Analysis of Electrical Energy Sector

    Energy Plan for the Development of Haiti

    Strategie Electricity pour le Development de Haiti

    The electricity industry has certain characteristics of a natural monopoly. It involves significant fixed costs, the average cost of production decreases with the quantity produced. In a natural monopoly, the cost is minimized when the entire market demand is satisfied by a single company. Until recently, the physical and economical size of power plants (hydraulic, thermal and other renewable energy) has continued to grow, which allowed them to achieve economies of scale as they grew to serve larger and larger markets.

    Transmission and distribution activities, which are organized in networks, have an immediate characteristic of natural monopoly because it is not economical to have several distribution lines in parallel on the same territory.

    Governments have always taken a great interest in the development of the electricity industry to ensure its effectiveness and minimize costs so that they are competitive and thereby promote economic development. Governments are also concerned with issues such as regulation, security of supply, etc., because of development impacts of this industry on the well-being of consumers.

    Monopolistic companies operating electricity networks are also often called “public utilities”. The monopoly that characterizes electricity companies has always been accompanied by a number of responsibilities, constraints and obligations. The government, or its regulator, fixed rules of behavior (pricing, service, etc.) to protect consumers and promote industrial and social objectives.
    This regulation is generally performed by a government “regulatory” agency independent of executive and legislative powers, although in many cases, regulation is exercised directly by the government, as it is the case in Haiti.

    Overall, in most developed countries, this regulation covers three types of objectives:

    • ENSURE THE ECONOMIC VIABILITY OF THE UTILITY: This objective is consistent with the mission of the government, because of the importance of electricity in economic and social life and the consequences that would result from the failure of electricity company.

    • ENSURE QUALITY OF SERVICE TO CONSUMERS AT A REASONABLE PRICE: The government must impose to the only company that offers electricity service quality criteria (reliability, security, etc.) and accessibility (reasonable prices).

    • ENSURE A SMOOTH INTEGRATION OF SOCIAL UTILITY: The utility must behave in ” good citizen”, especially as regards to human resources management, environment, etc.

    To achieve these objectives, the regulatory agency intervention is at two levels: the regulation of internal activities of the utility and regulation of market activities. These two interventions are interdependent; the regulatory approach must be integrated and coherent.

    The degree of intervention by the regulatory agency in the internal activities varies greatly from one jurisdiction to another, according to the mandate entrusted to the regulatory agency and the government’s objectives. Pricing is the main intervention. The traditional regulatory mechanism for pricing, which was almost universal until the late 80s, is the regulation which set the rate of return that the company is allowed on its capital investment. It is often said that this mechanism is based on costs (“cost of service”), because its starting point is the definition of the costs incurred to provide the service. This type of regulatory environment leads to abuse because of its “cost plus” structure.

    As in most developing and emerging countries, the Haitian political structure is centralized and keeps a significant control over many sectors of the economy, often affecting market forces. The energy sector is no exception. Pricing of electricity, subsidies on petroleum products and, to a different extent, maintaining Electricity De Haiti (EDH) in a state of financial dependence are all examples of the existing political structure. This structure has several negative effects:

    • Decisions can be made based on other factors, different from the real needs of the sector.

    • The so-called “market” constraints are rarely respected, causing a distortion of the financial reality that the government must assume. Rather the contrary to the principle of “customer user pays” normally applied in the energy sector.

    • The interdependence between the Haitian’s financial reality and international markets (the vast majority of the energy produced in Haiti stems from the means of production entirely dependent on fuel imports) create a gulf that becomes very difficult to fill without considering the prospect of a significant increase in the already expensive price of delivered electricity. The impacts on the situation with a government already struggling with major financial problems are virtually impossible to support medium and long term.

    • The direct current institutional structure also involves many levels and affects the performance of the organizations. Indeed, no less than six ministries, two state secretariats and two independent government agencies affect, directly or indirectly, the electric power sector.
      • MTPTC (Responsible ministry)
      • Ministry of Environment (Determines the best development sites)
      • Ministry of Economy and Finance (See the financial needs of EDH in addition to pay some bills directly)
      • Ministries of Trade and Industry (Negotiates fuel purchases for EDH)
      • Ministry of Agriculture, Natural Res ources and Rural Development (Analysis EDH’s needs of natural resources for future projects)
      • Ministry of Justice and Public Safety (Ensures the maintenance of an adequate legislative framework and support the fight against corruption and fraud)
      • Office of Energy Security (try to find solutions to the energy problems of Haiti)
      • Planning Office (Support EDH in the development of strategic plans)
      • Office of Monetization Program Development Assistance (Performs fuel purchases)
      • Bureau of Mines and Energy (Support EDH in determining the best development sites)

    It is clear that multiple levels and stakeholders becomes a factor limiting the effectiveness of EDH. In fact, during our visit, we discovered the difficulty of coordination of these departments in order to visit the power production facilities.

    The entire Haitian energy sector is under the Ministry of Public Works, Transport and Communications (MTPTC). This department also oversees the Bureau of Mines and Energy, whose function is mainly related to the promotion of research of natural resources that can be exploited commercially, including those related to energy.

    In 2012, the government established a secretariat to energy security. However, no new operating budget has been added, therefore the office of Deputy Minister of Energy Security (BMSE) operates on the already inadequate MTPTC funds. There is no ministry dedicated exclusively to the energy, even if it is a key sector of the Haitian economy accounting for almost 20% of GDP in 2013.

