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Final Decision And

Commission Order

Case U-0001-15

In the matter of VUI Limited 's electricity tariffs June 2015

Foreword

The Utilities Regulatory Authority (URA) Commission is pleased to issue this Final Decision and Order in the matter of the request from Vanuatu Utilities and Infrastructure Limited (VUI) for a tariff adjustment for electricity services in Luganville (case U-0001-15).

URA Staff (the Staf has investigated and analysed VUI's 2011-2014 performance smce assunung operations of Luganville electric system. Based on its analysis Staff has recommended a tariff adjustment. The adjustment is occasioned by a number of factors: significant drop in diesel prices in the global markets, improved hydro generation from Sarakata, improved collections and operating cost reductions from more efficient management.

Preliminary Decision in this case issued on the 13th May 2015 proposed a price reduction of 18.37%. Based on comments and additional information provided by VUI and  comments  from the Government  of Vanuatu (Director of Energy) Staff conducted further analysis. Based on Staff revised recommendation, the UR.A Commission (Commission) orders that the base rate be set at 40.52 VT/ kWh. This represents 14% price reduction from December 2014. This base price includes continuation of the Santo customer fund contribution of 1.00 VT/kWh and a 2.00 VT/k\Vh payment to the Government by VUI.

Comnussion also adopts a revised tariff strncture to  reflect  the  operating  cost breakdown  and  to  create better incentives for efficient use of electricity and fair  application of pricing  for electricity. Tlus new base rate and tariff structure will be applied to customer  bills  issued  after  July  1,  2015.  The  proposed breakdown  of  different  customer charges  is shown in the table below:

Table 1: Comparison of customer charges per Customer category from charge tariff of Dec-2014

The reconciliation provision established in Final Order of case U-000 1-14 shall remain in place to track variations in fuel prices, hydro operation and other variable costs estimated. In the reconciliation report, U-0005-15 issued in June, the Staff reconciled VUI's 2014 operating costs and did not fmd any substantial gap triggering a forward adjustment of the base rate according to the established procedure.

Johnson Naviti Matarnlapa  Marakipule, Chairman

Hasso Bhatia, PhD, CEO and Commissioner 

John Obed AWee, Executive Commissioner

Contents

FOREWORD.............. 2

1.               INTRODUCTION               5

1.1 LEGAL CONTEXT ........................................................................., 5

1. DISCUSSION... 6

2.1    1 SYSTEM LOSSES 6

2.2    HYDRO GENERATION EFFICIENCY AND DIESEL BURNING EFFICIENCY 6

2.3    FUEL AND LUBRICANTS 6

2.4           GPOBA IMPACT ON COST OF LABOUR AND NEW INSTALLATIONS MATERIALS 7

2.4.1         Labour      7

2.4.2         New installations materials      7

2.5 GOODS  AND  OTHER COSTS ............................................................, 8

2.6           PROVISIONS FOR BAD DEBTS 8

2.7           GOVERNMENTAL ASSET CONTRIBUTION FEE 8

2.8          SANTO FUND 9

2.9          REVENUE   REQUIREMENT 9

2.10       FINAL BASE RATE 10

2.11       FINAL CUSTOMER TAR IFF STRUCTURE            11

1. COMMISSION ORDER 12
   1. NOTICE OF GRIEVANCE 13
   2. EXECUTION PAGE 14

Table 1: Comparison of customer charges per Customer category from charge tariff  of Dec-2014 2

Table 2: Case information 5

Table 3: Total revenue requirement, in VT 9

Table 4: Final base rate 10

Table 5: Customer charges, in VT. 11

1. Introduction

Table  2: Case information [...] 

On May 13, 2015, URA issued the Preliminary Decision in response to Vanuatu Utilities  and  Infrastructure Limited's (VUI) request for an electricity tariff reduction. The Preliminary  Decision proposed a reduction in the tariff of 18.37%. A revised customer categories and proposed tariffs for each customer category were attached to the Preliminary Decision. It also included continuation of the Santo Fund and a payment  to the Government  of Vanuatu as VUI's contribution towards use of its assets.

The Preliminary Decision was based on the Staffs investigation and recommendations in the case. The Staff collected data from past tariff reviews of the Luganville electricity concession, VUI's annual financial and operating reports and from additional data requests made. The economic data was taken from various government sources (Ministry of Finance and Economic Management, the Vanuatu National Statistics Office website and recent reports of the  URA).

This is a comprehensive review of VUI operations during 2014 with the aim of revising the base rate that will reflect the current performance and cost conditions of electricity services in Luganville. The review includes adjusting the retail tariff structure and cross-subsidy among consumer groups.

