LESOTHO ELECTRICITYAND WATER AUTHORITY

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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.

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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)


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

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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.

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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.

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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

attendance, promptly availed maintenance materials, improved internal operational

efficiencies and rehabilitated reservoirs in order to alleviate the problem. The Application

further stated that the zoning of the WASCO network had to be extended to cover at least all

the large consuming centres. It also stated that NRW had an adverse impact on the revenue

of the company.

3.4. Revenue Streams and Financial Performance

The Application mentioned water billing, new water connection fees, meter

testing/reconnection fees, sewerage billing, sewerage tankering, new sewerage connection,

sewerage blockage and other fees as its revenue streams. Water billing was the largest;

sewerage billing and water connection are mentioned as significant contributors to total

revenue that should be augmented. Water and sewerage billing revenue constitutes about

90.0% of the proposed income for 2014/15.

In the Application, the liquidity ratio (Acid Test) was stated as 1.15 while collection

performance was stated as 171 debt days against the set target by WASCO of 155 days.

4 In Appendix E of the Application WASCO’s estimated NRW target for 2014/15 is 26.0%.

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3.5. Costs of Water Production

The Application stated that WASCO’s expenditure comprised costs of salaries including

related emoluments, fees (including consultancies), chemical usage for water and sewerage

treatment, power and plant maintenance. Base salaries, and electricity and chemical usage

constitute about 43.0% and 14.0% respectively. The proposed increases for 2014/15 were

approximately 30.0% for salaries and 48.0% for expenditure on power. The Application also

stated that manpower costs of the company were not expected to grow substantially but

human resources expenditure would require augmentation as a new team would have to be

deployed at the Metolong dam and implementation of the restructuring within WASCO might

have implications on the expenditure. The chemical usage in the treatment plant was

expected to increase due to the operation of the Metolong treatment plant later in 2014/15

and operation of the new sewerage treatment situated at the Agricultural College.

3.6. Forecasts of Capital Costs

The Application mentioned that WASCO was embarking on a number of projects that were

aimed at improving service coverage and treatment of waste water. The projects were largely

funded through the Government and its development partners’ funds while small projects

were funded internally. It also stated that new areas such as Masowe, Sekamaneng, Ha Foso

and expansion of Mazenod had been added to town centres and were included in WASCO’s

growth plan in terms of supply capacity.

3.7. Proposed Charges for 2014/15

The Application stated that since the time of its predecessors, WASCO had no framework or

a platform with which it could undertake a tariff review. This led to tariffs for supply of water

and sewerage services being revised only by inflationary adjustments and not through proper

analysis of its service obligations, operational capacity and need to break even. As a result,

the tariffs had fallen behind and the company was not self sufficient and was unable to meet

its obligations.

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The Application also stated that the historic capitalised value of the assets had been used to

calculate depreciation and that weighted cost of capital (WACC) was not determined for this

exercise.

The Application further stated that, on the basis of the foregoing considerations and analysis

of its performance, WASCO proposed 35.0% increase on volumetric charges and inflation

rate of 6.2%5 on standing charges. The proposed tariffs were as stated in Table 3 below:-

Table 3: WASCO’s proposed volumetric and standing charges for 2014/15

Band Old Tariffs (M/

kl)6

Increase (M/kl) proposed Tariffs

(M/kl)

Domestic Customer

A: 0 – 5kl 3.59 1.26 4.85

B:>5 – 10kl 6.07 2.12 8.19

C: >10 – 15kl 10.67 3.73 14.40

D: >15kl 14.71 5.15 19.86

Domestic

Standing

charge

(Band A)

Band

B-D

36.68

2.27

38.95

Band A 21.93 1.36 23.29

Non Domestic Customers

Industrial, business,

government

9.71

3.40

13.11

Schools, churches 9.63 3.37 13.00

Non – domestic Standing charge

Industrial, business and

schools

244.23 15.14 259.37

Government 352.77 21.87 374.64

Churches 176.39 10.93 187.33

Standpipe customers 4.86 1.70 6.56

5Annual inflation rate was 5.0% for the year 2013 from the Bureau of Statistics in Lesotho (BOS).

6M/kl

3 means Maloti per kilo litre.

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Waterborne sewerage customers

Sewerage to be charged

on 85% of water

consumed

7.487 2.62 10.10

Low – Flush Waterborne sewerage customers

Water closet customers to

be on 60% of water

consumed

8.00 2.80 10.80

3.8. Revenue to be yielded by tariff adjustment

Table 4 below shows WASCO’s revenue that will be yielded by a tariff adjustment and would

in turn generate M7, 246,475.00 in operating profit:-

Table 4: WASCO’s Revenue Requirement

Item Amount in Maloti (M)

Water Meter billing 181,281,165

Water tankered 39,589

Water New connection 14,750,000

Meter Test / Reconnection Fees 1,458,000

New water Application Fees 306,200

Sewerage Billing 34,387,069

Sewerage Tankered 642,930

Sewerage New Connection 451,720

Sewerage Blockage 21,500

Penalty Income 30,000

Miscellaneous (including sale of FA) 347,500

Delivery Fees 504,000

Grant Amortized 1,340,816

Total 235,560,4898

7The sewerage charge from WASCO’s website is 8.00 not 7.84.

