VZCZCXRO4853
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHLS #0066/01 0171144
ZNR UUUUU ZZH
R 171144Z JAN 08
FM AMEMBASSY LUSAKA
TO RUEHC/SECSTATE WASHDC 5341
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RHEBAAA/DOE WASHDC

UNCLAS SECTION 01 OF 03 LUSAKA 000066 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPARTMENT FOR AF/S AND AF/EX 
COMMERCE FOR 4510/ITA/IEP/ANESA/OA 
 
E.O. 12958: N/A 
TAGS: ENRG EINV BTIO AMGT ZA
SUBJECT: ZAMBIAN ELECTRICITY SERVICE PROVIDERS--ZESCO CHASTISED, CEC 
OVERSUBSCRIBED 
 
Refs: A) Lusaka 44; B) Lusaka 22 
 
¶1. (SBU) Summary. The Energy Regulation Board recently approved 
needed rate hikes for parastatal Zambia Electricity Supply Company 
(ZESCO) Limited for 2008, but made future increases contingent on 
better performance by ZESCO, which in the eyes of Zambian consumers, 
has failed to provide expected levels of service.  The ERB noted 
ZESCO's inefficiency and encouraged it to find cheaper sources of 
capital to fund projects, which include construction of transmission 
lines to serve several mining ventures.  Meanwhile, privately-owned 
Copperbelt Energy Corporation (CEC)'s first public share offering 
was oversubscribed, and the company, which until now has focused on 
distributing power to copper mines, has its eyes on a massive power 
generation project.  If it wins approval to develop the project, CEC 
could provide needed competition to ZESCO.  End summary. 
 
Long-Overdue Electricity Rate Hikes 
 
¶2. (U) In September 2007, ZESCO published proposals to raise the 
electric power rates (tariffs) charged to its customers, with 
proposed increases across different end-user categories that 
averaged 60 percent and went as high as 160 percent in some 
categories--not so shocking, considering that the last time a hike 
in charges and fees for electricity was approved was 1998.  ZESCO 
stated that the large rate increases were needed to cover increasing 
operating costs and to enable it to make capital investments.  Many 
stakeholders submitted comments to the Energy Regulation Board 
(ERB), which in December 2007 announced that it had approved rate 
hikes, but at levels below ZESCO's request.  In making its decision, 
the ERB took into account comments from Zambian stakeholders and 
analysis of the cost of providing electricity service conducted by a 
UK-based energy consultant funded by the World Bank and the Swedish 
government. 
 
¶3. (U) In a public statement, ERB Chairperson Sikota Wina summarized 
key findings of the Board, including: 
 
--ZESCO's quality of service has deteriorated. 
--ZESCO needs to increase its budget for maintenance costs. 
--ZESCO's staff costs are the largest of ZESCO's cost component and 
are too high, and the low electricity rates charged to ZESCO 
employees are prone to abuse. 
--ZESCO should implement a more transparent load shedding policy, to 
give its customers some notice, to the extent this is possible. 
--ZESCO needs higher rates to enhance financial viability and 
enhance security of supply of electricity in the nation. 
--ZESCO needs to put in place measures to access cheaper sources of 
capital to finance its capital expenditure program. 
 
¶4. (U) The new electricity rates took effect January 1, 2008 (Ref 
B).  The approved increase ranges from 1.3 percent for commercial 
customers (whose former rates were considered to reflect costs 
accurately) to 26.8 percent for residential customers and 27.5 
percent for "Large Power" consumers in 2008.  The ERB also approved 
conditional increases for 2009 and 2010, with the highest increases 
occurring in residential customers' rates.  In order to attain the 
increases in out-years, ZESCO must achieve or exceed performance 
benchmarks on which it has agreed with the ERB.  ZESCO 
representatives warned that ZESCO would not be able to implement 
major capital projects as a result of the lower-than-requested rate 
hikes, displaying a disinclination for tapping other sources of 
capital, such as a share issue, that would also bring requirements 
for better performance and greater transparency. 
 
¶5. (SBU) Comment.  Although a hike in electricity rates was needed, 
ZESCO's so-called "commercialization" in lieu of privatization has 
not resulted in greater operating efficiency of the parastatal, 
which maintains a monopoly over many aspects of the power sector in 
Zambia.  In Post's experience, ZESCO's service record has been 
consistently below standard and undependable, characterized by 
inaccurate billing, slow response times, poor workmanship, and 
shoddy equipment.  ZESCO representatives complain about their lack 
of resources and regularly request Embassy assistance, such as 
transportation for their technicians, paper for their billing 
department, and critical equipment (cables, transformers). 
 
¶6. (SBU) (Comment Cont.)  Not surprisingly, the Zambian public was 
outraged by the proposed rate hikes, as residential consumers have 
experienced a deterioration rather than an improvement in service in 
recent years.  Local media reported that one member of Parliament 
commented that many of the poorer residents in his constituency 
could not afford to pay higher rates, and would resort to cutting 
down firewood illegally, "contributing to deforestation."  It is 
heartening that the ERB criticized ZESCO publicly and made rate 
hikes in 2009 and 2010 contingent upon better performance by ZESCO. 
End comment. 
 