The Preliminary Decision sought comments from VUI and DoE on various aspects of the proposed Preliminary Decision, continuity of the "Santo Fund" and on the proposal on "Governmental asset contribution" acknowledging the Government: granting the use of electrical facilities and assets to VUI in Luganville.

The revised tariffs for the reviewed customer categories are attached to this Final Decision and Order.

1. 1   Legal context

The legislation governing the regulation of generation, supply and sale of electricity in Santo is established by the Electricity Supply Act N0. 13 of 2010 and the Utilities Regulatory Authority Act N. 11 of 2007.

Following the Supreme Court's verdict vacating the 2010 govenunent's grant of concession to VUI, and pending the retendering process, a stay order was issued by the court and VUI has been extended  the right to operate the Luganville Electricity system on the terms of the earlier MOU.

1. Discussion

Presented below are the Commission's discussions on the comments and  suggestions  received.

2.1     1   System losses

In its comments, DoE questioned whether the system losses assumed in the Preliminary Decision were reasonable. The Staff has forecasted losses at 12.28% on the total generation  for 2015.

Since March 2014 as per Final Order of case U-0001-14, the responsibility of operating and maintaining energy supply for Luganville street lighting, has been transferred to VUI.

Energy generated and used for street lighting is considered as unmetered energy and classified as internal consumption and included as non-technical losses.

Staff recommends that with this consideration of additional internal use, projected system losses for VUI is reasonable. The Commission adopts  the Staffs recommendation and sets VUI's system losses for 2015 at 12.28% of generation. The Staff is also instructed to monitor VUI's system losses and establish a benchmark loss factor from electric utilities similar to VUI.

2.2     2   Hydro generation efficiency and diesel burning efficiency

In its subtnission DoE challenged the hydro  efficiency  set  at  utilisation  rate  of  71%  or  7,463,520/kWh. DoE  stated  in  its  submission   that  due  to  El  Nino  effect,  2015  may  be  a  dryer  year  and  therefore the assumed utilisation rate may be too high for the utility' to reach considering the weather forecasted by the Department  of Meteorology.

VUI states, in its comments, that the hydro generation cannot be improved from its last performance in 2014 which was a utilisation rate of 70%. The reason for this, VUI argues is the maximum capacity utilisation the utility can produce out of the plant. Moreover, VUI conunented that with a raised hydro performance, the burning efficiency2  for diesel generation will decrease.

The Commission understands the constraints placed by weather on the hydro generation for VUI. However, Staff investigation on recent hydro performance has revealed that for the first four months of 2015, the hydro plant has attained a higher utilization rate than even the assumed rate by the Staff. The actual average rate year-to-date is 74%. The Staff s review of burning efficiency for diesel generation revealed that in April 2015, the utility was able to attain a heat rate of 0.2919 while using the hydro plant at 74% capacity. The Staff is convinced that the utilisation rate of the hydro plant a t 71% while still achieving a heat rate of 0.290 in its diesel units is reasonable and justified.

2.3     3  Fuel and lubricants

VUI challenged the fuel price of 97.50 VT/L assumed by the Staff and included in the Preliminary Decision. VUI argued that prices on the international market have been rising again. The utility suggested in its comments that the fuel price should be decreased by only 16% from 2013 level instead of  the 23.97% proposed by the Staff. DoE also commented that fuel prices have been rising again clue to pressures on the international fuel market and as indicated  by the raised  forecast of oil prices by OPEC.

1  In this report, "the utility" refers  to VUI.

2 Burning efficiency of the diesel generators is measured by the litres of diesel burned to prod uce 1 kWh. The lower  the rate is, the better the efficiency the less costly the  generation.

The comment also stated that main fuel supplier in Vanuatu, SSP, may  keep  prices steady  throughout 2015 or increase the prices according to international trend. DoE therefore stated tha t the Staff's forecast may be too low if prices were to increase again.

Based on its investigation earlier this year, Staff found that there is a three to four months lag between the international oil price trends and their impact on the Vanuatu market. The Staff estimated  that the fall in oil  prices will  be  realised  in  Vanuatu  during the  first semester  of  2015. The Staff  further performed a review of VUI's fuel costs for the first six months  of  this  year.  In March  diesel  price  dropped  to 105.59 VT/L; and again in April it dropped to 82.64 VT/L where it remained in May. Until tariff is adjusted, the utility's prices reflect a fuel price of 122.54 VT/L, which is significantly higher  than the current fuel price in Luganville and the assumed  price in this case. The review led the Staff  to  conclude that VUI has over-collected around VT 3.35 million on fuel cost in the first six months of 2015. Furthermore, the Staff notes that the difference between 105.49 VT/L  (price  proposed  by  VUI) and 97.50 VT/L (price proposed by  the  Staff)  is 7.99 VT/L. For an average diesel usage of 40,000  L/month and 6 months operation, VUI would under collect VT 1,917,600.  At  the year-end  2015 reconciliation, VUI would have an over collection balance of VT 1,436,873. Hence, the Staff's recommendation  to use  97 .50 VT/L is reasonable.

