tanesco tariff review application...recommended cost reflective tariff with increases of 33.8% for...

Tanzania Electric Supply Company Ltd

TANESCO Tariff Review Application

SEPTEMBER 2013

TANESCO Tariff Review Application

TABLE OF CONTENTS Top Sheet – Request for Regulatory Action ............................................................................ 1 Introduction .............................................................................................................................. 2 Summary of the Application ..................................................................................................... 3

Requested Regulatory Action .......................................................................................................... 3 Summary of Proposed Customer Bills ............................................................................................ 3 Current and Proposed Required Revenues .................................................................................... 3 Alternatives to a Tariff Adjustment .................................................................................................. 4 Subsidies and Grants Received ...................................................................................................... 5

1 Current and Proposed Tariffs ............................................................................................. 6 Current Tariffs ................................................................................................................................. 6 Proposed Tariff ................................................................................................................................ 6 Tariff Adjustment Factors ................................................................................................................ 7

2 Current and Proposed Customer Bills ............................................................................... 9 3 Tariff History ..................................................................................................................... 12 4 Proposed Customer Benefits ........................................................................................... 13 5 Corporate Financial Reporting ......................................................................................... 15

Audited Financial Statements ........................................................................................................ 15 Projected Financial Statements ..................................................................................................... 15 Financial Implications if Not Approved .......................................................................................... 15 Affirmation of Completeness ......................................................................................................... 15 Comprehensive Operating Information ......................................................................................... 15

6 Corporate Business Plan ................................................................................................. 22 Financial Plan ................................................................................................................................ 22 Forecast of Customer and Energy Consumption .......................................................................... 22

ANNEX A: Audited Financial Statements ............................................................................. 23 ANNEX B: Corporate Business Plan (2013) ......................................................................... 24 TABLES Table 1: REVENUE REQUIREMENTS (2013- 2015) ............................................................... 4 Table 2: Status of Key Performance Indicators (KPI) ............................................................... 5 Table 3: Grants and Subsidies (2011- 2013) ............................................................................ 5 Table 4: Current Tariff Structure ............................................................................................... 6 Table 5: Average Tariff Yield, Multi-Year Tariffs ....................................................................... 7 Table 6: Current and Proposed Tariffs ...................................................................................... 7 Table 7: Current Tariff and Historic Evolution ......................................................................... 12 Table 8: Projected Financial Statments from 2013-2015 ........................................................ 16 Table 9: Comprehensive Operating Information 2009-2012 ................................................... 19 Table 10: Customer and Sales Forecast (2013-2015) ............................................................ 22

TANESCO Tariff Review Application 1

Top Sheet – Request for Regulatory Action

Legal name of the regulated entity Tanzania Electric Supply Company Limited (TANESCO)

Full address of regulated entity Umeme Park

Ubungo

P.O. Box 9024

Dar Es Salaam

Authorized officer Eng. Felchesmi J. Mramba

Acting Managing Director

+255 222 451130 (Direct)

Company Business To generate, transmit and distribute electricity in Tanzania Mainland and sell bulk supply to Zanzibar and Kenya.

Date of Incorporation The Company was incorporated in November, 1931 with an incorporation number 255 and later on issued with a license in February 1957 for 55 years which expired in February 2012. New licences for electricity generation, electricity supply and electricity distribution and cross border trading was issued in March 2013 for 20 years.

Purpose of application Tanzania Electric Supply Company, Ltd. (TANESCO) respectfully requests that EWURA approve a Multi-Year Tariff Adjustment for three years effectively from October 1, 2013. The proposed average adjustments are 67.87% effective from October 1, 2013, 12.74% effective from January 1, 2014, and 9.17% effective from January 1, 2015. The average yield for sales of electricity by class in 2013-15 is specified in Table 5 of this application. It is proposed that these tariffs will apply to all sales made from 1 October 2013. The proposed adjustments for 2014 and 2015 are without automatic adjustments for inflation, currency fluctuation and change in fuel prices. A separate indexation mechanism has been proposed to cater for changes on quarterly basis from the effective date.

Key arguments supporting proposed regulatory action

The principal motivation for this tariff application is to cover TANESCO’s cost of operations while complying with the Government policy of making sure that the population with access to electricity reaches 30% by 2015. Without such a tariff increase, TANESCO will be unable connect more customers and to provide the quality of service that customers deserve and which TANESCO seeks to provide. The unavoidable reality is that no enterprise can provide the service that its customers seek if it loses money on every unit of output that it sales.

Signature of the authorized officer


Introduction On 9th November 2011, Tanzania Electric Supply Company Ltd (TANESCO) submitted to The Energy and Water Utilities Regulatory Authority (EWURA) an Emergency Tariff Application for an urgent tariff increase averaging 155% across all customer categories, to be effective on 1st January 2012. The Board of Directors of EWURA approved an emergence electricity tariff increase of 40.29% pending determination of the final tariff. The application of the emergence tariff was extended up to 14th January 2013.

EWURA opted to carry out a Cost of Service study which could be the basis for Multi-Year Tariff for TANESCO for the period between 2013 and 2015. A consultant, AF-MECADOS EMI from Spain, was engaged to develop a Rate Setting Methodology (RSM) for the Electricity Sector in Tanzania and a Cost of service study (COSS) for TANESCO. The study assumed the average hydrology (as opposed to the current situation which is dry hydrology) and recommended cost reflective tariff with increases of 33.8% for year 2013; followed by small increase of 0.85% in 2014 and 15.14% in year 2015. It was expected that, an Order of a Multi-year tariff would be issued and be effective from 15th January, 2013. However, before issuing the Order, MEM advised TANESCO to withdraw the Tariff submitted in year 2011. TANESCO through advise given by MEM, requested EWURA to suspend implementation of the Cost of Service Study result and be allowed to continue using the existing tariff.

EWURA considered the matter and issued TANESCO Tariff Adjustment Order No. TR-E-11-012 in January 2013 by maintaining the tariff rates as approved by the TANESCO Emergency Tariff adjustment Order, 2012.


Summary of the Application

Tanzania Electric Supply Company Limited (TANESCO) is a Tanzanian parastatal organisation established in 1964. It is wholly owned by the government of Tanzania. Its business includes the generation, transmission, and distribution of electricity, and the sale of electricity to the Tanzanian mainland as well as bulk power to the island of Zanzibar.

