Municipal Electricity Tariff Regulation
Presentation to NEDLAC
12 JUNE 2012
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Contents
1.
2.
3.
4.
5.
6.
7.
NERSA’s role
Overview of the Electricity Industry
Determination of the guideline
Consultation Process
Above guideline applications
Eskom MYPD Process
Conclusion
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1. NERSA’s Role
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Who is NERSA
•
•
•
•
National Energy Regulator Act, Act No 40 of 2004;
 Independent Regulator: 4 Full-Time and 5 Part-Time Members
 Responsible for the regulation of three energy industries: electricity;
piped-gas; petroleum pipelines
 Decisions based on reasons, facts and evidence
 Transparency: Public meetings/hearings
 Significant monitoring and compliance obligation
Industry legislation
 Electricity Regulation Act, 2006 (Act No. 4 of 2006) as amended in 2007
 Gas Act, 2001 (Act No. 48 of 2001);
 Petroleum Pipelines Act, 2003 (Act No. 60 of 2003);
Money Bills
 Gas Regulator Levies Act, 2002 (Act No. 75 of 2002); and
 Petroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004).
Policy Documents
 Electricity Pricing Policy
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 New Generation Regulations
NERSA Vision and Mission
NERSA strives to regulate the South African
electricity, piped-gas and petroleum pipelines industries
by ensuring that the most efficient and effective industries are in place
to exceed the requirements of existing and future energy customers.
This is encapsulated in its Vision statement:
“To be a world-class leader in energy regulation”
Further supported by this Mission
“To regulate the energy industry in accordance with government
laws and policies, standards and international best practices in
support of sustainable development.”
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Regulatory Principles
Regulatory principles, which guide the Regulator’s conduct and service
delivery:
•
•
•
•
•
•
Rule of Law: Law applies to everybody and provides a clear
framework for everybody to operate. Review and appeal by high court
Transparency: reason for decisions and consultative processes;
Neutrality: neutral to all market players without favouring one or other
group (non-discrimination)
Consistency: Explained decisions enabling stakeholders to take
informed decisions – no surprises; predictability
Independence: Independence from stakeholders and politicians;
within legal framework and published Government policy)
Accountability: Internal accountability – PFMA. Regulator takes
responsibility for actions and decisions.
In addition, NERSA binds itself to carry out its business efficiently,
economically and effectively, as required by legislation.
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Regulatory Functions
•
•
•
•
Licensing: Construction, operations, trading;
Setting and/or approval of tariffs and price structures;
Setting of conditions of supply and standards;
Monitoring compliance with licence conditions:
 separate accounting provisions;
 third party access and interconnection provisions;
 non-discrimination;
 safety, environment, health and security standards (in
collaboration with other agencies)
• Responding to non-compliance
 setting penalties and fines for non-compliance.
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Regulatory Functions (contd.)
•
•
•
•
Investigating complaints;
Mediating or arbitrating in disputes;
Gathering and storing industry information;
Promoting BEE, competition and improved efficiency of the energy
industry;
• Consulting with government regarding industry development; and
• Expropriating land as necessary to meet the objectives of the
relevant legislation.
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Developments in the Electricity Industry
2.1. General Industry Issues
• There is a supply-demand mismatch;
• Investments are being made to add more capacity;
 Eskom : Kusile, Medupi and Ingula Power Station
 A total of 28 bidders were selected for phase 1 with a total of 1406MW
 A total of 19 bidders have just been selected for phase 2 with a total of
1043.9MW
 CoGeneration Projects: SAPPI, IPSA, Mondi, and others
• Time lag to bring new generation capacity online implies that the
supply will remain tight in the short run;
• New investments have to be paid for through a combination of
borrowings, equity and tariffs as a general rule;
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Developments in the Electricity Industry
(contd.)
• IRP2010 (Integrated Resource Plan 2010) sets out for the first time
a balanced path to a low carbon future in a structured cost
optimized way
• It sets out a generation build time table per technology
• It resulted in the Government’s first and second round of bidding
for renewable energy IPPs;
• NERSA has put in place streamlined mechanisms for processing
the licence applications received from the selected IPPs with
minimum delay, arising from each bidding round.
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Developments in the Electricity Industry
(contd.)
• The Department of Energy intends to issue third bidding round in
August 2012 to allocate more generation capacity as per its (DoE)
published Integrated Resource Plan;
• Generation from renewable energy sources will diversify South
Africa’s electricity generation mix and reduction of greenhouse
gas emissions;
• This investment in capacity needs to be accompanied by demand
side management/conservation in the short-term;
• Eskom initiatives and delicate balancing act through power
buyback agreements with some of the large mining and industrial
customers to reduce demand
• The Department of Energy has also announced that it will
undertake a review the Electricity Pricing Policy before the MYPD
3 decision is made.
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Developments in the Electricity Industry
2.2. Regulatory Considerations
• NERSA electricity pricing is guided by the Electricity Pricing Policy
which was approved by Cabinet in 2009. (Currently under review)
• The cost of New capacity is inevitably higher (last power station built
in the 1970’s)
• The challenge to NERSA as Regulator to set a regulated price of
electricity when the input price (price of coal) is not regulated;
• NERSA required to set cost-reflective prices and tariffs to enable an
efficient licensee to recover efficiently incurred costs and make a
reasonable return commensurate with risk;
• In executing its mandate, NERSA is enjoined to strike a fair balance
between the long term financial sustainability of the utility and
affordability of the electricity prices to the customers;
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Determination of tariffs & increases
• Ideally Cost of Supply (CoS) studies need to be conducted:
 To determine the cost elements
 To determine the cost of supplying the different customer
categories
 To determine the required subsidies
• From the CoS studies
 Determine the weighting of the cost elements in the tariffs
 Determine the appropriate % increase of each element
• (e.g. Manpower or maintenance costs)
• Set or determine the tariffs for the different customer categories
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Determination of the guideline % increase
 Use of the current costs and cost structures of the municipalities
 To determine the weighting of the costs and cost structures
 Establish the appropriate ranges of the various cost structures
 Power Purchase cost for electricity
 Manpower costs (Salaries and wages)
 Repairs and maintenance
 Capital charges
 Other (e.g. shared services)
 Use the appropriate or determined % increases
 Eskom price increase for Power Purchase costs
 As determined by the MTBPS for Salaries and Wages
 Inflation (as determined by NT circulars) for Repairs,
Maintenance and other
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Determination of the guideline % increase
• On average the weighting of the different cost structures are:
Cost Category
% of total costs
Energy Purchases
70
Salaries & wages
10
Repairs & Maintenance
6
Capital Charges
4
Other costs
10
TOTAL
100
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Determination of the guideline % increase
• For the 2012/13 financial year the % increases are as follows:
Cost Category
% increase
Weighted %
increase
Energy Purchases
13.5
9.45
Salaries & wages
5
0.50
Repairs &
Maintenance
5.4
0.32
Capital Charges
5.4
0.22
Other costs
5.4
0,54
% guideline increase
11.03
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Other assumptions - % guideline increase
• Customer mix assumes % of industrial and commercial customers at
least 40%
• Electricity purchased from Eskom at the Mega-Flex or similar
• 50kWh of Free Basic Electricity for the indigent
• Time of Use tariffs are used for customer categories that can shift
load accordingly
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Determination of benchmarks
DOMESTIC TARIFFS(IBTs)
COMMERCIAL 2000 kWh
Domestic
Block 1
0 – 50 kWh
(c/kWh)
Domestic
Block 2
51 –
350kWh
(c/kWh)
Domestic
Block 3
351 – 600 kWh
(c/kWh)
Domestic
Block 4
>600 kWh
(c/kWh)
Prepaid
Conventio
nal
61 – 66
77 – 82
104 - 109
124 – 129
130 – 135
130 – 135
INDUSTRIAL
43800 kWh
(c/kWh)
132 – 137
ESKOM
MEGAFLEX
85.32
Notes:
1. Eskom customers are connected at High voltage levels (Transmission)
2. Municipalities buy from Eskom at Mega-Flex
3. Eskom has a customer base and mix that allows for cross subsidies
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Consultation processes
• The determination was done in consultation with the
following stakeholders:





Publication of the consultation paper for stakeholder comments
Consideration of stakeholder comments
Workshops with AMEU
Meetings with National Treasury
Public Hearing held on 18 November 2011 on the determined
guideline increase
 Approval of the initial guideline made on 24 January 2012
 After receipt and approval of Eskom’s revised price application a
revised guideline was approved on 9 March 2012
 Decision communicated to all stakeholders
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Timelines & processes
DIAGRAM: 4
NERSA & National Treasury Municipal Tariff processes combined
30 Jul 2011
Revised D-forms,
distributed timeously to
licensees
August 2011
Modelling
Municipal tariff
guideline +
benchmark
Mayor tables in
council a schedule
of key deadlines for
various budget
activities as spelled
out in section 21 of
the MFMA
Communication with
licensees to submit
their data continues
and correspondence
is stored on the
server as evidence
12 October 2011
Electricity
Subcommittee
approval – Draft
municipal guideline
+ benchmarks
November 2011
Nov/Dec 2011
Public Hearing for
the Municipal
guideline increase
and the
benchmarks
Electricity
Subcommittee
approval – Final
draft municipal
guideline +
communicate to
munics
National Treasury
process: Municipal
informal public
meetings with key
stakeholders,
government
spheres and
entities
National Treasury
issues a budget
circular to all
municipalities
Completed D-forms
are submitted to
NERSA
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Timelines & processes
NERSA & National Treasury Municipal Tariff processes combined cont....
Nov – Mar 2012
Apr – May 2012
Mar – May 2012
May - Jun 2012
1 Jul 2012
Dec – Jun 2012
Munics compiles
and submit draft
tariffs application
for consideration
by NERSA
Mayor table
municipal and
entity budgets and
budget related
policies (Drafts)
Evaluate and recommend
tariffs for approval based
on D-forms info and tariff
application.

