Rwenzori House I Lumumba Avenue P.

O Box 23841 Kampala Uganda

fax ( +256 41 4 34 6199) tel ( +256 41 4 34 4760) (+256 31 236 0600) www.umeme.co.ug

STRICTLY PRIVATE AND CONFIDENTIAL- NOT FOR PUBLICATION

Our ref: ERA/2015.10/223

----~~~~\
~ EtECTR!CIT'I Rf:Gl 'l.ATOR'i
30 October 2015
Chief Executive Officer
Electricity Regulatory Authority ~ \ \ t 'T\ \OiUT\
Plot 15, Shimoni Road, Nakasero
Kampala i.... OOC1 201~
Uganda
*
"T''"' ~ srraY
RECEIVED DY it"·~-1- -
Dear Dr. Mutambi:
L--------·
RE: ANNUAL TARIFF REVIEW FOR 2016

Pursuant to the provisions of section 3.3.2 of the License for Supply of Electricity, Umeme hereby
submits its tariff review appl ication for the year 2016 which includes details of its Revenue
Requirement, Distribution Energy Price (Appendix) and schedu le of charges outside of the energy
tariff to recover its costs.

The above information is intended to support the Tariff review, determination and approval by the
Electricity Regulatory Authority (ERA) as mandated by the Electricity Act, 1999.

1 Summary
Umeme has computed it's Revenue Requirement for its 2016 operations amounting to shs
741 ,355 million as shown in the table below;

Table 1: Summary Revenue Requirement

Component 2016 Base Tariff Comments Details

Application
(shs millions)
Net operating costs 175,007 Includes non-network Section 3.1
assets.
Investment related costs 456,583 Recovery against Section 3.2
rate base
Lease payments + 109,765 Based on Lease and Section 3.3 &
Reconciliations Assignment 3.4
Agreement
Total 741,355

Page 1 of 22

www.umeme .co.ug

~
2 Introduction
Section 3.3.2 of the Supply Licence requires Umeme to submit to the Authority, its tariff
computation prior to the tariff period to enable the Authority review and approve the applicable
tariff rates.

2.1.1 Methodology
In com puting the Revenue Requirement and Distribution Energy Price, Umeme has referred
to the methodology outlined in Annex A- Tariff Methodology within its Supply License, the
prevailing macroeconomic variables as required by the Automatic Tariff Adjustment
Methodology of 2014 and also taken into consideration the performance targets agreed with
the Authority for the seven year period 2012 to 2018. The resulting Distribution Energy Price
per customer category is included in the Appendix 1.

2.2 Performance Targets 2012- 2018

Umeme has referred to the performance targets agreed with the Authority for the period 2012 to
2018 as shown in the table below;

Table 2: Performance Targets

Tariff Year

Symbol Units
2012 2013 2014 2015 2016 2017 2018

Net Operating Costs DOMC USD x 106 42.5 44.1 44.6 46.2 47.7 49.3 51.1

Distribution Efficiency DEF % 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Days Lag DY Days 0 0 0 0 0 0 0

Target Uncollected
TUCF % 2.90% 2.70% 2.50% 2.30% 2.10% 1.80% 1.50%
Debt Factors

High Voltages
Technical Loss HVTLF % 8.00% 8.00% 7.50% 7.50% 6.00% 5.70% 5.20%
Factor

Overall Distribution
Loss Factor LF % 25. 50% 23. 00% 20. 00% 18.30% 16.90% 15.70% 14.70%

For purposes of the computing the Distribution Energy Price for 2016, the targets have been
adjusted for the periods 3 months in 2015 and 9 months in 2016 and the resultant applicable
tariff inputs are shown in the table below;

Table 3: Tariff Inputs

Tariff Parameter Agreed Target Adjusted Tariff Input

2015 2016 2016
High Voltage 7.50% 6.00% 6.4%
Technical Loss Factor

Page 2 of 22
 Tariff Parameter Agreed Target Adjusted Tariff Input
2015 2016 2016
Overall Distribution 18.30% 16.90% 17.10%
Losses
Uncollected debt 2.30% 2.10% 2.10%
factor
DOMC (USD' Million) 46.2 47.7 47.5

2.3 Macroeconomic Variables

The Tariff Methodology requires that for purposes of adjusting the revenue requirement for
movements in macroeconomic variables, the reference date will be the last date of the month
before the commencement of a quarter. For purposes of determination of the Q 1 2016 base
tariff the reference date would be 30 November 2015. Given that such a date has not been
reached, the tariff application for 2016 will consider the reference date to be 30 September
2015 as the full set of available indices as provided by the Bank of Uganda and the United
States Bureau of Labor Statistics as shown in the table below;

Table 4: Macroeconomic Indicators

Macroeconomic Base Indices Q4 2015 Q1 2016

Parameter
Reference Date 31 March 2012 31 August 2015 30 September 2015
Foreign exchange rates 2,372.52 3,658.39 3,695 .25
Inflation rates- UG CPI 189.63 223.00 225.90
Inflation rates- US PPI 181 .30 192.40 192.30

3 Components of Umeme's Revenue Requirement

3.1 Net Operating Costs

Umeme's net operating costs for 2016 amount to shs 172,837 million. The costs include the
agreed DOMC target adjusted for split of foreign content split, esca lated for inflation and foreign
exchange rate, additional application for non-network assets, other revenues and regulatory
fees pursuant of the Tariff Methodology, as shown in the table below;

Table 5 a: Summary of Net Operating costs

Parameter 2015 Base Tariff 2016 Base Tariff Comments

Application Apolication
(shs millions) (shs millions)
DOMC 137,446 157,907 As per agreed
adjusted target and
split (33% foreign
content)
Regulatory fees 949 3,049 As per the Authority's
Statutory Instrument
Supplement of 5
Page 3 of 22
 Parameter 2015 Base Tariff 2016 Base Tariff Comments
Application Application
(shs millions) (shs millions)
December 2014
Other Revenues (5,557) (4,425) Includes fees charged
for meter testing ,
reconnection and
disconnection
Non-network assets 24,682 18,476 Details under section
3.1.1
Total 160,975 175,007

3.1 .1 DOMC split for local and foreign content

Umeme profiled its operating expenditure for the period 1 January to 30 June 2015, and discovered
that 46% of its operating expenditure is in foreign currency. The table below shows the split between
foreign and local currency for the period.