This tariff review application closely follows the format set forth in EWURA’s Tariff Application Guidelines of 2009, including the specific request that the application be as succinct as possible.

Requested Regulatory Action With this tariff review application, TANESCO respectfully requests that EWURA approve a Multi-Year Tariff Adjustment for three years from October 1, 2013. The proposed average adjustments are 67.87% effective from October 1, 2013, 12.74% effective from January 1, 2014, and 9.17% effective from January 1, 2015. The 2014 and 2015 proposed tariff is exclusive of inflation, currency fluctuation and change in fuel prices.

We also proposed that the revenue requirement from 2013 be reviewed and adjusted to cover for changes in approved revenue requirement and carried forward for the subsequent year (2014) and the same should be applied for 2014.

Automatic adjustments to cater for inflation, currency fluctuation and change in fuel prices have been proposed to take place in quarterly basis and the effect to be applied across all customer categories.

These adjustments will enable TANESCO to fund its operational costs, capital investment program, to demonstrate its bankability to donors offering concessionary loans/grants, to increase capacity needed to meet system peak demand, and to adequately fund R&M to ensure a consistent and stable supply of electricity.

Summary of Proposed Customer Bills Average rate increases by class as of October 1, 2013 under the proposed tariff structure will be as follows:

D1 – Domestic: First 50 kWh/month 0%, over 50 units consumption 71%

T1 – General Use: 34%

T2 – Low Voltage: 71%

T3 -- Medium Voltage: 90%

T5 – High Voltage (Zanzibar bulk tariff): 57%.

The bill impact will not be identical for each class since consumption patterns for each customer class differs. Therefore, a share of cost is higher to customers whose consumption coincides (in time) with the peak demand of the whole system whereby the demand is met by dispatching the most expensive thermal power plants in the TANESCO system.

Current and Proposed Required Revenues TANESCO’s Tariff Model calls for the following increases in annual revenue from electricity sales for the coming three years:

2013 – 456.5 TShs billion from the fourth quarter (reflecting a 67.87% tariff adjustment from October 1, 2013);

2014 – 2,208.5 TShs billion (reflecting a 12.74% tariff adjustment from January 1, 2014); and

2015 – 2,603.9 TShs billion (reflecting a 9.17% tariff adjustment from January 1, 2015.


TABLE 1: REVENUE REQUIREMENTS (2013- 2015)

TANESCO(REVENUE(REQUIREMENT(

YEAR(2011 YEAR(2012OPERATING(EXPENDITURE (In(TZS(Million) (In(TZS(Million)

Jan(@(Dec Jan(@(Dec

ACTUAL DRAFTOwn$generation$cost 203,498$$$$$$$$$$ 375,056$$$$$$$$$$Purchased$electricity 361,172$$$$$$$$$$ 555,407$$$$$$$$$$EPP* A$$$$$$$$$$$$$$$$$ A$$$$$$$$$$$$$$$$$R&M 24,264$$$$$$$$$$$$ 15,679$$$$$$$$$$$$Staff$costs 133,883$$$$$$$$$$ 161,368$$$$$$$$$$Other$expenses 95,284$$$$$$$$$$$$ 102,034$$$$$$$$$$Provision$for$doubtful$debts A$$$$$$$$$$$$$$$$$ A$$$$$$$$$$$$$$$$$Sub(Total 818,101(((((((((( 1,209,545((((((((FINANCING(COSTSDepreciation 55,291$$$$$$$$$$$$ 63,914$$$$$$$$$$$$TANESCO$CIP 396,106$$$$$$$$$$ 438,132$$$$$$$$$$Loan$repayment 46,383$$$$$$$$$$$$ 58,268$$$$$$$$$$$$Long$Oustanding$Creditors$from$2011AAug$2013Sub(Total 497,780(((((((((( 560,314((((((((((TOTAL(REVENUE(REQUIREMENT 1,315,881(((((((( 1,769,859((((((((Less(Revenue(from(other(sourcesGOVERNMENT$SUBSIDY 186,285$$$$$$$$$$ 157,416$$$$$$$$$$LPP$Collection 20,436$$$$$$$$$$$$ 8,513$$$$$$$$$$$$$$Other$Income 87,761$$$$$$$$$$$$ 60,779$$$$$$$$$$$$Sub(Total 294,482(((((((((( 226,708((((((((((REVENUE(REQUIRED((from(Sale(of(energy) 1,021,399(((((((( 1,543,151((((((((

Electricity$$Sales$A$GWh 4,000$$$$$$$$$$$$$$ 4,443$$$$$$$$$$$$$$Required(Average(Tariff(yield((TZS/kWh) 255.36(((((((((((( 347.35((((((((((((

Approved$Average$Tariff$(TZS/kWh) 141.00$$$$$$$$$$$$ 197.81$$$$$$$$$$$$

YEAR(2013 YEAR(2013 YEAR(2014 YEAR(2015(In(TZS(Million) (In(TZS(Million) (In(TZS(Million) (In(TZS(Million)

Jan(@Sept Oct(@(Dec Jan(@(Dec Jan(@(Dec

BUDGET BUDGET FORECAST FORECAST215,293$$$$$$$$$$ 86,316$$$$$$$$$$$$$ 331,209$$$$$$$$$$ 364,330$$$$$$$$$$297,258$$$$$$$$$$ 101,311$$$$$$$$$$$$ 418,497$$$$$$$$$$ 431,052$$$$$$$$$$264,080$$$$$$$$$$ 142,777$$$$$$$$$$$$ 398,720$$$$$$$$$$ 394,732$$$$$$$$$$33,573$$$$$$$$$$$$ 11,191$$$$$$$$$$$$$ 98,719$$$$$$$$$$$$ 157,950$$$$$$$$$$118,616$$$$$$$$$$ 39,539$$$$$$$$$$$$$ 164,376$$$$$$$$$$ 180,812$$$$$$$$$$62,616$$$$$$$$$$$$ 20,872$$$$$$$$$$$$$ 98,181$$$$$$$$$$$$ 109,963$$$$$$$$$$12,587$$$$$$$$$$$$ 4,196$$$$$$$$$$$$$$$ 15,440$$$$$$$$$$$$ 14,823$$$$$$$$$$$$

1,004,022(((((((( 406,201(((((((((((( 1,525,141(((((((( 1,653,663((((((((

64,632$$$$$$$$$$$$ 21,544$$$$$$$$$$$$$ 94,794$$$$$$$$$$$$ 104,273$$$$$$$$$$326,070$$$$$$$$$$ 108,690$$$$$$$$$$$$ 403,201$$$$$$$$$$ 448,992$$$$$$$$$$69,268$$$$$$$$$$$$ 23,089$$$$$$$$$$$$$ 94,204$$$$$$$$$$$$ 96,089$$$$$$$$$$$$

158,035$$$$$$$$$$ 368,748$$$$$$$$$$459,970(((((((((( 153,323(((((((((((( 750,234(((((((((( 1,018,102((((((((

1,463,992(((((((( 559,525(((((((((((( 2,275,375(((((((( 2,671,764((((((((

45,535$$$$$$$$$$$$ 91,069$$$$$$$$$$$$$ 18,000$$$$$$$$$$$$ 18,000$$$$$$$$$$$$14,689$$$$$$$$$$$$ 4,896$$$$$$$$$$$$$$$ 21,704$$$$$$$$$$$$ 22,138$$$$$$$$$$$$21,272$$$$$$$$$$$$ 7,091$$$$$$$$$$$$$$$ 27,204$$$$$$$$$$$$ 27,749$$$$$$$$$$$$81,496(((((((((((( 103,056(((((((((((( 66,908(((((((((((( 67,887((((((((((((

1,382,497(((((((( 456,468(((((((((((( 2,208,467(((((((( 2,603,877((((((((

4,124$$$$$$$$$$$$$$ 1,375$$$$$$$$$$$$$$$ 5,899$$$$$$$$$$$$$$ 6,371$$$$$$$$$$$$$$335.24(((((((((((( 332.06((((((((((((( 374.38(((((((((((( 408.71((((((((((((

197.81$$$$$$$$$$$$ 197.81$$$$$$$$$$$$$ 332.06$$$$$$$$$$$$ 374.38$$$$$$$$$$$$PROPOSED(YEARLY(INCREASE(@(%Note(( !EPP!expenditures!in!the!FS!is!included!in!Purchased!Electricity

67.87% 12.74% 9.17%

Alternatives to a Tariff Adjustment The current tariff regime yields an average revenue of 197.81 TShs/kWh, yet the revenue requirement target for TANESCO in 2013 is 332.06 TShs /kWh. The shortfall of 134.25 TShs/kWh (67.87%) severely restricts the ability of the company to provide the services required to meet its obligations to both its lenders and its customers. Without such a tariff increase, TANESCO will be unable to provide the quality of service that our customers deserve and which TANESCO wants to provide.

It is therefore, reasonable to consider what steps TANESCO would take in the event that a tariff increase is not granted as requested. The following options would be considered:

Delay self-funded capital investment. TANESCO has a program of internally funded investment which is targeted to improve company financial performance. Since the company’s current financial condition does not meet lender’s requirements to finance these investments. However, TANESCO does not believe that delay in these investments would realize an equivalent overall savings since loss reduction targets would not be achieved.

Deferred repair and maintenance. In the recent past, TANESCO has spent only a fraction of the funds for repairs and maintenance (R&M) dictated by international best practice. The best industry practice requires 15 percent of revenues is the desired target for R&M expenditures; TANESCO’s actual expenditure in 2011 was only about 4 percent of revenues. Continued deferral can only be expected to result in increased forced outages for both generating equipments and the T&D networks.


Increase business risks. TANESCO has always been under-recovering for every unit sold including the period since our last tariff application in 2011; this has resulted in non fulfilment of contractual obligations and increased creditors outstanding to TZS 449.0 billion by July 2013. If tariff is not granted, this situation may lead to legal action, tarnish our business image and goods & service providers refrain to do business with TANESCO.

TABLE 2: STATUS OF KEY PERFORMANCE INDICATORS (KPI)

Table 2. shows actual performance for 2012 and up to July 2013 on KPI targets for TANESCO set by EWURA in year 2012 Tariff Order and projections up to 2015. Key$Performance$Indicators$2012$5$2015Objective KPI Target 2012$

Actual2013$Actual$up$to$July

2013$Target

2014$Target

2015$Target

Increase(access(to(electricity New(customer(connections 100,000 88,996 88,002 150,000 250,000 250,000Increase(reliability(;(SAIFI((220/132/66kV) Trips/Feeder/Month <(2 0.45 0.43 <(2 <(2 <(2Increase(reliability(;(SAIFI((33/11kV) Trips/Feeder/Month <(2 <(2 3.57 <(2 <(2 <(2Increase(reliability(;(SAIDI((33/11kV) Minutes/Feeder/Month <2 1.9 3.98 <(2 <(2 <(2Increase(reliability(;(CAIDI(in(DSM,(Arusha,(Kilimanjaro(and(Mwanza((220/132/66kV)

Minutes <(10 8.7 8.7 <(10 <(10 <(10

Increase(reliability(;(Voltage(variation((220/132/66kV)

% ±(10 ±(10 ±(10 ±(10 ±(10 ±(10

Increase(reliability(;(Voltage(variation(in(DSM,(Arusha,(Kilimanjaro(and(Mwanza((33/11kV)

% ±5 ±(5 ±(5 ±(5 ±(5 ±(5

Decrease(Transmission(Losses %(of(energy(sent(out(lost 5.50% 6.24% 6.17% 5.50% 5.50% 5.50%Decrease(Distribution(Losses %(of(energy(sent(into(MV(grid(

lost15% 13.7% 18.8% 13.5% 13.0% 12.5%

Optimal(Collection(Rate %(of(billed 96% 93% 93% 96% 96% 96%Increase(Staff(Productivity Customer(per(employee 172 187 191 230 240 250Improve(Financial(Performance Minimum(DSCR 1.15 ;0.4 ;0.4 1.15 1.15 1.15 Subsidies and Grants Received TANESCO receives grants and subsidies from the Tanzanian Government and from Development Partners. Table 3 summarizes the total value of direct grants and subsidies and the detail is provided in the Financial Statements provided as Annex A in this application.

TABLE 3: GRANTS AND SUBSIDIES (2011- 2013)

2011 2012* 2013*

Grants (in Million TZS) 220,532.0 189,807.0 33,116.0

Subsidies (in Million TZS) 186,284.9 157,415.6 136,603.9

Total (in Million TZS) 406,816.9 237,222.6 169,719.9

Note: Final Grants figures for 2012 and 2013 will be determined after the completion of the respective Financial Statements. Subsidies for 2012 is as per the draft Financial Statement and for 2013 is based on the Government Budget.

