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Odero AN. Tariff Development for Kenya. Nairobi: University of Nairobi; 1990. Abstract

For my final year undergraduate project, I developed tariffs for various classes of consumers of KPLC electrical energy using the marginal costing technique. This is a forward looking accounting method that takes into account expansion plans and how the power system is to be operated as demand increases. Expansion plans, which would entail capacity/inestment costs, operation and maintenance costs forecasts, administration and general costs forecasts, total kilowatt costs, and peak and off-peak energy and fuel costs, spring from load forecasts. This resulted in an efficient resource allocation scheme in which power prices to consumers are related to the resource costs of changes in consumption, i.e, the addition of a new consumer or an increase in consumption of an existing consumer will impose additional costs on the enterprise, while a reduction in consumption will save costs. These alteration in costs are the ones that need to be reflected in tariffs. The change in the cost to a consumer of altering his electrical behavior will then mirror the change in the cost to the enterprise. This not only results in fair and equitable tariffs, but also ones that inherently have incentives to better consumption patterns by consumers.

This marginal costing technique contrasts sharply with the accounting (traditional) one which is based on examining the records of past expenditure thus becoming backward looking. Such prorated accounting costs are quite different from the costs relevant to resource allocation and creates the illusion that resources which can be used or saved are as cheap or as expensive as in the past, i.e, resources are as abundant or as restricted as in the past. On the one hand this may cause over investment and waste; on the other, it may lead to under investment and unnecessary scarcity. In addition, if the past holds a number of poor projects, the sunk costs of mistakes, if reflected in prices, will overstate the costs to the consumer of extra consumption, which is not efficient. Tariff schedules and the various simplifications thereof are derived by spreading total accounting costs among consumers. This generates tariffs which relate to average rather than to marginal costs.

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