lesotho electricity authority (lea) · formosa, fepi, lesotho chamber of commerce and industry...

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LESOTHO ELECTRICITY AUTHORITY

In the matter regarding a

DETERMINATION OF LESOTHO ELECTRICITY COMPANY (Pty)

Ltd’s APPLICATION FOR A TARIFF INCREASE FOR 2012/13

1. DECISION

After duly considering the application, written and oral submissions from

stakeholders, reasons, facts and evidence provided thereof, the Lesotho

Electricity Authority (LEA) Board, at its meeting held on May 31, 2012, decided

and resolved as follows:

A tariff increase of 7.9% on the energy charges for all customers;

A tariff increase of 9.7% on the maximum demand charges for industrial and commercial customers; and

The energy and maximum demand tariffs for all customer categories be increased as shown in tables 1 and 2 below.

Table 1: Approved LEC Energy Charges for 2012/13

Customer Categories

Old Energy Charges (M/kWh)

Approved percentage change

Approved Energy Charges (M/kWh)

Adding Customer Levy @M0.0230/kWh

Adding Rural Electrification Levy @M0.02/kWh large customers and @M0.035/kWh for others (M/kWh)

Final Approved Energy Charges including levies (M/kWh)

Old Energy Charges including levies (M/kWh)

Final Tariffs Percentage increase

Industrial HV 0.1083 7.9% 0.1169 0.1399 0.1599 0.1599 0.1496 6.9%

Industrial LV 0.1199 7.9% 0.1294 0.1524 0.1724 0.1724 0.1612 6.9%

Commercial HV 0.1083 7.9% 0.1169 0.1399 0.1599 0.1599 0.1496 6.9%

Commercial LV 0.1199 7.9% 0.1294 0.1524 0.1724 0.1724 0.1612 6.9%

General Purpose 0.8855 7.9% 0.9555 0.9785 1.0135 1.0135 0.9418 7.6%

Domestic 0.7834 7.9% 0.8453 0.8683 0.9033 0.9033 0.8397 7.6%

Street Lighting 0.4448 7.9% 0.4799 0.5029 0.5379 0.5379 0.5011 7.4%

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Table 2: Approved LEC MD Charges for 2012/13

Customer Old Maximum Demand Approved Percentage Approved Maximum Demand

Categories Charges (M/kVA) Change Charges (M/kVA)

Industrial. HV 150.0586 9.7% 164.61428

Industrial. LV 175.2732 9.7% 192.27470

Commercial. HV 150.0586 9.7% 164.61428

Commercial. LV 175.2732 9.7% 192.27470

The above figures exclude a 5% VAT.

2. THE APPLICANT

LEC is a Government owned company registered in terms of the Companies Act

of 1967. It was established in terms of the LEC (Pty) Ltd Establishing and Vesting

Act 2006 wherein the assets, liabilities, rights and obligations of the former

Lesotho Electricity Corporation were vested in the company. It was subsequently

issued a Composite License in terms of Section 50 of the Lesotho Electricity

Authority Act 2002 as amended (hereinafter referred to as `the LEA Act’) to

transmit, distribute and supply electricity.

3. THE APPLICATION

The Authority received a Tariff Review Application from LEC on 13 February,

2012. A modification letter by LEA was written on 1 March, 2012 requesting,

amongst others, that the company should comply with Tariff Review and Filing

Procedure, Economic and Financial Regulatory Models and provide additional

information. LEC submitted a modified application on 27 April, 2012 but did not

fully comply with the Procedure and provision of some additional information

requested.

The modified application (referred to as ‘the application’) indicates that:-

LEC is a state owned company registered in terms of the Company Act of

1967 and it was established in terms of the LEC (Pty) Ltd Establishing

and Vesting Act 2006;

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LEC is conducting its business in terms of a composite license issued by

LEA to transmit, distribute and supply electricity in the country; and

The Company has a defined service territory in which it has an obligation

to supply customers with electricity, and the company is responsible for

economic procurement of power.

The application states that LEC has made the proposed tariff increases to strive

for commercial sustainability of the company and ensure reliability of supply.

Issues to be considered when designing tariffs are also stated.

The application lists and explains business units established within the company

and the basis for allocating costs to them. This includes how different cost items

are allocated in each one of the company’s business units.

