Page 1 of 33 LESOTHO ELECTRICITYAND WATER AUTHORITY In the matter regarding a DETERMINATION OF WATER AND SEWERAGE COMPANY’s APPLICATION FOR A TARIFF INCREASE FOR 2014/15 1. DECISION Based on the available information and analysis of the Application, the written and oral submissions from stakeholders during the public consultation process, reasons, facts and evidence provided, the Lesotho Electricity and Water Authority (LEWA) Board, at its meeting held on 25 April, 2014, decided and resolved as follows: a) That Water and Sewerage Company (WASCO) be allowed revenue of M202.09 million for 2014/15 Financial Year comprising M172.73 million and M29.36 million for water distribution and sewerage and wastewater treatment, respectively. b) That the water and sewerage charges for all customer categories be increased as shown in Tables 1 and 2 below.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Page 1 of 33
LESOTHO ELECTRICITYAND WATER AUTHORITY
In the matter regarding a
DETERMINATION OF WATER AND SEWERAGE COMPANY’s
APPLICATION FOR A TARIFF INCREASE FOR 2014/15
1. DECISION
Based on the available information and analysis of the Application, the written and oral
submissions from stakeholders during the public consultation process, reasons, facts and
evidence provided, the Lesotho Electricity and Water Authority (LEWA) Board, at its
meeting held on 25 April, 2014, decided and resolved as follows:
a) That Water and Sewerage Company (WASCO) be allowed revenue of M202.09
million for 2014/15 Financial Year comprising M172.73 million and M29.36 million
for water distribution and sewerage and wastewater treatment, respectively.
b) That the water and sewerage charges for all customer categories be increased as
shown in Tables 1 and 2 below.
Page 2 of 33
Table 1: Approved Water Charges
Customer Categories
New Approved Water Charges
Old Water Charges
Approved Percentage Increase
Unit Cost
Standing Charge
Unit Cost
Standing Charge
Unit Cost
Standing Charge
(M/kl) (M/month)
(M/kl) (M/month) (M/kl) (M/month)
Domestic Customers
Band A (0 - 5kl) 4.18 21.93
3.59 21.93 16.5% 0.0%
Band B (>5 - 10kl) 7.07 38.95
6.07 36.68 16.5% 6.2%
Band C (>10 - 15kl) 12.43 38.95
10.67 36.68 16.5% 6.2%
Band D (>15kl) 17.14 38.95
14.71 36.68 16.5% 6.2%
Non Domestic Customers Non-domestic excluding
Government, churches 11.31 259.37
9.71 244.23 16.5% 6.2%
Government 11.31 374.64
9.71 352.77 16.5% 6.2%
Schools 11.22 259.37
9.63 244.23 16.5% 6.2%
Churches 11.22 187.33
9.63 176.39 16.5% 6.2%
Standpipes 5.66 0.00
4.86 0.00 16.5%
Table 2. Approved Charges for Sewer Services
Customer Categories
New Approved Sewerage Charges
Old Sewerage Charges
Approved percentage Increase
Unit Cost Standing Charge
Unit Cost
Standing Charge
Unit Cost
Standing Charge
(M/kl) (M/month)
(M/kl) (M/month) (M/kl) (M/month)
Domestic Customers
Water borne sewerage customers 1 8.50 0.00
8.00 0.00 6.2% N/A Non Water borne sewerage customers 2 8.50 0.00
8.00 0.00 6.2% N/A
Non Domestic Customers Standard Non-Domestic 8.50 0.00
8.00 0.00 6.2% N/A Lesotho Brewing Company 8.50 0.00
8.00 0.00 6.2% N/A
Likotsi and Qoaling Clinics 42.81 0.00
40.31 0.00 6.2% N/A
C and Y Sewer 0.89 0.00
0.84 0.00 6.2% N/A
Page 3 of 33
c) The current charges for connection, meter testing, reconnection, application fees
and others remain the same for the financial year 2014/15.
2. THE APPLICANT
WASCO is a Government owned company established in terms of the Water and Sewerage
Company (proprietary) Limited (Establishment and Vesting) Act No. 13 of 2010 wherein the
assets, liabilities, rights and obligations of the former Water and Sewerage Authority were
vested in the company. It was registered in terms of the Companies Act of 2011 and
subsequently issued a Composite Water and Sewerage Services License in terms of Section
50 of the Lesotho Electricity Authority Act 2002, as amended, to conduct water and sewerage
services.
3. WASCO TARIFF APPLICATION
3.1. Overview of the Application
The Authority received an application for a Tariff Review (Tariff Filing Proposal) from WASCO
on 03 February 2014. In line with Tariff Filing and Review Procedure, the Authority identified
data gaps and communicated them in writing to WASCO on 21 February 2014.The company
provided the required clarifications, together with additional information on 14 March 2014.
In its Application WASCO stated that as the basis for its tariff review the company considered
issues related to its ability to meet its service obligation and be profitable as it has been
granted company status hence the need to be able sustainable as a commercial entity. It
further mentioned that its budget has been prepared on a zero-based1 budgeting, adjusted
upwards by an inflation factor of 6.2%2. With regard to the WASCO’s Regulated Businesses,
the Application mentioned that:-
a) The company operates in 16 centres serving 75 688 customers of whom 3 436 are
connected to sewer lines. It serves approximately 47 559 using post-paid meters
1This is not the case as the budget items are based on the previous year’s.
2The budget has increased by 35.0% compared to 2013/14.
