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ELECTRICITY REGULATION ELECTRICITY REGULATION IN IN

ETHIOPIAETHIOPIA

Presented by:Presented by: -- Seifu AliSeifu Ali ECOPAECOPA

MauritiusMauritius

March, 2007March, 2007

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ELECTRICITY COVERAGEELECTRICITY COVERAGEA. AN OVERVIEW A. AN OVERVIEW

Electricity coverage is the percentage of Electricity coverage is the percentage of population which have access to population which have access to Electricity.Electricity.

1.6 – 2.0 billion of the world population 1.6 – 2.0 billion of the world population have no access to electricity of this;-have no access to electricity of this;-

– 50% in south Asia (35% in India alone)50% in south Asia (35% in India alone)– 32% in sub Sahara Africa32% in sub Sahara Africa– 14% in East Asia (not including China) 14% in East Asia (not including China)

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– In rural areas of developing In rural areas of developing countries 4 out of 5 live without countries 4 out of 5 live without electricityelectricity..

– 99% of the people without 99% of the people without Electricity live in developing Electricity live in developing countriescountries

– It is clear that Electricity is closely It is clear that Electricity is closely linked to development both as a linked to development both as a cause and a consequencecause and a consequence..

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Circular Analysis of Improvement in Circular Analysis of Improvement in electricity Coverageelectricity Coverage

Increase in Electricity CoverageIncrease in Electricity Coverage

Increase national output & IncomeIncrease national output & Income

Help in increasing output in productive sectorHelp in increasing output in productive sector

Improved Living StandardImproved Living Standard

Increase the ability to pay Electricity billIncrease the ability to pay Electricity bill

Increased investment in the electricity sectorIncreased investment in the electricity sector

Expansion in electrification programExpansion in electrification program

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The major means to accelerate The major means to accelerate electricity coverage is to undertake a electricity coverage is to undertake a nationwide nationwide Rural Electrification (RE)Rural Electrification (RE) programprogram

Currently many developing countries Currently many developing countries are undertaking RE program to…are undertaking RE program to…

Economic developmentEconomic developmentPoverty ReductionPoverty Reduction

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B. Rural electrification Program in B. Rural electrification Program in ETHIOPIAETHIOPIA

The current Electricity coverage in Ethiopia The current Electricity coverage in Ethiopia is about 17% of the total populationis about 17% of the total population

The per capital Electricity consumption is The per capital Electricity consumption is about 30 kwh/year, which is significantly about 30 kwh/year, which is significantly small as compared to the African average small as compared to the African average (500kwh/year)(500kwh/year)

In order to alleviate this trend the In order to alleviate this trend the Ethiopian government has embarked up Ethiopian government has embarked up on a new programon a new program

UUniversal niversal EElectricity lectricity AAccess ccess PProgram rogram (UEAP)(UEAP)

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The The UEAPUEAP Document is prepared on April 2005 Document is prepared on April 2005 with the objective of:-with the objective of:-

Increasing the national electrification program from Increasing the national electrification program from the 15% to 50% with in 5 years (2006 – 2010)the 15% to 50% with in 5 years (2006 – 2010)

Through the supply of:- Through the supply of:- – Adequate - coverage and continuity Adequate - coverage and continuity – AffordableAffordable– Reliable electricity to the rural poor in a Reliable electricity to the rural poor in a

sustainable basissustainable basis

In the past 50 years only about 10.6 million of the In the past 50 years only about 10.6 million of the population (>977.000 customers) have access.population (>977.000 customers) have access.

But in the coming 5 years it is expected that But in the coming 5 years it is expected that about 24.9 million people will have an accessabout 24.9 million people will have an access. .

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UEAPUEAP is an autonomous program with in EEPCO is an autonomous program with in EEPCO (Ethiopian Electricity and Power Corporation) (Ethiopian Electricity and Power Corporation) which has its own administrative and technical which has its own administrative and technical staffs and the required materials along with staffs and the required materials along with financial resources.financial resources.

The whole program is financed by:-The whole program is financed by:-80% subsidy provided by the 80% subsidy provided by the governmentgovernment20% from EEPCO20% from EEPCO

The government acquires grants and loans from The government acquires grants and loans from bilateral and multilateral sources and then bilateral and multilateral sources and then channels to the UEAP program in the form of channels to the UEAP program in the form of subsidy to EEPCO.subsidy to EEPCO.

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The target area of UEAP are:-The target area of UEAP are:-– Towns Towns – VillagesVillages– All productive and service sectors, especially the All productive and service sectors, especially the

agricultural sector including agro-processing and agricultural sector including agro-processing and irrigated commercial farms.irrigated commercial farms.

– All the regional states of the country except Addis All the regional states of the country except Addis Ababa.Ababa.

Currently until last week (March 18, 2007 the first phase of the Currently until last week (March 18, 2007 the first phase of the progamme budgeted 133.4 million dollar (loan from WB) as well progamme budgeted 133.4 million dollar (loan from WB) as well as EEPCO was able to electrified 350 rural towns and villages. as EEPCO was able to electrified 350 rural towns and villages.

With the 2With the 2ndnd phase of the programme EEPCO requested 129 phase of the programme EEPCO requested 129 million dollar to electrify 335 rural towns and villages expected million dollar to electrify 335 rural towns and villages expected to commence in sep.2007.to commence in sep.2007.

However , the high cost of connection and operation compared However , the high cost of connection and operation compared with the affordability of the rural people has been significant with the affordability of the rural people has been significant factor to limit the program.factor to limit the program.

The market is highly characterized by small pockets of The market is highly characterized by small pockets of demand center widely spread through out the country demand center widely spread through out the country and therefore operation cost has been frequently high.and therefore operation cost has been frequently high.

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II. Electricity Regulation In Ethiopia II. Electricity Regulation In Ethiopia A. A. OVERVIEWOVERVIEW

Ethiopia has a huge hydropower potential which is Ethiopia has a huge hydropower potential which is estimated to be about 30,000 MW.estimated to be about 30,000 MW.

Of which only about 2% is harnessed.Of which only about 2% is harnessed.

EEPCO provide 791 MW of Electric power from 9 large EEPCO provide 791 MW of Electric power from 9 large and small scale hydropower station and from diesel and small scale hydropower station and from diesel generators.generators.

By By 2011,2011, the power that the company will be able to the power that the company will be able to generate will reach generate will reach 22182218 MW and increase the amount of MW and increase the amount of customer to 2.6 million. customer to 2.6 million. (Fortune vole 7No 359, March 18, 2007).(Fortune vole 7No 359, March 18, 2007).

The total installed capacity of the ICS is about The total installed capacity of the ICS is about 784.1784.1 MW, MW, of which hydropower plant comprises of which hydropower plant comprises 662.6 MW662.6 MW..

The SCS has a capacity of 30.09 MW (soar)The SCS has a capacity of 30.09 MW (soar)

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1. 1. Regulatory Structure and responsibilitiesRegulatory Structure and responsibilitiesElectricity proclamation no 86/1997 and electricity operations Electricity proclamation no 86/1997 and electricity operations of council of ministers regulation No 49/1999 has established of council of ministers regulation No 49/1999 has established regulatory agency with a major purpose of regulating the regulatory agency with a major purpose of regulating the power industries.power industries.

The The “Electricity Agency”“Electricity Agency” while it is an “independent” federal while it is an “independent” federal organ is accountable to the Ministry of Mines and Energy organ is accountable to the Ministry of Mines and Energy (MME) and is entrusted with the objective to promote (MME) and is entrusted with the objective to promote efficient, reliable, high quality and economical electricity efficient, reliable, high quality and economical electricity service.service.

Towards this end the agency has been vested with a power Towards this end the agency has been vested with a power to:-to:-

A.A. Determine the quality and standard of electricity service.Determine the quality and standard of electricity service.B.B. Issue, suspend and revoke license for generation Issue, suspend and revoke license for generation

transmission, distribution and sale of electricity.transmission, distribution and sale of electricity.C.C. Study and recommend tariff and supervise its implementation Study and recommend tariff and supervise its implementation

and other specific obligation and right of Agency has been and other specific obligation and right of Agency has been established by the same Law.established by the same Law.