It further gives the objective and the justification for the tariff increases. The

reasons for the tariff increases are stated as:

Need to increase security in all electricity infrastructure by way of

deploying security personnel;

Increased costs of imported power due to increased demand and bulk

supply purchase prices;

Increased staff costs (inflation, compulsory medical aid, insurance

premium, payment of provident fund and severance pay) aimed at

retaining staff and the associated fringe benefits tax; and

M88.6 million return on investment.

The application provides information on how the depreciation expenses, capital

and operational expenditures were worked out; including weighted average cost

of capital (WACC). Summary costs allocated to four business units namely

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generation, transmission, distribution, and procurement and supply (P&S) are

provided and they form the basis for a revenue requirement of M603.9 million.

This amount is explained as the basis for the proposed cost-reflective tariffs

contained in the application. The said cost-reflective tariffs result in a tariff

increase of 37%.

LEC finally concludes that the required revenue for 2012/13 is reduced by about

10% to M5501million comprising cost of sales, operating expenses and a return

on assets. This reduction results in what LEC states as a non cost-reflective

scenario. The basis for introducing the scenario is stated as generous tariff

increase awarded by the Authority in 2011/12, three (3%) percent salary

increases for public servants which LEC perceives will downgrade their standard

of living, and increases in oil prices that LEC also perceives may affect output of

large industries. To get the required revenue, the LEC proposes tariff increases

of 25% and 27% for energy and maximum demand, respectively.

4. APPLICABLE LAW

The legal mandate of the Lesotho Electricity Authority to make a determination of

tariff applications is derived from the LEA Act. In terms of this act, Section 22 (f)

thereof, it is the function of LEA to regulate prices charged to electricity

consumers.

5. PUBLICISING OF THE APPLICATION

In terms of Section 24 (6) of the LEA Act, the Authority is required to publish a

notice in newspapers and other local media to allow electricity consumers and

other interested stakeholders to comment on the reasonableness of the tariffs

applied for. Accordingly, a public notice was issued on 03 May, 2012 for

stakeholders to make their comments. Stakeholders were given until 18 May,

1The original revenue requirement by LEC was M548 695 047.00 and the requested tariff increases was 25% on

energy and 27% on maximum demand charges. The reasons for the revised figure were given during stakeholders’

public hearing.

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2012 to submit their comments. The notice further requested those stakeholders

who had interest in making oral presentations before the Pricing and Tariffs

Committee of the LEA Board to indicate accordingly so that appropriate

arrangements could be made. At the close of that day, comments had been

received from Consumer Protection Association (CPA), large industrial

customers (Humin Jeanswear (Pty) Ltd, CGM Group), Forum of Electrical

Practitioners Industry (FEPI), Queen Mamohato Memorial Hospital, Lesotho

Textile Exporters Association (LTEA), Lesotho Industrial Employers Association

(LIEA), Bakers Association of Lesotho (BAL) and domestic customers.

6. PUBLIC CONSULTATION SESSION

A public hearing was held on 22 May, 2012. LEC and representatives from

FORMOSA, FEPI, Lesotho Chamber of Commerce and Industry (LCCI) and CPA

made representations before the Pricing and Tariffs Committee of the LEA

Board.

In its presentation, LEC described its business as, amongst others, regulated,

capital intensive, having high fixed costs and using imported capital

equipment.

The company stated its objectives as guaranteeing security of supply, increasing

connections and regulatory compliance. It went further to mention its challenges

in meeting the objectives, of which the main ones were: the need to replace old

equipment, inability to make profit, low returns in electrification and regional

power shortage which requires LEC to import 40% capacity support from Eskom

and EDM.

In addition, LEC stated that its Long-Run Marginal Cost (LRMC) of electricity was

based on imports from EDM and ESKOM. This implied that LEC costs were high

as it imported from high cost suppliers. The `Muela effect of stabilizing prices had

diminished as its limited supply did not meet demand.

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LEC cited the following as factors driving the need for tariff adjustment:-

Planned shutdown of `Muela in October and November 2012 for

maintenance which would cost the utility M67 million of imported electricity

compared to M12 million charged by ` Muela;

Growing customer base resulting in increased operating expenditures; and

Antiquated equipment that needs to be maintained frequently.

The proposed tariffs by the Applicant were as shown in Table 3 below.

