ENERGY r REGULATION [les BOARD sae PRESS STATEMENT BOARD'S DECISION ON ZESCO’S APPLICATION TO ADJUST ELECTRICITY TARIFFS FOR RETAIL CUSTOMERS FOR THE PERIOD 2023 TO 2027 FRIDAY, 21% APRIL 2023 The Energy Regulation Board (ERB) received an application from ZESCO Limited to adjust the electricity tariffs for its retail customers for a multi-year period of five (5) years from 2023 to 2027. ZESCO proposed changes to the current tariff structure for residential, commercial, social, and maximum demand customers. In addition, ZESCO applied to introduce a new tariff category for water utilities. In accordance with the Electricity Act No. 11 of 2019, the ERB has reviewed the application. The analysis of the application was premised on the principles of Revenue Requirement. Through the Revenue Requirement, the Board determines the level of revenues necessary for the Utility to operate efficiently and cover its Operating and Maintenance (O&M) costs. Further, the Revenue considers taxes and depreciation undertake prudent Capital Expenditure and ensure a fair rate of return on assets utilised in the generation, transmission, distribution and supply of electricity. As part of the tariff review process, the ERB undertook a financial review of ZESCO for the period 2018 to 2022. The analysis revealed that ZESCO was facing financial challenges mainly arising from the growing gap between revenue, Operating and Maintenance costs. This is on account of the tariff in place being below cost reflective levels. In addition, the depreciation of the Kwacha against the US dollar over the review period has further exacerbated the revenue gap. As such, the result has been an accumulation of trade payable deficits and thereby creating a situation of technical insolvency where current liabilities have exceeded current assets from 2018 to 2022. The ERB notes ZESCO's efforts in re-negotiating the tariffs with Independent Power Producers (IPPs) and wish to encourage ZESCO to continue this course of action with all IPPs. In this regard, the Board notes for example that the capacity charge agreed with Ndola Energy is not prudent and must be re-negotiated forthwith.In arriving at its decision, the ERB has carefully considered ZESCO's financial Position, consumer submissions and Government policy in order to strike a balance ‘on the Utility’s viability, affordability and Government aspirations. Special attention has been paid to the low-income households, small commercial operations, social services and water utilities. Specifically, the Board has provided for four categories of energy consumption in each customer class. In that regard, the customer categories will include R1 to R4 for residential customers and C1 to C4 for commercial customers while S1 to $4 will cover social customers. The first customer category covers low income households that consume 100 units or less per month. Under this category, the approved tariffs are lower than the current tariffs and would provide relief to this customer category. The second category covers customers who consume upto 300 units monthly, The third category is for customers who consume upto 500 units monthly. The fourth category is for customers who consume more than 500 units per month and are considered to be significant consumers that have the capacity to pay for the power consumed at the cost reflective tariffs. The Energy Regulation Board is confident that this four tier structure offers electricity consumers the option to consume power at a level that they are able to afford whilst also allowing ZESCO the capacity to operate in a financially viable manner. ‘The Board Directives in respect of ZESCO’s tariff application are provided below. BOARD DIRECTIVES AND ORDERS Order 1: APPROVAL of the 2023 Tariffs ‘The Board has APPROVED the Multi-Year Tariffs for retail (domestic) consumers as presented in the tariff schedule effective from 1° May, 2023. Order 2: CONDITIONAL APPROVAL of 2024 — 2027 Tariffs The subsequent tariffs for 2024 to 2027 have been conditionally approved, subject to the ERB’s annual review of the Regulatory Clearing Account (RCA) results, The RCA will ascertain and establish the actual tariff adjustment to be awarded. Order 3: APPROVAL of Water Pumping Tariffs ‘The Board has APPROVED the introduction of Water Pumping Tariffs to be applicable to water pumping facilities operated by licensed water utility companies. Order 4: REJECTION of a change in the Life-line units for Residential ConsumersThe Board has REJECTED ZESCO's proposal to reduce the lifeline units from 100kWh to 75kWh for residential customers as this will be detrimental to the low-income households that are currently struggling with the increasing cost of living. The Board DIRECTS ZESCO to maintain the current lifeline units at 100kWh at a reduced tariff, from 47ngwee to 40ngwee/ kWh. This is consistent with the Government's aspiration to make electricity accessible to all Zambians. Order 5: APPROVAL of the change in the structure of Social Services Tariffs ‘The Board has APPROVED the abolishment of the monthly fixed charge on the Social Services Tariff. In addition, the Board has APPROVED ZESCO's proposal to streamline the social tariff category to be strictly applicable to Government and Community Schools; Government Hospitals and Clinics; Municipal Street Lighting and Traffic Lights; Places of Worship; Registered Orphanages; and Registered Old People's Homes. As an implementation measure, customers presently under this category that do not meet the new criterion must be migrated to either commercial or maximum demand tariff categories depending on their capacity and energy consumption. Order 6: APPROVAL of ZESCO’s proposal on the Maximum Demand Customer Category The Board has APPROVED ZESCO’s proposal to adjust the upper threshold on the MD-3 tariff category from 7,500KVA to 5,000KVA. Further, the Board has APPROVED the abolishment of MD-4 tariff band. Consequently, consumers who will be affected by this change will be required to negotiate a Power Supply Agreement (PSA) with ZESCO. Order 7: DIRECTIVE on ZESCO’s performance on KPIs The Board has noted with concern, ZESCO’s poor performance on the agreed Key Performance Indicators (KPIs) framework, which could have adversely affected the final tariff award. The Board's particular concern is ZESCO’s poor performance in new customer connections for both Standard and Non-Standard Connections, safety, quality of service and cash management performance indicators. This has compromised ZESCO’s customer service, financial and technical operations. The Board expects that the implementation of these approved tariffs, together with the earlier approved connection charges, will improve ZESCO’s performance and customer service delivery. In that regard, the Board DIRECTS that ZESCO must make an undertaking to improve performance on the stated KPIs. Going forward, during the multi-year period, the Board will strictly adhere to the KPI Tariff Award Rules and ZESCO will be penalized for poor performance. Order 8: MAINTENANCE of Regulatory Clearing Accounts (True-Ups) 3The Board DIRECTS that ZESCO maintains a Regulatory Clearing Account (RCA) that should contain detailed records of the revenue and expenditure that would be verified by the ERB during the True-Ups in the last quarter of each Financial Year. The multi-year tariff guidelines, rules and regulations, including the templates to use for the purpose of the reconciliations, will be transmitted to ZESCO in due course, Order 9: DIRECTIVE on Automatic Cost Pass-through Adjustments Section 34 (2) (c) of the Electricity Act provides that the ERB approved tariffs should include a provision for a retail tariff adjustment that takes into consideration the following: i) The exchange rate movements; ii) The changes in appropriate index; lil) The price of feedstock and any other consumables essential for power generation, distribution and supply; and iv) Other unavoidable cost increases and expected efficiency gains in the sector as may be determined by the energy regulation board. ZESCO is hereby DIRECTED that prior to adjusting the retail tariffs on account of the factors stated above, the Utility should demonstrate that proposed cost pass-through are beyond their control and are integral to the operations of the Utility. Order 10: UNDERTAKE a Human Resource Optimisation Programme The 2021 Cost of Service Study revealed that ZESCO was significantly overstaffed When benchmarked with similar Utilities in the Sub-Saharan Region. The ERB has noted that ZESCO has embarked on a human resource optimization programme Which is scheduled to be completed by 2031. The Board DIRECTS ZESCO to significantly accelerate the optimisation programme and bring forward the completion target to 31% December, 2024. This will ensure the achievement of a quick turnaround in making ZESCO efficient. Reynolds C. 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