Regulation is failing power consumers

Last week, I found myself watching Senate proceedings while a member was presenting a petition on concerns about Kenya Power’s unreliable services in many parts of the country. One senator talk of how some area in his county had had no electricity for almost a week.

The mover of the petition sought to have the Energy Committee look into the problem of inefficiency of Kenya Power and what can be done to help Kenyans access reliable electricity.

EXORBITANT BILLING

Now, this was an interesting petition because in 2019 senators raised the issue of Kenya Power’s exorbitant billing concerns and the Senate Energy Committee chaired by Nyeri Senator Ephraim Maina was assigned the task.

To see senators again canvass the issue again means that the Energy Committee did not take time to identify the problem at Kenya Power.

In fact, when the chair of the committee rose to contribute to the petition, he made a self-defeating remark about Kenya Power’s problems and how the House can help the consumer.

In the first petition, the concern was about exorbitant billing whilst the second one tabled last week is about Kenya Power’s unreliable services.

On the face of it, the two petitions seem different because the problems identified are different. But the root cause is one and the same. We have a regulatory problem that gives rise to those two problems.

When regulating a monopoly there are two approaches. First is the price-based regulation where prices are allowed to rise by means of a formula tied to an efficiency factor. This helps to account for expected productivity, so the monopoly, ideally, has the incentive to lower cost as well as improve productivity.

From the consumers’ end, this regulation is beneficial and favourable to their interest. This price regulation is common in the UK and South America.

The second model is the cost-based regulation where prices rise so as to keep the monopoly’s rate of return on capital at a constant level. This means that the monopoly is allowed to bill so as to cover their operating costs in order to build capacity.

OPERATION COSTS

But the fact that the monopoly can inflate costs to recover operating costs provides little incentive to reduce costs. So this regulation doesn’t favour the consumer. This is the model we have in Kenya, and is largely used in the US too.

This regulation has a big information problem that is hard to resolve. Because it requires rigorous research from the regulator on which costs should be included in the rate base and which ones shouldn’t be included. And this is what we have seen from the regulator, the Energy and Petroleum Regulatory Authority (EPRA). It has been sanctioning the costs to be added to the consumer without vigorously interrogating them.

A good example was last year when Kenya Power requested tariff hikes, arguing that it needs to cover the billions of shillings it has spent annually on power lines, transformers and labour operation and cushion it from losses and supplier defaults.

To start with, why should suppliers default, which is a management issue, be a cost the consumer should carry? Second, we have a ‘tenderprenuership’ problem at Kenya Power which is overburdening the consumer.

TRANSMISSION LOSSES

When one peruses through Kenya Power’s books of accounts, you notice the steady rise of transmission losses, which the company has done little to address because it passes that cost to the consumer.

Dissecting the transmission losses, you will find that it has been procuring transformers that are not durable, not lasting even two years, and so have to be regularly changed, creating a steady demand of transformers for vendors at the expense of the consumer.

In short, the cost-based regulation is broken in Kenya and if we are committed to addressing Kenya Power’s problems, that is where we need to start.