Electricity Tariff Study, Kenya

When:                  July to December 2006

Client:                   Fichtner GmbH & Co. KG, Stuttgart, Germany

Ultimate clients:     World Bank
                             Electricity Regulatory Board (ERB), Kenya

The specific broad objectives of this study were to: i) develop an appropriate transmission pricing model and the proposed Kenyan Transco’s revenue requirements together with an appropriate wheeling tariff; ii) review the unbundled distribution company’s revenue requirements and recommend new retail customer tariffs; and iii) determine the main generation company’s revenue requirements and recommend a new bulk tariff structure.

I was engaged mainly as the cost of service specialist, responsible for the derivation of the long run marginal cost (LRMC) of supply in Kenya, as well as the short run marginal cost, which were then used as inputs to the formulation of retail tariffs. I also provided input to other members of the study team on tariff and financial issues particular to the study.

Consistent with my approach adopted in other studies, the average incremental cost (AIC) method was applied in estimating the LRMC for all functional areas of electricity supply – generation, transmission and distribution. Although this method may underestimate energy related costs and overestimate capacity related costs related to generation, I have always maintained that this method, however inaccurate, generally provides a sufficient estimate of LRMC for retail tariff design purposes. Either that, or use a "proxy plant" approach for generation costs. In the vast majority of cases, there is no need for complex, sophisticated analyses when estimating marginal costs for tariff purposes.