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APPENDIX A Part of Solidarity’s submission to NERSA on the issue of Eskom’s proposed MYPD2 Municipal electricity redistributors’ price increases

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APPENDIX A – Municipal tariff increases Example 1 Current scenario of a 35% increase in Eskom's tariffs Original tariffNew tariff (35% increase) Eskom tariff to municipality70c per kWh94,5c per kWh Assume a fixed 100% profit margin for the municipality Municipal tariff to consumers(70c x 2) = 140c per kWh(94,5c x 2) = 189c per kWh Gross profit per kWh70c94,5c Result: 35% increase in profit for the municipality Profit margin remains 100% 35% increase in price for final consumers

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Example 2 Better scenario of a 35% increase in Eskom's tariffs Original tariffNew tariff (35% increase) Eskom tariff to municipality70c per kWh94,5c per kWh Assume a variable profit margin (being 100% originally) Municipal tariff to consumers(70c x 2) = 140c per kWh (70c x 2) + (94,5c - 70c) = 164,5c per kWh Gross profit per kWh70c Result: No increase in profit for the municipality Profit margin drops to 74,1% 17,5% increase in price for final consumers APPENDIX A – Municipal tariff increases

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Example 3 Better scenario of a 35% increase in Eskom's tariffs and where the municipality is allowed an 8% increase in gross profit to cover increased cost of distribution Original tariffNew tariff (35% increase) Eskom tariff to municipality70c per kWh94,5c per kWh Assume a variable profit margin (being 100% originally) Municipal tariff to consumers(70c x 2) = 140c per kWh (70c x 2) + (94,5c - 70c) + (70c x 0,08) = 170,1c per kWh Gross profit per kWh70c75,6c Result: 8% increase in profit for the municipality Profit margin drops to 80% 21,5% increase in price for final consumers APPENDIX A – Municipal tariff increases

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Components of calculationCumulative increase in three years Example 1 (at a constant profit margin of 100%) 35% on 35% on 35%146% Example 2 (at an original profit margin of 100%) 17,5% on 20,1% on 22,6%73% Example 3 (at an original profit margin of 100%, adding an 8% allowance for increased costs each year) 21,5% on 23% on 24,5%86% If the three different approaches are considered cumulatively over the three year period that Eskom’s MYPD2 covers, the following emerges: Between the range of an original municipal gross profit margin of 50% and 130%, the respective cumulative increases over the three year period range from 97,4% to 63,5% for example 2 and from 106% to 78,2% for example 3. Instead of the price of electricity for customers of municipalities more than doubling over the next three years, the cumulative increase could be kept much lower than the current method’s 146% while still allowing municipalities an 8% increase in gross profit each year to compensate for possible increases in the cost of distribution. In none of the examples is Eskom’s flow of revenue or tariff increases affected – the changes are merely made at municipal level. APPENDIX A – Municipal tariff increases

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