Table 5 b: Operating Expenditure Split for Local and Foreign Currency

JUNE YTD FIGURES UGX OOO's %ofDOMC % in Foreign % Share of DOMC

Currency in Foreign
Currency
Employment Costs 27,598,517 37% 24% 8.83%
Other Staff Costs 11 ,971,135 16% 75% 12.02%
Transport Costs 3,954,836 5% 10% 0.53%
Repairs and 9,144,190 12% 61% 7.42%
Maintenance
Administrative Costs 17,851 ,627 24% 48% 11.29%
Insurance Charge 2,013,602 3% 100% 2.68%
Operating Lease 2,587,006 3% 100% 3.44%
CharQe
DOMC 75,120,913 46.22%

From the above analysis, Umeme has applied a split of 46% DOMC in foreign currency and 54% in
local currency to reflect the actual changes in the expenditure pattern.

3.1.2 Other Revenues

For the purpose of computing the net operating costs, a provisional amount of shs 4,425
million has been deducted on account of revenues from other regulated activities. The figure
excludes the inspection fee for customers connected under OBA scheme.

The breakdown of other revenues for the period 1 October 2014 to 30 September 2015 is
shown below;

Page 4 of 22
 Table 5c: Other Revenues

Regulated Revenues Amount

UG Shs' 000
Reconnection Fees 1,210,789
Meter rrransformer Test Fees 2,071
Inspection Fees - Revenue 3,212, 175
Total 4,425,034

In the 2015 tariff determination, other revenues netted off the OOMC was shs 5,557 million, however
the out turn is shs 4,425 million. Therefore, Umeme has taken into consideration the difference of shs
1,132 as an under recovery and applied it as a recoverable amount in the computation of 201 6
revenue requirement.

3.1.3 Non- network Asset Additions

As has been the practice, Umeme submits a schedule of non- network assets to enable the
company improve efficiencies in service delivery and information systems to cope with
increase in its customer base and operations. In the 2015 tariffs , USO 3 million was allocated
for this purpose, below is the expenditure to date;

Table 5 b: Non network asset expenditure as at 30 Sep 2015

Item UG shs USD

million
Buildings 499,980,738 0.14
Communication Equipments 95,360,137 0.03
Computers And Peripherals 1,093, 167,537 0.30
Freehold Land 26,000,000 0.01
Management Information System 6,963,068 0.00
Motor Vehicles 4,632,254,493 1.25
Tools and Equipments 1,233,676,848 0.33
Grand Total 7,587,402,821 2.05
FX Rate: 3,695

It is expected that the more than the full allocation will be utilized in the remaining term of the
year 2015.

Included in the 2016 investment plan submitted to the Authority is an amount of USO 17.5
million in relation to non-network assets required to improve business operational efficiency.

However, for the purposes of computing the Revenue Requirement, a provisional amount of
USO 5.0 million has been included to cater for priority areas and a detailed analysis will be
provided due course.

3.2 Investment Related Costs

The investment related costs for 2016 amount to shs 456,583 million which includes return on
investments, capital tax allowance and income tax allowance pursuant to the Tariff
Methodology, as shown in the table below;

Page 5 of 22
 Table 7: Computation of Investment Related Costs

Component 2016 Base Tariff Comments

Application
(shs millions)
Return on Investment 224,248 20% rate applied on net
investments
Capital Recovery Costs 36,866 9.5% depreciation rate applied to
cumulative investments base
Income Tax Allowance 96, 106 Gross up of 30% income tax
Total 456,583

3.2.1 Weighted Average Depreciation Rate

Umeme has applied a depreciated rate of 9.5% to compute the capital recovery costs. However the
company is reviewing the rate to align it with the accounting depreciation rate applicable in the
accounting records which is believed to be lower. The results will be provided during the review
exercise.

3.2.2 Gross Investments Base

The computation of the company's investment related costs took into consideration the gross
asset base as at the end of 04 2015 tariff and the projected network asset additions for 2015.

There are investments completed pre- 2012 and 2012-2013 period for which the Authority has
unrecognized as legitimate additions to the company's rate base. The company's asset base
from which investment costs have been derived is shown in the table below;

Table 8: Summary of Gross Investments

Description 2016 Base Tariff Application

(USO millions)

Gross Investments for 2014 254.80

Unrecognized Investments 2010
Closing work in progress 3.38
Low Voltage Lines 3.54 6.92
Unrecognized investments 2011
Prepayment metering projects LV 1.90
lines
Unrecognized investments 2012- 26.9
2013
Investment Additions 2015 70.61
Gross investments 2015 361.13

3.2.3 Investment Additions in 2015

The Authority approved investments additions of USO 77.4 million in 2015 including work in
progress from 2014 to be complete in 2015. Below is the schedule of investments projected to
be closed in 2015 and considered verifiable and added to the gross investments rate base.

