UMEME HALF YEAR RESULTS SHOW PROMISE BUT …

Power distributor Umeme last week released its half year results, which showed that the demand for power continues to grow, with the sub-text being that in this context the need for an efficient distributor and a smooth running of the sector cannot be overstated.

According to the unaudited accounts for the six months to the end of June revenues grew to sh816b from sh741b during the same period last year. This was attributed to a seven percent increase in power consumption during the period, which should not come as a surprise with the commissioning of the 183 MW Isimba power project in April.

"An additional 93,580 customers were hooked up to the grid bringing the distributor’s client numbers up to 1.4m....

Profit after tax grew marginally to sh61.2b from sh61.1b during the same period last year, mainly due to a near doubling of their income tax bill to sh51.8b in the first six months of 2918 compared to sh26.3b at the same time last year.

Energy losses on the grid inched up to 16.9% from 16.8% last year, breaking a falling trend in Umeme’s fight to bring down losses – commercial and technical.

The accounts show that Umeme spent less on repair and maintenance expenses, sh16.1b compared to sh21.7b and this may be responsible for slip in technical losses.

Umeme says as much, “Despite the efforts to improve efficiencies as measured by cost to serve per customer and operating costs per MWh, the regulatory allowance for operations and maintenance costs were insufficient thus constraining our service levels.”

Electricity Regulatory Authority (ERA) at the beginning of the year, allowed Umeme distribution operation and maintenance costs (DOMC) of not more than an annual $50m for the next six years. Umeme protested that this was unrealistically low given that last year they spent $60m and were planning to spend $70m.

Umeme argued that the increasing customers coming to the grid and the new supply – about 800MW this year alone, necessitated a bump up in costs.

"ERA on its part argued that given that the network was virtually all new now, efficiencies from the new equipment should be able to kick in and hence no need for higher DOMC...

Umeme resubmitted their proposals and a public hearing was held in the middle of August. ERA say they are still scrutinizing the proposals but argue that if Umeme had not omitted certain detains during the first submission they may not have been in the current situation.

The liberalization of the electricity sector begun with the unbundling of the Uganda Electricity Board into its constituent parts -- generation, transmission and distribution. The generation and distribution parts were passed to private operators while government retained the transmission function.

However, the challenge of creating competition in the sector was a difficult one, not least of all because there was a small customer base then, which meant that a regulator there  to ensure the customers get value for money was always going to be a powerful entity.

As it is, unlike in the banking or telecommunications industries, other liberalized sectors that have a regulator, ERA sets tariffs and by extension regulates the costs that feed into the tariff. An imperfect necessity.

Imperfect because when you allow market insensitive players to determine or cap market sensitive parameters it rarely turns out well for the industry or for the consumer.

A necessity because if you left the private sector up to its own devices it may exploit the consumers and indulge in other anti-competitive shenanigans.

Uganda’s explosion in power generation capacity comes as a result of allowing the private sector to invest in the sector. This would not be possible if investors were not confident that there would be an effective distributor to not only take up their power but also to grow customer demand into the future.

Hence Umeme’s efficient operation is central to the industry.

"It is in all our best interests that the current impasse comes to a speedy resolution. Umeme’s inability to invest appropriately now and into the future can have long term repercussions for the industry and in fact subvert what ERA is trying to achieve – affordable tariffs for everyone....

ERA is taking its lead from President Yoweri Museveni’s wish to see an end user tariff of less than US5 cents sooner than later. The details of how to achieve this has to be arrived through ERA and its stakeholders in a way that is not only timely but sustainable.

Forcing tariffs down in the short term with some cosmetic changes may actually endanger the sustainability of the sector, discourage new investment and create a situation where tariffs increase in the future because we have to pay for the omissions created in the past.