Grants are for major projects such as SIDA electrification projects, the World Bank’s TEDAP project, the IDA’s Songo Songo project, ORET, JICA and Treasury (emergency power and rural electrification). Other grant support has come from the African Development Bank, JICA, and FINNISH. The REA Fund has also provided support grants for rural electrification projects.

The Government has been providing direct subsidy support of TZS 18.0 billion equivalent to 40% of total annual capacity charge for IPTL. The Government also has been providing subsidy to cover fuel costs for EPPs and IPPs and outstanding energy creditors amounting to TZS 450.0 billion from March 2012 to May 2013.


1 Current and Proposed Tariffs Current Tariffs The current tariff regime distinguishes between the following customer groups:

D1 -- Domestic Low Usage, for low consumption users;

T1 – General Usage, for general use of electricity including residential, small commercial and light industrial use, public lighting and billboards;

T2 – Low Voltage Maximum Demand Usage, for general use at 400 Volts with average consumption greater than 7500 kWh per meter reading period;

T3 – High Voltage Maximum Demand Usage, for general use where power is metered at 11/33 kV; and

T5 – Bulk Supply tariff for Zanzibar.

Table 4 shows the components of each tariff:

TABLE 4: CURRENT TARIFF STRUCTURE

CUSTOMER CATEGORY

TARIFF COMPONENTS

BASIC CHARGE

(TSh/month)

ENERGY CHARGE (TSh/kWh)

DEMAND CHARGE

(TSh/kVA/mo)

D1 √

T1 √ √

T2 √ √ √

T3 √ √ √

T5 √ √ √

The current tariffs for each class were authorized by EWURA’s Board of Directors in Order No. TR-E-11-012 in January 2013. The approved order revoked Emergency Tariff Adjustment Order, 2012 effective from 1st February 2013.

Proposed Tariff TANESCO wishes to apply for a multi-year tariff adjustment. It is proposed that tariffs be set for each of three years based on the company’s tariff model as approved by EWURA during this tariff review. The resulting tariff increases for the three-year period commencing in October 2013 are summarized in Table 5.


TABLE 5: AVERAGE TARIFF YIELD, MULTI-YEAR TARIFFS

.

2012 197.812013 332.06 67.87%2014 374.38 12.74%2015 408.71 9.17%

Year Current Tariff Yield

TShs/kWh

Revenue Required

TShs/kWh

Annual Increase Required

The initial tariff adjustment is proposed to be effective from October 1, 2013. The average rate of increase proposed on that date is 67.87 per cent, from an average current tariff yield (i.e., total revenues divided by total kWh sold) of 197.81 TShs/kWh to an average yield of 322.06 TShs/kWh.

TABLE 6: CURRENT AND PROPOSED TARIFFS

D1 Less&than&50&units 60&&&&&&&&&&&&&&&&& 60&&&&&&&&&&&&&&&&& 0% 65&&&&&&&&&&&&&&&& 8% 70&&&&&&&&&&&&&&&& 8%More&than&50&units 273&&&&&&&&&&&&&&& 467&&&&&&&&&&&&&&& 71% 506&&&&&&&&&&&&&& 8% 552&&&&&&&&&&&&&& 9%

T1 Basic&Charge 3,841&&&&&&&&&&&& 5,829&&&&&&&&&&&& 52% 6,506&&&&&&&&&&& 12% 6,613&&&&&&&&&&& 2%Units&(kWh) 221&&&&&&&&&&&&&&& 294&&&&&&&&&&&&&&& 33% 352&&&&&&&&&&&&&& 20% 391&&&&&&&&&&&&&& 11%

T2 Basic&Charge 14,233&&&&&&&&&& 27,250&&&&&&&&&& 91% 30,549&&&&&&&&& 12% 31,507&&&&&&&&& 3%Units&(kWh) 132&&&&&&&&&&&&&&& 252&&&&&&&&&&&&&&& 91% 277&&&&&&&&&&&&&& 10% 299&&&&&&&&&&&&&& 8%kVA 16,944&&&&&&&&&& 25,868&&&&&&&&&& 53% 27,150&&&&&&&&& 5% 31,798&&&&&&&&& 17%

T3 Basic&Charge 14,233&&&&&&&&&& 27,250&&&&&&&&&& 91% 30,549&&&&&&&&& 12% 31,507&&&&&&&&& 3%Units&(kWh) 118&&&&&&&&&&&&&&& 242&&&&&&&&&&&&&&& 105% 266&&&&&&&&&&&&&& 10% 284&&&&&&&&&&&&&& 7%kVA 14,520&&&&&&&&&& 22,174&&&&&&&&&& 53% 23,272&&&&&&&&& 5% 27,256&&&&&&&&& 17%

T5 Basic&Charge 14,233&&&&&&&&&& 27,250&&&&&&&&&& 91% 30,549&&&&&&&&& 12% 31,507&&&&&&&&& 3%Units 106&&&&&&&&&&&&&&& 170&&&&&&&&&&&&&&& 60% 186&&&&&&&&&&&&&& 10% 199&&&&&&&&&&&&&& 7%kVA 12,079&&&&&&&&&& 17,512&&&&&&&&&& 45% 18,380&&&&&&&&& 5% 21,526&&&&&&&&& 17%

Percentage)Increase)Category Unit

Current)Tariff

Proposed)Tariff)1st)Oct.)

2013

Proposed)Tariff)1st)

Jan.)2014

Proposed)Tariff)1st)

Jan.)2015

Percentage)Increase)

Percentage)Increase)

The increase was based on the a share of cost whereby the high propotion was allocated to customers whose consumption coincides (in time) with the peak demand of the whole system whereby the demand is met by dispatching the most expensive thermal power plants in the TANESCO system.

Tariff Adjustment Factors Due to the fact that, TANESCO is applying for the multi-year tariff adjustment, it is recommended that a tariff indexation mechanism be used to appropriately adjust changes in costs that are outside of TANESCO control. Electricity utilities throughout the world use indexation to assure that tariff revenues keep pace with rising costs during periods between formal regulatory reviews. The goal of indexation is to permit utilities to achieve their financial


performance targets while at the same time freeing regulators from the need to asses frequent requests for rate adjustment.

