The Public Utilities Regulatory Commission (PURC) is set to kick-start a “major tariff review process” after receiving proposals from service providers for an increase in water and power prices.

A major tariff review is the kind that ultimately leads to a one-time substantial jump in utility tariffs, buffeting consumers’ pockets and dislocating business budgets. The last such review occurred three years ago and led to electricity tariffs going up by 89 percent, and water tariffs by 36 percent.

Since then the rates have been reviewed quarterly, in accordance with a formula that measures factors affecting the tariffs -- such as the exchange rate, consumer inflation and production costs. The rates have however been fixed since November 30, 2011 and last year, the adjustment formula was set aside even as production costs and other elements rose.

Unlike the quarterly adjustment, a major review of tariffs incorporate additional factors such as the investment needs of the utilities.

“The Commission has received proposals from utility service providers for a possible adjustment in the current tariffs being paid by consumers of these services,” said the PURC in a statement on Thursday.

As happened in the past, the utilities’ request for more tariffs has set them on a collision course with consumers and businesses, who are demanding improved services first before they pay more for the services.

This time “efficiency in service delivery must precede tariff increments,” said Nana Osei-Bonsu, Director-General of the Private Enterprise Federation (PEF).

In a classic chicken-and-egg conundrum, the utilities say the under-pricing of their services has accounted for the under-investment and inefficiencies in their operations. They also argue that “unrealistic” tariffs imperil their finances, threatening their very survival.

“In 2011, when we had gas, for the whole year we purchased about US$200million of crude oil. Now in 2013, when we have no gas, in the first five months of the year -- not even half of the year -- we have purchased US$300million, but the tariffs have not changed,” said Chief Executive of the Volta River Authority (VRA) Kwaku Andoh Awotwi in an interview on May 17.

The VRA, which sells power to the Electricity Company of Ghana (ECG), is paid 4 cents per kilowatt hour whereas power producers in Togo, Benin, Burkina Faso and Ivory Coast earn between 10-13 cents for same.

Because of the damage to the West Africa Gas Pipeline, VRA’s fuel bill, according to Awotwi, has tripled as a result of having to replace cheap gas with more expensive crude oil.

The exchange rate, which affects the cost of imported crude oil, has weakened by around 30 percent since 2011 and the price of crude has risen to above US$100 per barrel, Awotwi said.

VRA incurs losses of US$3million daily from its use of crude oil to run thermal generating plants, Chairman of the Parliamentary Select Committee on Mines and Energy, Dr. Kwabena Donkor, disclosed last week.

Failure to increase the current power tariffs will cause the VRA’s “collapse”, he said. “The fundamental problem is that VRA is selling power at less than the cost of production. So from the onset, it is already making a loss.”

Failed Promises

In 2010, after the major review of tariffs, the PURC said it would “ensure that consumers of electricity have value for money through improvement in the quality of service being delivered by the service providers”.

Targets for achieving quality of service will be “monitored” and “enforced”, the Commission said; “These include minimisation of customer hours lost per year due to power outages; reduction in both technical and commercial losses; control of operational costs within regulated targets to ensure a fair return on investment; and publication of a customer charter.”

Three years on, there is total dissatisfaction with the quality and reliability of service among the public, and utilities’ performance against the indicators has worsened, not improved.

The ECG cannot account for around one-fifth of the power sold to it by the VRA, and is accumulating debt at a rate of GH¢26million per month to the Authority, said Ekow Acquah, VRA Manager for Sales Contracts and Regulations. The ECG’s total indebtedness to the VRA was GH¢545million in April, he added, “enough to pay for a year’s supply of crude oil”.

Meanwhile, Government and ministries, departments and agencies owe VRA and ECG millions in unpaid bills and subsidies. The overall structure of tariffs and the distribution company, ECG, does not encourage the participation of Independent Power Producers (IPPs) in the electricity sector, said Acquah.

A jump in tariffs for electricity raises the cost of water production, since electricity is a key input. About a third of the population lacks access to potable water, which the Ghana Water Company Limited blames on weak investment due to low tariffs.

The increases will also affect producer- and consumer-price inflation as businesses pass on the costs to buyers. Consumer inflation accelerated from 8.8 percent to 10.6 percent in the first four months of the year. Utility prices together with housing account for 6.98 percent of the inflation basket.

Combined with the proposed new taxes by Government, higher power and water tariffs will dampen consumer spending and business profits, hitting poor households and small- and medium-sized enterprises hardest.

Consultative Process

The PURC said there are processes that it must follow before it reaches any decision on the proposals for tariff adjustment.

“As a first step, the Commission is going to interrogate proposals from the utility service providers, after with the service providers will be requested to publish key highlights of their proposals in the media for the public to comment and contribute their views,” said the Commission’s statement, signed by Nana Yaa Akyempim Jantuah, Director for Public Relations and External Affairs.

The tariff review will help Government streamline its expenditure, as the current subsidies on electricity and water will be scaled back, said Finance Minister Seth Terkper on May 23.

Government must not worry so much about the poor since their tariffs are already low, said Awotwi. “By not giving us the right tariffs, you are subsidising the rich who use most of the electricity. Those we think of as very poor already have low tariffs.”