Table 3: LEC proposed tariffs for 2012/13 Financial Year Presented

during Public Consultation process

Customer

category

Current energy

Charges ( M/KWh)

Excluding Levies

Proposed energy

charges (M/KWh)

excluding levies

Increase

in M/kWh

Industrial HV 0.1083 0.1354 0.03

Industrial LV 0.1199 0.1499 0.03

Commercial HV 0.1083 0.1354 0.03

Commercial LV 0.1199 0.1499 0.03

General Purpose 0.8855 1.1069 0.22

Domestic 0.7834 0.9793 0.20

Street Lighting 0.4448 0.5560 0.25

In conclusion, LEC stated that the proposed tariff increases in Table 3 translate

into 25% increase on energy charges for all categories of customers. This is

however, not consistent with information in the last column of the Table as the

proposed increases translate into an increase in energy charges ranging from

25% to 56%.

FEPI, in its presentation, mentioned that increasing electricity tariffs by 25%

would result in households who were poor and living in rural areas reducing their

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electricity consumption and resorting to other sources of fuel. It argued that the

connection charges were already unaffordable and tariff increases would

exacerbate the problem of poor access to electricity. It further stated that

expensive electricity services could also result in electricity infrastructure not

being fully utilized. FEPI appealed to LEC to market electricity services in new

electrification areas so that electrification projects became sustainable. This

could be done by scaling up customer education on electricity efficiency and cost

effectiveness compared to other fuels, such as using electricity to boil water

compared to using other fuels. FEPI mentioned that LEC could also market and

promote use of electricity in the rural areas by providing electrical appliances. It

urged LEC to cut expenditure on expensive cars, ensure adherence to

electrification standards and ensure customers did not incur huge transport

expenses to buy electricity by increasing the number of sales agents within the

vicinity of their customers. FEPI concluded by recommending that the increase

in tariffs should not exceed 8%.

LCCI explained that the proposed increase would have negative effect on small

and medium enterprises. As such businesses consuming electricity to the value

of M1 000.00 per month would have to pay M250.00 additional due to the

proposed increase. It urged LEC to charge those who consumed more less and

vice versa. It advised the Company to engage in cost cutting measures such as

energy efficiency and loss control measures. Finally, it urged the company to

explore other means of financing its increasing costs other than through

customers.

FORMOSA representative explained that the increase in electricity tariffs would

make the industry less competitive globally as their input costs would increase.

The representative recommended that the increase should therefore not exceed

inflation rate. Responding to the question on how LEC should recover the bulk

supply costs, FORMOSA indicated that there was a need for LEC to be creative

in ensuring that both the company and its customers, especially, large ones

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would not be adversely affected. Operational efficiency was given as one

possible means of cutting costs.

The presentation by CPA highlighted that LEC disregarded the importance of

information dissemination to the stakeholders and this referred to failure by the

applicant to provide the 2010/11 audited financial statements . It further pointed

out that LEC should run different scenarios to show the impact of dollar market

impact instead of making decisions based only on speculation.

It posited that the tariff adjustment would adversely impact on Basotho,

consumers, textile industries and employees. For the consumers, the cost of

living would increase and the textile industries would collapse leading to loss of

jobs by many Basotho. It also mentioned that investors would desert Lesotho and

this would result in LEC being competitive in the labour market while the country

was not. It further cited that according to Pareto Optimality, consumers should

not be worse-off in order to provide for additional consumers, and this appeared

to be the case.

Finally, CPA recommended that LEC should not be granted the proposed

adjustment instead it listed recommendations to protect consumers, some of

which are given below:-

LEC should find alternative sources of financing a 10% salary increment;

There was need for competition authority in order to deal with market

failures; and

LEC should provide sufficient information in order for the regulator to

make an informed decision.

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7. ANALYSIS

7.1 LEC’s Costs and Required Revenues

The LEC’s revenue requirement was made up of the following major cost items:

Bulk Supply Purchases;

Operating Expenses;

Labour Costs;

Depreciation; and

Return on Investment.

7.1.1 Bulk Supply Purchases

In 2011/12 financial year, LEC was allowed M193 467 524.00 for bulk supply

costs and the company had paid M177 219 748.082 as shown in table 4 below.