In order to ensure that TANESCO revenues keep pace with its costs over the period, we propose indexation of two types:

• Fuel cost adjustment (FAC). Fuel costs are more significant variable cost component in TANESCO’s operations. The FAC is charged to recover the increased costs resulted from change in hydrological conditions outside of TANESCO control. Furthermore, the cost of fuel depends on international markets which are highly volatile, and equally outside of TANESCO control.

• Macroeconomic price adjustment. Local inflation results in increased cost of domestic goods (such as domestic construction materials). Similarly, foreign inflation and the foreign exchange fluctuations impact the cost of foreign goods. The level of these price adjustments is completely outside of TANESCO control.

The proposed FAC to be determined in accordance with the following formula:

FACt−1 =( i∑ (pit−1ASit−1

x−

Qit−1)BFCit−1

Where:

FACt−1 Means the fuel adjustment in month t−1 established by subtracting the forecast base fuel cost from the actual fuel cost.

pit−1 Means the actual price of fuel and associated operating costs (Variable O&M) for each fuel resource such as Diesel, HFO, natural gas and IPP/EPP/SPP energy resources in month t−1

Qit−1 Means the actual quantity of resource i consumed in month t−1

ASit−1 Means the actual end use energy sold in month t−1

BFCit−1 Means base fuel cost per unit of energy forecast to be sold provided in

the TANESCO’s revenue requirement as approved by EWURA

The proposed Inflation and Exchange rate fluctuation adjustments be based on reports as published by the Bank of Tanzania.

In order to effect the changes accordingly, it is recommended that the adjustments be published by EWURA in quarterly basis.


2 Current and Proposed Customer Bills Current and proposed customer bills by tariff class are summarized as follows:

Tariff D1 – Domestic

Rate Current ProposedEnergy0 - 50 kWh 60 60more than 50 kWh 273 467

BillEnergy Impact

kWh TShs/month Tshs/kWh TShs/month Tshs/kWh % Change25 1,500 60 1,500 60 0%50 3,000 60 3,000 60 0%75 9,825 131 14,679 196 49%100 16,650 167 26,357 264 58%125 23,475 188 38,036 304 62%143 28,389 199 46,444 325 64%150 30,300 202 49,714 331 64%152 30,846 203 50,649 333 64%

Current Bill Proposed Bill

Tariff T1 – General Use

Rate Current ProposedEnergy 221 294 Demand - - Basic Charge 3,841 5,829

BillEnergy Impact

kWh TShs/month Tshs/kWh TShs/month Tshs/kWh % Change100 25,941 259 35,273 353 36%152 37,433 246 50,583 333 35%200 48,041 240 64,716 324 35%300 70,141 234 94,160 314 34%400 92,241 231 123,603 309 34%500 114,341 229 153,047 306 34%1000 224,841 225 300,264 300 34%1500 335,341 224 447,482 298 33%2500 556,341 223 741,917 297 33%5000 1,108,841 222 1,478,004 296 33%7500 1,661,341 222 2,214,092 295 33%

Current Bill Proposed Bill


Tariff 2 – Low Voltage

Rate Current ProposedEnergy 132 252 Demand 16,944 25,868 Basic Charge 14,233 27,250

kW BillEnergy Demand Load Factor Impact

kWh kVA % TShs/month TShs/kWh TShs/month TShs/kWh % Change7,500 35 0.30 1,597,273 213 2,825,317 377 77%7,500 26 0.40 1,444,777 193 2,592,504 346 79%7,500 21 0.50 1,360,057 181 2,463,163 328 81%7,500 17 0.60 1,292,281 172 2,359,690 315 83%7,500 15 0.70 1,258,393 168 2,307,954 308 83%7,500 13 0.80 1,224,505 163 2,256,218 301 84%7,500 12 0.90 1,207,561 161 2,230,350 297 85%

20,000 93 0.30 4,230,025 212 7,480,139 374 77%20,000 69 0.40 3,823,369 191 6,859,303 343 79%20,000 56 0.50 3,603,097 180 6,523,018 326 81%20,000 46 0.60 3,433,657 172 6,264,336 313 82%20,000 40 0.70 3,331,993 167 6,109,127 305 83%20,000 35 0.80 3,247,273 162 5,979,787 299 84%20,000 31 0.90 3,179,497 159 5,876,314 294 85%50,000 231 0.30 10,528,297 211 18,620,669 372 77%50,000 174 0.40 9,562,489 191 17,146,186 343 79%50,000 139 0.50 8,969,449 179 16,240,801 325 81%50,000 116 0.60 8,579,737 172 15,645,834 313 82%50,000 99 0.70 8,291,689 166 15,206,075 304 83%50,000 87 0.80 8,088,361 162 14,895,658 298 84%50,000 77 0.90 7,918,921 158 14,636,977 293 85%

100,000 463 0.30 21,059,305 211 37,239,957 372 77%100,000 347 0.40 19,093,801 191 34,239,253 342 79%100,000 278 0.50 17,924,665 179 32,454,352 325 81%100,000 231 0.60 17,128,297 171 31,238,549 312 82%100,000 198 0.70 16,569,145 166 30,384,901 304 83%100,000 174 0.80 16,162,489 162 29,764,066 298 84%100,000 154 0.90 15,823,609 158 29,246,703 292 85%

Proposed BillElectricity Consumption Current Bill


Tariff 3 – High Voltage



kWh kVA % TShs/month TShs/kWh TShs/month TShs/kWh % Change250,000 1,157 0.30 46,313,873 185 86,266,895 345 86%250,000 868 0.40 42,117,593 168 79,858,719 319 90%250,000 694 0.50 39,591,113 158 76,000,509 304 92%250,000 579 0.60 37,921,313 152 73,450,543 294 94%250,000 496 0.70 36,716,153 147 71,610,133 286 95%250,000 434 0.80 35,815,913 143 70,235,368 281 96%250,000 386 0.90 35,118,953 140 69,171,035 277 97%500,000 2,315 0.30 92,628,033 185 172,528,714 345 86%500,000 1,736 0.40 84,220,953 168 159,690,189 319 90%500,000 1,389 0.50 79,182,513 158 151,995,943 304 92%500,000 1,157 0.60 75,813,873 152 146,851,663 294 94%500,000 992 0.70 73,418,073 147 143,193,016 286 95%500,000 868 0.80 71,617,593 143 140,443,487 281 96%500,000 772 0.90 70,223,673 140 138,314,819 277 97%

