(Paper presented to Africa Power 2000 Conference on 18 April, 2000 in Sandton, South Africa)
By Dr. Kevin K. Kariuki, PhD, C.Eng., MIEE Chief Power Engineer, Electricity Regulatory Board, Kenya
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Background
Historical Perspective
The origin of Kenya's electricity supply industry can be traced to the introduction of electricity in East Africa in 1875. That is the year that the Sultan of Zanzibar, Seyyied Bargash, while on a visit of Europe, acquired a generator to light his palace and the nearby streets. The generator was later sold to Harrali Esmailjee Jeevanjee, a wealthy merchant in Mombasa, who transferred it to the Mombasa Electricity Power & Lighting Company in 1908.
At around the same time, a Mr. Clement Hertzel was given the exclusive right to supply electricity to the then district and town of Nairobi. This led to the formation of the Nairobi Power & Lighting Syndicate.
The two utilities in Nairobi and Mombasa were later merged under a new company known as the East African Power & Lighting Company (EAP&L) which was incorporated in 1922. Ten years later, the company extended its operations to East Africa by acquiring a controlling interest in the Tanganyika Electricity Supply Company Ltd. (TANESCO) and, in 1936, obtaining generating and distribution licenses for Uganda.
In 1948, the government of Uganda formed the Uganda Electricity Board, which took over the distribution of electricity in that country. The Board and EAPL signed an agreement for EAPL to purchase power in bulk from the Board. In order to do this, the government of Kenya created the Kenya Power Company (KPC), which was managed by EAP&L, for the purpose of raising money to construct the Tororo - Juja transmission line, and to enter into a supply agreement with the Uganda Electricity Board.
In 1964, EAP&L sold its majority stockholding in Tenesco to the government of Tanzania. With its operations confined only to Kenya, EAP&L was subsequently renamed The Kenya Power & Lighting Company Ltd. (KPLC) in 1983.
Institutional Arrangements of the Power Sub-sector Prior to Restructuring
Prior to 1996 when the restructuring commenced, the power sub-sector comprised of three limited liability companies and two regional development authorities. Brief description of the companies and the development authorities are given below:
The two regional development authorities are Tana and Athi River Development Authority (TARDA) and the Kerio Valley Development Authority (KVDA).
KPLC purchased power from KPC, TRDC, TARDA and KVDA under some form of power purchase agreements.
The sub-sector institutions were governed by the Companies Act and the State Corporations Act. The latter act severely limits the management and operational autonomy. Subsequently, as part of sector reforms, KPLC and KPC were in 1995 exempted from the provisions of the State Corporations Act. The sub-sector was regulated by the Ministry of Energy.
Institutional Arrangements of the Power Sub-Sector Post- Restructuring
The thrust of the restructuring of the power sub-sector which started in 1996 was to create arm's length commercial type-relationships between the sector entities and to create legal and regulatory framework that facilitate the restructuring of the sub-sector and encourage private sector participation. Key steps in the restructuring process included:
Much progress has been realised with respect to the above steps and to date, the following milestones have been achieved:
With completion of milestone:
Institutional Responsibilities
Reforms of the power sub-sector will result in the separation of commercial, policy setting and regulatory functions, with the Ministry of Energy (MOE) responsible for overall policy formulation in the Energy Sector. As part of its overall policy formulation MOE is responsible for the updating of the national development plan, which serves as input for the annual review and updating of the least cost power development undertaken by KPLC. In addition, KPLC is responsible for:
ERB has responsibility for auditing the bidding process. In addition ERB is responsible for reviewing and approving power purchase agreements and any other related contracts between KPLC and project developers in accordance with the provisions of the Electric Power Act, 1997.
Figure 1 shows the existing structure of Kenya power sub-sector.
Trading Arrangements
Trading arrangements are the set of rules buyers and sellers have to follow when they make their transactions. Under the present structure KPLC which is currently the sole public electricity supplier, purchases power from electric power producers under long-term Power Purchase Agreements (PPAs). This power is then dispatched, distributed and ultimately supplied to eligible customers.
Due to capacity constraint, generation almost matches demand and there is no competition per se. This situation is likely to persist for some time due to the size of the market which makes competition inherently limited. Instead the generation plant is, and will continue to be dispatched to meet demand, subject to some merit order.