Page 6 of 22
Table 9: Schedule of 2015 Investments
ERA Category Project Category ERA Budget Projected Comments
Approved 2015
2015 Completion

USDM USDM USD M

LOAD GROWTH Namugongo Substation 4.000 4.500 7.14 To be Completed in 04 2015
Power Transformer Upgrades 1.800 1.800 1.40 Civil works in progress
(Ntinda, Mukono & Jinja
Industrial Substations)
Namanve Industrial Park - 4.000 4.000 Contract Awarded to be
Quality of Supply (Roofings Ltd) realized in 2016
Lugogo-Jinja Road and Kireka- 0.300 0.300 0. 3 To be completed 04 2015
Portbell Interconnection

Mutundwe-Lubowa 0.812 1.180 0.87 To be completed 04 2015

lnterconnector
UETCL-Forportal 33kV 1.205 1.950 0.68 To be completed Q4 2015
Integration Lines
Kampala Industrial Business 4.270 4.270 At procurement stage likely
Park completion in201 6
New Moniko Substation 7.950 7.950 At tender stage, 2016 project.
NAMUNKEKERA INDUSTRIAL 2.032 2.000 0.83 Completed, Bombo Industrial
PARK awaiting switchgear delivery.
Hima Cement , Tororo Factory Q.800 0.800 At procurement stage likely
completion 201 6

BMTS Factory, Mbarara 0.765 0.764 0.00 At procurement stage likely

completion 2016

Sebitoli Research Camp, Kibale 0.022 0.022 0. 02 To be completed 04 2015

National Park

Western Uganda -New Feeders 2.000 2.000 2.00 To close end of Nov 2015
(Bushenyi, Mityana, Kabale &
Kisoro)
Kawanda (UETCL) - Bom bo 0.500 0.50 To be completed 04 201 5
Industrial Park (China Gold
Phase II)
New Connections(92,000) 10.304 10.000 12.00 To close more than 100% by
year end
Others 2014 B/F
Sub Total 40.26 42.04 25.74
LOSS Mukono -Seeta Zone 1 1.720 1.72 to close end of Oct 201 5
REDUCTION
Mukono -Seeta Zone 2 2.090 2.09 to close end of Oct 201 5
Mukono -Seeta Zone 3 1.200 1.20 to close end of Oct 2015
Mukono -Seeta Zone 4 0.880 0.88 to close end of Oct 2015
Entebbe- Airport feeder 0.100 0.10
Mbarara- Ntungamo 0.900 0.73
ABC Lugogo-Kibu li 11 kV 1.835 1.835 0.46 At procurement phase
Feeder
MV Technical Loss Reduction 0.553 1.990 0.15 At procurement phase
(Gaba-Kansanga, & Kireka -
Kvambo,io)
CESI 0.288 0.400 0.43 To close end of Dec 2015.
CLR
AMR 0.000 8.000 6.80

Page 7 of 22
ERA Category Project Category ERA Budget Projected Comments
Approved 2015
2015 Completion

USDM USDM USDM

MV Switchgear Replacement( 1.000 1.000 1.18 Equipment expected at end
Bombo & Lira Spinning) of Nov 2015.
Underground Cable Works 1.500 1.500 1.40 To close end of Oct 201 5
Uoarade
Substation Access Control & 1.000 1.000 0.50 To close end of Dec 2015.
Fire Protection
Other MV/LV technical Losses 3.000 0.76 To close end of Dec 2015.
Sub Total 6.178 25.62 18.50
QUALITY OF Substation Refurbishment 0.015 0.015 0. 15 At procurement phase
SERVICE (Maaamaaa)
Substation Plant House 0.305 0.305 0.31 At procurement phase
Refurbishments (Mityana,
Kabale , Fort Portal, Mukono,
Gulu & Kam uli)
Comprehensive Distribution 2.700 2.700 Project to be completed in
Automation 2016
Masaka West -Rakai MV 0.850 0.850 1.01 to close end of Oct 2015
Lira -Lake Kwania MV 0.340 0.340 0.61 to close end of Oct 2015
Busunju - Kiziba MV 1.415 1.415 1.25 to close end of Oct 2015
Tororo Main -Tororo Rock MV 0.300 0.300 0.26 to close end of Oct 2015
NR - Tororo-Mbale 2 - Kiyeyi & 0.672 0.67 Completed
Kachonga T-offs

33 kV Mityana- Kasanda 0.596 0.596 0.60 To close in Mid- December

Restoration 20 15
33kV Nkenda- Kabale 0.041 0.041 0.04 To close in Mid- December
Restoration 2015
33kV Mukono-Nakifuma Feeder 0.150 0.149 0.15 To close in Mid- December
2015
11 kV Bulangira- Pallisa Feeder 0.380 0.379 0.38 To close in Mid- December
2015
11 kV Gulu - Layibi Feeder 0.240 0.239 0.24 To close in Mid- December
2015
Pole Mounted 33& 11kV
Caoacitor Banks
Distribution Transformers 3.000 4.440 3.9 To close 50% end of Nov
Injections/Upgrades 2015.

System Improvement To close end of Dec 2015.

Protection Systems Upgrade 0.965 0.965 0.88 To close end of Nov 201 5.
Sub Total 11 .30 13.41 12.63
GETFIT 33KV Kakaka-Nyamba- 0.630 0.630 0.63 Contract awarded
PROJECTS Rwimi/Rugendabara
interconnector
New Rugendabara Switch Yard 0.950 0.950 0.95 Contract awarded
33Kv Hima- Rugendabara 0.560 0.560 0.56 Contract awarded
Nsongya-Nyabuhuka 0.300 0.300 0.30 Contract awarded
lnterconnector
Nyamwamba -Nkenda 0.735 0.735 0.74 Contract awarded
Substation Line
New 33Kv Mbale lndiustrial - 1.000 Contract awarded
Mbale Substation

Sub Total 4.175 3.175 3.175

Page 8 of 22
 ERA Category Project Category ERA Budget Projected Comments
Approved 2015
2015 Completion

USDM USDM USDM

BUSINESS Prepaid- GOU TOU Meters 2.000 2.000 Costs included in
EFFICIENCY Prepayment conversions
Prepayment Metering 13.200 13.000 13.20 To close at 100% by end of
Conversion (80,000) Dec 2015.
Hand held Units
IT Systems 0.365 7.870 0.37
Sub Total 15.565 22.87 13.565

TOTAL 77.47 107.10 70.609

3.2.4 Unrecognized Investments Pre- 2012

Umeme reiterates that there are investment additions made in 2009, 2010 and 2011 which
have not been added to the company's asset base on account of being work in progress and
Low Voltage network upgrades. Umeme disagrees with the Authority's decision disallow
investments on low voltage lines, as the allocation under direct operating and maintenance
costs (DOMC) is inadequate to cater for the full requirement of low voltage upgrades to
restore and improve the distribution network.