2,000,000 9,259 0.30 370,454,913 185 690,010,933 345 86%2,000,000 6,944 0.40 336,841,113 168 638,679,004 319 90%2,000,000 5,556 0.50 316,687,353 158 607,902,020 304 92%2,000,000 4,630 0.60 303,241,833 152 587,369,249 294 94%2,000,000 3,968 0.70 293,629,593 147 572,690,313 286 95%2,000,000 3,472 0.80 286,427,673 143 561,692,197 281 96%2,000,000 3,086 0.90 280,822,953 140 553,133,180 277 97%5,000,000 23,148 0.30 926,123,193 185 1,724,997,545 345 86%5,000,000 17,361 0.40 842,095,953 168 1,596,678,809 319 90%5,000,000 13,889 0.50 791,682,513 158 1,519,692,002 304 92%5,000,000 11,574 0.60 758,068,713 152 1,468,360,073 294 94%5,000,000 9,921 0.70 734,067,153 147 1,431,707,080 286 95%5,000,000 8,681 0.80 716,062,353 143 1,404,211,792 281 96%5,000,000 7,716 0.90 702,050,553 140 1,382,814,249 277 97%

Electricity Consumption Current Bill Proposed Bill

Tariff T5 – Bulk Supply (Zanzibar)



kWh kVA % TShs/month TShs/kWh TShs/month TShs/kWh % Change21,480,250 43,873 0.68 2,806,862,700 131 4,411,311,645 205 57%21,480,250 43,237 0.69 2,799,180,456 130 4,400,173,862 205 57%21,480,250 42,620 0.70 2,791,727,713 130 4,389,368,812 204 57%21,480,250 42,019 0.71 2,784,468,234 130 4,378,843,957 204 57%21,480,250 41,436 0.72 2,777,426,177 129 4,368,634,323 203 57%

Electricity Consumption Current Bill Proposed Bill


3 Tariff History

Table 7 summarizes the historical evolution of tariffs by customer class from June 2006. The 2006 and 2007 increases were of 5 and 6 percent respectively, designed to adjust for inflation. The 2008 increase average 21.7 percent followed by 40.29 percent increase from January 2012. There was no tariff increase in the 2013 Order.

TABLE 7: CURRENT TARIFF AND HISTORIC EVOLUTION

CURRENTfrom from from from from

1-Jun-06 1-Feb-07 1-Jan-08 1-Jan-12 1-Feb-13(TSh) (TSh) (TSh) (TSh) (TSh)

Basic charge 0 0 0 0 0Energy charge 0 – 50 kWh/mo 60 60

High Cost Units Energy chargePenalty - High Usage: more than 50 kWh 273 273

Basic charge/month 1,785 1,892 2,303 3,841 3,841 Energy charge 100 106 129 221 221 Basic charge/month 6,615 7,012 8,534 14,233 14,233 Energy charge 66 70 85 132 132 Demand (kVA) 7,245 7,680 9,347 16,944 16,944 Basic charge/month 6,615 7,012 8,534 14,233 14,233 Energy charge 61 65 79 118 118 Demand (kVA) 6,720 7,123 8,669 14,520 14,520 Basic charge/month 6,615 7,012 8,534 14,233 14,233 Energy charge 26 28 75 106 106 Demand (kVA) 3,686 3,907 4,755 12,079 12,079

TANESCO Board EWURA EWURA EWURA EWURA Approving Authority:

T2 Low Voltage Supply

T3 High Voltage Supply

T5 Zanzibar (Bulk Supply)

49

121 128 156

T1 General Use

CUSTOMER CATEGORY COMPONENT

D1

Domestic Low Usage 38 40


4 Proposed Customer Benefits

The proposed tariff increase comes with a specific set of performance targets on the part of TANESCO. In return for the tariff increases, we commit to provide our customers with benefits in the following areas:

§ Improvements in Customer Service:

1. TANESCO will strengthen media communications with customers, in order to receive and follow-up on issues/concerns raised by customers without requiring them to physically go to TANESCO offices.

2. TANESCO will frequently be informing its customers about services and products. 3. TANESCO will continue to strengthen its customer service charter whereby customers are

made aware of their rights and obligations as electricity consumers. 4. TANESCO will continue to open more district offices in close proximity to customers.

§ Reduction of operational costs:

1. TANESCO will strengthen/expand usage of banks in collecting revenues by July, 2014. 2. TANESCO to continue its LUKU rollout program by December, 2014 and installation of

Automatic Meter Reading (AMR) meters for new T2 and T3 customers. 3. TANESCO will use mechanised tools for distribution network operations by July, 2014. 4. TANESCO will commence use of fleet management system by employment of car track

system by July, 2014. 5. TANESCO will start usage of AMR systems to monitor fuel consumption in its isolated power

stations by September, 2014. § Significant reduction in power rationing:

1. TANESCO will add new generation capacity by December, 2014. 2. TANESCO will continue to strengthen its transmission and distribution systems. 3. TANESCO will implement the energy efficiency programme such as Demand Side

Management by June 2014.

§ Improved system reliability and quality of supply by reducing outages through upgrading and rehabilitation of the transmission and distribution lines: 1. TANESCO will shift to high voltage distribution systems (HVDS) instead of relying on long low

voltage lines. 2. TANESCO will invest in the rehabilitation/maintenance of existing distribution systems. 3. TANESCO will use 33kV lines instead of 11kV lines in most new areas.

§ Reduction in transmission losses from 6.3% in 2013 to 5.5% by 2015:

1. TANESCO will invest in upgrading and maintenance of the network. 2. TANESCO, with the support of Development Partners, will execute critical investments to

strengthen and extend the transmission system, including the development of a 400 kV network which will reduce losses resulting from long transmission distances and overloaded lines.

§ Reduction in distribution losses from 13.7% in 2013 to 12.5% by 2015:

1. TANESCO, through its own budget and credits from institutions such as the World Bank and the African Development Bank, will invest in reinforcement and maintenance of the backbone 33 and 11 kV network and substations.


2. TANESCO will increase its efforts to reduce illegal consumption through extensive revenue protection programmes, including (i) increased inspection, (ii) continue investing in new metering systems such as Automatic Meter Reading (AMR), and (iii) installation of meter cabinets equipped with the appropriate security equipment, preventing meter tampering.

§ Accelerate customers’ connection.

1. TANESCO is committed to attain a target of connecting 150,000 new customers in year 2013 and 250,000 new customers from 2014.