The regulation established obligation and responsibilities of both the The regulation established obligation and responsibilities of both the operators and the utilities and the expectation of conduct in the operators and the utilities and the expectation of conduct in the business relations.business relations.

B. REGULATORY FRAMEWORKB. REGULATORY FRAMEWORK

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2. Regulatory Independence2. Regulatory IndependenceThe Agency has been provided with a The Agency has been provided with a general mandate by law in the area of:-general mandate by law in the area of:-

– Tariff setting and Tariff setting and – Technical and commercial services. Technical and commercial services. – Licensing (professional competence, Licensing (professional competence,

contractors)contractors)

From the point of view of independence, From the point of view of independence, demands that specific technical and non-demands that specific technical and non-technical subjects that are potentially lead technical subjects that are potentially lead the regulatory action has to be established the regulatory action has to be established preferably by law. preferably by law.

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The regulation has not been procedural The regulation has not been procedural and too specific in technical matters.and too specific in technical matters.

– rather it requires the Agency to rather it requires the Agency to dispose such function by menace of dispose such function by menace of directives.directives.

To Support the independent conduct To Support the independent conduct of the regulatory which reduce of the regulatory which reduce discretion and at the sometime discretion and at the sometime maintaining balance from risk.maintaining balance from risk.

– Procedures ought to be developed. Procedures ought to be developed.

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3. Regulatory Transparency3. Regulatory Transparency Transparency in the regulation has been incorporated in area Transparency in the regulation has been incorporated in area of issuance of license by specifying general and of issuance of license by specifying general and specific requirements including project specific specific requirements including project specific feasibility analysis.feasibility analysis.

Outlining of time bounded procedural steps Outlining of time bounded procedural steps for:-for:-

Procurement of licenseProcurement of licenseCondition for refusal or revocation of it. Condition for refusal or revocation of it.

In establishing efficiency rate, it has been stated In establishing efficiency rate, it has been stated that operators would be consulted before adapting that operators would be consulted before adapting efficiency parameters to be incorporated in tariff efficiency parameters to be incorporated in tariff formula.formula.The transparency requirement ought to go through The transparency requirement ought to go through the decision process when disputes arise:-the decision process when disputes arise:-

Providing opportunity of the different parties Providing opportunity of the different parties to present their views before final decision.to present their views before final decision.Providing appeal forum for parties injured by Providing appeal forum for parties injured by the decisions.the decisions.

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This would also be instrumental to build This would also be instrumental to build regulatory impartiality under situation regulatory impartiality under situation where the government might appear as:-where the government might appear as:-

Owner. Owner. Operator and Operator and Through its ministerial offices as a regulatorThrough its ministerial offices as a regulator

However, price regulations which is highly However, price regulations which is highly sensitive and decisive as far as private sensitive and decisive as far as private investment in the sector is concerned to investment in the sector is concerned to be supported by detailed and transparent be supported by detailed and transparent procedure to guarantee Return on procedure to guarantee Return on Investment (ROI) Investment (ROI)

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4. Price Regulation4. Price Regulation With respect to pricing, principles has been With respect to pricing, principles has been established with the acknowledgment of the need established with the acknowledgment of the need to minimize discretion in regulatory control of to minimize discretion in regulatory control of price by way of directives. price by way of directives.

From the legal provisions tariff is regulated and From the legal provisions tariff is regulated and fixed by the Agency including generation price to fixed by the Agency including generation price to be paid to the independent producers.be paid to the independent producers.

The pricing approach has paid sufficient emphasis The pricing approach has paid sufficient emphasis to cost of service for a regulated rate of return to cost of service for a regulated rate of return with adequate incentives incorporated into with adequate incentives incorporated into appropriate cost componentsappropriate cost components. .

