REGULATORY FRAMEWORK FOR ENERGY INFRASTRUCTURE INVESTMENT – GHANA’S EXPERIENCE (PURC).

ABUJA – NIGERIA MAY 1, 2008 By Commissioner Andrew Quayson Chairman, Technical Committee Public Utilities Regulatory Commission (PURC-GHANA)

Presentation Outline

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Background to Establishment PURC-The Commission Act 538 Tariffs PURC Tariff Responsibilities Tariff Decision Process Composition of tariff Key Tariff Considerations Challenges PURC’s Experience to date Conclusion 2

1.0 PURC – Background to establishment

    Independent regulatory institution Established by an Act of Parliament (Act 538) To regulate and oversee the provision of utility services Created out of power sector reform recommendation Chronic lack of investment in Energy Sector Poor Quality of Service Low Tariffs Poor Financial Performance by Utilities Recommendation by the World Bank to Reform Sector Power Sector Reform Committee (PSRC) - 1994 Recommendations by PSRC  Unbundling of System    Establish Regulatory Framework Restructure the Distribution System Attract private Investment 3

PURC – Background to establishment -Contd

 Goals of Power Sector Reform Increase access to electricity to all sectors of the economy Ensure efficiency in delivery of power to consumers  Specific Objectives Enhance the management and accountability of the public utilities Promote private sector participation in the Generation and Distribution Sectors Ensure an effective regulatory environment Energy Commission: Technical Standards and Licensing PURC: Economic Regulation Quality of Service Regulation 4

2.0 PURC - The Commission Act 538 Functions

 Provide guidelines for rates to be charged by utilities.

   Examine and approve rates to be charged by utilities for services provided Monitor standards of performance for provision of utility services Protect interest of both consumers and providers of utility services  Promote fair competition.

5

3.0 Tariffs

History of Electricity Tariffs in Ghana      Previously determined by Government (both as Regulator and operator) Tariff structure was not cost reflective (Tariff levels too low to cover cost of production) Low tariffs resulted in chronic lack of investment and poor quality of service PURC constituted as an independent body to take charge of regulatory functions including tariffs setting 2000 PURC developed and issued Electricity Rate Setting Guidelines 6

History of Electricity Tariffs in Ghana Continued

    Transitional plan for gradual tariff adjustment also developed in 2001 PURC has carried out two major tariff reviews since its inception in 1997.(1998-2003) Quarterly Automatic Adjustment Formula implemented from March 2003 to August 2006 PURC carried out a third major tariff review in 2006 7

4.0

PURC Tariff Responsibilities  Develop tariff setting mechanism which is fair and predictable.

 Ensure transparency in the tariff making process.

 Set efficient economic tariffs, based on efficient production costs  Provide opportunity for utilities to earn a fair risk adjusted return  To enable utilities to improve quality of service 8

5.0

Tariff Decision Process     Submission of tariff proposals by utilities to PURC Submission of tariff proposals to key institutions Publicise proposals – through electronic & print media Organise Public hearings  Consultation with key stakeholders   Utilities Consumers – all major classes  Government 9

6.0 Composition of Tariff

  Bulk Generation Tariff – weighted average of all generation sources  Imports     Combined cycle thermal Simple cycle thermal Hydro Renewables Fair RoR on investment 10

Composition of Tariff cont’d

  Transmission Service Charge   Cost of transmission, Transmission losses  Reasonable RoR Distribution Service Charge  Cost of distribution,    Distribution losses Energy purchase Fair RoR on Investment 11

Composition of Tariff cont’d

  Bulk Supply Tariff – sum of the Bulk Generation Tariff and Transmission Service Charge Average End User Tariff: Sum of the Bulk Supply Tariff and Distribution Service Charge 12

Trend of Bulk Supply Tariff (BST), Distribution Service Charge (DSC) and Average End-User Tariff (AEUT) in cents/kwh for the Period 1998-2007

Tariff trends in Electricity

16 14 13.44

12 10 10.21

8 6 4 2 4.2

2.4

1.8

8.2

7.3

2.5

5.2

7.8

4.5

3.3

8.2

4.8

3.4

8.2

4.8

3.4

8.2

4.8

3.4

5.34

4.86

0 1998 F 1998 S 1999 2000 2001 2002

Year

2003 2004 2005 2006 2007 7.28

6.16

EUT BST DSC 13

7.0 Key Tariff Considerations

7.1

Objectives of tariff Ensure full Cost recovery of reasonable and efficient costs Encourage efficiency through performance targets Provide incentives for operational efficiency Ensure financial viability of utilities 7.2 Tariff structure Structure inherited contained cross subsidies Too many bands for residential consumers 14

Key Tariff Considerations (cont’d)

Compound house effect/multi tenanted dwellings Low collection rate and high system losses Subsidy Life line tariff – subsidy was enjoyed by all consumers 7.3

Tariff Decisions

Reduced cross subsidies and band Gradual move to economic tariff Rebalance of max demand and energy for industry Lifeline tariff targeted at low income consumers Efficiency benchmarks for system losses and collection rate Customer outage duration and frequency targets per year 15

8.0

Challenges

  Regulatory Independence Determined by: Level of discretionary decision making power Staffing autonomy, own procedures, determine own salaries Funding mechanism Accountability Regulators must be able to justify decisions Regulatory decisions can be subjected to public scrutiny 16

9.0

PURC’S EXPERIENCE TO DATE   First decade devoted to addressing tariffs Bold tariff decisions taken to restore viability of utility (from 4.2 cents US in 1998 to 13.4 cents in 2008) Increasing access of electricity from 40% in 2000 to 54% in 2005 Generation capacity increased by over 60% from 1072MW (1997) to 1730MW (2005) No significant improvement in quality of Service delivery (load shedding 1998, 2003, 2006-7) Energy Commission has developed a Strategic National Electricity Plan 2006-2020  Generation separated from transmission Independent System Operator set up (GRIDCO – 2007) 17

PURC’S EXPERIENCE TO DATE cont’d

 Encouraging private sector participation in Generation    TICO 2002 220MW Simple Cycle Since 2007, 12 IPPs showed interest to generate a total of over 1500MW.

Construction of first phase of 540MW combined cycle 2008 Government sourced funds for investment in Power Sector    Retrofit of Akosombo generation plant at a cost of US$130M increased capacity from 912MW to 1020MW US$ 622M Chinese loan for 400MW Hydro Electric Dam at Bui ( 2007 ) US$ 250M from Eurobond market for investment in Transmission and Distribution (2007) 18

10.0 Conclusion

 Opportunities for investors   Political Stability Planned accelerated economic growth of 8%      Established Regulatory Institutions 20% supply gap Establishment of WAPP Fair risk adjusted RoR for investors Oil/Gas find in Ghana 19