Automatic Adjustment Formula (AAF)

EXPLANATORY NOTES TO REVISED AUTOMATIC
ADJUSTMENT FORMULA FOR SETTING ELECTRICITY AND WATER TARIFFS

 

  1. Introduction

In July 2002, the PURC published its Proposed Transitional Plan for Electricity Rate Adjustment for the period 2001-2004.  A key component of the Transitional Plan involved implementation of an Automatic Adjustment Formula (AAF). The main objective of the AAF was to review quarterly, electricity tariffs to reflect changes in factors whose effects on operations were considered beyond the control of the utility companies namely the Volta River Authority (VRA) and Electricity Company of Ghana. To a very large extent, volatility in the spot price of light crude oil (LCO) on the international oil market and the Ghana Cedi-US Dollar exchange rate and their impact on electricity generation from thermal sources became the main focus of the model. Though the Commission’s Proposed Transitional Plan for Electricity Rate Adjustment was designed solely for electricity, its implementation also affected water tariffs.

With respect to tariff adjustments based on the AAF, it is worth noting that though Crude Oil Prices surged during the period of implementation of the formula ((November 01, 2003-April 30, 2006), improved electricity generation from hydro sources, coupled with stability in the Cedi-US$ Exchange Rate over this period ensured that no major tariff adjustments were required. These developments led the Commission to discontinue application of the model in the second quarter of 2006. Additionally, the discontinuation of the model was to offer the utility service providers the opportunity to submit proposals to the Commission and to justify the need for any tariff adjustments. In light of foregoing, the Commission approved an average of thirty-five percent (35%) increase in both electricity and water tariffs in November 2007.

In the latter part of 2009, (November 2009) and early 2010 (January-February, 2010), the utility service providers submitted proposals to the Commission for upward review in tariffs. Consequently, the Commission, after critical analyses and evaluation of tariff proposals submitted by VRA, GRIDCo, ECG and GWCL, announced on May 31, 2010 an average increase of 89% in electricity and 36% in water tariffs effective June 01, 2010. The rationale for this upward review was to re-position the utility service providers financially to enable them address the continuing deterioration in the quality of service being delivered to consumers.

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