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5. Procurement Regulation5. Procurement RegulationIn the National Grid system generation procurement In the National Grid system generation procurement managed by through competitive bidding in Build managed by through competitive bidding in Build Own and Operate (Boo) arrangements after Own and Operate (Boo) arrangements after determining the additional capacity and energy that determining the additional capacity and energy that is desired to be purchased.is desired to be purchased.

Depending on the interest of the purchaser, the Depending on the interest of the purchaser, the arrangement could be on the Basis of Project arrangement could be on the Basis of Project Transfer (BPT) after a period of operation where Transfer (BPT) after a period of operation where sufficient capital reform is achieved.sufficient capital reform is achieved.

Private power generation involves a number of Private power generation involves a number of contractual arrangements betweencontractual arrangements between

– The owner/developer the public utilityThe owner/developer the public utility– InsurerInsurer– Loan financiers Loan financiers – Equity investorsEquity investors– ContractorsContractors– Operators andOperators and– Credit suppliers Credit suppliers

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This chain of contractors are interlocked and can result a chain This chain of contractors are interlocked and can result a chain of undesirable effects, if the terms are stringent, vigorousof undesirable effects, if the terms are stringent, vigorous

Temporary ownership is the most favored arrangement where Temporary ownership is the most favored arrangement where after a certain period of operation the project to assumes after a certain period of operation the project to assumes adequate return on investment be transferred to the adequate return on investment be transferred to the government or its utility, The transfer assumes adequate government or its utility, The transfer assumes adequate Return on Investment.Return on Investment.

Private investors have a particular concern about commercial Private investors have a particular concern about commercial risksrisks

– Currency fluctuation riskCurrency fluctuation risk– Performance risk – poor technical performancePerformance risk – poor technical performance– Social risk – non-payment of billSocial risk – non-payment of bill– Political risk – civil conflict Political risk – civil conflict – Block tariff Block tariff

The extra cost to cover such risks will inevitably be passed on The extra cost to cover such risks will inevitably be passed on the customer, thus aggravating affordability problems.the customer, thus aggravating affordability problems.

There is no doubt that such risk a real deterrent to There is no doubt that such risk a real deterrent to investment.investment.

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Independent Power Producers(IPPs) finance requires Independent Power Producers(IPPs) finance requires efficient risk allocation among the contracting parties, efficient risk allocation among the contracting parties, where usually the purchaser takes demand risk and the where usually the purchaser takes demand risk and the supplier constriction and operation risks.supplier constriction and operation risks.

Since IPPs do not directly participant in retail Since IPPs do not directly participant in retail trading, market risk are to be borne by the trading, market risk are to be borne by the purchasing utility. purchasing utility.

Private sector-Independent power producers (IPPs) is Private sector-Independent power producers (IPPs) is advocated for not only complementing the capital need but advocated for not only complementing the capital need but also for spill over effect of efficiency to public sectors.also for spill over effect of efficiency to public sectors.

The country should design and seek options to increase The country should design and seek options to increase efficiency of the power industries for a better service to the efficiency of the power industries for a better service to the economy and to increase internal resources in as much economy and to increase internal resources in as much possible way to finance development.possible way to finance development.

Against the wide spread and rampant sector problem Against the wide spread and rampant sector problem ranging from governance to operational efficiency and ranging from governance to operational efficiency and financing, reform measures is important that affect the financing, reform measures is important that affect the industry at different level. industry at different level.

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CC. . Scenarios for ORGANIZITIONAL REFORM AND Scenarios for ORGANIZITIONAL REFORM AND INDUSTRY STRUCTUREINDUSTRY STRUCTURE

Even though, the regulation emphasizes bulk procurement Even though, the regulation emphasizes bulk procurement of power from private producers for distribution to of power from private producers for distribution to customers the Ethiopian Electric Power Corporation (EEPCO) customers the Ethiopian Electric Power Corporation (EEPCO) is likely remain major power supply source.is likely remain major power supply source.

The regulation and Electricity law is not articulated in The regulation and Electricity law is not articulated in regard to the desired structural requirement of the power regard to the desired structural requirement of the power industry.industry.

