Power deal haunting nation and the sweetheart deal that cost Zesco millions of dollars

  

 

ON MAY 29, 2020, Minister of Energy Mathew Nkhuwa announced a new sweeping law that declared all transmission lines, including those belonging to the Copperbelt Energy Corporation (CEC), as a common carrier, ending the Lusaka Securities Exchange-listed company’s reign as the sole supplier of electricity to the Copperbelt, chiefly the mines. But the move is now playing like a bitter divorce with a cut-throat row over child custody between CEC and Zesco Limited. Zesco, a public institution, has over the years been hard done by the lopsided power deal and is now seeking parity or a reversal altogether. JACK ZIMBA reports.

 

THE marriage between Zesco and CEC that has lasted 23 years could best be described in one word – COMPLICATED.

It all started in 1997 at the height of a World Bank-induced privatisation drive. Government was selling, with some companies, including mines, priced to go.

But the conglomerate Zambia Consolidated Copper Mines (ZCCM) was too big to sell at one fall of the hammer. It had to be unbundled.

And so Power Division, which was a subsidiary of ZCCM in charge of supplying electricity to the mines and communities on the Copperbelt, was sold to a consortium of private companies.

While the mines were struggling due to low copper prices at the time, Power Division was still a viable company with valuable assets.

But why was it still sold?

“It was meant to support the sale of the mines. At the time that the MMD government took over, they were trying to privatise the mines, and they wanted to privatise them successfully – and they were put under pressure because they were told ZCCM was not looking after the assets well. So, to sweeten the deal, to make it attractive, they packaged electricity almost for free. That is where the story begins,” says Patrick Mwila, who is director of strategy and corporate affairs at Zesco.

He was a young engineer in Zesco at the time of the deal, but he still recalls that the State utility did push in a bid to acquire ZCCM Power Division, but was not considered.

Instead, Zesco was made to sign a bulk supply agreement (BSA) with the new company, CEC.

The agreement gave CEC exclusive rights to supply power to the Copperbelt, which it bought from Zesco.

Arnold Simwaba, who is acting director, department of energy, in the Ministry of Energy, says when the BSA was signed, the mines were going down and no-one was interested in them. 

A favourable BSA was, therefore, the best incentive to investors to buy the mines.

And it was hoped that once the mines got into production, the country would reap the benefits.

Johnston Chikwanda is an energy expert with vast knowledge and experience in the sector.

He says the BSA may not have started as a raw deal “because at that particular time the environment was different and the character of the energy sector was different, and it is very much possible that Zesco had excess electricity at that time.”

“But we might have missed one or two things without looking into the future,” he adds.

He also thinks there was pressure from the World Bank to sell ZCCM Power Division to a private investor and not Zesco. 

Mr Chikwanda says there is no doubt the deal has had a backward lash on the public.

The BSA also had a negative effect on Zesco. It had restrictive clauses that stopped Zesco from increasing tariffs.

Zesco now counts its losses in millions of dollars yearly since the BSA was signed. It is, in reality, subsidising CEC. (See table)

For example, in early 2000, Zesco saw an investment opportunity in a greenfield in Chambishi at a new industrial zone, and because the utility had a line nearby, it decided to seize the opportunity, but that resulted in a turf war.

“CEC was up in arms, they took us to a London court and they grabbed US$10 million off us just for that,” says Mr Mwila. “So when we say this deal is costly to Zesco, we mean real money going out the window.”

One of the first amendments to the BSA was done a few years into the deal. CEC could not continue distributing power to residential customers, who became a liability to the company.

It handed them over to Zesco, but at a huge cost.

“Over the last 20 years, Zesco has spent in excess of US$100 million in rehabilitating and expanding the distribution network on the Copperbelt that was left in a dilapidated state from the year 2000 which should have been a cost borne by CEC, who still maintained control of the overall supply infrastructure. In addition, Zesco has to pay CEC close to US$12 million annually to transmit its own power meant for supply to retail consumers sitting behind the CEC ‘curtain’ on the Copperbelt through CEC-owned infrastructure,” Mr Mwila says.   

CEC charges Zesco 0.66c/kWh to wheel power to domestic customers on the Copperbelt.

“When you get a benefit in a business, you take everything, the assets and the liabilities, but our colleagues managed to get the cream and throw all the bad things to Zesco, who were not even involved in that deal. That particular process has been very painful for Zesco,” he says.

The BSA was initially scheduled to expire after 15 years, in November 2012, but it was extended to March 31, 2020.

And so for 23 years, the BSA has existed as a thorn in the side of Zesco, which had to supply power to CEC at a subsidised price.

Records show that CEC uptake from Zesco was about 400MW every day, and half of that went to its biggest customer, Konkola Copper Mines (KCM).

Power purchase agreements are shrouded in secrecy, and it is usually difficult to know the tariffs from end to end.

But latest data from CEC indicates that the company was buying power from Zesco at 8.31c/kWh, and passing it on to the mines at 9.8c/kWh.  

This was under a renegotiated purchase tariff effected in 2017.

But Mr Mwila says Zesco still lost out due to price differentials.

“In 2017, a joint agreement between the Government, Zesco and the mines agreed that the mines would pay an effective tariff of 9.3c/kWh. However, given the BSA, a challenge still existed on the final tariff that the mining companies paid to CEC. In recognising the CEC asset on the Copperbelt, Zesco agreed to charge CEC an effective tariff of 8.11c/kWh which was effected in two parts, a capacity charge and an energy charge. However, due to the use of an unrealistic load factor in determining the two-part tariff, the cash flow tariff to Zesco was 6.8c/kWh, resulting in a further loss of approximately US$2.5 million per month or US$30 million annually,” he explains.

Meanwhile, during this same time, Zesco was still buying expensive power to supply all consumers, including the mines from various independent power producers (IPPs) such as Maamba and Itezhi-Tezhi at prices ranging from 8c/kWh to 13.5c/kWh.

This represented a subsidy of up to 6.7c to both CEC and the mines on every unit supplied.

“The price to CEC does not represent Zesco’s true cost of providing the power at the points where Zesco delivers the power to CEC. If Zesco was to add the cost of wheeling to the supply of power to the mines on the Copperbelt, it would cost in excess of 13.0c/kWh. The loss in monetary terms due to the mismatch between the CEC price paid to Zesco and the actual cost of supply paid to IPPs by Zesco amounts to approximately US$10 million per month or US$120 million annually. This situation is completely unsustainable going forward,” says Mr Mwila.

Zesco also accuses CEC of lacking transparency as it did not allow access to its meters or metering data to show the true consumption by the mines that showed the true peak on the Zesco system.

“As such, CEC enjoyed the additional benefit from what is known as ‘simultaneous maximum demand’. This is a situation which occurs as a result of the mining companies reaching their maximum demand consumption at different times to the maximum demand readings at the Zesco CEC bulk supply points,” explains Mr Mwila.

For Zesco, there was no gain from the CEC deal.

“It’s a catch-22,” says Mr Mwila. “You are caught in an agreement which is lose, lose, lose. Are you going to sign it again? How would the public forgive you that you renewed such a thing?”

Zero-sum game

Following the declaration by Government that all transmission lines are common carrier, there is now a dispute between CEC and Zesco over the tariff charge for using CEC lines.

The Energy Regulation Board (ERB) has proposed 1c/kWh as transmission charge for Zesco to wheel power across its lines.

But CEC rejected the tariff, saying it is 30 percent less than what it is currently charging.

However, Mr Chikwanda says the transmission tariffs in the region are below 2c/kWh.

“I have never seen them go beyond 2c/kWh in the region,” he says.

However, Government has already signed a new agreement with KCM which Mr Mwila says has left both parties smiling.

“What we have signed with KCM is much better than CEC – for them it is better than what they had with CEC, and for us it is better than what we had with CEC. The guy sitting in the middle was paying me less, and charging them higher,” he says.

But Mr Chikwanda says Zesco must give more information on the new deal it has signed with KCM.

“We need more information to be released because a lot of harm is being caused, painting each party black. Zesco has been painted black, CEC has been painted black, and Government has been painted black, and the public has been left wondering. So, the only way to cure this kind of situation is to release more information,” he says.

Energy reforms

The process to reform in the energy sector began about three years ago, and culminated into two legislations – the Energy Regulation Act and the Electricity Act of 2019.

This is in line with Government’s push to have cost-reflective tariffs, which would encourage more investment in the sector.

The Energy Regulation Act is what gave birth to Statutory Instrument No. 57, which declares all electricity transmission lines “common carrier”.