Furthermore, it should be noted that these assets exist on the network and benefits have
accrued to the consumers. And therefore , Umeme requests that these investments are
rightfully included in the company's asset base for purposes of computing the return on
investment and that the associated loss of revenues for the periods is recognized .

Table 10: Unrecognized Assets Pre- 2012

Item Value Issue

(USD million)

Closing Work in 3.38 Amount relates to an error in the 2010 tariff review,
Progress relating to closing work in progress. This was corrected ,
and approved in the 01 2011 tariff review (refer to
ERA 's letter dated 21 December 2010) . However, the
same amount was erroneously removed in the 04 2011
tariff review.

Page 9 of 22
 Item Value Issue

(USO million)

Low Voltage 3.54 Amount relates LV line upgrades under emergency

Network lines CAPEX that were disallowed by ERA in 2009 on
grounds that they are replacements and should be part
of repairs and maintenance.

Umeme clarified that the capitalized expenditure relates

to system LV improvements/ upgrades and are
qualifying investments, in line with the restoration and
refurbishment annual plans pre approved by the
Authority.

Umeme 2011 1.90 The amount relates to the investments not yet
Investments recognized for ROI in the year 2011 , but which Umeme
provided adequate clarification and documentation to
the Authority. The details of the investments are
illustrated in the section below.

TOTAL 8.78

3.2.5 Investments 2012 and 2013

Umeme invested USO 36.5 million in 2012 and USO 50 million in 2013. During the 2015 tariff
determination exercise, only USO 70.7 was agreed in the company's rate base. Consequently,
it was implied with the Authority as per the letter dated 12 February 2015 Ref: FIN/9/11/1, that
Umeme would provide additional documentation for unrecognized investment of USO 15.4
million.

Umeme submitted documentation to support the balance of USO 15.4 million via the letter
dated 19 March 2015 Ref: ERA/2015.3/61. It took the Authority 2 months to review the
submission and only responded via letter dated 10 June 2015 Ref: FIN/9/11/2, in which the
recognized investment was reduced to USO 59.5 million only. The amount disallowed is USO
27 million. This action came at a time when the foreign exchange rate had escalated from shs
2,780 allowed in 01 2015 to a potential 3,054 for 03 2015 determination.

The amount of USO 27 million disallowed represents 30% of the initial investment of USO
85.6 million made in 2012 and 2013 period.

The above issues notwithstanding, Umeme responded and provided additional information to
support its investments via letter dated 24 July 2015 Ref: ERA/2015. 7/152 to which the
Authority has not provided feedback and response.

Umeme reiterates that the above behavior is inconsistent with the fact that the investments
have been completed and benefits have accrued to the respective customers and that this
undermines the company's investment program and ability to raise internally generated funds
to improve the reliability and meet the growth requirements of the distribution network.

Umeme therefore requests the Authority to review the above investments and include them in
the company's rate base.

Page 10 of 22
Table 11 b: Disallowed Investments for 2012 and 2013

Year Allowed in Q4 Allowed in Q1 & Q2 Allowed in Q3 & Q4 Disallowed

2014 2015 2015
USO million USO million USO million USO million
2012 36.50 25.20 22.40 14.10
2013 50.00 45.50 37.10 12.90
Total 86.50 70.70 59.50 27.00

Table 11 b: Summary of investments by Category

Investment Amount Summary of issues raised by ERA Comment

Category in USO 2012 2013
millions
Work in 5 • SCADA (2.3 • Technical loss Umeme has provided
progress million) (0.6 million) additional information
• Quality of supply to indicate that the
(1 million) assets are fully
• Distribution deployed to benefit
Automation (1 the customer through
million) reduction in energy
losses outage time,
fault identification and
reliability
Lack of 8 • New • New substations Umeme has provided
adequate connections and additional information.
information (2.4 million) interconnecting
• Substation lines (1 million) The projects were
works (0.3 • Substation and completed and
million) upgrades (2.6 benefitted the
million) customers and
• Technical loss (2 addressed growth
million)
• Quality of supply
(0.7 million)
14 • Feeder • Technical loss The allocation of
restorations (1 .3 million) DOMC for repairs and
(2.5 million) • Safety (1 .3 maintenance including
• Upgrades and million) poles, conductor and
restorations (4 • Commercial loss transformer injections
million) (1.6 million) was inadequate,
• Commercial • Quality of supply however the projects
loss (1 .7 (1 million) were completed using
million) the capital budget
• Safety (0.9
million)
Total 27

Page 11 of 22
3.3 Lease Payments
Umeme's Lease and Assignment Agreement specified pass through payment as prescribed in
the payment schedules to meet UEDCL's rent and administration costs as well as replenish the
Escrow Account. The sum prescribed amounts to USD 16.307 million for the year 2016, to be
recovered through the tariff.