Public Hearings (2X)
for
munics
with
applications that are
above the guideline
increase
REC approval of the tariffs
and communication of
NERSA decision to munics

Regulator meetings
to
consider
and
approve
aboveguideline increases



Considerations &
Approval of revised
applications
(Appeals)
Implementation of
the approved
budget including
Nersa approved
tariffs
Implementation of
approved budget
including NERSA
approved tariffs
Public submissions on
the
draft
budget.
(Formal response to
the draft budget)
Council
hearings/meetings
to
consider submissions.
(Amendments
are
made
where
necessary).
Mayor submit amended
budget
for
council
approval and adoption
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5. Above guideline applications
(2012/13)
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Above guideline applications
Name of
Municipal Proposed
Motivation provided by
Municipality Percentage Increase for municipalities for above-guideline
2012/13
increase
City Power
14%
Drakenstein
13.03%
Gamagara
23.83%
Hessequa
11.5%
Repairs and Maintenance
Additional staffing, equipment for revenue
management and increased costs for new smart
metering
Making provision for the capital expenditure
projects
To ensure revenue neutrality
Lesedi
20.00%
To cater for the increased operational expenditure
Midvaal
25.04%

Mthonjaneni
18%
Expenditure on electricity purchases is larger
than anticipated income.
 High increases due to a mistake on Eskom’s
metering equipment
Upgrading of infrastructure
Nkomazi
15%
Repairs and Maintenance
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Above guideline increases
• Eight (8) municipalities were considered during the first Public
hearing held on 29 May 2012
• Next public hearing scheduled for 22 June 2012
• An additional 12 municipalities have applied for increases that are
above the guidelines
• Not all municipalities applying for above guideline increase will go
through a public hearing process. Municipalities whose tariffs are
below NERSA’s benchmarks would not be required to go through a
public hearing process.
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Requirements for above guideline increases
• Municipalities applying for an increase that is above the
guideline have to justify their increases to the Energy
Regulator and the following actions would be expected:
 a full analysis of additional funds requested needs to be
presented to NERSA as part of the motivation for above
guideline increase.
 the approved funds must be ring-fenced to ensure that they are
strictly utilised for the identified projects;
 municipalities must report to NERSA on a six-monthly basis on
how the additional funds are utilised;
 NERSA does do inspections to verify municipal reports
 funds not utilised for the purpose for which they were approved
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for will be clawed back in the following financial year.
Review of the MYPD methodology
• NERSA is awaiting the finalisation of the EPP review by government
 Revaluation of the assets
 Rate of return
• Awaiting Eskom’s application
 Length of the MYPD application
 Claw-back mechanism
.
7. Conclusion
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Conclusion
• NERSA, through its mandate of tariff/pricing, has a critical role to
manage the price paths migration during this period of necessary
high capital investment in South Africa;
• Pricing decisions will continue to balance between sustainability of
the utilities and affordability for the consumers.
• NERSA will continue to conduct its business in fair and
transparent manner, within published government policy and
legislation in exercising its mandate.
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THANK YOU
Website: www.nersa.org.za
Tel:012- 401 4600
Fax:012- 401 4700
Email: info@nersa.org.za
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