2. These targets will also be achieved through contracting private contractors to speed up new customers’ connections in addition to TANESCO’s own capacity.


5 Corporate Financial Reporting Audited Financial Statements Audited financial accounts are available from 2009 to 2011, and provisional accounts are available for 2012. Audit reports for each of these years are attached in Annex A.

Projected Financial Statements Projected financial statements from the year 2013 to 2015 are presented in Table 8 assuming that the proposed tariff will take effect from 1st October 2013.

Financial Implications if Not Approved If the Tariff Application is not approved, and TANESCO were to make no compensatory adjustments in its operations, the company would be projected to incur a financial loss in each of the next three years: TSh 76.5 billion from October to December 2013, TSh 641.3 billion in 2014, and TSh 897.8 billion in 2015.

Furthermore, TANESCO will not be able to meet its operational expenses, invest on its infrastructures and consequently failing to deliver quality services to its customers.

If the Capital Investment Plan (CIP) expenditure is reduced, the 250,000 customer connections goal is unlikely to be achieved, and Tanzania’s household electrification rate will not reach national target of 30%.

Affirmation of Completeness The TANESCO Board of Directors and Management affirm that all contractual agreements of the company that may have an impact on the proposed tariffs have been included in this application.

Comprehensive Operating Information Table 9 summarizes comprehensive operating information for the past four years (2009-2012).


TABLE 8: PROJECTED FINANCIAL STATMENTS FROM 2013-20151

Table 8(a) STATEMENT OF COMPREHENSIVE INCOME DETAILS 31-Dec-2013 31-Dec-2014 31-Dec-2015

BUDGET PROJECTION PROJECTIONRevenue 1,316,523 2,194,830 2,572,058 Cost of sales (1,393,879) (1,650,712) (1,970,078) Gross loss (77,356) 544,118 601,980 Other operating income 184,552 66,908 67,887 Operating expense (84,811) (98,181) (109,963) Operating profit/loss 22,385 512,845 559,904 Interest on bank depositsFinance cost (109,140) (109,644) (110,912) Loss before tax (86,755) 403,201 448,992 Income tax(charge) (120,960) (134,698) Loss/Profit for the year (86,755) 282,241 314,294 Other comprehensive incomeGains on revaluation of property, plant and equipment - - - Income tax on other comprehensive income - - - Revaluation adjustments - - - Income tax on revaluation adjustments - - -

Other comprehensive income after tax - - - Total comprehensive income for the year (86,755) 282,241 314,294

1 Note: Electricity Revenue assumed Tariff Increase as per EWURA Tariff Application Guideline.


Table 8(b) STATEMENT OF FINANCIAL POSITION

31-Dec-2013 31-Dec-2014 31-Dec-2015BUDGET PROJECTION PROJECTION

NON CURRENT ASSETSProperty, plant and equipment 2,241,841 2,238,148 2,235,257 Capital work in progress 484,617 536,034 592,906 Intangible assets - Investments 13 13 13 AFUDC-Prepayment - - - Capacity charges prepayment 51,878 47,755 40,466

2,778,349 2,821,950 2,868,642 CURRENT ASSETSInventories 143,223 181,716 225,091 Trade and other receivables 415,515 454,149 472,971 Current income tax recoverable - - - Bank and Cash balances 97,505 81,404 67,962

656,243 717,269 766,025 TOTAL ASSETS 3,434,592 3,539,219 3,634,667 CAPITAL AND RESERVESShare capital 986,717 986,717 986,717 Advance towards share capital 194,064 195,394 196,735 Accumulated loss (1,174,113) (891,872) (577,578) Revaluation reserve 793,266 753,602 715,922 TOTAL EQUITY 799,933 1,043,841 1,321,796 NON CURRENT LIABILITESGrants 730,288 690,577 661,579 Borrowings 569,523 859,680 699,720 Consumer deposits 16,483 17,091 17,723 Post employment benefits 22,580 23,829 25,148

1,338,874 1,591,178 1,404,169 CURRENT LIABILITIESBank overdraft 160,186 17,583 8,419 Trade and other payables 909,039 654,460 575,152 Borrowings 91,921 205,593 309,667 Deferred income tax 134,639 26,563 15,464

1,295,785 904,200 908,702 TOTAL LIABILITES 2,634,659 2,495,378 2,312,871 TOTAL EQUITY AND LIABILITIES 3,434,592 3,539,219 3,634,667


Table 8(c) STATEMENT OF CASH FLOWS

2013 2014 2015DETAILS BUDGET PROJECTION PROJECTIONCASH AVAILABLE FROM OPERATIONS Revenue from Sale of Electricity 1,349,590 2,246,396 2,190,176 Other Operating Income 106,301 29,559 34,050 Goverment Support & Grants 305,079 18,000 18,000 Non Customer Income 24,002 26,841 27,358 Total cash from Operating activities 1,784,972 2,320,796 2,269,584 OPERATING EXPENDITURE Energy Purchases 959,393 979,794 997,643 Own Generation Expenditure 341,514 375,348 406,694 R&M Expenditure 52,821 116,488 186,381 Staff Costs 158,153 164,376 180,810 Other Operating Expenditure 530,299 799,390 725,523 Total Operating Expenditure 2,042,178 2,435,397 2,497,051

Net Operating Cash Flow (257,207) (114,602) (227,467) Capital Expenditure 513,017 403,201 448,992 Less:- Material at Stores 148,995 134,400 149,664 Net Cash Flow After Funding CAPEX (621,228) (383,402) (526,795) Net Financing (30,689) (49,495) (19,798) Opening Cash Balance 116,791 (535,126) 110,964 Cash Balances at the end of the year (535,126) (968,023) (435,630)


TABLE 9: COMPREHENSIVE OPERATING INFORMATION 2009-2012

Table 9(a)

31-Dec-2009 31-Dec-2010 31-Dec-2011 31-Dec-2012DETAILS Audited Audited Audited DraftRevenue 413,501 466,477 545,658 820,445 Cost of sales (439,124) (492,252) (768,548) (1,145,464) Gross loss (25,623) (25,775) (222,890) (325,019) Other operating income 166,590 106,507 294,482 226,708 Operating expense (114,396) (76,851) (106,277) (127,995) Operating profit/loss 26,571 3,881 (34,685) (226,306) Interest on bank deposits 4,158 1,121 3,423 1,346 Finance cost (67,358) (48,931) (44,949) (58,268) Loss before tax (36,629) (43,929) (76,211) (283,228) Income tax(charge) 76,786 (3,383) 32,784 (110) Loss/Profit for the year 40,157 (47,312) (43,427) (283,338) Other comprehensive incomeGains on revaluation of property, plant and equipment 403,339 102,603 - - Income tax on other comprehensive income (121,002) (30,781) - - Revaluation adjustments 111 - Income tax on revaluation adjustments (33) -