However, at the commencement of 2012 period, the Authority has allowed amounts less than
the prescribed contractual obligation (USO 3.7 million for 2012, USO 1.2 million for 2013, USO
2.2 million for 2014 and USO 1.9 million for 2015)

For the purposes of this tariff application, Umeme has applied the full contractual amount of
USO 16.307 million as prescribed by the Lease and Assignment Agreement

Umeme restates its preposition to draw the Authority's attention to a letter from the Ministry of
Finance and Economic Development, in connection with the above matter, which gave
confirmation that conversion of Government debt did not eliminate Umeme's contractual
obligation to make lease payments to UEDCL and urgently requested the Authority to address
the matter.

3.4 Reconciliations

3.4.1 Power Supply Price Reconciliation

The reconciliation was first brought up in 2013 tariff application and is still outstanding without
decision from the Authority. Umeme submitted a report showing the computation of the Power
Supply Price Reconciliation to the Authority via letter dated 16 June 2015 Ref:
ERN2015.6/124 and additional support information was provided on 9 September 2015 Ref:
ERN2015.9/180 amounting to USO 13 million. The amount was independently computed by a
reputable third party consultant in accordance to the requirements of the Tariff Methodology
and the business statistics.

For avoidance of doubt and confirm the company's interpretation of the same, the Tariff
Methodology in the Supply Licence signed between Umeme and ERA, defines the reconciliation
amount (Rq) as;

"The cumulative amount required to reconcile power supply costs and related revenues equal to; (a)
power supply costs incurred by the Licensee from UETC or any other suppliers and self-generation
(including related wheeling charges) less {b} the revenues billed to retail customers by applying the
Power Supply Price to retail kWh sales as such amounts recorded in the Licensee's accounts over the
period commencing on the Transfer Date and ending on the last day of the month for which actual
data is available to any quarter q".

The intention of the above reconciling amount is to ensure that Umeme's commercial obligation to
UETCL is not jeopardized and that the revenues billed for purposes of power purchase are
adequate irrespective of increase in actual purchases over and above the target purchases,
undesirable energy loss performance or distorted load factors against target parameters used in
setting the retail tariff and Bulk Supply Tariff rates.

The reconciling amount (Rq) can be represented as an equation below;

Rq =[PSPr.o.u x GWh Sales r.o.u] - [BST r.o.u x GWh Purchases r .o.u]

Page 12 of 22
 Where;

PSP is the power supply price component of the retail tariff

T.O.U is the respective time of use periods per customer class

BST is the bulk supply tariff used on UETCL invoice, unadjusted for energy losses and collection
target

For purposes of this tariff application, the amount has not been included in the Revenue
Requirement however Umeme requests that the Authority concludes its review exercise to make
a decision on the quantum of the same and agree a framework for future treatment and
determination of the reconciliation .

3.4.2 Effective Date Reconciliation

The tariff letter dated 12 January 2015 Ref: ECR/25/1 , the Authority indicated that Umeme
had over recovered revenues from consumption bills in January 2014, due to the late
implementation of new tariff rates for 2014 given that there was a general decrease in the
compared to the 2013 tariff rates.

In the month of January 2015, the new rates were implemented on 16 January 2015 and
therefore Umeme charged the first 15 days of January 2015 at the lower tariff regime of Q4
2014. The company is computing the amount of revenue shortage due to this event and will
provide detailed schedule for consideration by the Authority.

4 Demand Assumptions and kVA Sales

During 2015, the maximum peak demand has increased marginally from 526 MW to 528 MW
owing to the reduced industrial activity from commercial, medium and large industrial customers.
This has also impacted on a marginal growth in Umeme's bulk electricity purchases from UETCL
as reviewed in the sections below.

During the 2015 base tariff determination, the Authority maintained the demand charges as
approved in 2012 as shs 16,644 per kVA per month for medium industrials, shs 11 ,096 per kVA
per month up to 2000 kW and shs 5,548 per kVA per month for large industrials. It should be
noted that the above rates have remained the same irrespective of escalation in macroeconomic
variables that may affect the same.

That fact notwithstanding, Umeme has applied the same rates as approved by the Authority to
compute the distribution energy price based on the kVA units sold.

For the period 1 October 2014 to 30 September 2015, Umeme's sold 1,922,689 kVA units for
medium industrial and 3, 753, 115 kVA units for large industrials.

4.1.1 Bulk Electricity Purchases

For the period 1 October 2014 to 30 September 2015, Umeme's bulk electricity purchases
from UETCL have increased by 5.8% to 3,019 Gwh compared to 2,853 Gwh purchased in
2014 for a similar period.

4.1.2 Time of Use weighting factor

In the 2015 base tariff determination the Authority increased the time of use weighting factor
from 120% to 130%, to incentivize reduction of peak consumption for commercial, medium
Page 13 of 22
 and industrial customers following the comm1ss1oning of Bujagali Energy Limited and
elimination of load shedding. The profile in the pu rchases by time of use has not changed
between 2014 and 2015 periods as shown the table below, however for purposes of this tariff
application , Umeme has applied a weighting factor of 130%.

Table 12: Profile of Purchases by Time of Use

Period 2014 Period 2015 Period

GWh Purchases % GWh Purchases %
Peak 837 29% 871 29%
Shoulder 1,421 50% 1,510 50%
Off peak 595 21 % 638 21%
Total 2,853 3,019

4.1 .3 Load factors by customer category

To derive the applicable load factors per customer category, Umeme has taken into
consideration the electricity sales for period 1 October 2014 to 30 September 2015, allocated
for each time of use and based on the period sales, Umeme has applied the following period
sales weights as the load factors ;

Table 14 a: Sales by T.O.U and by customer category in kWh

TOU/ non TOU Domestic Commercial Medium Large Street Light Total
Prepaid 202,677,840 12,831 ,326 215,509, 165
Post paid -
Non-TOU 364 ,800,391 59,757,995 1,287,311 - 1,788,058 427,633,755
-
Peak 58 ,241 , 179 96,293,094 271 ,734,008 426,268,281
Shoulder 129,049,206 234,057,814 601 ,520,620 964 ,627,640
Off peak 45,285,269 70,634,948 273,382,839 389,303,056

Totals 567,478,231 305, 164,975 402,273,166 1,146,637,467 1,788,058 2,423,341,897

Table 14 b: Proposed Load Factors

Domestic Commercial Medium Large Street

Industrial Industrial Lighting
Code 10.1 Code 10.2 Code 20 Code 30 Code 50
36% 24.5% 24.3% 24.4% 60%
44% 55.8% 59.0% 52.0% 0%
20% 19.7% 16.7% 23.6% 40%

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5 Impact of Reactive Power Tariff
The Authority approved a reactive energy charge of shs 40 per kVArh per month and reactive
energy reward of shs 20 per kVArh per month to incentivize efficient energy utilization and
reactive power compensation for medium and large industrial consumers .

