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1 Municipal Electricity Tariff Regulation Presentation to NEDLAC 12 JUNE 2012.

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Presentation on theme: "1 Municipal Electricity Tariff Regulation Presentation to NEDLAC 12 JUNE 2012."— Presentation transcript:

1 1 Municipal Electricity Tariff Regulation Presentation to NEDLAC 12 JUNE 2012

2 2 Contents 1.NERSAs role 2.Overview of the Electricity Industry 3.Determination of the guideline 4.Consultation Process 5.Above guideline applications 6.Eskom MYPD Process 7.Conclusion

3 1. NERSAs Role 3

4 4 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 New Generation Regulations Who is NERSA

5 5 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. NERSA Vision and Mission

6 6 Regulatory principles, which guide the Regulators 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. Regulatory Principles

7 7 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. Regulatory Functions

8 8 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. Regulatory Functions (contd.)

9 9 2. Overview of the Electricity Industry 2.1 General Industry Issues 2.2. Regulatory Consideration

10 10 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; Developments in the Electricity Industry 2.1. General Industry Issues

11 11 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 Governments 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. Developments in the Electricity Industry (contd.)

12 12 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 Africas 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. Developments in the Electricity Industry (contd.)

13 13 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 1970s) 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; Developments in the Electricity Industry 2.2. Regulatory Considerations

14 3. Determination of guideline 14

15 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 15

16 16 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

17 17 Determination of the guideline % increase On average the weighting of the different cost structures are: Cost Category% of total costs Energy Purchases70 Salaries & wages10 Repairs & Maintenance6 Capital Charges4 Other costs10 TOTAL100

18 18 Determination of the guideline % increase For the 2012/13 financial year the % increases are as follows: Cost Category% increaseWeighted % increase Energy Purchases13.59.45 Salaries & wages50.50 Repairs & Maintenance 5.40.32 Capital Charges5.40.22 Other costs5.40,54 % guideline increase11.03

19 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 19

20 Determination of benchmarks 20 DOMESTIC TARIFFS(IBTs)COMMERCIAL 2000 kWhINDUSTRIAL 43800 kWh (c/kWh) ESKOM MEGA- FLEX 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) PrepaidConventio nal 61 – 6677 – 82104 - 109124 – 129130 – 135 132 – 137 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

21 4. Consultation process 21

22 22 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 Eskoms revised price application a revised guideline was approved on 9 March 2012 Decision communicated to all stakeholders

23 Timelines & processes 23

24 Timelines & processes 24

25 5. Above guideline applications (2012/13) 25

26 Above guideline applications 26 Name of Municipality Municipal Proposed Percentage Increase for 2012/13 Motivation provided by municipalities for above-guideline increase City Power14%Repairs and Maintenance Drakenstein 13.03%Additional staffing, equipment for revenue management and increased costs for new smart metering Gamagara23.83%Making provision for the capital expenditure projects Hessequa11.5%To ensure revenue neutrality Lesedi20.00%To cater for the increased operational expenditure Midvaal25.04% Expenditure on electricity purchases is larger than anticipated income. High increases due to a mistake on Eskoms metering equipment Mthonjaneni18%Upgrading of infrastructure Nkomazi15%Repairs and Maintenance

27 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 NERSAs benchmarks would not be required to go through a public hearing process. 27

28 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 for will be clawed back in the following financial year. 28

29 6. Eskom MYPD process 29

30 Review of the MYPD methodology NERSA is awaiting the finalisation of the EPP review by government Revaluation of the assets Rate of return Awaiting Eskoms application Length of the MYPD application Claw-back mechanism

31 31. 7. Conclusion

32 32 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. Conclusion

33 33 THANK YOU Website: Tel:012- 401 4600 Fax:012- 401 4700 Email:

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