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National Electricity Regulator Tariff Approval Process Presentation to: Parliamentary Portfolio Committee on Minerals and Energy Prof Anthon Eberhard – Board Member Dr Wolsey Barnard – EM: Regulation Mr Brain Sechotlho – HoD: Tariffs and Pricing 9 April 2003. Agenda.

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Agenda

National Electricity RegulatorTariff Approval Process Presentation to:Parliamentary Portfolio Committee on Minerals and EnergyProf Anthon Eberhard – Board MemberDr Wolsey Barnard – EM: RegulationMr Brain Sechotlho – HoD: Tariffs and Pricing9 April 2003


Agenda

Agenda

  • South Africa’s electricity industry

  • National Electricity Regulator (NER)

  • Tariff regulatory methodology

  • Tariffs structures and customer categories

  • Eskom price increase process

  • Municipal price increase process

  • Future tariff regulation

  • Future electricity prices


South africa s electricity industry

South Africa’s Electricity Industry


The supply chain

The Supply Chain

PRIMARY ENERGY

SUPPLY

SUPPLY

SIDE

GENERATION

TRANSMISSION

&

DISTRIBUTION

MARKETING, SALES, &

CUSTOMER SERVICE

DEMAND

SIDE

RESIDENTIAL AGRICULTURAL

INDUSTRIAL

KEY CUSTOMERS

COMMERCIAL


Agenda

SA Electricity Industry

  • Generation Eskom 4 Mun/Private

  • (41 800 MW) 96% 4%

  • Max demand

  • 31 800 MW)

  • Transmission Eskom - 100%

  • Distribution Eskom 177 Munic’s

  • Sales 55% 45%

  • Customers 40% 60%


Agenda

Gross Generation

198 TWh

Private

3.1%

Munic.

1.3%

Eskom

95.7%

Energy Flow between the role players in the Electricity Industry in South Africa

Distribution Purchases

for End Use

194 TWh

End Use

191 TWh

Domestic

19.4%

Municipal and Other

Distributors

45%

Agriculture

2.3%

44.9%

Mining

17.4%

Eskom

T

r

a

n

s

m

i

s

s

i

o

n

Industry

Manufac.

42.4%

Eskom

Distributors

55%

55.1%

Comm.

10.3%

0.1%

Transport

3.1%

SAPP

Imports

SAPP - Exports from South Africa

General

5%


Distribution of electricity

Distribution of electricity

  • Eskom is a national distributor – Eskom customers in WC and Limpopo province have the same tariffs

  • Municipalities distribute only to customers within their demarcated boundaries – local distributor

    • Eskom distribute to its customers within municipal boundaries

  • Differences between Eskom and Municipal tariffs

    • Different customer mix

    • Different consumption patterns

    • Dependent on surpluses made by munic’s


National electricity regulator ner

National Electricity Regulator (NER)


Power and functions of ner

Power and Functions of NER

  • Powers/ functions/ mandate of NER are to be found in the Electricity Act, Government Policies and Mandate from Minister of Minerals and Energy

  • Objects: “Exercise control over the electricity supply industry so as to ensure order in the generation and efficient supply of electricity”

  • Functions:

    • Issue licences; generation above 5 GWh annually

    • Determine prices/conditions for electricity supply

    • Settle disputes

    • Collect information

    • Perform inspections of equipment

    • Advise Minister on any matter relating to the ESI


Role of ner

Role of NER

  • Protect interests of electricity customers

  • Ensure efficient electricity supply industry

  • Ensure lowest cost electricty prices

  • Ensure acceptable quality of service and supply

  • Ensure long term provision and development of electricity services

  • Ensure fair play amongst suppliers – level playing field


Tariff regulation methodologies

Tariff Regulation Methodologies


Agenda

Economic Regulatory Methodologies

  • Different regulation methodologies used worldwide by regulators:

    • Benchmarking

    • Rate of Return Regulation (RoR)

    • Incentive Based Regulation (IBR)

  • Methodology will be dependent on the state of development of the electricity industry

  • Apply different methodologies for Eskom and Municipalities – Eskom national utility that generate, transmit and distribute; Municipalities only

  • distribute electricity


Rate of return ror

Rate of Return (RoR)

  • Cost plus methodology of evaluating tariff increases

  • Definition: The revenue required by an entity is equal to the cost to supply plus a fair rate of return on the rate base

  • Methodology was published on the NER website for comments – Comments received and methodology is being refined


Ror formula

RoR formula

  • ROR is calculated as a Weighted Average Cost of Capital

  • Where the cost of debt is given by the Government bond R153

  • The cost of equity is calculated using the Capital Asset Pricing Model

  • Assets are allowed only when productive

  • Expenses are allowed using the prudency judgement


Incentive based regulation

Incentive Based Regulation

  • To follow RoR

  • Gives incentives for the improvement in productivity

  • Given by this formula

    • P(new) = P(old) [1+CPI –X + Z]

  • Difficult to calculate X

  • Applied with some successes in Britain, Norway, Australia, New Zealand etc

  • Favoured in many countries because it closely mirrors competition


Tariffs structures and customers categories

Tariffs structures and customers categories


Tariffs structures and customer categories

Tariffs structures and customer categories

  • Domestic low tariff

    • Applicable for residential low usage customers (Average usage equal to 100 kWh/month)

  • Domestic high tariff

    • Applicable for residential high usage customers (Average usage equal to 800 kWh/month)

  • Ruraltariffs

    • Applicable for customers in rural areas (Rages form very low to very high seasonal consumption)

  • Commercial tariff

    • Applicable to small businesses with an average usage of 2000 kWh/month


Tariffs structures and customer categories cont

Tariffs structures and customer categories cont.