    EDH is a single vertically integrated company (production, transmission and distribution), public, holding from the government a monopoly right for regulated operation of the entire power grid in a defined geographic market. This company serves the entire market, with the exception of a few self-producers, for example, large energy companies producing electricity for their own needs. The organization Electricity of Haiti (EDH) is under the direct supervision of MTPTC. The state company provides production activities:

    • Generation park of 105 MW current installed capacity
    • Utilization factor less than 50% due to network problems, maintenance of equipment or fuel supplies

    To better describe the global situation in which EDH operates, we must add the many challenges the government has to face:

    • 60% of the population is unemployed
    • The operating deficit reached 20% of government revenue in 2013, or about U.S. $200M on a budget of $1MM
    • Investments in government assets are 25% lower than those required to improve the situation. At the current level, it is not enough to maintain the level of operation of the assets.
    • It is estimated that 60% of tax revenue is not being collected due to different reasons.
    • The government invested in all sectors but with very low budgetary allocation for programs and projects The consequenc es are already being felt significantly on the financial capacity of the government. Current government policy requires it to pay a monthly subsidy to fill institutionalized gaps in EDH’s cash flows.

    The current institutional sector requires EDH to operate all aspects of the electricity sector without having the means. Indeed, by its current financial structure and its current inability to generate positive cash flows, EDH is unable to assume all responsibilities as national electricity company, namely:

    • Electricity Generation
    • Transportation and Distribution
    • Marketing, Selling and Collection
    • Demand Analysis
    • Network Planning

    This precarious financial situation means to limit the scope of the initiatives of leaders who do not have the resources to correct the situation. Indeed, the current financial problems of EDH result in the following insidious effects:

    • Lack of qualified staff
    • When qualified personnel are hired by EDH, they can be quickly attracted by the often more attractive wages offered by the private sector
    • The existing staff is very limited in terms of challenges, the situation of EDH forcing it to merely limit the damage without being able to implement initiatives that could be seen as motivating for the resources
    • The inability of EDH to retain its most promising hands force it to often use people less trained that flows on significant productivity losses
    • Lack of financial resources allocated to prevent post-training amounts necessary to eliminate this gap
    • Zero capital investment capacity
    • Slow but steady degradation of the electrical system
    • Total dependence to contributions of donors and/or government
    • Difficulty to properly plan the growing needs in production and transmission:
      • New Additions
      • Improving
      • Strengthening, etc.
    • Difficulty to intensify action to reduce commercial losses:
      • Lack of qualified resources
      • Lack of vehicles
      • Lack of monitoring equipment
      • Lack of resources for the purchase and installation of meters

    The vicious circle in which is embedded EDH is unquestionably a spiral whose end can lead only to a failure of the current system.

    The structure of EDH customers is as follows:
    A. Residential Customers

    • Regular customers, low voltage
    • Payment of bills are made to EDH host offices
    • ± 170,000 customers – RE tariff code, managed by agencies
    • Customer Login: these customers are unmetered and are charged a fee.

    B. Commercial Customers

    • Low voltage customers, small businesses
    • The payment of bills are made to EDH host offices
    • ± 12,000 customers – CO code rate. These clients are managed by agencies

    C. Industrial customers MT

    • Voltage limit for counting MT least 45 kw
    • ± 500 clients managed by the Corporate Banking Department. Tariff Code: IM. Double counting dial

    D. Industrial Customers BT

    • Limit voltage BT, up to 45 kw power
    • ± 1,100 clients managed by the Department Great Clients. Tariff Code: IB. Counting single dial

    E. Public Bodies

    • Buildings belonging to the GOH whose bills (Ministries and Crown corporations ) are set in the state budget
    • ± 800 clients. Clients managed by the Department Great Clients. Tariff Code: GVT

    F. Autonomous Agencies

    • Public bodies whose invoice is sent to an organization that manages its own budget
    • ± 360 clients. Managed by the Department Great Clients. Tariff Code: GVA
    • Electricity bills. Issue of payment of bills

    G. Street Light

    • All light sourc es for street lighting. An invoice for whole streets, even sometimes for a full borough. Billing package
    • Number of invoices: ± 300. Rate code GR. Managed by Team Great Clients.

    H. Other

    • Agents EDH. Price 50% off the regular residential rate. Considered BT customers

    As of 2013, current rates vary between 13. 4 and 14 HTG/kWh (between 33 and 34 U.S. cents/kWh). There is a very little difference between the residential and industrial tariff rate for great Clients.

    • The price for industrial and large consumers is overvalued based on a subsidy mechanism
    • The last rate increase, and the determination of the price per kWh in 2009, was not supported by an economic study
    • The high rate of industrial sector in direct competition with the self-production
    • No regionalization: one single price for each customer category at national level
    • The rate does not take into account the commercial losses and technical losses
    • The tariff structure is applied without difficulty by the FAB implementation and future CMS application
    • Tax (TCA – 11%) is charged to customers
    • A discount is applied to large industrial customers for payment before maturity
    • No indexing is applied to the variation in production costs
    • Special rate is offered for EDH agents. This rate, 50% of the regular residential rate, is provided in the Rules of Procedure of HRE.
    • Few controls currently on the portfolio “employees.” A first analysis shows little drift points of consumption concerned (about 750 now), but against abuse at some counters recorded for “employees” consumption suggesting either the resale of energy, or the transfer of rights to electricity-intensive activities (production of ice for food preservation by example)