LUSAKA 00000066  002 OF 003 
 
 
 
Copperbelt Energy Corporation: Successful Shares Offer, Future 
Generation Project? 
 
¶7. (U) Copperbelt Energy Corporation (CEC) distributes power to 
major copper mining ventures located in the traditional Copperbelt 
of Zambia.  CEC is owned by a group of primarily Zambian investors, 
whose Netherlands-registered corporate entity, Zambia Energy 
Corporation, bought out the interests of U.S.-based Cinergy and 
UK-based National Grid in 2006.  Cinergy (now called Duke Energy) 
and National Grid originally acquired the company in a 1997 
privatization deal.  CEC buys power from ZESCO under a Bulk Supply 
Agreement (BSA) that is in effect until 2020; ZESCO recently raised 
the power rates charged under the BSA, reportedly by 27 percent.  In 
early January 2008, CEC was continuing discussions (and, per local 
press accounts, close to reaching agreement) with mining companies 
about rate increases under the long-term Power Supply Agreements, 
through which CEC supplies power to many of the copper mines in 
central-northern Zambia: Chibuluma Mines, NFC Africa Mining, 
Chambishi Metals, Mopani Copper Mines, Luanshya Copper Mines and 
Konkola Copper Mines. 
 
¶8. (U) CEC in November 2007 offered 100 million shares for sale to 
institutional investors, its employees, and the Zambian public, in 
its first listing on the Lusaka Stock Exchange.  The share offer 
ended in mid-December 2007 and was oversubscribed.  CEC's principal 
assets are primary transmission, emergency generation, and bulk 
distribution equipment.  Its network was purpose-constructed to 
supply and distribute electric energy to the traditional mining 
sector, and spans approximately 6000 square kilometers.  It includes 
36 substations and accounts for about 50 percent of the electrical 
power consumption in Zambia.  CEC has invested in maintenance and 
upkeep of its distribution and transmission assets and continues to 
replace older equipment that is coming to the end of its operating 
life.  CEC's modest generation capacity consists of six gas turbines 
alternators, which provide 80 megawatts (MW) of back-up generating 
capacity.  If there is a complete loss of power from ZESCO, the gas 
turbine alternators can operate for a limited period in "island" 
mode to allow mining operations to evacuate personnel from 
underground and other plants, to shut down plants in an orderly way, 
and to maintain essential services. 
 
¶9. (SBU) According to Executive Chairman of CEC and Managing 
Director of Zambian Energy Corporation, Hanson Sindowe, CEC also has 
joined forces with Mopani Copper Mine (a potential end-user of the 
power produced) to propose to the GRZ a plan to develop the Kafue 
Gorge Lower hydropower station (Ref A).  The project would cost 
about one billion U.S. dollars and would generate 750 MW.  Part of 
the project involves exporting power to two mines (with linkages to 
Mopani) across the border in the DRC.  CEC would oversee the 
project, and has hired an energy sector consultant to assist with 
both the design and future tendering.  CEC plans to contract out the 
construction of the project if it wins GRZ approval. 
 
Biofuel-Powered Options Under Consideration 
 
¶10. (SBU) Sindowe told Emboffs that CEC is also exploring a 
biofuel-powered project that would use jatropha.  CEC would prefer 
to buy the jatropha crop from local farmers, rather than take 
responsibility for jatropha cultivation, but Sindowe acknowledged 
that this approach could lead to difficulties in having a reliable 
supply of jatropha feedstock--it needs enough to produce 100,000,000 
liters of biofuel. 
 
In Mining Ventures Outside the Copperbelt, ZESCO Is In Charge 
 
¶11. (SBU) ZESCO, which in a controversial 2003 ERB decision beat out 
CEC to win a power line construction contract, built a 330 kV 
transmission line from Chingola to Solwezi in North Western Province 
(home of Zambia's "new" Copperbelt) and a sub-station to supply 
power to the Kansanshi copper mine, which started commercial 
operations in 2005.  Kansanshi asked ZESCO for additional power 
supply of 100 MW and as a result, ZESCO plans to add a third 330/33 
kV (kilovolt) transformer rated at 80 mega-volt amperes (MVA) to the 
substation, at an expected cost of USD five million.  ZESCO also is 
constructing a 72-kilometer long transmission line from Solwezi to 
Lumwana and a 330/33 kV substation at the newly-commissioned Lumwana 
copper mine (which will be Zambia's largest when it starts 
production in 2008), in order to supply 130 MVA to Lumwana.  To 
serve a new nickel mine in the Southern Province, ZESCO will build a 
25 kilometer, 33 kV line from Kafue to Mazabuka at an approximate 
cost of USD 2.2 million. 
 
¶12. Comment: ZESCO's track record in completing transmission 
projects appears somewhat more successful than in other areas 
(namely, generation and retail distribution), perhaps as a result of 
 
LUSAKA 00000066  003 OF 003 
 
 
competitive pressure from CEC.  If CEC wins approval to develop the 
Kafue Gorge Lower hydropower project, one potential benefit will be 
increased competitive pressure in the generation sector from a local 
service provider. 
 
KOPLOVSKY