Page 4 of 33
approximately 400 public standpipes, more than 3 050 using pre-paid meters and
3 370 communal pre-paid cards;
b) 64.0% of water produced in Maseru was consumed by the commercial and industrial
customers while 36.0% was used by domestic customers;
c) The company was placed under regulation by LEWA since 20123 in order to enhance
its operational effectiveness and efficiency. This means the company’s performance
would be monitored in key operational areas;
d) WASCO operates within the water and sanitation sector and reports to the Ministry of
Energy, Meteorology and Water Affairs, while it is overseen by the Board of Directors.
The Board is responsible for key strategic issues such as finance, audit and risk and
performance management. The company has a Chief Executive who is supported by
four heads of Divisions (Operations and Maintenance; Engineering, Planning and
Design; Finance and Shared services; and Strategic Services and Human Resources).
e) WASCO’s business entails extraction of raw water from rivers and boreholes, and
production of potable water for distribution and supply to households. The company
also collects wastewater and safely disposes it to the environment. The company’s
regulated businesses were therefore water production, distribution and sewage
disposal. The functions of Sanitation Services Unit were outsourced in 2011 to private
operators and were therefore not part of the tariff application. Sewerage tankering
(which is still conducted by the company) in districts was also not included in the
Application;
f) The Application was the first formal single-year tariff filing since the company was
licensed by LEWA on 13 April 2013; and
g) Issues relating to Cost Allocation Manual, Contingency Fund for emergencies and
customer levies and licence fees were not included as they were yet to be determined
and agreed upon.
3.2. Performance and Quality Performance
Inadequate materials and human capacity are stated as challenges that contribute to water
and sewerage connections backlog. Regarding quality of water and effluent, the application
3The Company was only licensed by LEWA in May 2013.
Page 5 of 33
indicated that WASCO is challenged in consistently meeting turbidity, PH, suspended solids
and Chemical Oxygen Demand (COD) standards. It further stated that treatment of waste
water continued to be a challenge and the company has earmarked it for drastic
improvement.
3.3. Non Revenue Water
The Application stated that non revenue water (NRW) in 2013/14 for up to September 2013
was estimated at 38.0%4 which was 10 percentage points above the set target, but by
December 2013 it had reduced to 27.0%. The high figure of 38.0% was attributed to the
increased incidents of minor and major pipe bursts due to old infrastructure, mainly in the
districts and deteriorating response time to bursts. WASCO had installed float valves and
pressure switches, implemented the hydraulic model, institutionalised the pipe bursts
Labour costs M68,223,000 M70,022,000 M97,714,493 M118,203,984
Repairs and
maintenance
M10, 236,000 M7,555,000 M10,458,624 M18,089,456
WASCO further stated water billing (prepaid and post-paid), water new connection fees,
reconnection fees, and sewerage new connection fees as its revenue streams. In addition,
the company stated that it has managed to reduce time for new customer connections to two
weeks, with 60.0% of new connections being made on an instalment basis. These revenue
streams are stated as being not adequate to cover the cost of providing the services. The
utility’s presentation included Table 6 below showing the current and proposed water services
tariffs for domestic customers.
Table 6: WASCO’s Current and Proposed 2014/15 water services Tariffs for domestic
customers.
Bands Current Charge
(M/kl)
Proposed
percentage
Increase
Proposed Charge
(M/kl)
Band A (0- 5kl ) 3.59 35% 4.85
Band B (>5 – 10kl) 6.07 35% 8.19
Band C (>10 - 15kl ) 10.67 35% 14.40
Band D ( > 15kl) 14.71 35% 19.86
Standing Charges
Band A 21.93 6.2% 23.29
Band B 36.68 6.2% 38.95
Band C 36.68 6.2% 38.95
Band D 36.68 6.2% 38.95
Page 12 of 33
6.2. Drivers of Price Increases
Reasons stated as attributes to the price increases were:
a) Yearly increases on prices of electricity tariffs, chemicals and pumps, among others;
b) Aging pipes;
c) Loti/dollar exchange rate;
d) Need to pay back investment loans;
e) Prices of services that do not cover the costs of providing services;
f) Plans to improve service provision such as introduction of smart metering which would
require huge financial injections;
g) Need to meet standards set under regulation; and
h) Long time taken since the last tariff review which has caused shortage in finances.
6.3. Issues Raised by Various Stakeholders
During the three public hearings that were held, stakeholders, through group discussions,
raised a number of issues that needed to be addressed by the company. These include:-
a) Water is a basic need and a necessity and considering living standards in
Lesotho, the Government must intervene in the form of a subvention to assist
WASCO;
b) Standing charge should either be repealed or not increased as it increases the
cost to consumers;
c) Meter reading has to be accurate in order to ensure timely payment of bills as
inaccurate bills lead to disputed claims;
d) WASCO should consider raising capital through the sale of shares to the public;
e) The Government should provide consumption-related subsidies to WASCO so
that every family can have 1000 litres free per month;
f) Advocacy for the company’s installation of prepaid meters as a means of
assisting consumers to control consumption;
g) The collection of outstanding M80 million debt accumulated over a long time
from customers should be expedited;
Page 13 of 33
h) Timely information dissemination to customers regarding planned water
interruptions;
i) Speedy processing of customers’ connection Application and connections;
j) Main trunk pipes must be brought near communities so as to reduce connection
costs, and standard connections below distance of 50 metres should be free;
k) WASCO needs to diversify its sources of water in order to ensure security of
supply;
l) The company should explore working with communities in order to cut down on
the number of illegal connections;
m) WASCO should consider the costs of electricity for pumping when it designs its
infrastructure; and
n) WASCO should improve on the accessibility of its services and at least connect
those people/households who are within 50 metres of its network;
The stakeholders noted that with some customers being unable to pay for services before the
increase (if any), WASCO was likely to face greater challenges in debt collection. They,
however, recommended that increase should be between the inflation of 6.2% and 15.0%.