Table 15: Summary reactive energy rewards and penalty per month

Period Penalty Reward Net Inflow/

(Outflow)
shs shs shs
October-14 257,265,220 (246,551, 100) 10,714,120
November-14 253,411 ,840 (264, 142,060) (10,730,220)
December-14 243,325,880 (267,883,350) (24,557,470)
January-15 263,603,360 (288,546, 730) (24,943,370)
February-15 227,765,440 (239, 133,000) (11 ,367,560)
March-15 267,825,892 (267, 122,420) 703,472
April-15 504,797,320 (548,929,940) (44, 132,620)
May-15 238,639,860 (308,558,940) (69,919,080)
June-15 239,612,788 (284,425,720) (44,812,932)
July-15 269,349,360 (306,642,200) (37,292,840)
August-15 228,597,860 (295,521 ,020) (66,923,160)
September-15 249,504, 140 (282, 124,730) (32,620,590)
Total 3,243,698,960 (3,599,581,210) (355,882,250)

Umeme is in the process of concluding in the study to review the adequacy of the rates and
presumed impact on customer behavior after which the company will provide findings and
recommendations to the Authority. However for purposes computing the Revenue
Requirement, Umeme has considered the net reward of shs 356 million.

6 Customer Numbers
Umeme has connected over 107,000 customers between the January 2015 and 30 September
2015, compared to 77,000 customers connected in the 2014 period. The company projects that it
will connect an additional 39,000 customers between October and December 2015, going by an
average monthly addition of 13,000 customers. For purposes of computing the distribution
energy price, the actual customer number as at September 2015 and the projected number of
customers as at 31 December 2015 are shown in the table below;

Table 15: Projected Customer Numbers

Customer Category Actual 30 Average Forecast 31

Sep 2015 Monthly Dec 2015
Connections
Domestic 702,488 12,000 738,488
Commercial 65,019 1,400 69,219
Medium Industrial 2,353 17 2,404

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 Customer Category Actual 30 Average Forecast 31
Sep 2015 Monthly Dec 2015
Connections
Large Industrial 492 1 495
Street lighting 324 (2) 317
Totals 770,676 13,416 810,923

6.1 Monthly Service Fees

In the 2015 base tariff determination, the Authority maintained the fees applied in 2012. It
should be noted that these costs may not be reflect changes in the macroeconomic variables
which affect the same.

That fact notwithstanding, Umeme has applied the monthly fee rates approved by the Authority
in the 2015 base tariffs to compute standing service fee revenues.

Table 16: Monthly Standing Fees

Charge per Domestic Commercial Medium Large Street Lighting

month Industrial Industrial
shs shs shs shs shs
Monthly Fee 3,360 3,360 22,400 70,000 Not Applicable

7 Other Charges not provided in the Retail Tariff

7.1 Service Cost Charges

On takeover of the electricity distribution business, on P 1 March 2005, Umeme Ltd implemented
the Service Cost Charges contained in Annex C of the Distribution Supply License and
previously used by Uganda Electricity Distribution Company Limited (UEDCL).

Pursuant to Section 3.2 of the Distribution Supply License, in May 2008, Umeme Ltd engaged a
firm "Power Planning Associates Ltd" (PPA), to carry out a cost of services study. The study
was to develop a methodology to calculate charges not included in the Retail Tariff which would
form the basis for review of the Service Cost Charges. The charges include; inspection fee,
connection cost, disconnection/ reconnection, penalty charges , transformer and meter testing
fees .

The PPA report was thoroughly discussed at our various joint meetings between the Electricity
Regulatory Authority (ERA) technical team, Power Planning Associates and UMEME.

Umeme made a formal application to the Authority, on 13 August 2008, to review the service
cost charges not provided in the retail tariff. However, on ly reconnection charges were revised
in the 2012 tariff review.

As indicated in the letter Ref: ECR/25/1 dated 20 February 2015, the Authority stated that it is
undertaking a study to harmonize the methodology for all charges in force for all licensees
including the cost of service for; one-pole connection, two-pole connection , inspection for
connection as well the different fines and financial penalties in force by licensees. The results
of this study have not yet been shared with the company.

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7.2 Penalty Charges for Power Theft
The Authority approved new penalty charges for power theft during the 2015 tariff determination
to prohibit power theft by customers and reduce commercial energy losses as follows;

• Shs 350,000 plus estimated unbilled consumption for domestic and commercial single phase
customers

• Shs 700,000 plus estimated unbilled consumption for commercial three phase customers

• Shs 1,400,000 plus estimated unbilled consumption for three phase medium and large
industrial customers

A review and analysis of the impact of the new penalty rates will be provided to the Authority in
due course.

8 Performance Review 2015

8.1 Safety Record

During the period from 1 January 2015 to June 2015, there were no fata lities attributable to the
network. It should be noted that to achieve such a performance, Umeme has invested using its
capital budget to complement the repairs and maintenance budget allocated under DOMC to
rehabilitate and make the distribution network safe for our customers via priority targeted
projects for example ABC wiring and pole replacements.