Based on the comments stated above,  the Commission  adopts the Staff s  recommendation  on  fuel price at 97.50 VT/L for setting base tariffs. Using forecasted kWh generation and generation mix, the fuel and lubricant costs for 2015 is estimated  at VT 40,043,708.

2.4                   GPOBA impact on cost of labour and new installations materials

VUI commented that installing new connections under the GPOBA program has created  an increase in the costs for labour and new installations materials.

2.4.1                 Labour

VUI commented that due to GPOBA, labour cost has increased as additional labour had to be hired to undertake increased workload.

The Staff is aware that the aim of the GPOBA program is to increase electricity access to low-income consumers. However the GPOBA implementation costs incurred by the utilities were to be fully offset by donations from World Bank.

The Commission affirms that costs of connections for customers under the GPOBA program should be recovered through donor contributions. The incremental expenses of  VT 2,329,210  for  GPOBA  are added to the labour cost offset by revenues of same amount. The Commission adopts the revised Staffs calculation of 2015 labour cost at VT 116,000,000.

2.4.2               New installations materials

The utility challenged the Staffs estimate of materials for new installations cost of VT 15,000,000. VUI argued that the Staff recognised the revenue from GPOBA and not the cost of materials of the program. Based on additional information received from VUI on this cost item, the Staff has reviewed its estimations and impact of GPOBA on  its estimations. The review  led  the Staff  to  set VT 15,000,000 as the normal average yearly expense to be incurred by VUI for new installations. The GPOBA program 's impact on this cost item is of additional VT 10,000,000. Since the contributions from GBOBA are recognized as other revenues the additional expenses should also be  recognized.

The Commission agrees with the Staff s revised cost for new installations and sets VUI's new installations costs for 2015 at VT 25,000,000.

Taken together the total expenses and revenues assumed from GPOBA is VT  12,329,210.

2.5                   Goods and Other costs

VUI  challenged  the  Staff's  estimated  goods  and  other  costs  in   the   Preliminary  Decision,  valued   at VT 45,190,637 . VUI comments that costs have increased in  the last  two  years  to  above  VT  51,000,000. Due primarily  to  the  GPOBA  inside wiring  installation s and  legal fees incurred  in 2014.

The Staff s investigation presented in the Preliminary Decision forecasted Goods  and  other  costs  for 2015 at VT 45,190,637. The Staff considers that GPOBA costs are recovered by the revenue collected from the program. Further legal fees incurred by VUI to defend its concession award and MOU are costs that should not be borne by customers of the utility and are thus excluded by the Staff The Staff believes its estimates to be reasonable  for Goods and other  costs. 

Considering the comments from the utility and the Staff s review, the Commission adopts the Staffs estimations as set in the Preliminary Decision. The Commission sets the 2015 Goods and Other costs for VUI at VT 45,190,637.

2.6                    Provisions for bad debts

In case U-0001-14 Commission allowed VT 1.8 million for  bad  debts.  In actuality  VUI  collected VT 2.5 million over and above its billed revenues in 2014. For 2015, VUI had forecasted a similar over collection in the material submitted for the tariff review but later commented that recoveries made in 2014 are not likely to be repeated in 2015.

Following this comment, the Staff requested additional data on VUI's bad debts account. Based on bad debt provisions allowed by the Commission in its Final Order of case U-0001- 14 and the improvement in debt collections in 2014 as being a one-off occurrence, the Staff estimates that a provision of VT 500,000 suggested in the comments received is reasonable.

The Commission adopts the Staff's estimations  and  sets  the  provisions  for  bad  debts  for  2015  at  VT 500,000.

2.7                   Governmental asset contribution fee

Under the MOU agreement signed by VUI and the Government, the utility is granted use of the Government's assets for producing and supplying electricity to Luganville consumers and to charge the URA's approved tariffs. The Staff has recommended in the Preliminary Decision that VUI collect a fee of VT 2.00/kWh billed  and transfer  the amounts collected  to the Government.