In addition to the above arrangements, the Act provides for sale of power or transmission services between and among electric power producers, public electricity suppliers and large retail consumers . However for purposes of off-grid supplies, the Act provides for local generating licences which allow both generation and distribution of electrical energy over areas covered by such licences.
Figure 2 shows the structure of the power sub-sector contemplated by the Act.
Creating a Regulatory Framework for Kenya
As mentioned above, the reforms of the power sub-sector will result in the separation of commercial, policy setting and regulatory functions, with the Electricity Regulatory Board (ERB) responsible for regulating the generation, transmission and distribution of electric power in Kenya. In the new arrangements, regulation therefore becomes the new border between the state and the power industry.
In general the principal requirements for effective regulation are statutes or permitting legislation, regulatory institutions and rules.
Permitting Legislation
As intimated earlier, the Electric Power Act, 1997 which established ERB was promulgated with appointment of the Board and establishment of its secretariat taking place in 1998 and 1999 respectively. To date, of the three requirements only the setting of rules is yet to be finalised although the necessary arrangements are being put in place.
Apart from providing the legal authority to regulate, the statutes also define the boundaries of regulatory action including:
In defining the boundaries of regulatory action in the power sub-sector, Section 121 (1) of the Act sets the functions of the Board to be as follows:
In addition Schedule 10 of the Act states that the Board may make regulations for the better carrying out of its functions under the Act.
Regulatory Institution - The Electricity Regulatory Board (ERB)
ERB was established by the Electric Power Act, 1997, which also stipulated the composition of the membership of the decision-making body, the Board. In addition, the Act also provided details about the establishment and staffing of a secretariat as well as the funding of ERB. In accordance with the Act, ERB is an industry-specific regulatory body and therefore has potential to provide industry-specific expertise and focus. The Board was appointed in January 1998 while key secretariat staff was appointed in June/July 1999.
Herebelow are some salient features of ERB.
| Agency Name: | Electricity Regulatory Board |
| Regulated Industry: | Electricity |
| Decision Making Structure: | 7 Board members |
| Appointment procedure: | Chairman of Board appointed by the President. Minister for Energy appoints five members, 2 representing the private sector and 3 representing national bodies representing workers, employers and manufacturers. The PS for Ministry is responsible for energy policy and development is also a member |
| Term of Board: | Chairman: 4 year term renewable for 3 years. Others: 3 year term renewable. (max. 2 terms) |
| Qualifications: | University degree and at least 15 years practical experience in matters related to industry, finance, economics, engineering, energy or law. |
| Removal from Office: | Removal only on legal grounds and mental or physical infirmity |
| Source of funds: | Levy on electricity sales, penalties and license fees |
| Salary rules: | Exempt from civil service rules |
Economic regulation involves making decisions on politically sensitive matters and also decisions that have important implications on regulated utilities and their competitors, customers, investors and shareholders. Often the interests by the stakeholders would be conflicting. These conflicting interests would need to be evaluated and balanced in an impartial and objective way, meaning that the regulatory entity must be, and must be seen to be, a neutral and disinterested party. The Act anticipates a fairly independent Board and tacitly bestows on it independence from political authorities and regulated firms. The Board also has institutional autonomy.
The Board however depends on the Ministry of Energy for policy guidance with respect to the power sub-sector. As a safeguard against abuse of the trust reposed in it, parties aggrieved by the Board's decisions may seek recourse from the Minister for Energy, with the High Court of Kenya being the final arbiter. In addition members of the Board may be removed from office for reasons such as misconduct, insolvency, conviction of criminal offence involving dishonesty, fraud or moral turpitude and incapacity.
Rules
Schedule 10 of the Act vests on the Board the power to make regulations for the better carrying out of its functions under the Act.
Rules define the boundaries of permissible conduct and the consequences for non-compliance. In the case of the power sub-sector, these will usually comprise relatively detailed and specific rules governing tariffs, quality of service standards, obligations to supply, etc.
These rules would normally be contained in licences and concession agreements, which are the instruments with the real powers to control the utilities. The consequences of non-compliance with these rules may include fines, requirements to compensate injured parties, cancellation of licenses or concessions, even imprisonment of corporate officers.
The setting of rules is yet to be finalised although the necessary arrangements are being put in place.