8.2 Investments
As covered under section 3.2 of this letter, Umeme has projected to add investments worth
USO 74.61 million onto the distribution network in 2015. Umeme request the Authority to review
the disallowed investments as highlighted in section 3.2.3 and 3.2.4 of this application.

8.3 Regulatory Targets

Umeme's detailed business statistics for the period 1 January to 301h September 2015 were
submitted to the Authority, including the analysis of achievement against regu latory targets.
The table below is a summary of the performance at the end of 30 June 2015 as indicated in
the half year interim results.

Table 17: Summary Performance against Targets

Parameter Target fo r Actual at H1

2015 2015
Energy Loss Factor (LF) % 18.60% 19.10%
Uncollected Debt (TUCF) % 2.30% Less than 0%

8.3.1 Energy Losses

Umeme has reduced energy losses to 19.1 % for the six months ended 30 June 2015
compared to21.6% over the period in 2014. The performance has been achieved through
continued implementation of technica l and commercial loss reduction oriented investments
irrespective of the fact that the Authority has previously disregarded Umeme's commercial
loss reduction investments. The reduction in the target energy loss benefits the customer

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 through a reduction the end user tariff and Umeme's performance against the targets has
provided the electricity sector with efficiencies.

8.3.2 Uncollected Debt/ Collection Rates

The collection rate as at 30 June 2015 was 100.4% compared to 96.6% achieved over the
same period in 2014. The performance was driven by roll out of prepaid meters as well as
payments by the Government entities. Similar to energy losses the reduction in the target
collection rate benefits the customer through a reduction the end user tariff and Umeme's
performance against the target has provided a timely recovery of sector revenues.

8.4 Growth in Customer Numbers

Umeme is committed to increasing access to electricity to all potential customers through
investments in new connections to the grid. Umeme has connected over 107,000 customers
between the January 2015 and 30 September 2015 compared to 80,000 for the year 2015
projected at the tariff review for period from 2012 to 2018.

Similar to the energy losses and collection rates, growth in customer numbers provides a buffer
and purchases base to absorb sector revenues and thereby in effect reducing the resultant end
user tariffs irrespective of the fact that the incentive mechanism envisaged at the onset of the
concession period has been unilaterally revoked by the Authority and in effect removed growth
factor revenues from the company's revenue basket.

8.4.1 Customers on Prepaid Metering

Umeme continues to roll out the prepaid metering project and currently 45% of the customer
base has been successfully converted as at 30 September 2015. The roll out has greatly
improved the business efficiency and performance against collection targets. The table below
shows an update and forecast of the national roll out program to 2018.

Table 18: Roll out Update and Forecast

2011 2012 2013 2014 2015 2016 2017 2018

YTD Forecast Forecast Forecast
Retrofit 6,732 8,079 28,385 88,460 55,069 120,000 120,000 100,000
New 329 2,819 6,384 43,782 110,073 150,000 200,000 200,000
connection
Total 7,061 10,898 34,769 132,242 165,142 270,000 320,000 300,000

8.4.2 The Global Output Based Aid

Umeme implemented the Output Based Aid (OBA) project, funded by the World Bank and
other Donor Agencies and administered by the Rural Electrification Agency (REA). The OBA
Project is aimed at accelerating connectivity in the existing grid (grid intensification) through a
subsidized connection cost to all eligible customers meeting the connection criteria set by the
Ministry and World Bank, and would also reduce incidences of illegal connections on the rural
schemes connected to the grid.

The Authority approved separate connection charges with respect to new connections made
by company under the OBA scheme as per letter dated 10 March 2015 Ref: ECR/38/39/1 of
shs 411 ,500 for split- pole with communication cable no pole new connections . However, it
should be noted that these costs are sufficient to recover only the cost of material and not the

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 component of labor and transport. Umeme requests the Authority to review and approve costs
that cater recovery of the labor and transport component of new connection.

As at end of September 2015, over 50,000 connections had been effected under the OBA
Program against a target of 30,000. The target for 2016 is 30,000 connections and Umeme is
required to pre-finance these (as provided in the grant agreement) .

The above customer numbers are still low to meet the universal access and Umeme is
exploring initiatives to scale up the connection rate in the year 2016 and these are covered in
the section 9.2 below.

9 Summary of 2016 Plans

9.1 Investments
Umeme is aware of the expected growth in generation capacity and has in fact taken part in
discussions and agreements with the private investors undertaking the construction of both
Karuma (600 MW) and lsimba (180 MW) Hydro power dams expected to be commissioned in
2019-2020. Umeme is also aware of the expected growth in other renewable energy sources
upstream. These developments will more than double the current available capacity.

Similarly, Umeme is also cognizant of the national aspirations to grow electricity access from
15% in 2014 to universal access by 2040 in line with the millennial goals.

From the above developments, Umeme is committed to enhancing the distribution end of the
sector in preparation for expected growth, improve supply reliability and to meet a steep
reduction in the energy loss targets.

Umeme has independently carried out preliminary assessments (Asset Master Plan 2016-
2025) of the required investment focusing on the following key areas;

• Growth

• Reliability

• Asset replacement

• Energy loss reduction

The master plan has been shared with the technical team at ERA, UEDCL and the Ministry and
the discussions are in progress to review and approval by the respective stakeholders in
preparation of the implementation phase.

Pursuant to the Distribution Licence and the Investment Verification Guidelines, Umeme
submitted the 2016 investment plan to ERA via letter Ref: ERA/ 2015.10/ 210.

9.1.1 Energy Loss Reduction

The company will continue to implement its energy loss reduction projects to meet the targets
set in the tariffs determination, with greater emphasis on technical loss reduction.

In addition, the company will conclude the Phase 2 of the Distribution Loss Study to
disaggregate energy losses by customer category and time of use.