“The minister was not just dreaming, it is something in the law. That is what the law says and it is not the minister who put it up, it was the entire Government and all the key stakeholders, including CEC,” says Mr Simwaba.

Mr Chikwanda says Government’s decision to declare transmission lines a common carrier is not new in the industry.

“We have seen all over the world gas pipelines being declared common carriers; you can declare a crude pipeline a common carrier, even a rail line. The principle behind is to avoid duplicity and to stop monopolistic tendencies,” he says.

He also doubts there is anything sinister about the move.

“Personally, I have a lot of faith in the ERB because it is a licensing board, and I don’t think it is in the interest of a licensing body to kill off any licensee,” he says.

He also says there was wide consultation on the new legislation and they went through Parliament swiftly, supported by Members of Parliament from both sides.

“The writing on the wall was more than three years ago when we said that we wanted an open access regime,” he says.

Mr Chikwanda thinks the biggest crunch for CEC may be how to remodel its business.

“Now that they are no longer able to access power, their only revenue stream will be charging a transmission tariff, and they have to remodel their business and processes in order to adjust to the new environment,” he says.

And, of course, there is the huge debt sitting at KCM, which is now under Government.

“When you are owed, you want to be in control of certain facilities in order to compel the other party to pay,” says Mr Chikwanda. “Maybe that is where the hard feeling could be coming from.”

But he also warns that if CEC does not get a good deal, it might compromise the infrastructure

“It is important that a team of investigators investigates this thing very deeply because there are some capex (capital expenditure) issues that are due for replacement this year,” he says.

He says it is possible for all the players to emerge winners.

But CEC has already warned its shareholders that the move by Government might affect its business

In a statement, the corporation said: “GRZ’s actions have the full effect of taking away CEC’s commercial and property rights, and completely inhibiting the company from taking viable business decisions, including enforcing its legal and commercial rights in the best interest of the business.

“CEC takes this opportunity to advise all its investors of these actions from the GRZ that are highly detrimental to the well-being of the business and its ability to continue as a going concern,” the statement reads.

The CEC accuses Government of trying to give KCM, which it took over as liquidator, a cushion against its debts.

KCM owes CEC US$144 million, of which US$100 million must be paid to Zesco.  

The agreement between Zesco and CEC mirrors another deal, between South Africa’s Eskom and the global mining giant BHP Billiton.

The row between the two also spans about three decades, starting in 1992.

It had to take a lawsuit by News24 to compel BHP Billiton to disclose what was in the deal.

But Eskom had already lost billions of rands.

In 2012, the Mail & Guardian reported that Eskom’s loss of revenue by supplying two of BHP Billiton’s smelters was R5 billion.

Treachery

In 2006, the major shareholders in CEC decided to offload their shares to a consortium of Zambians.

And despite President Levy Mwanawasa objecting to the move, his minister of Energy at the time, Felix Mutati, allowed the sale to happen behind his back.

In an exposé by The Post, the President told reporter Amos Malupenga, when asked whether he was aware about the sale of CEC shares:

“Yes, I was consulted on that issue but for one and half years, I kept on refusing and later the consent was given without my authority.”

And in a letter to Mr Mutati, President Mwanawasa expressed his displeasure at the deal.

“…I regret that I am unable to comment on this matter on which I would have expected you to brief me before reading in the press that the shares of the two companies have been sold and I assume therefore that that was done with your support ostensibly giving the consent of the Government of the Republic of Zambia to the transfer of the shares,” President Mwanawasa wrote.

He added: “I am aware that many difficulties will arise but it is my hope that you will be capable of resolving them.”

His warning could not sound truer today.

With a little more foresight, perhaps the architects of the BSA between Zesco and CEC would not have committed.

 

 

 

Zesco loss under the BSA

US$10 million – The amount of money Zesco was fined by a London court for violating the exclusivity clause by supplying a Greenfield in Chambeshi, which was CEC turf.

US$100 million – The money Zesco spent to accommodate domestic customers who CEC could not take on because they were not profitable.

US$12 million – The amount of money Zesco paid CEC every year to transmit power to domestic customers on the Copperbelt.

US$67.2 million – The amount of money Zesco was losing annually through unaccounted for power supplied to CEC owing to alleged lack of transparency in the private utility’s metering system.

US$120 million - The amount of money lost due to mismatch between the CEC price paid to Zesco and the actual cost of supply (paid to IPPs by Zesco).

Source: Zesco Limited