In its presentation, Maluti Mountain Brewery stated that WASCO’s costs such as power and
maintenance appeared overstated and should be reviewed by the company and the Authority.
MMB further questioned whether WASCO had done an in-depth analysis of its maintenance
costs as the exercise might help in deciding whether it is cheaper to maintain the existing
infrastructure compared to investing in a new infrastructure. MMB also suggested that
WASCO should review the proposed staff cost increases as they reflect an organization
whose salary structure is ‘top-heavy’. In raising the required investment capital, MMB
asserted that WASCO should explore the possibilities of using what is owned by Government,
as a government guarantee when looking for finances. MMB cautioned that if the proposed
costs were to be allowed by the Regulator, they would set a high base for tariff review in
subsequent years. MMB concluded by stating that the proposed tariff increase was high due
to overstated costs and if all these were addressed an appropriate tariff increase would be
decided.
Page 14 of 33
TRC and Catholic Commission for Justice and Peace (CCJP), in their presentations,
emphasized that water and sanitation are human rights and should be provided freely as
people were so poor that they were unable to afford the lowest tariff rate. The two consumer
advocacy organisations emphasized that water should be accessible to all and WASCO
should seek assistance from the Government in order to ensure reliable and safe supply of
water to the people. They mentioned that the Government should subsidise provision of
water, instead of subsidising provision of petroleum products, for the benefit of Basotho. They
stated that there was a compelling link between economic growth and poverty reduction and
further suggested that pro-poor tariff for the poor should be introduced. They both suggested
that there should be no tariff increase and all the WASCO costs should be borne by the
Government.
The Consumer Protection Association (CPA) argued that water was a necessity and without
water there is no life. Consumption charges and connection fees, must therefore, be
affordable. CPA stated that raw water was free so the requested increase was not
acceptable. Regarding the aging infrastructure, CPA advised WASCO to go back to the
donors for future investment and asset replacement funds. It also stated that WASCO should
adhere to connection standards so that water loss through pipe bursts due to damage during
construction could be reduced. CPA suggested that LEWA should grant a 7.0% increase in
volumetric tariff and no increase for standing charge. Even these suggested increases should
take into account the inflation rate of 6.0%, old age pension allowance of M500.00, Civil
servants salary increase of 4.0% and the economy of the country.
One of the consumers, Mrs. M.V. Qheku, maintained that WASCO should take initiatives to
publicise itself and its activities to the customers and the public as a whole. She asserted that
the company lacks monitoring and evaluation programs and as such it does not take care of
its customers. She went on to emphasise that the company should have catchment
management programs as this will assist in reducing costs of treating water. Frequent
shortages of water should be addressed as this affects businesses negatively. She further
mentioned that WASCO should improve response time to repair bursts and leakages in order
to reduce water loss. Finally, she suggested that tariffs could be increased by not more
than15.0%.
Page 15 of 33
6.4. Analysis of Public Hearings
It became evident in all three public hearings conducted in Mokhotlong, Mohale’sHoek and
Maseru that stakeholders valued reliability of water supply and increased access to water and
sewerage services. It was emphasised that WASCO should diversify its sources of water in
order to ensure continuity of supply. Access to potable water was also raised and WASCO
was requested to extend the mains to communities so that they can connect at reduced
charges. WASCO was urged to request Government to provide consumption and capital
related subsidies to the company so that water services would remain affordable to the widest
number of households. WASCO was further urged to be efficient in conducting its business
and should inform customers on time of any planned disruptions. WASCO was also
requested to explore possibilities of implementing targeted subsidies for the poor, orphans,
old aged, unemployed and the sick. Finally, it appeared that most of the stakeholders were
not opposed to tariff increase but that the increase should be moderate and supported with
reasons and facts. Government should also subsidise customers though subvention to
WASCO on both connection and consumption costs.
7. ANALYSIS
7.1. WASCO’s Revenue Based on Proposed Tariff Adjustment
Based on proposed WASCO’s charges, the sources of revenue to be generated are as shown
in Tables 7 and 8 below.
Page 16 of 33
Table 7: Revenue from Water Distribution base on WASCO’s proposed tariffs
Demand and Customer Information Customer Categories Proposed Water
Charges Forecasted Demand Unit
Cost (M/kl)
Standing Charge
(M/month) Sales
(kl/year) Connections
(Number)
Total Revenue
(M)
Domestic Customers
Band A (0 - 5kl) 4.85 23.29 2,762,657 36,482 23,594,876
Band B (>5 - 10kl) 8.19 38.95 1,107,198 18,257 17,601,273
Band C (>10 - 15kl) 14.40 38.95 471,237 6,324 9,741,650
Band D (>15kl) 19.86 38.95 1,068,941 5,620 23,855,956
Non Domestic Customers
-
Non-domestic excluding Government and churches
13.11 259.37 5,967,835 2,016 84,512,996
Government 13.11 374.64 1,868,383 631 27,331,275
Schools 13.00 259.37 323,177 274 5,054,110
Churches 13.00 187.33 234,518 199 3,496,078
Standpipes 6.56 0.00 23,907 104 156,850
Total 13,827,853 69,907 195,345,045
Table 8: Revenue from Sewerage and Wastewater Treatment based on WASCO’s proposed tariffs
Demand and Customer Information Customer Categories Proposed Sewerage
Charges Forecasted Demand
Unit Cost
(M/kl)
Standing Charge
(M/month) Sales
(kl/year) Connections
(Number)
Total Revenue (M)
Domestic Customers Water borne sewerage customers 1 10.80 0.00 207,337 1,130 2,239,186 Non Water borne sewerage customers 2 10.80 0.00 0 0 -
Zero Charge 0.00 0.00 770 3 -
Non Domestic Customers 0.00 0.00
-
Standard Non-Domestic 10.80
2,111,081 993 22,799,675
Lesotho Brewing Company 10.80 0.00 968,504 1 10,459,843
Likotsi and Qoaling Clinics 54.42 0.00 22,889 2 1,245,619
C and Y Sewer 1.13 0.00 516,918 1 586,117
-
Total 3,827,494 2,130 37,328,440
Page 17 of 33
The WASCO’s requested revenue for the financial year 2014/15 was mainly to cover the
following major cost drivers.
7.1.1 Labour Costs
While WASCO has stated that an above-inflation salary adjustment was overdue, the labour
budget in 2013-14 was 33.0% higher than that of 2012-13. The respective costs were M69.00
million and M92.20 million, excluding security costs. Inflation in 2012-13 was 6.1%, so the
increase represented a real budget increase of more than 25.0%.
Despite WASCO’s claim that total staff numbers have been reduced from more than 700 to
around 570, it was noted that staff salaries have increased substantially, by 39.6%, in the past
year.
Despite WASCO’s claim that staff turnover was unacceptably high the company has not been
able to provide the Authority with evidence to substantiate its claim or to show that it has not
been able to recruit and attract sufficiently skilled staff to deliver to its customers.
WASCO’s assertion that other institutions pay higher salaries and were able to attract skilled
staff was not in itself a justification for significant increases in labour costs for the entire staff.
Some positions may require high salaries, while others do not require exceptional skills and
are not difficult to retain. To justify the increase of M20.00 million in labour costs a strong case
for skills retention and scarcity, customer employee ratio, benchmarking, efficiency levels, etc
is necessary.
While WASCO may incur some additional labour costs in 2014-15 due to the operation of new
works, such as Metolong, the commissioning of such facilities may also create the opportunity
to reduce labour costs in existing plants as they might be mothballed. WASCO did not provide
any proposal for a staffing structure in its tariff submission, so the Authority was unable to
comment on the efficiency of the new Metolong arrangements. In the absence of any
compelling evidence, the Authority finds the requested increase unjustified.
Page 18 of 33
7.1.2. Maintenance costs
WASCO did not provide any expected outputs from the large proposed increase in the
maintenance budget, or specific reasons for the increase. WASCO has also not provided any
estimates of operating costs due to these new works in their submission. It has further been
noted that the new treatment plant at Metolong would not impact WASCO costs in 2014-15 as
the operating costs for the first year would be borne by the contractor who built the plant, not
by WASCO. WASCO will or may only incur some labour related costs for staff appointed to
run the plant.
7.1.3. Electricity Costs
The increase in power costs was mainly attributed to a possible electricity price adjustment
following an application by Lesotho Electricity Company (LEC). WASCO submitted energy
consumption data, which was budgeted at 28.80GWh in 2012-13 compared to 43.80GWh in
2014-15. Based on the power costs submitted (M13.60 million and M20.20 million
respectively), the price paid per kWh was M0.47/kWh in 2012-13 and will be M0.46/ kWh in
2014/15.
This suggests a decrease in the price paid per kWh; while it is known that it is incorrect
(LEC’s prices have not decreased). In the absence of reliable electricity consumption data,
the Authority was unable to verify the reasonableness of the power costs.
7.1.4. Other Costs
Other costs in the tariff submission which increased include Chemical costs (24.0% increase),
Administration (+15.0%) and Depreciation (+16.0%). On the other hand, cost reductions
include Transport (-23.0%) and Finance costs (i.e. interest payments, which decreased by
10.0%).
Page 19 of 33
8. LEWA’s Review of WASCO’s Costs
In line with Tariff Filing and Review Procedure, WASCO’s costs were separated into regulated
water production, Water Distribution and Sewerage and Wastewater treatment) and non-
regulated activities. The costs were further separated into controllable and non-controllable
costs. Controllable costs are those that WASCO can manage or influence to some extent,
while non-controllable costs are those that WASCO has a limited or no control over, such as
license fee and customer levy, interest costs on loans, depreciation, electricity charges and a
return on investment.
For water supply and treatment, the unit costs used to analyse WASCO’s costs since
2010/2011 are shown in Table 9 below.
Table 9: Unit Costs Used for Analysis of Water Supply and Treatment (Water production) Cost of goods services related to.
Items from the WASCO budget included in unit cost (M-Maloti)
Item that the costs are divided by to get the unit cost
Units
Volume Labour costs Chemical Costs Fuel Costs (other than transport) Operating Maintenance Costs (not capital maintenance) Payments for Raw Water (including abstraction licenses) Doubtful Debt Expense
Volume of water produced by treatment plants (kilo litre or kl)
M / kl
Volume and Power
Electricity kWh used kl of water produced
kWh / kl M / kWh
Number of sites WASCO needs to operate
Transport Costs (including fuel for transport) Rent, Security, Insurance ICT Costs
Number of sites producing water
M / site
Fixed costs Audit and Compliance Costs Other Expenses Stock Adjustment
(nothing – fixed costs are not a unit cost)
M
Based on the parameters defined above, WASCO’s unit costs for water supply and treatment
are as shown in Table 10 below.
Page 20 of 33
Table 10: Unit cost Results for Water Production Business and Approved efficient cost
Cost item YEARS
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015
Approved Efficient Unit cost
Volume Related Unit cost (M/kl) 2.74 2.94 3.10 - 3.74 3.30
Power intensity (kWh/kl) 0.95 0.92 1.01 - 1.39 1.00
The justification for the proposed efficient unit cost is illustrated in Table 11 below.
Table 11: Approved Efficient Unit Costs and their Justification
Cost Item Approved efficient Unit costs (M)
Justification for the approved unit costs
Volume Related Unit cost (M/kl) 3.30 The Authority considered that the rising costs per cubic metre were not justified by any improvement in service or fundamental change in the costs WASCO faced. The large increase in labour costs was not justified by the small increase in production.
Power intensity (kWh/kl) 1.00 WASCO has not provided any supporting evidence that the power intensity of its water treatment plants has increased. There had been no new technologies or improvements in water quality which reflect the need for more power.
Electricity Price (M/kWh) LEC tariff LEC’s tariff would apply.
Site Related cost (M/km) 440 509.00 LEWA accepted the unit cost which resulted from WASCO’s 2014-15 budget for water supply and treatment.
Fixed Cost (M) 6 141 716.77 LEWA accepted the proposed fixed costs in WASCO’s 2014-15 budget for water supply and treatment.
Regarding the water distribution, the Authority used the unit costs that are shown in Table 12 below.
Page 21 of 33
Table 12: Unit Costs Used for Analysis of Water Distribution Cost of goods services related to…
Items from the WASCO budget included in unit cost (M)
Item that the costs are divided by to get the unit cost
Units
Volume Chemicals Fuel Costs (other than transport) Doubtful Debts
Volume of water actually delivered to customers (kilo litre or kl)
M / kl
Volume and Power
Electricity kWh used in kl of water produced
kWh / kl M / kWh
Number of customers WASCO needs to manage
Labour costs Transport Costs (incl. fuel for transport) Rent, Security, Insurance, Rates ICT Costs Laboratory and Testing
Number of customers in WASCO’s billing system
M / customer
The length of network operated
Operating Maintenance Costs (not capital maintenance)
Km of water mains M/ km
The cost of water from the treatment plants
(this value is brought forward from the Water Supply and Treatment Module)
Volume of water produced
M / kl
Non-revenue Water
The model allows the costs of water supply and treatment (above) to be passed through into the distribution model only for water which meets the non-revenue target in the distribution model. If WASCO has more leakage than the target, the costs of producing that water are not allowed in the total distribution budget.
(Volume of water produced – volume of water sold), divided by Volume of water produced
%
Fixed costs Audit and Compliance Costs Other Expenses
Unit costs not applicable to fixed costs
M
The results emanating from the above table unit costs analysis are as shown in Table 13 below. Table 13:Unit cost Results for Water Distribution Business and Approved Efficient Cost
Cost item YEARS
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015
Approved Efficient Unit cost
Volume Related Unit cost (M/kl) - - 0.586 0.047 0.102 0.102
Power intensity (kWh/kl) 0.89 0.81 0.91 - 1.23 1.23
Electricity Price (M/kWh)
Customer Related cost (M/Connection 825.12 733.63 654.80 - 783.25 650.00
Network Related cost (M/km) 1,872 2,181 1,655 2,782 2,936 2700.00
The reasons for the Approved efficient unit costs for water distribution are stated in Table 14
below.
Table 14: Approved Efficient Unit Costs and their Justification
Cost Item Approved efficient Unit costs (M)
Justification for the Approved unit costs
Volume Related Unit cost (M/kl) 0.10 Clearly, volume related costs appeared to vary enormously, and this was probably not a very good unit measure to use. The only cost included in this measure was “doubtful debts”, and the total amount in the 2014-15 budget was M1.42 million. The Authority accepted WASCO’s proposal as it appears reasonable as compared to the total costs.
Power intensity (kWh/kl) 1.23 The authority did not have confidence in the numbers of kWh submitted by WASCO, however the total power budget for water distribution was low (M93, 000.00), so the authority accepted the WASCO figure this year, and would require accurate power information next year.
Electricity Price (M/kWh) LEC LEC tariff would apply
Customer Related cost (M/Customer)
650.00 The Authority has not been provided with reasons why there was an increase in customer related costs over the 2012-13 value of M650.00 per customer per year. The Company has not explained why it has become more expensive (in real terms) to service a customer. The Authority therefore allowed normal inflation on the cost to service a customer.
Network Related cost (M/km) 2 700.00 The costs of operating the network appear to have risen considerably in real terms between 2012-13 and 2013-14, and were again projected to rise in 2014-15. The company has not provided any justification for the real increase in costs per km. As such, The Authority would hold WASCO to the 2013-14 budgeted level, allowing only inflation to 2014-15 prices
Non-Revenue Water 26.0% While the set target of NRW by WASCO was relatively efficient, the Authority would need to monitor it very closely as there was no reliable past years information to assess performance.
Fixed Cost (M) 3 450 000.00 WASCO has succeeded in keeping fixed costs relatively flat in real terms, and as such LEWA accepted their budget proposal. In future years LEWA may consider if the fixed costs could be reduced.
The sewerage and wastewater treatment unit costs used are shown in Table 15 below.
Page 23 of 33
Table 15: Unit Costs Used for Analysis of Sewerage and Wastewater Treatment Service
Cost of goods services related to…
Items from the WASCO budget included in unit cost (M)
Item that the costs are divided by to get the unit cost
Units
Volume Chemical Costs Fuel Costs (other than transport) Payments to Bulk Waste Water Treatment providers Doubtful Debt Expense
Volume of waste water delivered to the treatment plants (kilo litre or kl)
M / kl
Volume and Power
Electricity kWh used kl of water produced
kWh / kl M/ kWh
Number of customers WASCO needs to manage
Labour costs Transport Costs (including fuel for transport) Rent, Security, Insurance ICT Costs Laboratory and Testing
Number of sewerage customers
M / customer
The length of network operated
Operating Maintenance Costs (not capital maintenance)
km length of sewer mains
M / km
Fixed costs Audit and Compliance Costs Other Expenses
Unit costs not applicable to fixed costs
M
Based on the above unit costs calculation method, the results for sewerage and wastewater
treatment are as reflected in Table 16 below.
Table 16: Unit Costs Results for Sewerage and Wastewater and Approved Efficient Unit cost
Cost item YEARS
2010-2011 2011-2012 2012-2013 2013-2014 2014-2015
Approved Efficient Unit cost
Volume Related Unit cost (M/kl) - - - - 0.05 0.05
Power intensity (kWh/kl) 0.07 0.09 0.17 0.16 0.21 0.21
Customer Related cost (M/Connection 3,738 3,644 3,854 4,639 5,516 3,700
Network Related cost (M/km) 117,525 137,102 104,621 107,386 98,977 98,977
The rationale for approved efficient unit cost for sewerage and wastewater are tabulated in
Table 17 below.
Page 24 of 33
Table 17: Approved Unit Costs and their Justification
Cost Item Approved efficient Unit costs (M)
Justification for the Approved unit costs
Volume Related Unit cost (M/kl) As there were no volumetric unit cost trends, and the total value of volume related costs was low (0.23m), The Authority accepted WASCO’s budget. This represented an increase on previous years (when the budget was zero), but this is because a new treatment plant has been commissioned, offering a better level of treatment, which required chemicals.
Power intensity (kWh/kl) 0.21 Again, the Authority did not have confidence in WASCO’s power consumption data, but the total power budget was relatively low (M1.78 million), so the Authority accepted WASCO’s proposed budget figure.
Customer Related cost (M/Customer)
3,700.00 The Authority did not accept that the price of managing a sewer customer should be increasing at more than 5% above inflation, or by 32% more than inflation over the past two years. WASCO did not provide any explanation or justification for this increase. As such, the allowed budget per customer was the one that was achieved between 2010-11 and 2012-13
Network Related cost (M/km) 98,977.00 Network related costs did not represent a large part of the budget, and WASCO has done well by reducing these in real terms over the past years (operation and maintenance costs). It may be that WASCO was not carrying out enough maintenance, however no performance data was submitted to show the level of service provided. As such, the Authority accepted WASCO’s budget this year and require that accurate sewerage performance data be submitted in future years.
Fixed Cost (M) 1,040,000.00 Fixed costs are also a relatively small part of the total budget (they consisted of “Audit and compliance” and “Other costs”). These costs seemed to be variable from year to year, but the low budget for 2014-15 was encouraging and the Authority accepted WASCO’s budget proposal.
9. Allowed Revenue for Water Supply and Treatment and Water Distribution
Using the unit cost analysis described above, the allowed budgets for water distribution
(including water supply and treatment) and sewerage and wastewater treatment are M172.73
million and M29.36 million, respectively as opposed to M181.28 million and M34.39 million
Page 25 of 33
requested by WASCO. The allowed revenues for WASCO’s businesses are as reflected in
Table 18 below.
Table 18: Allowed WASCO’s Revenue
Costs item Allowed Revenue in Million Maloti (M) per regulated
business
Water Supply
and
Treatment
Water
Distribution
Sewerage
and
Wastewater
Treatment
Total
Controllable costs
Power (volume and
LEC tariff related) costs
15.99 0.09 1.78 17.86
Volume related costs
excluding power
61.66 1.42 0.18 63.26
Customer related costs - 45.44 13.12 58.56
Network length related
costs
- 4.68 1.83 6.51
Site related costs 9.69 - - 9.69
Fixed costs 6.14 3.45 1.04 10.63
Total 93.48 55.08 17.95 166.51
Non-controllable costs
Depreciation (including
Contingency Fund)
7.94 7,96 9.75 25.65
Interest payments 4.06 3.46 1.66 9.18
Licence fee 0.25 0.5 - 0.75
Total 12.25 11.92 11.41 35.58
Total (controllable and
non-controllable)
costs
105.73 67.00 29.36 202.09
Page 26 of 33
10. The Approved Tariffs by the Authority
In order to meet M172.73 million and M29.36 allowed revenue for water distribution and
sewerage and wastewater treatment respectively, the tariffs would increase as stated in
Tables 19 and 20 below.
Table 19: Approved WASCO Water Charges for 2014/15
Customer Categories
New Water Charges
Old Water Charges Approved percentage
Increase
Unit Cost
Standing Charge
Unit Cost
Standing Charge
Unit Cost
Standing Charge
(M/kl) (M/month)
(M/kl) (M/month) (M/kl (M/month)
Domestic Customers
Band A (0 - 5kl) 4.18 21.93
3.59 21.93 16.5% 0.0%
Band B (>5 - 10kl) 7.07 38.95
6.07 36.68 16.5% 6.2%11
Band C (>10 - 15kl) 12.43 38.95
10.67 36.68 16.5% 6.2%
Band D (>15kl) 17.14 38.95
14.71 36.68 16.5% 6.2%
Non Domestic Customers Non-domestic excluding
Government, schools and churches 11.31 259.37
9.71 244.23 16.5% 6.2%
Government 11.31 374.64
9.71 352.77 16.5% 6.2%
Schools 11.22 259.37
9.63 244.23 16.5% 6.2%
Churches 11.22 187.33
9.63 176.39 16.5% 6.2%
Standpipes 5.66 0.00
4.86 0.00 16.5%
11
The split increases between volumetric and standing charges ensure that, on average, customers’ bill in A is not increased
by more than inflation of 5.0%.
Page 27 of 33
Table 20. LEWA’s Approved WASCO Sewer Services Charges for the 2014/15
Customer Categories
New Sewerage Charges
Old Sewerage Charges Approved percentage
Increase
Unit Cost Standing Charge
Unit Cost
Standing Charge
Unit Cost
Standing Charge
(M/kl) (M/month)
(M/kl) (M/month) (M/kl) (M/month)
Domestic Customers
Water borne sewerage customers 1 8.50 0.00
8.00 0.00 6.2% N/A Non Water borne sewerage customers 2 8.50 0.00
8.00 0.00 6.2% N/A
Non Domestic Customers Standard Non-Domestic 8.50 0.00
8.00 0.00 6.2% N/A Lesotho Brewing Company 8.50 0.00
8.00 0.00 6.2% N/A
Likotsi and Qoaling Clinics 42.81 0.00
40.31 0.00 6.2% N/A
C and Y Sewer 0.89 0.00
0.84 0.00 6.2% N/A
11. Forecast Water and Sewerage Sales for 2014/15.
The forecast sales for water and sewerage are as stated in Tables 21and 22 below.
Table 21: Water Volumes to be sold
Customer Categories Forecasted Demand
Sales (kl/year)
Connections (Number)
Domestic Customers
Band A (0 - 5kl) 2,762,657 36,482
Band B (>5 - 10kl) 1,107,198 18,257
Band C (>10 - 15kl) 471,237 6,324
Band D (>15kl) 1,068,941 5,620
Non Domestic Customers Non-domestic excluding Government, schools and churches 5,967,835 2,016
Government 1,868,383 631
Schools 323,177 274
Churches 234,518 199
Standpipes 23,907 104
13,827,853 69,907
Page 28 of 33
Table 22: Sewerage volumes to be sold
Demand and Customer Information
Customer Categories Forecasted Demand
Sales (kl/year)
Connections (Number)
Domestic Customers
Water borne sewerage customers 207,337 1,130
Non Water borne sewerage customers 0 0
Non Domestic Customers
Standard Non-Domestic 2,111,081 993
Lesotho Brewing Company 968,504 1
Likotsi and Qoaling Clinics 22,889 2
C and Y Sewer 516,918 1
3,826,729 2,130
12. Provision of Accurate Data, Regulatory Reporting and Incentives for WASCO
Whilst the Authority acknowledged that WASCO’s tariff Application was the first since it was
licensed, the quality of information provided to the Authority for decision making should be
addressed by the licensee. Submission of accurate and quality information assists the
Authority in setting performance targets and monitoring them. In the current Application,
accurate and reliable data has been a challenge and going forward, WASCO should put more
effort into putting in place systems to collect technical information.
13. WASCO’s Depreciation Charges
The company’s depreciation revenues for water distribution and sewerage and wastewater
treatment have been adjusted upwards in order to allow capital maintenance and the
establishment of ‘Contingency Fund12’.The depreciation funds should be ring-fenced by the
company and reported quarterly to the Authority. The allowed depreciation charge is M25.65
million inclusive of M3.00 million designated for the Contingency Fund.
12
The LEA Act, as amended, requires that WASCO must have Contingency Fund which will be utilised after approval by
the Authority.
Page 29 of 33
14. CONCLUSIONS
From its analysis of WASCO’s Tariff Application, the written and oral submissions from
stakeholders during public consultation process, reasons, facts and evidence provided and
WASCO’s response to both LEWA and public comments, the Authority has found justification
for 35% volumetric tariff increase inadequate. LEWA Board therefore concludes as follows:
A. WASCO’s proposed tariff increase of 35.0% on volumetric and 6.2% on standing
charge will generate M195.35 million instead of M181.28 million on water services
and M37.33 million as opposed to M34.39 million on sewerage services,
respectively;
B. The WASCO revenue requirement from regulated activities, after making the
adjustments, is M202.09 million (consisting of M172.73 million and M29.36 million
on water and sewerage services respectively) and to achieve this adjusted required
revenue, the increase in tariffs would be: 16.5% and 6.2% on volumetric water and
sewer tariffs respectively, and 6.2% and 0.0% on standing charge on all customers
(excluding Band A domestic customers) and Band A domestic customers
respectively;
C. The proposed tariffs are not fully supported by output data in relation to efficiency
performance levels such as collection efficiency, targeted non-revenue water, water
and sewerage coverage, water quality (residual chlorine and bacteriological), hours
of supply (hrs/day) and staff productivity (number of staff per 1000 connections);
D. The financial and technical data supporting the WASCO’s Application was
inadequate and needs to be improved. Calculations done by the Authority to check
the data showed that some of the numbers provided were incorrect and
inconsistent. For instance, electricity costs and consumption suggest that power
costs are decreasing but the budget shows an increase and the budget for new
connections has increased by 51.0% while the connections will only increase by
9.0%;
