The Bhutanese Leading the way.
This is with regard to the article titled “DHI does not expect electricity tariffs to increase beyond 15%” which was published on the 27 July 2013 issue of The Bhutanese sent in by DHI. The article is very misleading and it has created more misunderstanding within the minds of the general public rather than provide clarifications, as intended.
It is, therefore, imperative that certain facts be put into perspective so that the general public is made aware of the actual issues related to the electricity tariff.
The current methodology to determine electricity rates in Bhutan is based on the cost of supply. This is enshrined in the Electricity Act, 2001 and the Tariff Determination Regulation (TDR) 2007 thereof. The Bhutan Electricity Authority, the regulatory body assigned the task of approving the electricity tariffs, must simply follow the law and use the principle of cost of supply to derive the electricity tariff. This basically means that the tariff is set according to how much it costs DGPC and BPC to service its customers (including a fairly reasonable profit margin). The tariff is not determined based on the customer’s willingness or ability to pay. This is an appropriate pricing methodology as both BPC and DGPC are state run monopolies, and therefore, the prices charged by them have to be regulated and cannot be left to market forces.
It is wrong for DHI to imply that they have the right to increase the electricity tariffs just because a handful of customers are willing to pay more. In fact, it is a violation of both the Act and the TDR. Further, we are left wondering how DHI arrived at the conclusion that “industries can bear at least 10-15% annual increase in tariffs” as all the existing industries have said that they will close shop if the rates are increased even by 5-10% , especially as the business environment currently is not favourable.
DHI has also gone on to say “Although industries could afford it, during 2010-2013 period, industry tariff increased by only 2% for a year with no increase thereafter. By marginally increasing the tariff, the government lost huge potential revenue, while industries did very well”. We fail to understand how the Government lost huge revenue as the industries paid everything that was due based on the laws of the country. Moreover, BPC and DGPC made huge profits after taxes (BPC made about Nu.1 billon per year and DGPC made about Nu. 4.2 billion per year) for the last three years. How could these companies make such large profits if the electricity tariff is “underpriced” as it’s been claimed? For companies that are monopolies and protected from competition, such profits are exceptionally high. By any industry standard in the world, our two public sector monopolies’ profit margins are very high. The average three year profit margin for BPC was 25.34% and for DGPC it was 37.18%. Whereas, the much touted industries that DHI claims benefitted for supposedly “subsidized” electricity made on average, during the same time period, a profit margin of only 3.2% based on records of 26 industries both large and medium. Unlike the two monopolies, these industries are exposed to competition from a large low cost-market and constantly face the risk of global economic vagaries.
DHI is like any other corporate body and should not be stating views on behalf of the government as the latter knows best and is actively working on diversifying the economy and creating employment opportunities. It is largely the Bhutanese citizens that own industries in the country, and to say that selling electricity to your own citizens is an error of judgment, reflects the insensitivity shown to the Bhutanese consumers. Even if we assume, hypothetically, that we will shut down industries in the country and sell the electricity to India, the following analysis shows that this would be undesirable as it will lead to more losses for the Government. This is again, without taking into account other aspects such as Bhutan Sales Tax (BST) that is paid when raw materials are imported by these industries, employment that is generated, other kick-on effect it has on the economy, Personal Income Tax (PIT) paid by the employees working in these companies, etc.
Furthermore, DHI has said that High Voltage industries are subsidized in the context of electricity tariff. It needs to be clarified here that there is no subsidy for High Voltage industries in any way since July 2011. The subsidy that arises from the 15% royalty energy is allocated to low voltage customers (rural and urban homes) and medium voltage customers only. I am sure the Royal Government has taken all these factors into consideration starting from decades ago when the first large scale industry was established and embarked on a national plan to provide electricity to all citizens with the ultimate aim of betterment of our livelihoods.
DHI has said that the regulations of the BEA are to be followed for tariff revision and setting, but it is unfortunate to note that the supposedly most professional entity in the country has not complied with these regulations themselves. The proposal for revision has used parameters that are way above the allowed values resulting in the proposed tariffs being much higher than allowed. These double standards are not fair to all consumers and the people have the right to know the facts, as they are the rightful owners of this resource including DHI.
DHI has also said that it expects an electricity tariff increase of not more that 15%. However, it has proposed for an increase much more than this (DGPC has proposed to increase the rates by 66% and BPC has proposed to increase the rates by 38% for HV, 99% for MV and 103% for LV customers). DHI very well knows and is aware that the regulator will not allow more than a 15% increase in the tariff and by resorting to such “bazaar bargaining” tactics with BEA through the media, only blemishes its own image as a corporation that should actually be setting the standards of good corporate governance and corporate social responsibility to the people of Bhutan.
In conclusion, I can only say that with the increase in the electricity rates as proposed, business owners can either opt to shut down business or not –if one can call it a choice – but what about the home consumers? We have no other source of electricity and we will have to resort to burning timber for our energy needs. And what about the thousands of people employed by these industries? Will we sacrifice their livelihood so that DHI can make more profits and provide more revenue to the Government?
This perspective is not intended to attack any entity, but to make certain facts clear to the general public.
Opinion by S Dorji,
Changangkha, Thimphu
