Portfolio Committee on Trade and Industry Electricity Pricing 16 November 2012

1. Portfolio Committee on Trade and IndustryElectricity Pricing 16 November 2012

2. Presentation Content SALGA was invited to present on the following: - • Non-Compliance of Municipalities with Municipal Tariff Guidelines and Benchmarks • Tariff Structures of Municipalities not being Aligned with Eskom’s Tariff Structures • Failure of Municipalities to commission Cost of Supply Studies • Absence of Information and the necessary Skills dealing with Electricity Tariffs within Municipalities • Impact of Electricity Tariffs Hikes on the Manufacturing Sector.

3. Non-compliance of Municipalities with Municipal Tariff Guidelines and Benchmark • I.t.o. the Electricity Regulation Act, NERSA has the general power to regulate Prices and Tariffs (charged by licensees) • In addition, NERSA is empowered to make any licence issued by it subject to a number of conditions, including conditions relating to the Setting and Approval (by NERSA) of Prices, Charges, Rates and Tariffs which must be imposed by licensees (section 14(1)(d) read with section 15(2) of the Electricity Regulation Act). • Section 24(2)(c)(ii) of the Municipal Finance Management Act refers to the “Setting” of Municipal Tariffs generally by municipalities. • Section 75A(1) of the Municipal System Act states that a municipality may Levy and Recover Fees, Charges or Tariffs in respect of any function or service of the municipality.

4. Non-compliance of Municipalities with Municipal Tariff Guidelines and Benchmark (Cont…) • Accordingly, there appears to be an overlap in the provisions of the Electricity Regulation Act and the Municipal Finance Management Act (read with the provisions of the Municipal Systems Act) in that both Acts deal with the imposition of tariffs, albeit the Electricity Regulation Act deals specifically with tariffs charged by its licensees, whilst the Municipal Finance Management Act deals generally with municipal tariffs.

5. Non-compliance of Municipalities with Municipal Tariff Guidelines and Benchmark (Cont…) • While the two legislations seem to clash, local government chooses an interpretation that gives full force and effect to each, rather than an interpretation which will partly destroy the effect of one of them • It accepts that NERSA determines the tariffs while Municipalities, on the other hand, must “set” (or, in the case of the Municipal Systems Act, “levy”) tariffs i.e. “impose” and not necessarily determine tariffs. • In this interpretation municipalities “set” or “levy” a tariff which was “determined” by NERSA • None of the Major metros (constituting more than 80% of municipal electricity distribution) ever imposed tariffs that were not approved by NERSA – there could be isolated cases of smaller municipalities not complying • The following 2 slides will highlight the process followed by eThekwini in determining the tariff increases in line with NERSA guidelines

6. Compliance with Municipal Tariff Guidelines and benchmarks • In regulating municipalities NERSA has introduced a guideline methodology for calculating tariff increases. • The method is logical and fair, however different municipalities have different cost structures and the increases per cost structure will vary per municipality. • NERSA is now regulating each cost item in line with is cost causation driver and then approving an average tariff increase per municipality. • Durban was within the benchmark increase of 11.03% and applied for an overall tariff increases of 11.00% which was approved by the regulator. Annual Increase

7. Compliance with Municipal Tariff Guidelines and benchmarks 1 2 3 5 4 OTHER INTEREST CHARGES SALARIES + WAGES REPAIRS + MAINTENANCE ELECTRICITY PURCHASES Cost Element % of Budget 8 % 4 % 16 % 8 % 64 % % Increase 12 % 11.4 % 6 % 13.5 % 2 % Effect on increase 8.6 % 0.96 % 0.91% 0.32 % 0.24 % • The Eskom Increase of 13.5% contributes 8.6% to the total average increase of 11%. This is a direct pass through cost for the municipality. Even if the municipal cost did not go up, the increase would be 8.6% to the end customer as a direct result of Eskom’s increase. • As a result of the municipal cost increases, a further (SMALL) 2.4 % has been added onto the total increase for the year. This is as a result of increases in salaries & wages, repairs maintenance etc…

8. NERSA Tariff guidelines, benchmarks for 2012/13

9. ESKOM PRICING OVER5YEARS • The graph stretches over more than 5 years, tracking Eskom increases in seasons and time periods • Note the very high red peaks indicating winter peak prices

10. TARIFF COMPONENTS (1) • The graph shows the Eskom Megaflex tariff on the left, red = peak energy, yellow = standard energy, green = off-peak energy, purple = demand • Other cities are shown next to Eskom, each with their own mix of tariff components

11. TARIFF COMPONENTS (2) • The graph shows the Eskom Megaflex tariff, analyzed on the right • Energy is 90% of the cost, • Demand is 10% of the cost, and • The mark-up is shown as zero (Eskom is the baseline tariff for a municipality)

12. TARIFF COMPONENTS (3) • The graph shows the Tshwane tariff, analyzed on the right • Energy is 62% of the cost, • Demand is 38% of the cost, and • The mark-up (to cover Distribution O&M) is only 9%

13. The graph shows the Tshwane tariff, demand charges (kVA) are 400% higher than Eskom demand charges, however • the Tshwane energy charges are below the Eskom energy charges! • With a final result of only a 9% mark-up (to cover Distribution O&M) on Eskom!