Regulating the Power-Sub-Sector Under the Existing Institutional Arrangements
General
Under present institutional arrangements the companies engaged in the business of generation, transmission or distribution of electric power are KenGen which a wholly owned government company, KPLC in which the government owns just over 50% shareholding and independent power producers. These entities are all regulated under the broad framework created by the Electric Power Act, 1997, with the boundaries of permissible conduct and the consequences for non-compliance defined by specific licence conditions. The licences include those validly issued before the commencement of the Act .
Regulating KPLC and KenGen
Prior to the commencement of the Act KPLC through its successor company the East African Power & Lighting Co. Ltd. was the holder of validly issued power distribution licenses . These licences covered major load centres and surrounding areas. In generation KenGen, through its successor companies, KPC and TRDC, is the owner of two generating licenses. In accordance with the Act, these licenses are still valid, although it is expected that the licensees will apply for renewal of the respective licenses when and as the dates of their expiration draw near.
The existing distribution licences, although valid would have to be redrafted to bring them in line with modern distribution practice. Accordingly, ERB is in the process of developing a contemporary distribution licence. In addition, the Board has asked KPLC to submit a Customer Charter for consideration and adoption. The Board considers that attributes in such a charter would constitute invaluable performance measures.
With respect to setting of tariffs, the Board approves power purchase contracts between KenGen and KPLC and also approves and sets the retail tariffs between KPLC and consumers. In this regard, the Board in July 1999 approved a two year interim power purchase agreement between the two companies, pending the establishment of more comprehensive and longer-term PPA . The Board also approved and set, after an extensive public hearing exercise, retail tariffs and rates which became effective on 1 August 1999.
Regulating Independent Power Producers
A key objective of the power sub-sector restructuring is to create an enabling environment for private sector participation in the sub-sector. The fact that 31 international firms expressed interest to build, own and operate the proposed Nakuru and Eldoret generating plants implies that the investment environment in the power sub-sector is perceived as sufficiently attractive. Still, considering that the contribution by IPPs to the interconnected generation capacity will increase from the current 10% to about 25% by 2002/3, it is imperative that the environment be made more attractive by establishing a regulatory environment that is fair, transparent and predictable.
The Act provides the broad framework for regulating IPPs. However, it is envisaged that regulating of IPPs will be achieved through inter alia,
To date the Board has:
Ideally the regulatory systems should be established before the introduction of private investment in any sector. That this was not the case when the first two IPPs were licensed, and the fact that further IPPs are likely to be licensed before the promulgation of rules and regulations will pose a number of challenges, including:
These points are particularly pertinent considering that PPAs are in most cases held harmless of change in law.
Likely Future Trends
From the point of view of competition in the product market, there are really dour fundamentally different ways of structuring the industry, although there are many possible variations on each. Figure 3 shows the features of the models .
The current institutional arrangement for the power sub-sector closely fits what is referred to as the purchasing agency model. In this model, the generators sell their output to a purchasing agency which in turn either retails the power or sells it in bulk. This model is preferable in instances where the institutions are immature or the systems so small that competition is inherently limited because of few generating units and consequent market power problems. The model has distinct advantages including:
Despite the above advantages, the fact that the purchasing agency dispatches, transmits, distributes and ultimately supplies power, means that it is very easy to hide excess costs making power unnecessarily expensive. Efforts must therefore be made to distinguish between KPLC's transmission, distribution and supply costs as this would ease the entry of other public electricity suppliers and possibly inspire the advent of competition at the wholesale level. Also this would facilitate the "wheeling" of power in the context of the proposed East African Power Pool. Ultimately it would be expected that the disaggregation of costs along the lines described would set the stage for providing open access to transmission services to other public electricity suppliers, large consumers and perhaps regional utilities. Such a move would lead to a new market structure with characteristics of the wholesale model. Figure 4 shows a possible market structure for the power sub-sector in Kenya.
Conclusion
The foregoing shows that Kenya has already made significant progress towards the creation of a fair, transparent and predictable regulatory environment in the power sub-sector. The Electricity Regulatory Board hopes to hasten this progress in order to realise the objectives of the power sub-sector restructuring sooner for the ultimate benefit of electricity consumers in Kenya, and perhaps in the region as well. In order to achieve this ERB expects to undertake a number of challenging tasks including development of model transmission and distribution licences, harmonisation of licence conditions in order to ensure parity for similar licensees and the development of a customer charter specifying acceptable performance standards. In addition ERB expects to overcome challenges associated with transition to new market structures.