PNG Power facing pricing dilemma

ELECTRICITY is a topic that comes up every time in discussions on what needs to be improved to enable economic growth.
Discussions range from how to make power affordable, strategic expansion of the grid, ensuring reliable supply, competition and possible deregulation.
Independent Consumer and Competition Commission (ICCC) chief executive Paulus Ain held a press conference last week to explain its role in all of this with a special emphasis on the rationale behind the tariffs it sets.
Ain explained the current policy framework that gave rise to the establishment of the commssion in 2002, also giving it regulatory oversight of the electricity industry.
“At that time most of the State Owned Enterprises were at the stage of liquidation and through a reform the ICCC was established as the principle economic regulator among other regulatory responsibilities” he said.
“One of the industries that were declared to be a regulated industry is electricity and the major player being PNG Power Limited.
“Under the ICCC Act and the Electricity Industry Act, PNG Power became a regulated entity under ICCC.”
This put in place an electricity regulatory contract that binds PPL to certain requirements and allows the ICCC to:
• Monitor the service standards performance under the electricity code;
• Set price paths through a review in order to determine the efficient costs that will be recovered over a five-year regulatory period; and
• Adjust annually the electricity tariffs for the services provided by PNG Power .
“And over this period we have had a very good working relationship with PNG Power which has helped it to recover some of the costs through the tariff-setting arrangement that we have with them,” Ain said.
“This regulatory arrangement was stifled or came to a halt at the decision of the government in 2013 which was to freeze PNG Power’s tariff. So from then up till now we have not done a tariff adjustment and that has affected PNG Power’s work as well the ICCC’s”.
The acting executive manager of the Regulated Industries Division of the commission, Roy Daggy, explained that the tariff arrangement was to assist PNG Power recover costs while also earning revenue and have the financial capacity to invest in needed capital.
“We set it to recover their cost because when we set the price part in the regulatory contract for the five years, we capture the operational costs, the expected capital costs for that period and then we determine the price part and the tariffs are set according to that,” Daggy said.
“This is done because when they charge their services, the money they get will recover their costs and allow for a certain portion of that to be revenue which can be used for capital expenditures.”
“With the tariff freeze, they will have financial constraints because in the price part they are required to earn that much but if they don’t apply the relevant tariff for that year they do not get the revenue needed to expand or roll out those capital expenditures.”
“These capital expenditure areas have been identified which are to improve reliability issues such as creating a substation or putting a transformer where it is needed. That is why the tariff is tied into the contract for the regulatory period which is simply to allow PNG Power to recover costs, make money at the end of the year and have enough to fund capital expenditure”.
Ain further stated that there were several project areas identified in PNG Power’s current five-year contract, and according to a mid-term year review, most of them were not achieved.
He explained that the ICCC sought a balance through the electricity tariff to allow for a reasonable price setting that ensures much needed investment in the industry.
The current tariff freeze may not allow for an increase in price but this would be at the long-term expense of the reliability of the electricity network, he explained.
“But after the (2013) tariff freeze they are unable to spend on those project areas for service improvement and greater reliability. We are not sure how PNG Power is progressing with the tariff freeze. Nevertheless it has the opportunity to go to government and say as a result of this decision, they are largely affected and unable to undertake investments and request for a lifting of the freeze.”
Ain has been concerned with reports in the media about how PNG Power is trying to reduce the tariff by half.
“This is concerning to the ICCC and even to the status of the network itself. I don’t think it is commercially sensible to cut the tariffs by half. It would be like commercial suicide. This in our view will damage the network. We should look at ways to ensure that they recover some of this costs and expand the network.”
The ICCC is currently taking several reviews on the industry that will provide a guideline for PNG Power and the government on new tariffs and other industry issues.
“There are a number of exercises that we are undertaking to address the problems that PNG Power is facing. One is a major review to the existing PNG Power network which is being done by our team, PNG Power and the University of Technology team who are on the ground. They have completed the Port Moresby grid, and are now at the Kokopo grid before going into the Highlands.” Ain said.
“We are also undertaking a competition assessment of the industry as well while reviewing the tariff setting arrangement through the regulatory contract.”
“There is a misconception that the ICCC is increasing the price or not doing anything about the price and that from our view would be unfair because what is happening in the industry is purely with the government and the PNG Power itself. We are trying our best to put in place regulatory instruments and mechanisms to assist PNG Power to recover from where it is now.”
Ain said the commission reviews would provide timely information on the state of the industry, especially as the electricity regulatory contract with PNG Power would expire next year.
He said this information would be used to determine the need for deregulation of certain segments of the industry as well as asses ongoing arrangements for third party access.
“We are not only sitting down but we are doing something to help this industry and that will also require a collective effort from the government, PNG Power, policy makers and other stakeholders.”
He said everyone should work as a team to help the industry and especially PNG Power instead of talking “without understanding the state of the network”.