14. Tariff Structures of Municipalities not being Aligned with Eskom’s Tariff Structures • The 5 Metros represent more than 80% of the electricity consumed by all municipalities. A review of their tariff structures indicated compliance to Eskom’s tariff structures. • The following slides presented by City Power is an example of how municipal tariffs are structured similarly to Eskom. • Note: Rates will vary on individual circumstances. These include variation in customer mix, cross subsidy frameworks, network age and social responsibilities and contribution to rates. • We do recognise that there may be smaller municipal distributors that may not conform to the Eskom’s tariff structure due to implementation challenges. • SALGA would like to be informed of these individual cases for so that they may be assisted to conform with norms.

15. Alignment with Standard Tariff Structures

16. Alignment with Eskom structures vs. rates Tariffs to Local Authorities are Eskom Distribution Retail Tariffs (MYPD3 terms): • Eskom Tariffs to Municipalities include a 4,17 c/kWh cross-subsidy towards Eskom’s residential customers • They also include a cross-subsidy for electrification in Eskom Supply areas – 3,59 c/kWh • Differences between Local Authority and Regular Eskom tariffs is negligible, and do not reflect the cost of non-Eskom distribution Eskom Generation Eskom Transmission (Incorporates the System Operator) Eskom Distribution Eskom Residential Customers Municipal Distributors Eskom C&I Customers Municipal Residential Customer Municipal C&I Customers

17. Comparison of Local Authority and direct Eskom connected customer Megaflex tariffs

18. Alternative Industry Structure Government’s initiative to establish an Independent System and Market Operator: • Eskom and Municipal Distributors treated as peers • All distributors purchase from the ISMO at wholesale rates • Tariff alignment possible – no external cross-subsidization. Eskom Generation Independent Transmission System and Market Operator 132 kV or DX/TX boundary Wheeling charge Distributed Generation IPP Eskom Distributor Municipal Distributor Review the Single Buyer directive for distributed generation plant (< 15 MW) connected directly to Municipal distribution networks and that do not require Transmission Network Access Eskom Residential Customers Eskom C&I Customers Municipal Residential Customer Municipal C&I Customers

19. Failure of Municipalities to commission Cost of Supply Studies... Guiding principles for tariff setting • Social norms: • Tariffs should be equitable and affordable • Tariffs must allow provision of basic services to everyone • Tariffs must provide for transparent cross-subsidisation of poor households where necessary and feasible • The tariff structure and levying process should be simple and easy to implement. • Economic norms: • Tariffs should encourage local economic development • Tariffs should have a positive influence on economic input factor costs for industrial and commercial firms • Tariff setting should be aligned with economic policies of the country. • Financial norms: • Whenever feasible the tariffs should be cost reflective and cost effective link into the municipal financial framework • Tariffs should be linked to unit costing and efficiency improvements • Tariffs should promote sustainability and extension of service provision.

20. Failure of Municipalities to commission Cost of Supply Studies • The tariff design process as carried out by the 5 Metros take into consideration the principles of the cost of supply and hence they are in compliance • A great deal of base information is in fact required to put any distributor in a position to do a reasonably plausible Cost of Supply Study. • Further, Metropolitan Distributors and a significant portion of the Larger Municipal Distributors are working towards detailed cost of supply analysis

21. Absence of Information and the • necessary Skills dealing with Electricity • Tariffs within Municipalities • In general there is a shortage of skills in the engineering sector • Industries and Metro’s have an ability to attract and retain specialised engineering skills, however even Metro’s tend to be out-competed by the private industries • We acknowledge that small municipalities faces a severe challenges in terms of attracting and retaining skilled resources • In an effort to assist smaller municipalities with the skills gap, the following is being done: • SALGA has initiated a businesses-adopt-a-municipality programme • We are also looking at Metros partnering and supporting smaller municipalities

22. Impact of Electricity Tariffs hikes on the Manufacturing Sector • Municipalities are also concerned about the escalating electricity prices • However, it must be noted that municipalities are mere transporters of electricity and not generators, hence the increase in bulk energy cost must be a pass through cost to the customer • The ability of the municipality to cushion these high increases is limited as they have no control over the bulk energy costs

23. Impact of Electricity Tariffs hikes on the Manufacturing Sector (Cont…) • Most users who have approached LG wish to be charged Eskom bulk prices at municipal distribution points (free distribution services) • Which customers would cross-subsidise the foundries, Agriculture, Manufactures, NGO’s, Public Service etc.? • If a sector is chosen as to be subsidised, on what basis would a municipality decide it could not provide a similar subsidy to any other sector?

24. Impact of Electricity Tariffs hikes on the Manufacturing Sector (Cont…) • Are the electricity tariffs the best method of addressing economic competitiveness challenges of the country? • Shouldn't the country consider developing a comprehensive framework of retaining its economic competiveness in the context of increasing electricity prices and other prices such as water prices?

25. Thank you