1. 1 Presentation to Parliamentary Portfolio Committee on Energy 21 February 2012 Overview of the Regulatory Environment Regarding The Electricity Distribution Industry in South Africa

2. 2 Contents Who is NERSA Regulatory Principles Powers and duties of Energy Regulator Contravention of licence conditions Applicability to Municipalities Constraints and Challenges in EDI Interventions and Actions taken Tariff Issues Concluding view

3. Who is NERSA  The National Energy Regulator (NERSA) is a regulatory authority established as a juristic person in terms of Section 3 of the National Energy Regulator Act, 2004 (Act No. 40 of 2004).  NERSA’s mandate is derived from three (3) underlying statutes:  ELECTRICITY - Electricity Regulation Act, 2006 (Act No. 4 of 2006)  PIPED-GAS - Gas Act, 2001 (Act No. 48 of 2001)  PETROLEUM INFRASTRUCTURE - Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) 3

4. 4 Established 1 October 2005 by the NERSA Act. –Independent Regulator Separate unbiased view. –Decisions based on reasons, facts and evidence Means regulator depends on good information –Public meetings Many opinions obtained from valuable and knowledgeable experts and end-users of regulated services The Minister of Energy designates the members as follows: –One part-time member as chairperson and another as deputy chairperson; –One full-time member as the Chief Executive Officer (CEO) –Three full-time members to be primarily responsible for each of the regulated industries. –Four other part time member Who is NERSA (Cont.)

5. Regulatory Principles Regulatory principles, which guides the Regulator’s conduct and service delivery: Rule of Law: Law applies to everybody and provides a clear framework for everyone 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 groups (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 – 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.

6. Powers and duties of Energy Regulator s4 of the ERA outlines the mandate of the Regulator as follows: Licence and/or register Generators, Distributors (including Municipalities), Traders and Importers and Exporters Regulate Prices and tariffs Monitor Compliance with Licence conditions Issue rules designed to implement the national government's Electricity Policy Framework, the Integrated Resource Plan and the ERA Establish and manage monitoring and information systems Enforce performance and compliance Mediate disputes Undertake investigations 6

7. Contravention of licence conditions s18 of the ERA outlines the procedure that the Regulator has to follow: 1.sitting as a Tribunal the Regulator should first send a notice where they instruct the Licensee to comply within a set period 2.If there is no compliance within that period then Regulator may impose a penalty of 10% of the annual turnover of the licensee or R2m, whichever is the higher, per day commencing on the day of receipt of the notice sent earlier. 7

8. 8 Applicability to Municipalities The Municipality electricity supply business is included under the umbrella of the ERA along with all other electricity supply businesses in the country. In addition s27 of the ERA imposes specific obligations on the municipalities to conform with technical and operational requirements for electrical networks as determined by the Energy Regulator. Primary means of regulation is through licence conditions wherein the Energy Regulator sets the tariffs and other conditions which the municipality as a licensee must comply with.

9. 9 Constraints and Challenges in EDI NERSA regulates 188 electricity distribution licensees (175 Municipalities, Eskom and 12 Private distributors). Lack of tariff rationalization and harmonization. Electricity business not ring-fenced in most municipalities Old electricity infrastructure that requires major maintenance and refurbishment Nonexistence of formalised maintenance practices Maintenance backlog estimated at R27 billion as at 2008

10. 10 Constraints and Challenges (cont.) Dual regulatory reporting system –National Treasury –NERSA Information Asymmetry between NERSA and Municipalities –D-Forms either not completed or completed with incorrect information –Ability to provide good Information seems to be limited Misaligned financial year ends for different stakeholders –Three (3) month time lag between Eskom and municipalities’ –MFMA Budgetary requirements and NERSA tariff determination processes not aligned

11. 11 Interventions and Action Taken NERSA has a project to harmonize tariff structures Electricity Distribution Maintenance Summit (EDMS) was convened in 2008 –NERSA has included some of the resolutions in the business plan –Distribution Compliance audits are carried out to check conformance with regulatory requirements Guideline Tariff increase allows 6% of revenue for maintenance Above-guideline increase is possible if properly motivated

12. 12 Tariff Issues Different customer mixes (commercial, residential and industrial) mean tariff levels vary so that cost recovery can be achieved Levies, surcharges are added by the municipalities resulting in up to 100% mark-up FBE and IBT implementations vary across the different municipalities FBE varies in amount provided and to whom it is given. Bad debts and revenue collection that is not optimal also impact tariff levels

13. 13 Concluding view Despite the challenges NERSA is achieving its mandate in the regulation of the Municipalities Electricity Supply industry

14. 14 Thank You