DoE commented that the Government of Vanuatu is already considering incorporating such a fee in the new electricity concession contract for Luganville. DoE  further commented  that the amount of  the fee will be set by the Government with the  collaboration of  the URA.  No comments were received from VUI on this.

The Staff recommends that the fee shall be made effective at this Final Order and continue until the Luganville concession tender is completed and granted to the winning  bidder.

The Commission adopts the Staff's reconunendation and sets the Governmental asset contribution fee at VT 2.00/kWh billed. The collected amount is to be paid to the Government on an annual basis. The payment is to be made by the end of the first quarter of the following calendar year. The Commission orders that this fee be collected by VUI and paid to the Government until the Luganville concession is re­ tendered and the winning bidder commences operation under the concession.

2.8                    Santo Fund

DoE commented that the aim of the Santo Fund should be narrowed down to only fund projects to increase network extensions.

The Staff recommends that the Santo Fund established  in March  2014 be kept in place. The purpose of the fund is to improve access to electricity to Santo residents and businesses. The Fund Committee was created, represented by Luganville city council, VUI and the URA to select and  approve electricity projects to be funded by the Santo fund. It has operated well and three extension projects have been completed or are underway. The scope of the fund shall remain as defined in the Final Order to allow for off-grid solutions and rural electrification projects in addition to network  extensions. 

2.9                    Revenue requirement

The following table provides summary of cost breakdown and total revenue required to meet these expenses.

Table 3: Total revenue requirement, in VT

2.10  Final Base rate

The table below  shows  calculation  of  the new  base tariff.

Table 4: Final base rate

The  Commission  adopts  VUI's  base  rate  at  VT  40.52/kWh,  which includes  the  Santo fund  of   VT 1.00/kWh billed and the Governmental asset contribution fee of VT 2.00/kWh billed. This new tariff represents a reduction of 14% from the base rate of VT 47.07/kWh determined in the Final Order of  March 2014. This new tariff shall be applied to derive each block of the tariff structure so as to recover average base rate. 

2.11 

The Commission  adopts the following final customer tariff structure:

Table 5: Customer charges, InVT

3 The new tariff structure has been designed to propose a better suited progressive tariff for high end users. As a result, former 120-180kWh tranche  that was  billed at a higher rate per kWh  has been  merged  with  next tranche into a single tranche from 120kWh and above. Despite showing no variation  in  price  in this new  tariff tranche, savings will materialise for consumers as they will no longer face higher rares for their use in the 120 to 180kWh usage. 

1. Commission Order

The Commission  therefore orders that: 

1. Base price for VUI is set at VT 40.52/ kWh, a reduction of 14% from the December 2014 price of VT 47.07/k\Vh;
2. VUI shall adopt the new tariff structure and prices set in table 5 of this Order; 
3. Payment for "government asset contribution"shall be implemented as described in this order; 
4. The total funds collected by the end of the year, shall be paid to the Government within the first guarter of the followmg year;
5. New tariff is to be applied to customers as of the next billmg cycle after the issue of this  Order.

4. Notice of Grievance

If the utility is aggrieved by this Order, it may request the Commission to reconsider the decision  on  issues aggrieved upon. A Notice of Grievance must be submitted within 30 days  of  the  Order. The  Notice should contain:

• The issue or issues being contested
  • A detailed  description of any facts or matters supporting the grievance
  • Copies of any documents supporting  the grievance
  • A detailed description of any alleged error of law or  fact
  • A detailed  description of any  relevant  change  in  facts or circumsta nces  since  this Order

A Notice of Grievance can be received until 241h July 2015 and addressed to Hasso Bhatia, PhD

Chief Executive Officer

Utilities Regulatory Authority The Notice  may  be:

• Delivered in person at:

Office of the Utilities Regulatory .Au thority VNPF   Compound

Corner Pierre Lamy & .Andre Ballande Street Port Vila, Vanuatu

• mailed to:

Case U-0001-15

Utilities  Regulatory Authority

P.M.B 9093 Port Vila Vanuatu

• emailed to: [email protected]

If the Conunission receives a timely Notice of Grievance, it will conduct a review in accordance with Section 27 of the URA Act. If upon review the Commission determines that the grievance is justi fied, then it shall revoke, amend or vary the decision on the matter complained of. 

1. Execution Page [...]

Utilities Regulatory Authority Vanuatu

You can access the case U-0001-15 Final Decision J une 2015 on our website www.urn.gov.vu,  or  by contacting us b}' telephone (+678)  23335,  email: breuben@ura .gov.vu  or  regular  mail  at  Case  U-0001-15, U tilities Regulatory Authority,  PMB  9093, Port Vila, Vanuatu.