Cabinet finalizes tariff policy to reduce domestic electricity tariff hikes

And also to make it more predictable and fair to both sides

For a power abundant country there have been increasing complaints from both industries and household consumers on the increasing power bills every year. A further complaint from both customers and also power suppliers has been on the unpredictable nature of the tariff increases in the absence of any clear policy.

Now, the cabinet has come up with a Domestic Electricity Power Tariff Policy, which while ensuring the power suppliers get a fair return also ensures that it does not lead to very high tariff increases for customers. The policy also brings about more predictability in the tariff calculation in the future for both power suppliers and customers.

Minister for Economic Affairs Lyonpo Norbu Wangchuk said, “In the first cycle of tariff increases (July 2013) there was a lot of bickering about the power tariff being unaffordable for industries and households but the government’s hand was tied as BEA was using its Act to decide the tariff.”

Lyonpo said that, however, the same Act allows the government to issue policy directives on domestic tariff, which the government has done, and so now the BEA in turn would set the tariff determination mechanism based on these policies.

The minister said, “The policy will mean tariff increases that are reasonable and not unaffordable for consumers while at the same time ensuring that generation companies can recover the cost of investment. Electricity is a national resource and it should be used for the greater good of the people.”

In the past the power generators like Bhutan Power Corporation (BPC) and Druk Green Power Corporation (DGPC) would propose exorbitantly high tariff rates based on their own calculations. On the other extreme domestic industries even as recently as a few months ago requested for the tariff to be kept the same for them with no increase at all. Household users also complained about their rising electricity bills.

The BEA would be in the middle with an Act and rules but no written policy to come up with the final tariff rate.

The cabinet while maintaining a fine balance in its policy for both power producers and customers has ensured there is more focus on ensuring that the tariff rates are not too high.

The BEA takes into account multiple parameters showing the cost of generation of power and the return required to maintain the power system and also make a reasonable profit. The cabinet’s policy directives are on each of these parameters.

One such parameter is the Operation and Maintenance (O and M) costs of power producers. The higher the O and M the higher is the tariff. The policy says that BEA shall come out with allowable and non-allowable O&M expenses for the purpose of tariff determination. The policy also disallows Corporate Social Responsibility costs and other internal rental and hire costs to be added to the O and M.

Another is the ‘Gearing Ratio’ which simply put is the ratio of debt and equity. Currently, the BEA takes a gearing ratio of 60 debt and 40 equity and since equity is more expensive it means slightly higher tariff rates. The cabinet’s policy gives a maximum directive of 70 debt and 30 equity making it cheaper.

The cabinet has also decided that the cost of equity will be based on the average lending rate of financial institutions and the BEA may allow a 2.5 % increase above the lending rates to ensure a reasonable premium.

When it comes to cost of debt the cabinet directive says that the actual cost of debt for the tariff period should be considered. The debt along with its tenure should be structured by the power companies so as to encourage reduction in tariff. It also says that power companies should be incentivized by BEA to restructure their debt to yield cost savings.

The policy also says that the government will continue to use the subsidy of the Royalty or 15 percent free power from the power projects to make power tariffs more affordable. Currently Low Voltage users like domestic households get this subsidy while rural households get an additional first hundred units subsidy.

While trying to ensure affordability the policy directives are also careful to ensure that power companies get a fair and predictable return.  It also attempts to ensure predictability in how tariff rates would be increased in the future.

Under deprecation the policy says depreciation shall be such that it allows recovery of investment over the economic life of the asset. At the same time when the power utilities are in difficulty in meeting the debt service obligation, accelerated depreciation may be allowed during the initial debt servicing period.

Earlier the interest on Working Capital was determined at 10 percent or the lending rate to the project. However, the cabinet policy says that it shall be determined based on the prevailing lowest short term lending rate of financial institution of Bhutan. This means that the interest rate will actually be higher.

Another example of an attempt to strike a balance is the cabinet’s directive on assets made through grant. Earlier some customers challenged the BEA saying that grants assets like the 60 percent grant for Chukha should not be treated as equity. However the cabinet says that all grant assets shall be treated as equity to determine the actual cost of supply.

The policy directive has also not accepted the demand of the industrialists to freeze the tariff rate or give them subsidies. The policy in fact says that High Voltage users which stand for big industries will not get subsidies.

The BEA CEO Samdrup K Thinley said that the BEA is already working on regulations and tariff calculation formula based on the cabinet’s policy directives. He said that the regulations would be ready by the end of April 2016, well before the next tariff revisions period of July 2016.

The CEO said that the cabinet regulations are important as it brings about predictability in how tariff rates would rise. He said that both power companies and customers like industries wanted predictability. He pointed out that now power companies can map their revenue while at the same time business people can make their calculations before opening an industry.

He also pointed out that the predictability in turn would ensure that tariff rates while not becoming too high would also allow for fair returns.

The CEO said that many of the directives were already being practiced by the BEA but due to a lack of policy it kept getting challenged by various sides. He also said that important thing about the directives was that it set both the floor and ceiling in deciding the various parameters.

Currently power tariff rates are decided every three years with the next upcoming revision due on July 2016. The new tariff rates are then applied incrementally every year until it is time for the next revision three years later.

An important reform in the policy is that Medium Voltage and High Voltage customers have to surrender any unutilized demand capacity to the BPC within one year of allocation. It says BPC shall exercise its right to take over any unutilized demand capacity for reallocation to other customers.

This is important as so far some industries take large allocations of power and do not use it but at the same time keep asking the government for a reduction in rates. This prevents new and interested industries from coming due to these few players sitting on the allocated power.





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