Other comprehensive income after tax 282,337 71,822 78 - Total comprehensive income for the year 322,494 24,510 (43,349) (283,338)

STATEMENT OF COMPREHENSIVE INCOME


Table 9(b)

31-Dec-2009 31-Dec-2010 31-Dec-2011 31-Dec-2012DETAILS Audited Audited Audited DraftNON CURRENT ASSETSProperty, plant and equipment 1,828,480 1,982,451 2,035,738 2,243,057 Capital work in progress 66,359 189,165 396,106 438,132 Intangible assets 232 116 - - Investments 13 13 13 13 AFUDC-Prepayment - - - - Capacity charges prepayment 65,393 61,176 56,356 51,878

1,960,477 2,232,921 2,488,213 2,733,080 CURRENT ASSETSInventories 65,452 57,761 73,566 112,167 Trade and other receivables 250,101 292,314 350,511 452,593 Current income tax recoverable 5,392 5,503 2,479 2,556 Bank and Cash balances 94,470 104,256 139,891 116,791

415,415 459,834 566,447 684,107 TOTAL ASSETS 2,375,892 2,692,755 3,054,660 3,417,187 CAPITAL AND RESERVESShare capital 986,717 986,717 986,717 986,717 Advance towards share capital 158,406 158,635 159,943 192,745 Accumulated loss (713,483) (760,795) (804,222) (1,087,357) Revaluation reserve 781,370 853,192 853,270 835,016 TOTAL EQUITY 1,213,010 1,237,749 1,195,708 927,120 NON CURRENT LIABILITESGrants 249,172 406,046 629,768 814,515 Borrowings 466,891 474,627 377,299 414,056 Consumer deposits 13,865 14,431 15,329 15,896 Post employment benefits 19,273 20,028 20,275 21,396

749,201 915,132 1,042,671 1,265,863 CURRENT LIABILITIESBank overdraft - - 36,723 76,698 Trade and other payables 321,883 428,961 613,526 938,507 Borrowings 47,582 32,534 120,403 147,166 Deferred income tax 44,216 78,380 45,629 61,832

413,681 539,875 816,281 1,224,203 TOTAL LIABILITES 1,162,882 1,455,007 1,858,952 2,490,066 TOTAL EQUITY AND LIABILITIES 2,375,892 2,692,756 3,054,660 3,417,187

STATEMENT OF FINANCIAL POSITION


Table 9(c)

2009 2010 2011 2012DETAILS Audited Audited Audited DraftCash generated from operating activities 43,196 100,715 145,409 (45,240) Interest received 4,158 1,121 3,423 1,343 Interest paid (34,128) (25,308) (14,118) (29,956) Tax paid (491) (111) (339) (77) Net cash fro generating activities 12,735 76,417 134,375 (73,930) Cash Flows from investing activitesAdditions to capital work in progress (112,925) (236,731) (320,722) (346,253) Purchase of intangible assets (348) - - - Capitalization of interest on borrowings (1,035) - - - Capitalization from sale of property, plant and equipment 60 246 71 37 Net cash used in investing activities (114,248) (236,485) (320,651) (346,216) Cash flows from financing activitiesProceeds from borrowings 125,932 44,824 5,216 137,738 Loan repayment (20,000) (47,000) (60,000) (60,000) Proceeds from grants 71,230 171,801 238,664 206,552 Capacity charges prepayment (59,371) - - 32,802 Advances towards share capital 1,439 229 1,308 39,979 Net cash generated from financing activities 119,230 169,854 185,188 357,071 Net increase/decrease in cash and cash equivalents 17,717 9,786 (1,088) (63,075) Movement in cash and cash equivalentsCash and cash equivalents at beginning of year 76,753 94,470 104,256 103,168 Increase/decrease during the year 17,717 9,786 (1,088) (63,075) Cash and cash equivalents at the end of the year 94,470 104,256 103,168 40,093

STATEMENT OF CASH FLOWS


6 Corporate Business Plan The complete Corporate Business Plan 2013 (CBP), as approved by TANESCO’s Board of Directors, is included in this document as Annex B. The CBP highlights among others the following key areas:

Financial Plan Section 5 of CBP, summarizes investment plan and sources of fund reflecting TANESCO’s current ambition to expand its capital base, these include new projects in generation, transmission and distribution areas.

Forecast of Customer and Energy Consumption Table 10 reports actual and forecast energy consumption by class from 2013. Year-on-year growth rates vary due to the impact of new customer connections and changes in specific consumption patterns. It is expected that sufficient generation capacity will be available to meet demand throughout the period.

TABLE 10: CUSTOMER AND SALES FORECAST (2013-2015)

YEAR 2013 YEAR 2014 YEAR 2015

Number of Customers BUDGET FORECAST FORECAST

Less than 50 units 292,037 347,521 403,005More than 50 units 321,581 382,678 443,776T1-‐General Use 699,287 832,145 965,004T2-‐Low Voltage Supply 2,483 2,955 3,427T3-‐High Voltage Supply 461 549 636T5-‐Zanzibar State Fuel & Power Corp. 1 1 1 Total 1,315,849 1,565,849 1,815,849 Annual % Increase 19% 16%

Total Electricity Sales by Customer Class (GWh)D1-‐Domestic Low Usage 515 552 597 T1-‐General Use 2,203 2,364 2,553 T2-‐Low Voltage Supply 634 680 735 T3-‐High Voltage Supply 1,804 1,935 2,090 T5-‐Zanzibar State Fuel & Power Corp. 342 367 397 Total 5,499 5,899 6,371 Annual % Increase 7% 8%

Note: Source Corporate Budget and Business Plan 2013


ANNEX A: Audited Financial Statements


ANNEX B: Corporate Business Plan (2013)

The Corporate Business Plan, as approved by TANESCO’s Board of Directors, is bound separately, but is intended as an integral part of this application.

tanesco tariff review application...recommended cost reflective tariff with increases of 33.8% for...

Documents