Power industry in the country, characterized by governance Power industry in the country, characterized by governance problem, where policy making, ownership and operational problem, where policy making, ownership and operational activities is vaguely defined with apparent lack of clear activities is vaguely defined with apparent lack of clear objectives and legal and regulatory frame work.objectives and legal and regulatory frame work.

The industry structured with monopolistic responsibility The industry structured with monopolistic responsibility virtually closed to private capital.virtually closed to private capital.

The Ministry of Mine and Energy (MME) play a conflicting The Ministry of Mine and Energy (MME) play a conflicting role as operator and regulator.role as operator and regulator.

There is no any clear delineation of MME in its role as There is no any clear delineation of MME in its role as supervisor and regulator.supervisor and regulator.

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Many activities are centralized beyond the Many activities are centralized beyond the manageable limit creating additional burdens on top manageable limit creating additional burdens on top management.management.

This actually distract policy issues and overall This actually distract policy issues and overall development visions in the sector.development visions in the sector.

Even contemporary major source of power – EEPCO Even contemporary major source of power – EEPCO adopted industry structure indicate a vertical adopted industry structure indicate a vertical integration of all functions under one corporation integration of all functions under one corporation management.management.

Within the National Grid it is possible to maintain a Within the National Grid it is possible to maintain a vertically integrated (Generation, transmission, vertically integrated (Generation, transmission, distribution) utility, while organization or distribution) utility, while organization or administrative disintegration is not a mandatory administrative disintegration is not a mandatory condition.condition.

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disintegration of the industry in the free system disintegration of the industry in the free system (separate, generation, transmission, distribution (separate, generation, transmission, distribution company) considering the prevailing market size in company) considering the prevailing market size in this center may be a necessary pre-requirement. this center may be a necessary pre-requirement.

Since the regulation is open on this subject, some Since the regulation is open on this subject, some details may be required to provide guidance in details may be required to provide guidance in regard to when and when not to establish regard to when and when not to establish organizational or accounting internal disintegration organizational or accounting internal disintegration or both at generation level.or both at generation level.

The regulator has to look and provide investment The regulator has to look and provide investment opportunities for promoting “Yardstick” opportunities for promoting “Yardstick” competition in the market. competition in the market.

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Conclusion and RecommendationConclusion and Recommendation As one prominent Harvard law school scholar in the area of As one prominent Harvard law school scholar in the area of Electricity regulation at one occasion said “Regulation is the Electricity regulation at one occasion said “Regulation is the art of making unpleasant choices wisely”art of making unpleasant choices wisely”

Besides government regulation is said to be burdensome and Besides government regulation is said to be burdensome and intrusive.intrusive.

Vertically integrated structure of electricity industry dominate Vertically integrated structure of electricity industry dominate and hurdle the way of introducing competition. and hurdle the way of introducing competition.

Though the regulation promised to provide access for Though the regulation promised to provide access for generation, transmission and distribution the private investor generation, transmission and distribution the private investor couldn’t possibly come to the upfront to exploit this couldn’t possibly come to the upfront to exploit this opportunities. opportunities.

The private sector is largely detached from readiness as well The private sector is largely detached from readiness as well as experience in medium and large scale power business.as experience in medium and large scale power business.

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The domestic finance is similarly, poorly developed to The domestic finance is similarly, poorly developed to assume any significant level of financing.assume any significant level of financing.

Therefore, Ethiopia as a developing country, the Therefore, Ethiopia as a developing country, the transition to private sector will not be easy.transition to private sector will not be easy.

There has been a sustained attempted at implementing There has been a sustained attempted at implementing the existing law and regulation, to create competitive the existing law and regulation, to create competitive market in the Electricity supply chain.market in the Electricity supply chain.

Much more is to be done, towards the restructuring reform Much more is to be done, towards the restructuring reform of the power market. of the power market.

Such reform accompanied by the establishment of Such reform accompanied by the establishment of relatively autonomous government regulatory office, relatively autonomous government regulatory office, replacing direct ministerial control.replacing direct ministerial control.