Table 4: LEC's Actual bulk supply Costs for 2011-12

Intake point Energy Bought in kWh

Amount Paid in Maloti (M)

Average Price in Maloti/kWh

Maseru Bulk Supply 104 709 710.09 68 699 871.22 0.6561

Butha-Buthe- Clarens 79 452 479.00 36 167 218.58 0.4552

Qacha’s Nek 6 706 182.00 5 038 209.54 0.7513

‘Muela 505 933 447.00 55 104 224.04 0.1089

EDM 27 540 000 12 210 224.70 0.4434

Total 724 341 818.09 177 219 748.08 0.2447

This meant LEC had over-recovered by M16 427 775.68 during the 2011/12

financial year. In line with the Pass-through Principle and its implementation

Procedure approved by the Authority’s Board in November 2011, the LEC’s bulk

supply costs for the financial year 2012/13 should take into account the over-

recovery realised in the previous year.

2LEA reconciled figures from invoices received show that the company has paid M176 222 800.75 indicating that

the company paid less by M1 million.

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The proposed LEC’s bulk supply costs of M194 821 096.003 for the financial year

2012/13 appeared reasonable. The average price for bulk purchases in 2011/12

was 8.8% higher compared to the previous financial year’s price. In order to cater

for increase in demand of 3%4, the LEC’s bulk supply costs were also adjusted

by 3% to M200 million, inclusive of technical losses. The adjusted amount, which

is 13% increase from 2011/12 actual bulk supply costs, would be adequate to

cater for increase in demand and bulk supply costs which include the shutdown

of ‘Muela in October and November 2012.

Table 5 below does not support the reasons advanced by LEC that demand

would be increasing in Butha-Buthe by 26% and Qacha’s Nek by 31%, and the

effect of the ‘Muela Hydropower plant shutdown. In fact, energy imports in

Maseru and Clarens intake points would decrease by 24% and 0.5%,

respectively while imports from EDM would increase by 74%.

Table 5: LEC's Forecast bulk supply Costs for 2012-13

Intake point Energy to be Bought in KWh

Amount to be Paid in Maloti (M)

Average Price in Maloti/kWh

Maseru Bulk 79 278 430.00 63 270 413.00 0.7981

Butha-Buthe 79 056 942.00 42 205 786.00 0.5339

Qacha’s Nek 6 979 371.00 5 920 375.00 0.8483

‘Muela 540 692 666.00 61 782 258.00 0.1143

EDM 47 859 926 21 642 264.00 0.4522

Total 753 867 335.00 194 821 096.00 0.2584

7.1.2 Operating Expenses

LEC’s allowed operating expenses, excluding depreciation and labour costs,

were M54.6 million in 2011-12 but LEC’s actual operating expenses were M75.8

million, indicating 39% increase compared to the allowed costs by the Authority.

3LEC application requests M221.7 million, inclusive of M26.6 million losses.

4LEC’s proposal stated that demand will increase by 10%.

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For 2012/13, LEC proposed a budget of M85.65 million for operating expenses

which was 57% higher compared to the 2011/12 allowed revenue.

In the absence of supporting information from LEC, the basis on which LEA could

assess the reasonableness of these costs was inflation, increase in sales and

customer growth. Based on the data provided by LEC, connections would

increase by 10% and sales by 3% as shown in table 6 below. Based on the

inflation rate of 4.9%, half the predicted growth in sales and the increased

customer connections6, the operating expenses in LEC’s allowed revenues

would be M60.8 million, an increase of 11.4% instead of 57% as proposed by

LEC.

Table6 : Energy sales (kWh), Connections and Revenue per kWh

Item Actual in 2011-12 Projected in 2012-13 Increase in Percentage

Energy Sales (kWh) 645446021.00 672 405 279.00 3%

Connections

128 583.00

141 083.00 10%

Total Revenue 426 875 312.00 473 764 737.00 11%

Revenue (M) Required per kWh 0.661 0.705 6.5%

7.1.3 LEC’s Labour Costs

LEC’s allowed labour costs for 2011/12 were M97.6 million but the actual costs

were M101.3 million, indicating 4% higher than the allowed costs. For the

financial year 2012/13, the company proposed M112.3 million for the labour

costs, indicating 15% increase compared with the allowed labour costs in

2011/12 financial year. Whist the Company had provided the Authority with

justification for the increased staff costs, mainly to cater for inflation, staff

retention, increased staff fringe benefits and increased fringe benefits tax; LEC’s

5Operating expenses for the regulatory accounts is M99 million and 80% higher than the allowed revenue for 2011-

12. 6 Based on international best practices (incentive-based regulation), labour costs are allowed to increase in line with

growth in business and in LEC this is shown by increase in connections and MWh sales.

