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Wednesday, April 18, 2012

Zesa under fire for excessive tariffs

Friday, 13 April 2012 09:53
Chris Muronzi

ZESA Holdings, which now has a notorious habit of sending customers
disproportionately huge bills and cracking down on the poor while allowing
VIPs to consume electricity without paying, has come under fire from the
Competition and Tariff Commission (CTC) for its exorbitant charges not in
line with services the utility is offering.An anti-monopoly investigation by the CTC unearthed excessive pricing of electricity by Zesa which the commission feels has a direct adverse effect
on the operations of businesses in the country and on consumers’ disposable
The CTC launched an investigation into allegations of abuse of monopoly in
the production and distribution of electricity by Zesa and its subsidiaries
Zimbabwe Power Company and the Zimbabwe Electricity Transmission and
Distribution Company ZETDC. Although it charges are exorbitant, Zesa’s
services are unreliable.

Among some of its findings, the commission unearthed that the pricing
formula used to calculate the price of electricity did not inculcate
discipline of efficiency, and the cost of sales comprised both power costs
from local power stations and imports.
The investigation also observed that the figure representing the imported
power component in the calculations was much higher than the actual costs
because it was based on budgets and estimates were consistently used evenwhen actual contract supply prices had been concluded.

“Operational costs have a very high fixed proportion with salaries as a high
component,” the report reads. “A more detailed study would show the
activities which caused these costs and the value they bring. The impact of
business culture on cost levels is also not known as this tends to lead to
high costs where transparency is weak.”

“It was evident during the investigation that assets are operational below
capacity, the calculation includes all fixed assets yet there was some under
utilisation of the assets.”
The commission says from its findings, only 47% of established capacity was
being utilised by Zesa.

“The use of low load factor in calculating the unit cost of power has the
effect of increasing the unit price charge. This is not in line with best
practice,” the report says.

Apart from this, the commission also noted Zesa was not able to account for
the quantity of power lost during transmission and distribution.
The report says an analysis of transmission and distribution losses showed
material losses ranging from 20% to 24% of power supplied.
“The normal acceptable loss should be 10%. This was explained as being
attributable to old transformers and power thefts that are not registered in
meters,” the report says.

“An analysis of cash received by the generating companies and how it was
applied is quite revealing. For the 18-month period which was covered by the
investigation, it was observed that most of the cash received was spent on
Hwange operations even though there was no performance. It would seem the
organisation was allocating cash to cover fixed costs, mainly human
resources related costs even though electricity generation was not taking
place at a reasonable level.”
The report recommends that tariff levels be determined on the basis of what
the market can realistically pay for. It also says the tariffs industry and
commerce pay should also be affordable to enable economic recovery.

“It is recommended that pricing of services should be decided on a policy
basis and not left to the companies and organisations on their own,” it
“The fact that the organisation can send bills every month which are known
to be higher than incomes of their consumers, and may not necessarily be
recoverable, should raise concern. It is notable that external auditors of
some of these organisations have reasonably forced the organisations to
provide for bad debts as it is not prudent to account for some of the debts as assets carrying value.”

The commission says there is need for an independent study to restructure
service providers in order to impose transformational pressure on them to
rid them of poor practices. Its report notes that while Zesa recovered full
costs, there was no matching service.
“Bearing in mind that the fixed costs of these organisations are very high
in comparison with variable costs, it is logical that fixed costs should
have been trimmed in line with the level of service that was provided and
the level of economic performance,” it said.

The commission also observes that the capacity of utility providers was
designed to support a certain level of economic activity. For instance,
Zimbabwe’s GPD of US$9 billion in 1999 has not been achieved since
dollarisation with last year’s GDP estimated at US$8 billion.

“Wealth created was therefore not able to support infrastructure supported
by a GDP of US$9 billion. The utilities are high fixed cost/ low variable
costs organisations. During the period, fixed costs, mainly human resources,
were not rationalised to be at the level of services provided, yet their
tariff structures carried a full load,” it says.

The CTC has also launched an investigation into allegations that TelOne, the
state-owned fixed line operator, was also abusing its monopoly while the
cities of Harare and Bulawayo were abusing their positions in the water
utilities services and administration of rates and levies system.

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