Effects of Foreign Currency Risk on Operational Costs at Kenya Power and Lighting Company Limited

Abstract

The study was on the effects of foreign currency risk on operational cost at Kenya Power and Lighting Limited. The operational costs of running power utilities are affected by among others the costs of inputs/equipments denominated in foreign currencies, the changes in interest rates, the level of business and economic growth outlook. A descriptive case study design was used as only one firm (Kenya Power) was researched on. The population of the study was all 8 state corporations under the ministry of energy and petroleum. No sampling was necessary and therefore, the study took Kenya Power as the unit of analysis. The study used both primary and secondary data. The primary data was collected from the senior staff from Finance and Planning departments. Secondary data was collected to represent the three exposures together with operational costs. Regression analysis was conducted using the secondary data only. Primary data was only for collaboration purposes. The results reveal that economic exposure was the only statistically significant variable in explaining operational costs in Kenya Power and Lighting Company Limited. The other variables that are the transaction exposure and interest exposure are not statistically significant variables in explaining or predicting the level of operational costs. A rise in economic exposure therefore leads to a rise in operational exposure. This is justified because economic exposure is highly correlated or connected to both transactional costs exposure and interest rate exposure. Specifically, it was concluded that economic exposure was significant in explaining operations costs. This was the case as commodity / fuel costs which were taken to be a proxy of economic exposure are highly influenced by the interest rates and also by the foreign exchange fluctuations. However, it was concluded that individually, interest exposures and foreign exchange exposure were not significant determinants of operational costs.