, starting with the Monasavu Hydro Scheme. Subsequent governments followed suit, and in the current climate of  environmental concerns, these policies are being reviewed and the achievement of ultimate goals are being hastened.  The initiative to achieve high level of renewable energy (90%) is not a target set by RBF as  mentioned in the EFL submission but initiatives and commitments taken up by the previous governments.
  4. EFL’s debt commitments are being met and were always met under FEA. It is sound financial and administrative management practices  that will ensure timely debt servicing and not the entry of IPPs attracted through “good will” tariff payments.’
    5. Electricity consumers are generally conscious of the benefits of keeping their power costs low.  However, EFL could be doing a disservice to itself if it adopts a policy of reducing electricity consumption through the imposition of a punitive tariff. If power is affordable, consumers will patronise its use adding to the revenue of EFL and  generally sending positive signals to the economy. In this digital age of mod cons, electricity is no longer considered a luxury but a necessity in everyone’s daily life.
  • Objective 6

As stated earlier the reduction of fuel import bill is a target set by successive governments and not RBF.

  • Objective 7: “minimise potential requirement for government to inject additional equity capital …”

This in our view is pure assumption without any basis in reality. Government has, in fact, been milking FEA/EFL in the past several years. It received close to $50m as dividends for the last two financial years –  $20m in 2017 and $29m in 2018.

  • Objective 8: Strengthening risk mitigations towards national disasters…

This again is spurious and not based on ground realities. We note that in 2016 FEA announced a $60m profit despite meeting all contingencies caused by extensive damage to power plants, equipment and lines by Cyclone Winston. Besides, Fiji receives considerable assistance for such contingencies from donor countries.

  • Objective 9

As stated earlier, the public and business are conscious of the benefits derived from conserving energy. We don’t need a punitive tariff to discourage them from wasting electricity.

  • Objective 10

        This has been dealt with in the earlier paragraphs.

Conclusion

It is evident from the nature of EFL submissions that the proposed tariff increase is a government ruse for indirectly taxing the people and the economy to raise revenue through dividends and share sales to rescue it from its current untenable financial situation.

Recommendations

  1. EFL’s application for an across the board increase of 17.27% in electricity tariff be rejected
  2. The FCCC commission a revision of the current tariff structure to correct anomalies therein. This exercise be undertaken by a tripartite committee comprising representatives from the government, the business community and domestic customers. The report of this committee be actioned by the FCCC in the usual manner.
  3. Payment of dividends to government from EFL profits be ceased and the monies be retained by EFL for its capital expenditure programmes. As stated in our submissions, the EFL is owned by the people. The State is a mere trustee on their behalf. It has made negligible investment in FEA/EFL over the past 53 years and cannot be considered as having a right to any dividend from its profits. Government’s annual financial contribution to Rural Electrification is an ongoing commitment under successive governments’ “Power for All” programme as a discharge of its social responsibility to the people.