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justification was not in line with the conclusions of the benchmarking study

conducted by the Authority in 20097, which indicated that the company’s actual

staff compliment (excluding vacant positions) appeared excessive and staff

numbers should not increase substantially as the number of connections

continued to increase. The 15% increase in labour costs proposed by LEC was

attributed to increases in salaries (at and above inflation rate) and staff numbers

which were above the efficient levels recommended by the study.

The company should consider provision of either gratuity or severance pay to its

employees and not the current practice where both were provided.

In order to maintain efficient level of staffing at LEC, the Authority considered

increase in staff costs that was in line with inflation and customer numbers. This

would mean labour costs were allowed to increase by half the increase in

customer numbers plus the rate of inflation. On this basis, labour costs in LEC’s

allowed revenue would be M107.3 million instead of M112.3 million proposed by

LEC. This would represent an increase of 9.9% compared to allowed labour

costs in 2011/12.

7.1.4 Depreciation Charge

LEC’s depreciation charge for regulatory accounts should take into account

assets financed through grants and by customers. The depreciation charge

should be adjusted downwards by income from these two sources. Since there

was no proper asset register to differentiate these assets, the depreciation

charge as proposed by LEC should be recovered from the tariffs. The company

would be carrying out a revaluation exercise during the 2012/13 financial year

and the charges would be reviewed when the results of the revaluation were

available. Once this exercise was complete, LEA would expect the findings to be

communicated to it before submission of next financial year (2013/14) tariff

7 Economic, Regulatory and Financial Model Study undertaken by ECA Consultants on behalf of LEA

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application. The Authority would only consider such an application after receiving

the revaluation exercise report or findings.

7.1.5 LEC’s Return on Investment

Based on economic and regulatory financial models developed by the Authority,

the company’s return on its investment was reflected as M93.7 million. The

downward review of the return to M7 million by LEC during the public hearing,

could signal that the Government, as the sole shareholder of LEC, was not keen

to claim dividends from the company. However, the Authority was of the view that

the proposed return on investment by LEC needed to be maintained at last year’s

level of M13.9 million until such time that Government of Lesotho (GoL) policy

directive was obtained. Again, lack of proper asset register at LEC prohibited

separation of assets so that grants, donations and customer financed assets did

not form part of the Regulatory Asset Base (RAB). During 2012/13, the Company

should finalize and provide to the Authority the proper asset register detailing all

the assets categories. Failure to provide a proper asset register to the Authority

would render LEC’s application for a tariff increase for 2013/14 incomplete.

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7.2 LEC’s Adjusted Revenue Requirement

Adjustments made in 7.1 above lead to the revenue requirement shown in table 7

below.

Table 7: LEC Revenue Requirement 2012-2013

Cost Items

Approved in

2011/12 Actual in 2011/12

Variance

between

Approved and

Actual in 2011/12

Projected LEC

Costs for 2012-13

Adjusted LEC

Costs for 2012/13

based on the

approved costs in

2011/12

Adjusted

LEC Cost

minus

Projected for

2012/13

Cost of Sales 207 713 524 192 339 873 15 373 651 211 162 524.00 217 515 000.00 6 352 476

Bulk Purchases 193 647 524

177 219 748.08 16 542 250 193 647 524.00 200 000 000.00 6 352 476

Repairs and

maintenance 13 142 000 14 325 599 -1 183 599 16 606 000.00 16 606 000.00 0

Diesel and oil 924 000 909 000 15 000 909 000.00 909 000.00 0

Operating

Expenditures 200 661 472 252 928 276 -52 266 804 274 019 690.00 244 249 737.36 -29 769 953

Labour 97 636 331 101 301 477 -3 665 146 112 328 511.00 107 302 327.77 -5 026 183

Depreciation 46 054 783 73 422 674 -27 367 891 73 398 105.00 73 398 105.00 0

Other expenses 54 616 128 75 849 895 -21 233 767 85 586 136.00 60 842 366.59 -24 743 769

LEA License 2 354 230 2 354 230 0 2 706 938.00 2 706 938.00 0

Sub-total (Cost of

sales and operating

expenditures) 408 374 996 445 268 149 -36 893 153 485 182 214.00 461 764 737.36 -23 417 477

Return on Asset 13 911 128 13 911 128 13 911 128 7 000 000.00 12 000 000.008 5 000 000

LEC's Total

Required Revenue

(excl. levies) 422 286 124 459 179 277 -22 982 025 492 182 214.00 473 764 737.36 -18 417 477

Based on the figures in table 7 above, on average, tariffs would need to increase

by 6.5% without levies and 6.4% inclusive of levies. The average increase was

consistent with a 6.5%9 increase in revenue required per kWh as shown in table

6 above.

8 The figure is slightly below last year LEC’s allowed return on investment and would be reviewed with the outturns

in 2012/13 when LEC applies for Tariff Review. 9Average price increase is equal to expected total revenue divided by expected sales (M/kWh) compared to previous

year’s average M/kWh.

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7.2.1 Average Tariff increase

In order to achieve the adjusted required revenue indicated in table 7 above, the

average increase in tariffs would be 6.5% and the tariffs would be increased as

indicated in tables 8 and 9 below.


Customer Categories

Old Energy Charges (M/kWh)





Final Approved Energy Charges including levies (M/kWh)


Final Tariff Percentage increase

Industrial HV 0.1083 7.9% 0.1169 0.1399 0.1599 0.1599 0.1496 6.9%

Industrial LV 0.1199 7.9% 0.1294 0.1524 0.1724 0.1724 0.1612 6.9%

Commercial HV 0.1083 7.9% 0.1169 0.1399 0.1599 0.1599 0.1496 6.9%

Commercial LV 0.1199 7.9% 0.1294 0.1524 0.1724 0.1724 0.1612 6.9%

General Purpose 0.8855 7.9% 0.9555 0.9785 1.0135 1.0135 0.9418 7.6%

Domestic 0.7834 7.9% 0.8453 0.8683 0.9033 0.9033 0.8397 7.6%

Street Lighting 0.4448 7.9% 0.4799 0.5029 0.5379 0.5379 0.5011 7.4%



Categories Charge (M/kVA) Change Charges (M/kVA)

Industrial. HV 150.0586 9.7% 164.61428

Industrial. LV 175.2732 9.7% 192.27470

Commercial. HV 150.0586 9.7% 164.61428

Commercial. LV 175.2732 9.7% 192.27470


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The above tariffs would enable the utility to generate M473.7 million from its

customers. This is shown in table 10 below.

Table 10: LEC 2012/13 Revenue Based on the Approved Tariffs

Revenue Based on the Approved Energy Charges

Customer Categories


Estimated Energy Sales in 2011/12

Total Revenue in 2012/13

Industrial. LV 0.1294 32 883 614 4 254 222.19 Commercial. HV 0.1169 75 385 667 8 809 244.92 Commercial. LV 0.1294 53 377 973 6 905 620.45 General Purpose 0.9555 94 353 955 90 150 911.19 Domestic 0.8453 227 845 340 192 595 068.51 Street Lighting 0.4799 5 693 890 2 732 721.09 Total Revenue based on

Energy Charges 672 405 278.57 326 816 587.11 Revenue based on approved MD charges

Customer categories

Approved MD Charges (M/kVA)

MD Forecast for 2012-13

Total Revenue from MD Charge

Industrial. HV 164.61428 378 572.33 62 318 413.12 Industrial. LV 192.27470 140 802.42 27 072 743.12 Commercial. HV 164.61428 169 313.37 27 871 399.21 Commercial. LV 192.27470 154 222.01 29 652 990.77

LEC’s Total Revenue based on MD Charges 146 915 546.22

LEC’S Total Revenue Based on approved Tariffs

473 732133.33

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7.2.2 Regulatory Accounts

LEC should submit Cost Allocation Manual to the Authority for approval and on

the basis of the approved manual and allowed revenues prepare regulatory

accounts for 2012/13. These accounts would be the basis for 2013/14

preparation and submission of regulatory information to the Authority. In the

absence of an approved Cost Allocation Manual, LEC’s future tariff applications

would be compromised. To this end, LEC is obliged to submit the Manual for

approval before the next application.

7.2.3 Compliance with Regulatory Decisions and Tariff Filing and Review

Procedure

Despite previous Regulatory Decisions on Tariff Determination and approved

procedures for tariff filing and review, the LEC was not able to fully comply with

those directives and approved procedures. This had led to the company

providing the Authority with insufficient data which was not compliant with the

procedure. Furthermore, there was little progress regarding issues that ought to

have been addressed by the company which were emanating from the previous

determinations. Tariff submissions to the Authority did not obtain the necessary

approval from the LEC’s Board. As such supporting information, such as the

Budget, was not consistent with the tariff application. In future, LEC’s tariff

application should be consistent with their approved budget. Furthermore, LEC’s

application should be supported by proof that the same had been approved by its

Board. Proof in this instance should be a Board Resolution confirming approval

of the application. To this end, any application submitted without the Board’s

resolution would be considered incomplete.

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7.2.4 Lack of Audited Financial Statements for 2010/11

The Authority had noted with serious concerns that the Company had no Audited

Financial Statements for 2010/11. The Audited Financial Statements form part of

the key information requirements in relation to the Company’s performance and

tariffs’ reviews. The situation was further exacerbated by the fact that the latest

Audited Financial Statements of 2009/10 of the Company had been qualified,

mainly on issues that affected tariffs such as assets of the company. To correct

the above, LEC should ensure that prior to 2013/14 tariffs’ review, it had audited

statements for both 2010/11 and 2011/12.

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8. CONCLUSIONS

From its analysis of LEC’s Tariff Application, the written and oral submissions from

stakeholders, reasons, facts and evidence provided thereof, and LEC’s response to

both LEA and public comments, LEA Board had found justification for a M550 million

revenue requirement inadequate. LEA Board therefore concluded as follows:

A. The requested 25% and 27% increase in energy and demand charge

respectively, requested by LEC in order to meet its revenue requirement of

M550 million did not have sufficient justification for the proposed costs for

each of the proposed business units of the company.

B. LEC revenue requirement, after making the adjustments, was M473.7 million

and to achieve this adjusted required revenue, the average increase in tariffs

would be 6.5%.

C. The Company’s return on assets was relatively low and needed further

investigation and to be addressed in line with tariff restructuring exercise

being undertaken by the Authority.

D. The Company’s operating expenses were proposed to increase by 57% and

this was not related to inflation, increased sales and customer connections.

E. LEC’s staff costs increase of 15% was high and the increase was not

consistent with the recommendations of the Benchmarking Study that was

undertaken by the Authority.

F. LEC’s estimates of bulk supply costs were based on 25% tariff increase from

Eskom and assume high losses of M26.6 million and had not taken into

account over-recovery realized in 2011/12.

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9. APPROVAL

A. The Board therefore approved that the LEC tariffs should be increased as shown in tables 11 and 12 below.


Customer Categories

Old Energy Charge (M/kWh)





Final Approved Energy Charge including levies (M/kWh)


Final Tariff Percentage increase

Industrial HV 0.1083 7.9% 0.1169 0.1399 0.1599 0.1599 0.1496 6.9%

Industrial LV 0.1199 7.9% 0.1294 0.1524 0.1724 0.1724 0.1612 6.9%

Commercial HV 0.1083 7.9% 0.1169 0.1399 0.1599 0.1599 0.1496 6.9%

Commercial LV 0.1199 7.9% 0.1294 0.1524 0.1724 0.1724 0.1612 6.9%

General Purpose 0.8855 7.9% 0.9555 0.9785 1.0135 1.0135 0.9418 7.6%

Domestic 0.7834 7.9% 0.8453 0.8683 0.9033 0.9033 0.8397 7.6%

Street Lighting 0.4448 7.9% 0.4799 0.5029 0.5379 0.5379 0.5011 7.4%



Categories Charge (M/kVA) Change Charges (M/kVA)

Industrial. HV 150.0586 9.7% 164.61428

Industrial. LV 175.2732 9.7% 192.27470

Commercial. HV 150.0586 9.7% 164.61428

Commercial. LV 175.2732 9.7% 192.27470


10. EFFECTIVE DATE

The effective date of the new tariff structure shall be June 01, 2012

lesotho electricity authority (lea) · formosa, fepi, lesotho chamber of commerce and industry...

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