4Who is NERSA National Energy Regulator Act, Act No 40 of 2004; Independent Regulator: 4 Full-Time and 5 Part-Time MembersResponsible for the regulation of three energy industries: electricity; piped-gas; petroleum pipelinesDecisions based on reasons, facts and evidenceTransparency: Public meetings/hearingsSignificant monitoring and compliance obligationIndustry legislationElectricity Regulation Act, 2006 (Act No. 4 of 2006) as amended in 2007Gas Act, 2001 (Act No. 48 of 2001);Petroleum Pipelines Act, 2003 (Act No. 60 of 2003);Money BillsGas Regulator Levies Act, 2002 (Act No. 75 of 2002); andPetroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004).Policy DocumentsElectricity Pricing PolicyNew Generation Regulations
5“To be a world-class leader in energy regulation” NERSA Vision and MissionNERSA strives to regulate the South Africanelectricity, piped-gas and petroleum pipelines industriesby ensuring that the most efficient and effective industries are in placeto 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.”
6Regulatory 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 courtTransparency: 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; predictabilityIndependence: 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.
7Regulatory 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-compliancesetting penalties and fines for non-compliance.
8Regulatory 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; andExpropriating land as necessary to meet the objectives of the relevant legislation.
92. Overview of the Electricity Industry. 2. 1 General Industry Issues 2. Overview of the Electricity Industry General Industry Issues Regulatory Consideration
10Developments 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 StationA total of 28 bidders were selected for phase 1 with a total of 1406MWA total of 19 bidders have just been selected for phase 2 with a total of MWCoGeneration Projects: SAPPI, IPSA, Mondi, and othersTime 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;
11Developments 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 wayIt sets out a generation build time table per technologyIt 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.
12Developments 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 demandThe Department of Energy has also announced that it will undertake a review the Electricity Pricing Policy before the MYPD 3 decision is made.
13Developments in the Electricity Industry 2.2. Regulatory ConsiderationsNERSA electricity pricing is guided by the Electricity Pricing Policy which was approved by Cabinet in (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;
15Determination of tariffs & increases Ideally Cost of Supply (CoS) studies need to be conducted:To determine the cost elementsTo determine the cost of supplying the different customer categoriesTo determine the required subsidiesFrom the CoS studiesDetermine the weighting of the cost elements in the tariffsDetermine the appropriate % increase of each element(e.g. Manpower or maintenance costs)Set or determine the tariffs for the different customer categories
16Determination of the guideline % increase Use of the current costs and cost structures of the municipalitiesTo determine the weighting of the costs and cost structuresEstablish the appropriate ranges of the various cost structuresPower Purchase cost for electricityManpower costs (Salaries and wages)Repairs and maintenanceCapital chargesOther (e.g. shared services)Use the appropriate or determined % increasesEskom price increase for Power Purchase costsAs determined by the MTBPS for Salaries and WagesInflation (as determined by NT circulars) for Repairs, Maintenance and other
17Determination of the guideline % increase On average the weighting of the different cost structures are:Cost Category% of total costsEnergy Purchases70Salaries & wages10Repairs & Maintenance6Capital Charges4Other costsTOTAL100
18Determination of the guideline % increase For the 2012/13 financial year the % increases are as follows:Cost Category% increaseWeighted % increaseEnergy Purchases13.59.45Salaries & wages50.50Repairs & Maintenance5.40.32Capital Charges0.22Other costs0,54% guideline increase11.03
19Other assumptions - % guideline increase Customer mix assumes % of industrial and commercial customers at least 40%Electricity purchased from Eskom at the Mega-Flex or similar50kWh of Free Basic Electricity for the indigentTime of Use tariffs are used for customer categories that can shift load accordingly
20Determination of benchmarks DOMESTIC TARIFFS(IBTs)COMMERCIAL 2000 kWhINDUSTRIAL43800 kWh(c/kWh)ESKOM MEGA-FLEXDomesticBlock 10 – 50 kWhBlock 251 – 350kWhBlock 3351 – 600 kWhBlock 4>600 kWhPrepaidConventional61 – 6677 – 82124 – 129130 – 135132 – 13785.32Notes:Eskom customers are connected at High voltage levels (Transmission)Municipalities buy from Eskom at Mega-FlexEskom has a customer base and mix that allows for cross subsidies
22Consultation processes The determination was done in consultation with the following stakeholders:Publication of the consultation paper for stakeholder commentsConsideration of stakeholder commentsWorkshops with AMEUMeetings with National TreasuryPublic Hearing held on 18 November 2011 on the determined guideline increaseApproval of the initial guideline made on 24 January 2012After receipt and approval of Eskom’s revised price application a revised guideline was approved on 9 March 2012Decision communicated to all stakeholders
26Above guideline applications Name of MunicipalityMunicipal Proposed Percentage Increase for 2012/13Motivation provided by municipalities for above-guideline increaseCity Power14%Repairs and MaintenanceDrakenstein13.03%Additional staffing, equipment for revenue management and increased costs for new smart meteringGamagara23.83%Making provision for the capital expenditure projectsHessequa11.5%To ensure revenue neutralityLesedi20.00%To cater for the increased operational expenditureMidvaal25.04%Expenditure on electricity purchases is larger than anticipated income.High increases due to a mistake on Eskom’s metering equipmentMthonjaneni18%Upgrading of infrastructureNkomazi15%
27Above guideline increases Eight (8) municipalities were considered during the first Public hearing held on 29 May 2012Next public hearing scheduled for 22 June 2012An additional 12 municipalities have applied for increases that are above the guidelinesNot 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.
28Requirements 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 reportsfunds not utilised for the purpose for which they were approved for will be clawed back in the following financial year.
30Review of the MYPD methodology NERSA is awaiting the finalisation of the EPP review by governmentRevaluation of the assetsRate of returnAwaiting Eskom’s applicationLength of the MYPD applicationClaw-back mechanism
32ConclusionNERSA, 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.
33THANK YOU Website: www.nersa.org.za Tel:012- 401 4600 Fax: