Submission to the Commerce Commission on FEA tariff increases and realignment of the tariff structure

  • 7th September 2010
  • 2010
  • // Display comment count + link

(This submission is restricted to a consideration
of domestic tariff increases only)

Introduction

1.01 It is interesting that the Commerce Commission (Commission hereafter) is now calling for public submissions after arbitrarily awarding increases in tariff to the Fiji Electricity Authority, effective 1 June 2010.

1.02 We note that this is a departure from the Commissions’ normal practice of calling for submissions before determining FEA’s application for increases in electricity tariff. We welcome the Commission’s belated initiative to rectify this serious oversight which appears to have stemmed from the huge public outcry following exorbitant increases to their electricity bills for the month of July.

1.03 The hike awarded by the Commission has seen the cost of electricity jump to shocking levels, thereby causing undue hardship to consumers. Most affected are those in the lower income bracket who are already struggling to cope with the ever escalating cost of living.

1.04 We note the following as a result of the re-alignment of tariff rates from 1 June 2010:

• The Commission has imposed an increase of 8.82c per kWh for high end domestic users – a 34% hike as applied for by FEA.

• At the same time, it has substantially reduced the domestic tariff lifeline from 250kWh to 130kWh – pushing a lot more consumers into the higher tariff rate

• It has permitted rates to be calculated on an average daily usage instead of actual monthly usage, much to the confusion and disadvantage of consumers

1.05 The combined effect of these changes has seen electricity bills jump 10-fold or more for ordinary users who are now excluded from the reduced lifeline tariff band of 130kWh per month. Unless the June 1 decision is rescinded, the majority of our domestic users will not be able to afford electricity in their homes.

1.06 May we point out that electricity in the 21st century is regarded as a necessity and not a luxury, as FEA and the Commission appear to think. Affordable electricity should be as much a basic right now, as is the right to clean, pure drinking water.

1.07 FLP notes that according to the Commission this is only the 1st phase of the tariff review, making it obvious that subsequent review(s) are likely, with the probability of more increases in the near future.

1.08 The Fiji Labour Party submits that the tariff restructure as announced on 1 June 2010 is unwarranted, was arbitrarily imposed without consultations with the public, and is unaffordable for the ordinary consumer.

1.09 The FLP also maintains that there is an urgent case for a thorough review of the operations and policies of the FEA to rectify a number of anomalies and questionable policy decisions.

2.00 Recent Domestic Tariff increases:

2.01 2005 – 9.6% tariff increase awarded by the Commission to be spread over three years from 2005-2007 as follows: 3.3% in 2005; 3.2% in 2006 and 3.1% in 2007

• September 2006 – granted 30% (6.51c per kWh) fuel surcharge by the Commission; this was reviewable every month and was gradually reduced based on the price of fuel and the hydro/diesel generation ratio

• 2007 – FEA sought another 6.6% tariff increase but this was rejected because of the phased out increase of 3.1% in 2007 as awarded in the 2005 Commission Determination

• 3 June 2008 – increase in fuel surcharge from (the remaining) 2.83c per unit to 5.53c per unit approved by the Commission but refused by the Energy Minister and not implemented

• March 2009 – fuel surcharge lifted

• 1 September 2009 – 15% increase in tariff rate
awarded and implemented
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• 1 June 2010 – 34% hike in domestic electricity rates
accompanied by other tariff restructuring mentioned earlier

2.02 This means that in the past five years from 2005 – 2010, electricity tariff rates went up by almost 60%; plus a 30% fuel surcharge from September 2006 to March 2009. In fact, increases were awarded every year except for 2008 when approvals granted by the Commission were knocked back by the Interim Finance/Energy Minister.

2.03 The increases (excluding fuel surcharge) awarded beteeen 2005-2010 are substantial. If the fuel surcharge is included then the increases can be described as unjustifiably exorbitant.

2.04 How could the Commerce Commission justify or entertain an application for yet another increase under the guise of the so-called “re-alignment of the tariff structure”? There may have been some justification for the increases sought in 2007/2008 when oil prices escalated to about $US150 a barrel but prices have since almost halved and are currently consistent at about $US75 a barrel.

2.05 The increases are also not justified considering the highly glowing statement on FEA finances made by its chairman in the Authority’s 2009 Annual Report. It seems that the Commission has dealt with FEA’s requests for increases in a rather shallow manner, granting each one applied for.

2.06 Although the financial viability of the Authority is important, it should be pointed out that as a responsible corporate entity- a monopoly holder at that- the policies of FEA should at all times be governed by a sense of its social responsibility as provider of a basic amenity.

2.07 The Commerce Commission gives the following reasons for its 1 June 2010 hike:

• low water levels at the Monasavu Dam

• rising level of fuel prices

• $3.8m (unaudited) financial loss in the first four months of 2010
as a result of the above factors

• impact of the 2009 devaluation of the Fiji dollar

3.0 FEA’s Financial Performance:

In his 2009 report to shareholders, Chairman Nizam-Ud-Dean paints a very healthy picture of FEA finances for the year.

3.1 “FEA performed admirably in 2009 both in financial and non financial terms…FEA made a financial profit of $2.4million after tax in 2009, after booking an unrealised foreign exchange loss of $5.3 million arising from the devaluation of the Fiji dollar in April 2009. This equates to a Return on Shareholder Funds (ROSF) of positive 0.6%.

“This result was achieved despite two unplanned contingency events that impacted the financial performance in 2009 by $5.2 million-severe floods in January 2009 incurred additional costs of $1.1 million and Cyclone Mick in December 2009 incurred additional costs of $2.1 million and lost revenue of $2 million.”

3.2 One wonders then why FEA is suddenly facing a financial crisis when none of the factors have changed much since its glowing financial performance of 2009.

3.3 One also notes that it sought, and received, a 15% hike in tariff rates in September 2009 despite its strong cash flow position.

4.0 Lowering the domestic lifeline threshold

4.01 In its Press statement issued on 1 June 2010 regarding the tariff restructure, the Commission claims that 17,343 households that consume 130kWh or less will have their electricity bills reduced by 16.4%.

4.02 However, it failed to mention, quite deliberately it seems, that it had, in fact lowered the lifeline threshold from 250kWh per month to 130kWh per month. This manipulative restructure of the lifeline threshold pushed close to a 100,000 poor and low income households into the high end domestic user bracket by just a stroke of the pen – a great disservice to the poor!

4.03 According to the Commerce Commission’s 2005 determination, the 250kWh lifeline meant that 63% of domestic customers were excluded from the increases then granted.

4.04 If reducing the lifeline to 130kWh means concessionary rates will apply only to 17,343 households, it means that close to 100,000 lower income households that were formerly exempt from tariff increases, have now been brought into the net. They face a sudden jump of 60% in their electricity bills.

4.05 No wonder so many consumers are outraged at the increase in their July bills – sometimes as much as a ten fold increase.

4.06 FLP believes there is no justification for reducing the lifeline tariff from 250kWh to 130Kwh. When introduced in 2005 by Commerce Commission, the 250kWh was based on the electricity normally expected to be consumed by an average household in the lower income bracket .

4.07 The Commission has given no reasons for almost halving the lifeline tariff. It has simply slipped it into the re-aligned tariff structure without any explanations. We strongly recommend that the 250kWh lifeline rate be reinstated and retained.

5.0 Average Daily Usage

5.01 The change to average daily usage in calculating charges instead of the actual usage, as in the past, is another questionable change that was sneaked in without any explanation. On inquiry, we are told that an arbitrary mean of 4.27 is used on a daily basis to determine whether the consumer is categorised as being in the lifeline range (130Kwh) or a high end user category.

5.02 This is absolutely ridiculous. It is tantamount to double dipping and is clearly unethical. The consumer must be billed on actual usage, as determined at the end of the billing cycle, and not on any fictional daily average. This is yet another manipulative mischief concocted by the Commission.

5.03 No wonder consumers have suddenly found their July electricity usage has doubled or even trebled under the new system. The system is clearly wrong here because domestic usage tends to be fairly consistent. The only significant difference in consumption may be between the cooler and hotter months of the year.

6.0 The practice of ‘estimating’ usage

6.01 FLP has always protested against this practice. People who subsist on lower incomes, do not generally have the spare cash to make sudden big payments for their electricity bills which is what happens under this practice. Estimated usage bills may usually be lower than those that follow ‘normal’ readings.

6.02 In the interest of fair play for the consumer, this practice of estimating usage should cease forthwith. All meters should be read. Where this does not happen for good reasons, the consumer should be notified that his/her bill will be based on the previous month’s reading but that he/she should make arrangements to facilitate reading of his/her electricity meter.

6.03 It would help if meter reading days in the various localities could be advertised and consumers requested to cooperate.

6.04 Secondly, it has been noted that while the May, June (2010) bills tend to be estimated, all of a sudden all the July bills are based on “normal readings” – this accounts, to some extent, for the sudden high increase in the bills. When queried, FEA said it made a special effort to read all the meters in July to get exact readings. Why can’t it do so every month?

7.0 Non payment of government subsidy for NCO costs

7.01 In its 2009 annual report, FEA states that it cost the Authority around $20 million a year to meet its social obligation to provide electricity to the rural sector and the outer islands – what it termed as FEA’s non-commercial obligations (NCO). These NCO costs were previously reimbursed by the Government.

7.02 However, in 2002, the government grant to FEA to meet its social obligations was stopped. Instead, Cabinet decided that FEA’s contribution to its social and community obligations be regarded as its dividend to government.

7.03 This is not only wrong in practice, but utterly ludicrous. In effect, what this means is that the urban consumer is heavily subsidising rural electrification when this should be the responsibility incumbent on the government of the day.

7.04 The Cabinet decision of 10 September 2002 must be rescinded. FEA must get its NCO costs back from government. Government has to take responsibility for this social obligation and not pass it on to the urban consumer.

8.0 Street Lights

8.01 Commerce Commission’s decision to charge Municipal Councils for street lighting at the same rate as high end domestic users on the grounds that “they must show greater responsibility” is unreasonable and misguided.

8.02 Where is the justification for categorising street lighting as a luxury when it is an absolutely necessary for the safety and security of residents. It is patently foolish of the Commission to suggest that municipal authorities can “show greater responsibility” in this area by cutting back.

8.03 This would clearly mean reducing hours during which time street lights are on. There can be no compromise when it comes to providing adequate measures for the safety and security of our people, particularly in the urban areas which are generally prone to violent crime.

8.04 Such patronising remarks do the members of the Commission no credit and should be avoided in the future.

8.05 If relief measures are not provided, Municipal Councils will simply pass on the additional cost of providing street lights to the residents and the business community – adding to the already high cost of providing such services.

9.0 Cost of energy in Fiji

9.01 In its June 2010 Determination, the Commission claims that Fiji’s electricity tariff rates are much lower than ‘comparator economies’ and it provides a comparative table showing rates in the Pacific region. Such generalised comparisons are misleading and distorted because they do not take into consideration the cost structures or the ratio of thermal/renewable/hydro used to generate electricity in the countries listed in the table. Nor do they really compare like with like. Australia and New Zealand for instance can hardly be considered ‘comparator economies’ with Fiji or other smaller Pacific Island States.

9.02 Interestingly, though, in its 2005 report, the Commission had stated that if it were to grant FEA’s request for a 20% hike in tariff, it would place Fiji’s domestic rates as 7th highest internationally and commercial/industrial rates as 4th highest.

9.03 Now what does one believe: the 2005 or the 2010 report?

10.0 An inquiry into FEA

10.1 FLP reiterates the call made by the 2005 recommendation of the Commission for government to initiate an inquiry into the affairs of FEA.

10.2 There has been a questionable lack of transparency in a number of FEA’s commercial dealings in recent years. The Commission needs to investigate the Telesource affair, the Butoni wind Farm, the sale of the FEA Headquarters to Fijian Holdings, which it is now leasing back at a very high rental.

11.0 Butoni Wind Farm

11.1 This $34 million project initiated in conjunction with a French company at the time Joe Mar was chairman of FEA, is a sad failure. In the end, it exceeded initial costs by $10 million.

11.2 Butoni was projected to generate 10 Megawatts of electricity – sufficient to provide 70% of the consumption needs of the Coral Coast. FLP is reliably informed that it is not even meeting 40% of the current requirements of the Coral Coast.

11.3 Nor is it making any significant contribution to foreign exchange savings. Since its commissioning in June 2007, its total contribution to foreign exchange savings has been a mere $3.5m compared to FEA’s total fuel bill of close to $90m per annum (2008).

12.0 Telesource Fiji

12.01 This is another highly controversial arrangement entered into by FEA. It signed a 20-year commercial agreement with Telesource Fiji to operate and maintain diesel based stations in Vuda and Kinoya.

12.02 The exact terms of the agreement remain a secret to this day. It is still not known whether expressions of interest were ever called for this project. It is noted from the 2005 Parliamentary debate on the subject that a partner in the law firm of Munro Leys who were also legal representatives for FEA, was a director of Telesource Fiji. Three other former directors of Telesource Fiji were partners in Munro Leys. Something somewhere does not seem right.

12.03 The Commission must also look into why all of a sudden the Monasavu Dam is unable to meet its commitment to supply 65%-70% of the electricity requirements of the nation. Fiji has had some prolonged and crippling droughts in recent years – the worst being in 1997/98 – but at no time did we hear that water levels at the Dam were so low as to reach crisis point.

12.04 This critically low water levels at Monasavu is a recent phenomenon. In fact, it has started cropping up since the Telesource deal was signed. Since then, we are told Monasavu supplies only about 40% of the national grid. What has affected Monasavu’s capacity in recent years? Is it really low levels of rainfall in the Central Ranges? The Commission needs to fully investigate this phenomenon.

13.0 Conclusion

13.01 FLP maintains that the consumers of Fiji, both domestic and commercial/industrial users are being held at ransom by the FEA. Each time FEA seeks an increase, it warns the nation: either the rates go up or you face power cuts. This is sheer corporate blackmail.

13.02 A 34% increase combined with the fact that the domestic tariff lifeline has been reduced to 130kWh from 250kWh thus bringing over 100,000 low income earners into the increased tariff net, will create undue hardship for the majority of our people.

13.03 This must be viewed along with the escalating cost of living which has been pushed up since the devaluation of the Fiji dollar in April 2009. Although the devaluation was 20%, actual price increases on the ground have been at least 30% to 40%, if not more.

13.04 The Commerce Commission must take all such relevant factors into consideration before granting increases sought by the FEA. It must also take into account imprudent investment and policy decisions by FEA, and we refer here in particular to the Butoni Wind Farm, the Telesource deal and the sale of the FEA headquarters, when considering applications for increases.

13.05 FEA must learn to control costs realising that it provides a public amenity which is a necessity. FEA has a very high overhead and fixed costs structure. The provision of a public amenity carries immense social responsibilities. It cannot be asking for tariff hikes each year to pay for its incompetence and inefficiencies.

13.06 We note that in granting FEA’s application for a 20% increase in 2004, albeit spread over three years (2005-2007), the then Commerce Commission had noted that Fiji’s electricity rates, both commercial and residential, ranked among the highest in the world. This is a sharp contradiction of what the present Commission has tried to sell to the public.

13.07 In terms of commercial/industrial consumers, the current increases will only aggravate the already high cost of doing business in Fiji. It should be noted that businesses simply pass on the extra cost to the consumer – resulting in uncompetitive exports and even higher costs of living. Either that, or employers try to reduce costs by cutting back on the salaries and wages of employees down the line.

13.08 There is nothing that is innovative in the June 2010 Determination of the Commission to indicate that it has an appreciation of the prevailing climate of social distress, economic decline and stagnating businesses.

13.09 The Commission could, for instance, have considered providing incentives such as lower night time tariff to encourage greater usage when demand is usually low. The Commission could have provided an off-peak tariff rate to encourage industries to switch to night-time or week-end usage.

13.10 In the final analysis, the Determination undermines the real benefits of providing relief to the poor through the domestic lifeline concession. Which ever way one views the issue, in the end it is the ordinary people of Fiji who pay the price. Such decisions make one wonder whether the Commission has not completely lost its social conscience.

13.11 How could the Commission in all fairness justify a 34 % increase in domestic electricity tariff at a time of widespread suffering as a result of rising prices, a depressed economy, high unemployment and a sluggish business environment.

13.12 This excessive tariff increase is made worse by such manipulations as the reduction in the domestic lifeline from 250kWh to 130Kwh and the switch to calculating charges based on a daily mean instead of actual consumption.

13.14 Indeed, the 1 June 2010 Determination of the Commission seems to have been tailor-made to meet FEA’s demands. It is quite pedestrian, lacking in depth and a hurriedly compiled document. One is forced to compare it with the 2005 Determination of the Commission which seems a much more comprehensive, well reasoned and argued document.

14.00 Recommendations

• Revert tariffs to the pre – June 2010 rates

• Reinstate domestic lifeline tariff to 250kWh

• Rescind average daily usage reading

• Initiate inquiry into the finances and operations of
the FEA as recommended by the Commerce Commission in 2004

Mahendra P. Chaudhry                                                                    Secretary General