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Why punish CEC for KCM’s failure to pay for electricity?By Diggers Editor on 6 Oct 2019
On 27th September 2019, the Copperbelt Energy Corporation Plc (CEC) issued a cautionary notice, primarily meant for its shareholders and the capital market, advising that they had received notice from ZESCO Limited that it will commence arbitration proceedings against the Copperbelt-based power utility.
As with most commercial agreements, disputes are resolved by arbitration; so government, through ZESCO, has deemed it a dispute that CEC is not remitting money that the company is collecting from Konkola Copper Mines Plc (KCM) for the supply of electricity, in accordance with the Bulk Supply Agreement (BSA) between the two utilities.
This is a very strange demand from ZESCO in the sense that everybody knows KCM is not paying CEC for the electricity that the mining company under ‘liquidation’ is using. So how does ZESCO expect to get money from CEC which KCM has not paid? We would like to believe that CEC is not disputing that ZESCO should be paid for the electricity it supplies under the BSA, but we wonder where the money is going to come from if the consumer is not paying.
Now, this may be argued very well that it is not Zesco’s problem if CEC’s customers don’t pay for the electricity, but when you look at this matter with a critical eye, it is easy to see corporate injustice from ZESCO. We can say this because ZESCO is owned by the Industrial Development Corporation (IDC) and so is ZCCM-IH which partly owns KCM, and under the current status, is in full control of the mining firm. It is government through IDC and through ZCCM-IH that has taken legal action against the ‘previous’ owners of KCM, Vedanta Resources, who were ultimately responsible for paying KCM electricity bills to CEC.
Ideally, common sense would demand that ZCCM-IH should understand all the commercials between CEC and its supplier ZESCO on the one hand and CEC and KCM on the other hand. Government and ZCCM-IH should know that the agreement to supply KCM with electricity is in parallel with the agreement for CEC to be supplied electricity by ZESCO. This simply means CEC only pays the supplier after the customer has settled, so if KCM is not paying for power supplied by CEC, how can CEC pay ZESCO for that portion?
Now, if ZESCO is displeased with the fact that they are losing millions of dollars a month as a result of CEC’s failure to pay for the supplied electricity, we believe there are other measures that the power utility can pursue, in accordance with the same Bulk Supply Agreement that they are relying on to arbitrate. What ZESCO should do is simply restrict power supply to CEC so that CEC, in turn, restricts supply to KCM, which is not compliant.
But can ZESCO afford to do that? No! If Vedanta Resources was still responsible for the operations at KCM, CEC would have already restricted power to KCM; they did it in 2014 over a less significant electricity bill and to a different customer last year. But today, government cannot allow CEC to stop supplying power to KCM because that would completely render the mine obsolete and a people’s uprising would be the next item in the news. So it is hard to understand the reasoning from ZESCO, IDC and ZCCM-IH on this.
The second contention by ZESCO for arbitration relates to a tariff hike that the Energy Regulation Board (ERB) unilaterally effected on the mines in 2014. We know that tariffs between mines and their supplier are negotiated and agreed bilaterally. ERB technically only endorses. But in 2014, they decided to hike tariffs without consultation or negotiation. The mines took legal action and that matter has been in court since then.
The mines have never paid CEC for electricity at that tariff. Now, should the court rule in favour of ERB? The implication would be for the mines to first settle those arrears and then ZESCO could claim its portion from CEC. But ZESCO demands that CEC should pay those arrears immediately, in the event that the court rules in favour of ERB, without waiting for the mines to pay first. Again, we don’t understand the reasoning here.
All the parties to this fiasco are either partly government owned (through ZCCM-IH) or fully owned by the government (through IDC). They should have full understanding of everything that’s going on. But somehow, government, IDC, ZCCM-IH and ZESCO are putting CEC in a corner, trying to squeeze out cash from a problem they caused.
It’s important for people to understand that the larger portion of the money that mines pay for power goes to ZESCO and that ZESCO already supplies some mines directly, like the North-Western Province mines and Bwana Mkubwa, which CEC has nothing to do with. How much profit is ZESCO getting from these mines?
What we are seeing from government in this matter is a malicious attempt to dump the blame for ZESCO ’s poor financial management on CEC. Zambians must not be fooled by this move because ZCCM-IH has two seats on the CEC board. In addition, government, as a special shareholder, has one seat represented by the Permanent Secretary in the Ministry of Energy. So it’s not like they don’t understand or are not party to decisions made by the Company. They are well aware or they should be. It’s not like CEC is a totally private business in which GRZ has no inkling as to what happens. Since the company’s privatisation in 1997, ZCCM-IH is and has been CEC’s second largest shareholder, currently with 24.11 per cent stake in the company.
These are the consequences of impulsive political decisions that are made in State House without evaluating the economic impact. We will stop here today, and talk about the consequences of keeping KCM in that status in our next opinion.
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