Page 30 of 33
E. The company’s operating expenses have not been fully supported by evidence.
Increase in costs such as labour, maintenance and electricity have not been fully
supported by either technical or financial information;
F. The Authority allowed M17.86 million revenue for power consumption costs as
opposed to M21.22 million requested by WASCO. The Authority understands that
WASCO is not responsible for the price of power but it is expected to manage
efficiently the use of electricity in all its facilities. The allowed revenue shall be
reconciled at the end of the year and the under or over recovery shall be factored in
when determining the power costs for 2015/16.
G. WASCO’s depreciation charges were low due to the use of historic book value
method used in depreciating the assets. The depreciation charges by the company
may therefore not be sufficient for capital maintenance. The Authority has allowed
the depreciation which includes emergency fund amounting to M25.65 Million.
WASCO is required to open a depreciation account and ring fence the allowed
revenue for depreciation. The allowed depreciation which includes contingency
fund must be used only for capital maintenance and the use of the funds must be
reported separately to the Authority. M3.00 million of the allowed depreciation is
for the emergency fund and therefore should be used for emergency cases as
agreed with the Authority and if there are no emergency cases that occurred during
2014/15 the accumulated fund shall be used for future emergency cases;
H. The return on assets has not been considered, as WASCO did not provide asset
register, which must also reflect the assets per their financiers (grants, loans,
customers, WASCO, etc) in addition to the fact that WASCO did not apply for the
return. In all the future applications, WASCO must provide the asset register which
clearly identifies assets per their financiers so that the appropriate return can be
considered by the Authority;
I. The WASCO full compliance to tariff filing and review procedure for electricity and
water in applying for tariffs review must be adhered to. In all future tariffs’ review
Page 31 of 33
applications, non compliance to the tariff filing and review procedure shall render
the application incomplete;
J. WASCO needs to improve the quality, credibility and consistency of the data
submitted to the Authority both during the year and on submission of tariff reviews
applications;
K. For the year 2014/15, the licence fee amounting to M0.75 million has been charged
for Water services only and not on sewerage services; and
L. For the year 2014/15, no customer levies will be charged for both water and
sewerage services;
15. APPROVAL
A. The Board therefore approved that the WASCO’s tariffs should be increased as shown in
Tables 23 and 24 below.
Table 23: Approval WASCO Water Charges for 2014/15
Customer Categories
New Approved Water Charges
Old Water Charges
Approved percentage Increase
Unit Cost
Standing Charge
Unit Cost
Standing Charge
Unit Cost
Standing Charge
(M/kl) (M/month)
(M/kl) (M/month) (M/kl) (M/month)
Domestic Customers
Band A (0 - 5kl) 4.18 21.93
3.59 21.93 16.5% 0.0%
Band B (>5 - 10kl) 7.07 38.95
6.07 36.68 16.5% 6.2%
Band C (>10 - 15kl) 12.43 38.95
10.67 36.68 16.5% 6.2%
Band D (>15kl) 17.14 38.95
14.71 36.68 16.5% 6.2%
Non Domestic Customers Non-domestic excluding
Government, churches 11.31 259.37
9.71 244.23 16.5% 6.2%
Government 11.31 374.64
9.71 352.77 16.5% 6.2%
Schools 11.22 259.37
9.63 244.23 16.5% 6.2%
Churches 11.22 187.33
9.63 176.39 16.5% 6.2%
Standpipes 5.66 0.00
4.86 0.00 16.5%
Page 32 of 33
With regard to sewerage and wastewater treatment, tariffs would increase as stated in Table
24 below.
Table 24. Approved WASCO Sewer Service Charges for 2014/15
Customer Categories
New Approved Sewerage Charges
Old Sewerage Charges
Approved percentage Increase
Unit Cost Standing Charge
Unit Cost
Standing Charge
Unit Cost
Standing Charge
(M/kl)
(M/month)
(M/kl)
(M/month)
(M/kl) (M/month)
Domestic Customers
Water borne sewerage customers 1 8.50 0.00
8.00 0.00 6.2% N/A Non Water borne sewerage customers 2 8.50 0.00
8.00 0.00 6.2% N/A
Non Domestic Customers Standard Non-Domestic 8.50 0.00
8.00 0.00 6.2% N/A Lesotho Brewing Company 8.50 0.00
8.00 0.00 6.2% N/A
Likotsi and Qoaling Clinics 42.81 0.00
40.31 0.00 6.2% N/A
C and Y Sewer 0.89 0.00
0.84 0.00 6.2% N/A
B. The current charges for connection, meter testing, reconnection, application fees and
others remain the same for the financial year 2014/15.
16. EFFECTIVE DATE
The effective date for the approved tariffs is 1 May 2014.