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9.2 Growing Customer Numbers
With the hindsight of the sector growth and national aspirations, Umeme will seek to ramp up
the number of customers connected to the grid to over 200,000 per annum , including both last
mile and existing networks compared to the 90,000 assumed in the tariff review for the period
2012 to 2018. In order to exponentially grow these numbers, a large number of uneconomic
connections will need to be made. Putting the financing costs of these connections as part of
Umeme's revenue requirement will lead to an increase in end user tariffs. Umeme is currently in
discussions with both the World Bank and KfW, and the Ministry of Finance (Uganda),
regarding access to sources of concessionary financing for investment in the customer access
project which include among others;

• World Bank - OBA Programme, ERT 2 and ERT 3 Programme, Kawanda - Masaka 220
kV Transmission Line Corridor

• KfW -Access Initiative

The successful implementation of the above initiatives as indicated in the respective business
plans requires pre-financing and or co-financing mechanism which implies that Umeme will be
tasked to raise sufficient funds to meet the above expectations. Among the sources of internally
generated funds under consideration is the utilization of growth factor revenues which the
Authority has reconciled out of the company's revenue requirement.

9.2.1 Utilization of Growth Factor Revenues

In 2012, the Authority unilaterally implemented revenue reconciliations, which resulted in claw back of
growth factor revenues and income tax allowance against Umeme's revenue. The respective
reconciliations have subsequently been fully applied against Umeme's revenues for 2013, 2014 and
2015.

The growth factor reconciliation is intended to retain any 'windfall' revenues arising from the purchase
and sale of excess energy above the target used in the determination of the energy tariff.

Umeme states that the windfall revenue includes a component of operating costs incurred by
company, the cost of energy losses, cost of collections and marginal profit.

Therefore, it's considered prudent that the Authority claws back only the portion of this 'windfall'
revenue that relates to marginal profit.

In addition, among the proposals to be presented to the Authority is the reinstatement of the profit
elements of the growth factor revenues to enable the company generate sufficient funds to participate
in the above initiatives together with establishment of annual customer numbers targets to incentivize
the access project.

The above discussions are in progress and expected to be concluded prior to the next period review
of 2019-2025.

10 Recommendation on Tariff Structure

10.1 Prepayment Flat Rate

Umeme has received several complaints from customers concerning the interpretation of the vending
receipts owing to the many lines and adjustments reflected on these receipts. It is from this
background that Umeme recommends a single flat rate to be generated for our customers that will

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cover the base energy charge, adjustments and service fees . It is presumed that such rate will be
understandable and predictable by customers and reduce on complaints. The implementation of such
flat rate tariff is not expected to materially distort recovery the company's revenue requirement.

10.1.1 Tariff Code for Agricultural Processors

Umeme has also been faced with high energy losses and low collection rates from customers
engaged in agriculture oriented processing namely grain milling . And these specifically affect the
overall recovery of the company's revenue requirement. Umeme thus recommends that the Authority
consider implementing a separate tariff code for such customers to take into account and address the
behavior specific to this category of customers.

11 Conclusion
The Umeme 2016 tariff review application which has been prepared and submitted in accordance
with the provisions of our license, contains market sensitive information and in addition the tariff
review process will involve detailed discussions between the ERA, Umeme and other stakeholders
regarding the same at an appropriate time.

Umeme therefore expressly requests that the Authority takes all necessary and strict
precautions to safeguard the confidentiality of all information contained herein to enable
objective discussion and most importantly protect Umeme's business interests.

Yours sincerely,

Seles ino Babungi

MANAGING DIRECTOR

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 APPENDIX 1- ANNUAL TARIFF REVIEW

Confidential and Proprietary to Umeme Limited

Pursuant to section 2.4.5 of the Licence Conditions for the Supply Licence, Umeme would request
that the Authority treats sections below as being private and confidential and therefore not considered
to be public information.

As such Umeme would request that the information provided in the sections below be held by the
Authority on a strictly confidential basis and not disclosed to any third party. Any breach by the
Authority of this condition in the Licence will result in irreparable commercial harm to Umeme, not
justified by any public disclosure purpose.

1- Tariff Application- Indicative Distribution price

Umeme's computation of the revenue requirement for 2016 is in accordance with the
requirements of Tariff Methodology Annex- A and takes into account the full recovery of lease
payments due to UEDCL for the period as contractual obligations pursuant of the Lease and
Assignment Agreement. The other components considered in the computation include;
unrecognized investments from prior periods (2009 and 2013), investment additions in 2015 and
performance targets of distribution loss factor, uncollected debt factor and net operating costs as
agreed with the Authority for the 7 year period from 2012 to 2018 and reconciliations.

Umeme hereby applies for Distribution price component adjusted for debt for each customer
category and time of use as shown below:
TARIFF PRICES Domestic Commercial Small Large TX Large Street Weighted
Industrial Industrial Industrial Lighting Average

Units Code 10.1 Code 10.2 Code 20 Code 30 Code 40 Code 50

Distribution Price
First 15 kWh per Bill Ush/kWh 150.0
All kWh over 15 kWh 427.4 409.4 352.7 124.5 0.0 428.7 269.4
Peak Period 535.9 460.4 164.9 0.0

Shoulder Period 403.5 354.2 124.2 0.0

Off peak Period 233.8 196.6 79.0 0.0

Average Distribution 409.4 352.7 124.5 0.0 428.7 269.4

Price

2- Indicative end user base tariff for 2016

Umeme is unable to provide for the actual end user tariffs that take into account the full bulk
supply costs since it includes projected upstream costs whose applicable information for
determination of the same is not within the company's domain. Umeme recognizes that the retail
tariff is a summation of both distribution price and the power supply price and consequently, the
end user tariffs will be determined the Authority after taking into account the power purchase
costs for 2016.

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