  • Large/industrial tariff

    • Applicable for large customer who are on a Maximum Demand (MD) meters – NER uses a MD of 200 and a load factor of 30 % as a benchmark

  • Special pricing agreements

    • Large customers that have short to medium term contracts linked to generation availability and/or commodity prices


Eskom price increase process

Eskom price increase process


Eskom price increase process 1996 2000

Eskom price increase process1996 - 2000

  • The revenue requirement methodology was applied

    • Determine the revenue that Eskom requires to run its operation in the following year; compare it to the previous year’s revenue and approve the percentage if reasonable – cost based methodology

  • Govt compact (1994 & 1996) – Eskom to decrease their prices in real terms by 20 % by 2000

    • Compact achieved


Eskom price increase process 2001

Eskom price increase process2001

  • Corportarisation of Eskom – become tax paying entity

  • Shareholder compact between government and Eskom

  • Eskom applied for an increase equal to CPI

  • CPI estimated at 6.2 %

  • NER decided to use the CPI – X + Z formula:

  • X was to be an efficiency factor and Z was an allowance for uncontrollable costs and other risks faced by Eskom (last year of electrification funding)

    • X = 2 and Z = 1

    • Price increase = 5.2 %


Eskom price increase process 2002 3

Eskom price increase process2002 - 3

  • 2002 to current

    • Development of RoR methodology

    • RoR applied for the Eskom price increase

  • Price increase history


Eskom price increase process1

Eskom price increase process

  • Bi-weekly meetings with Eskom as early as January

    • Discussions are around the methodology to be applied and the format of the application and not about the number/percentage increase to be approved

  • Eskom submits application at end July for only one increase per annum in January the following year

  • NER staff evaluates application from July to mid-October

  • Towards end of October NER’s Tariffs and Pricing committee considers staff recommendations and makes further recommendations to NER board

  • NER board considers recommendations and makes final approval where satisfied

  • NER informs Eskom of its decision

  • Eskom informs customers


Municipal price increase process

Municipal price increase process


Municipal tariffs

Municipal Tariffs

  • Munics buy from Eskom and then sell to end-use customers

  • Munics then puts a mark-up on Eskom’s price

    • Eskom price normally lower than municipal price

  • In 1995 the NER developed the a documents called “Interim National Distribution Tariff System (INDTS)” to guide munics in moving towards similar tariffs – At least in terms of structures

  • The process has been reasonably successful

    • Rationalised municipal tariff structures fromabout 2000 to 1100


Brief summary of the indts

Brief summary of the INDTS

  • Pricing philosophy

  • Cost behaviour and cost definitions

  • Recommended tariff structures

  • Allocations of cost in structures

  • Benchmarking of electricity prices

  • Cross subsidies

  • Taxation of electricity

  • Document is on NER website www.ner.org.za


Future tariff regulation

Future tariff regulation


Future plans for tariffs

Future plans for tariffs

  • Tariff structure rationalisation

    • Demarcation

    • In preparation for REDs

  • Evaluating current munic applications according to RED area

  • Further benchmarking is necessary

  • Development of methodology of regulating the retail part of the business

    • Different from rest of electricity sector - low asset base

  • Transparency and cross-subsidies

    • Within customer tariff structures

    • Between tariff structures


Cross subsidisation

Cross-subsidisation

c/kWh

Revenue

Cost

-

Agricultural

Bulk

Commercial

Domestic

Electrification

Industrial

Traction


Future tariff structures

Future Tariff structures

  • Will apply Rate of Return methodology for Eskom until divided into separate entities

  • Incentive Based Regulatory Methodology (IBR) will be introduced when ESI and EDI restructuring is completed - Transmission

  • Framework for managing municipal tariffs in process of refinement in preparation of REDs

  • Introduction of Wholesale Electricity Pricing System (WEPS) for large customers


Agenda

WEPS

  • Developed in order to level the playing field between large municipalities/Eskom distribution/large customers

  • Unbundling of the tariffs into energy, wires and customer service components

  • Allows for more transparency and cost reflectivity

  • Currently in the process to introduced for a selected group of customers where unbundling is possible


Future electricity prices

Future electricity prices


Demand forecast southern africa

Demand Forecast Southern Africa


Future prices

Future prices

  • SA was in fortunate position of generation over capacity for last 20 years

  • SA will have to invest in new peaking generation capacity within the next 4 to 8 years

    • These investments needs 3-5 years lead times, depending on the technology that will be used

    • Replacement costs of base load power station about R35 billion

  • Will also need to invest in Demand Side Management processes – can extend the building of the next power station for up to 5 years

  • Government announced that private sector will be given opportunity to invest in next generation capacity

    • Will invest if returns are market related and linked to risks

    • Eskom as a corporate entity operates in the same environment

  • Electricity prices will increase to allow for these future investments


Conclusion

Conclusion

  • NER used internationally accepted regulatory methodologies

  • RoR methodology has been applied for Eskom price increase – done on an annual basis

    • Last 7 years price increases were below CPI

    • National distributor

  • Municipal tariffs evaluated according to INDTS

    • Tariffs have been rationalised

    • Need refinement in preparation for REDs

  • Future tariff regulation will be influenced by ESI and EDI restructuring processes

  • Future electricity prices will increase due

    to future capacity requirements


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