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To be certain enough, whether unbundling and private sector To be certain enough, whether unbundling and private sector participation will constitute long term improvement towards:-participation will constitute long term improvement towards:-

1.1. Economies of scale advantageEconomies of scale advantage

• Electric market need to have a certain scale to be Electric market need to have a certain scale to be successful.successful.

• In small market there is no enough “room” for In small market there is no enough “room” for sufficient large-scale power companies to create a sufficient large-scale power companies to create a competitive market.competitive market.

• To provide sufficient market for large size of To provide sufficient market for large size of hydropower potential, there should be series of hydropower potential, there should be series of attempts to join regional power market, which now is attempts to join regional power market, which now is highly concentrated in East Africa. (Djibouti, Sudan, highly concentrated in East Africa. (Djibouti, Sudan, Kenya).Kenya).

• Towards this end their has been a remarkable move Towards this end their has been a remarkable move to create regional power trade and further enhance to create regional power trade and further enhance this- via regional power pool market in the best this- via regional power pool market in the best interest of mutual benefits among participating interest of mutual benefits among participating countries. countries.

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2. The presence of a competent and 2. The presence of a competent and independent competition authority and/or an independent competition authority and/or an equally well-organized electricity regulator.equally well-organized electricity regulator.

This is the second requirement for This is the second requirement for competition competition in electricity.in electricity.

If those requirement are not fulfilled, benefit of liberalization If those requirement are not fulfilled, benefit of liberalization are elusive.are elusive.

Where technically feasible competitive procurement have also Where technically feasible competitive procurement have also been considered to fairly impact end-users with the gain of been considered to fairly impact end-users with the gain of competition at the generation level which roughly shares 50% competition at the generation level which roughly shares 50% of the total average tariff.of the total average tariff.

However this alone cannot be enough to alleviate the However this alone cannot be enough to alleviate the potentially strong biting effect of private finance on the potentially strong biting effect of private finance on the economic of developing countries like Ethiopia.economic of developing countries like Ethiopia.

Private financing is as much as it is necessary and important Private financing is as much as it is necessary and important to supply the capital needs, its introduction in the power to supply the capital needs, its introduction in the power sector will require meticulous care.sector will require meticulous care.

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Apart from the issue of public or private Apart from the issue of public or private ownership, what really matter is that:-ownership, what really matter is that:-

– Is unbundling is realistic?Is unbundling is realistic?As long as the federal and state governments As long as the federal and state governments still a monopoly.still a monopoly.

– Does grid-based electricity move in exorability Does grid-based electricity move in exorability back forwards vertical integration?back forwards vertical integration?

Whenever experience of unbundling, competition Whenever experience of unbundling, competition and private sector participation in electricity and private sector participation in electricity supply deals with:supply deals with:

– Problem of scarce public capital .Problem of scarce public capital .– Inadequacies of good governance and Inadequacies of good governance and

management will not go away.management will not go away.

This issue of equitable distribution of supply is a This issue of equitable distribution of supply is a vital interest of the consumers.vital interest of the consumers.

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We strive that consumers should participate and represent We strive that consumers should participate and represent in the regulatory process and monitoring of public utilities – in the regulatory process and monitoring of public utilities – like electricity.like electricity.

Complaint handling processComplaint handling processMediation of disputesMediation of disputesPrice policy. (tariff settings) Price policy. (tariff settings) Provision of sustainable, affordable power supply.Provision of sustainable, affordable power supply.

We believe and adhere to the premises that public service We believe and adhere to the premises that public service have a less risk than privatization option, government and have a less risk than privatization option, government and management reforms are essential.management reforms are essential.

Risk of maintaining sustainability and affordability Risk of maintaining sustainability and affordability Risk of accessibility than the unbundling Risk of accessibility than the unbundling Risk of power surges and interruption of supply at inconvenient time Risk of power surges and interruption of supply at inconvenient time (Rota cuts)(Rota cuts)

The difficulties and limitations of The difficulties and limitations of private sector participation must not private sector participation must not be used to justify inaction in reforming be used to justify inaction in reforming public sector services public sector services

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Thank you!!Thank you!!