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  ECONOMIC REGULATION - Electricity Pricing

The ERB currently uses the ââËRevenue Requirementâââ pricing method to regulate tariffs of electricity utilities. Revenue requirement is here taken to mean ââË the sum of all allowable costs, including a rate of return, deemed just and reasonable for the supply of electricity to customersâââ.

Revenue Requirement = Operating Expenses + Rate of Return x Rate Base

The Rate Base is the amount of capital or assets the utility dedicates to providing its regulated service while the rate of return is the cost of capital. Depreciation and taxes are also added to the operating Expenses.

The Revenue Requirement approach is also referred to as the Rate of Return methodology. The general principle here is that the utility is allowed to cover ââà prudentlyââ incurred expenses and earn a reasonable return on its investment. The utilityâââs costs are therefore reviewed, and those costs deemed to be unnecessary or unreasonable are eliminated or adjusted accordingly.

Having determined an appropriate level of revenue requirement, or budget, for the utility, the ERB then works out a corresponding rate of increase to the tariff that will enable the utility to generate the approved revenue requirement. This rate of increase is then applied by the utility on its existing tariffs.

Once a tariff is determined on the basis of the utilityâââs approved revenue requirement at the beginning of the year, the utility is free to apply to the ERB for a review under the Automatic Tariff Adjustment Formula (ATAF) in October. ATAF is only utilised to restate the approved tariff in the event of significant macroeconomic shocks such as a huge depreciation of the Zambian Kwacha or a huge rise in the level of inflation. Read More...

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