8In page 23 and Appendix A of the Application the required revenue for WASCO is M237 484 556.00

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With regard to Affordability Analysis, the Application mentioned that while Lesotho was the

least developed country, the proposed 35.0% increase in tariffs would add an extra M7.64

and M12.90 to a customer bill consuming in the first and second bands, respectively. The

proposed increases were, therefore, in line with the Government’s Policy for protecting the

poor9 and alleviating poverty in the country.

4. APPLICABLE LAW

The legal mandate of the Lesotho Electricity and Water Authority to make a determination of

tariff applications was derived from the LEA Act, as amended. In terms of this Act, Section

22(n) thereof, it is the function of LEWA to regulate prices charged to water and sewerage

services consumers.

5. PUBLICISING OF THE APPLICATION

In terms of Section 24 (6) of the Act, the Authority is required to publish a notice in

newspapers and other local media to allow consumers of water and sewerage services and

other interested stakeholders to comment on the reasonableness of the tariffs applied for.

Accordingly, a public notice was issued on both the print and electronic media from 09 to 21

February 2014 for stakeholders to provide their comments. Stakeholders were given until 25

February 2014 to submit their comments. It further requested stakeholders who had interest

in making oral presentations before the LEWA Board to indicate in writing, so that appropriate

arrangements could be made. At the close of that day (25 February 2014), comments had

been received from Lesotho Flour Mills Ltd, Lesotho Chamber of Commerce and Industry

(LCCI), Consumer Protection Association (CPA), Nien Hsing, Catholic Commission for Justice

and Peace (CCJP), Transformation Resource Centre (TRC), Maluti Mountain Brewery

(MMB), Mrs. M. V. Qheku and other individual domestic customers.

6. PUBLIC CONSULTATION PROCESS

9During public participation processes WASCO indicated that issues of protecting the poor were aligned to the Government

Policy on Water and Sanitation and the company illustrated that industrial worker who is considered as low income earners

will be able to spend less than 5% of his/her income in water if they consume in Band A.

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Three public hearings were held on 28 February 2014, 07 March 2014 and 14 March 2014 in

Mokhotlong, Mohale’s Hoek and Maseru, respectively. WASCO and stakeholders10,

Transformation Resource Centre (TRC), CPA, CCJP, MMB and Mrs. Qheku made

presentations before the Pricing and Tariffs Committee of the Authority.

6.1. WASCO’s Presentation

In its presentation WASCO stated as follows:-

a) It was established by the company Act no 13 of 2010 and provides water and

sewerage services in all the 10 towns of Lesotho, including Roma, Mapoteng, Peka,

Mazenod, Morija and Semonkong; and

b) It receives no subventions from Government. It also mentioned that it extracts water

from the rivers and underground, cleans it with chemicals and pumps it to the high

level reservoirs. To accomplish the assignment WASCO requires staff, pumps,

technological systems, pipes and others.

The company was faced with the following challenges:-

a) Pipe bursts and leakages;

b) Very old infrastructure;

c) Staff salaries that make it impossible to employ and retain staff with required skills;

d) Increased demand for water services due to population increase in its service areas;

e) Illegal connections;

f) Huge customer debts amounting to around M80.00 million which had accumulated

over a long time;

g) Prices that do not cover costs; and

h) Houses constructed on WASCO’s pipes wayleaves.

WASCO also briefly presented costs that it incurred from 2011/12, including estimates and

proposals for 2013/14 and 2014/15 as shown in Table 5 below:

10

Participants at public hearings were afforded opportunity to organise themselves into groups and air their views through

their representatives, after WASCO had made its presentation.

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Table 5: WASCO’s Summary of Selected Main Cost Drivers and their Actual and

Estimated Costs.

Cost Item/Years 2011/12 2012/13 2013/14 2014/15

Power costs M10,980,000 M13,622,000 M14,297,940 M21,225,877

Chemicals M6,880000 M5,460,000 M6,311,275 M7,878,934

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

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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;

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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.

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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%.

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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.

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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 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

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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.

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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

Electricity Price (M/kWh) 0.73 0.78 0.81 - 0.74 LEC Tariff

Site Related costs (M/ site ) 338,758 425,461

468,199 -

440,509 440,509

Fixed Cost (M) 6,820,889 9,126,354

6,210,689

4,996,208

6,141,716 6,141,716

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)


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


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

Non-Revenue Water 37.1% 30.0% 23.1% 24.6% 26% 26%

Fixed Cost (M) 3,951,434 5,857,903 3,414,478 3,369,547 3,449,124 3,450,000.00

Page 22 of 33

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


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)


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


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

Fixed Cost (M) 1,684,899 2,714,715 1,455,347 959,946 1,037,767 1,040,000

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


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%


Government, schools and churches 11.31 259.37

9.71 244.23 16.5% 6.2%


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%


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

(M/kl) (M/month)


Domestic Customers



8.00 0.00 6.2% N/A



8.00 0.00 6.2% N/A


40.31 0.00 6.2% N/A


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


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


Unit Cost

Standing Charge

Unit Cost

Standing Charge

Unit Cost

Standing Charge

(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%


Government, churches 11.31 259.37

9.71 244.23 16.5% 6.2%


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%


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



Unit Cost

Standing Charge

Unit Cost

Standing Charge

(M/kl)

(M/month)

(M/kl)

(M/month)

(M/kl) (M/month)

Domestic Customers



8.00 0.00 6.2% N/A



8.00 0.00 6.2% N/A


40.31 0.00 6.2% N/A


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.

Page 33 of 33

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LESOTHO ELECTRICITYAND WATER AUTHORITY