1. Prepared by: Sibusiso Dlamini1 PRESENTATION TO THE PORTFOLIO COMMITTEE ON PUBLIC ENTERPRISES: STUDY GROUP CAPETOWN PRESENTER : SIBUSISO DLAMINI Dr. J. MZALIYA The Purpose of the Study Problem Statement What informs our approach? Scope of the Research Structural arrangements Demand sector Rational for Regulating Prices of Public goods What are the current pricing mechanisms Total Cost of electricity Opportunity Cost Pricing &Market Pricing Structural Arrangements Dilemmas confronting DPE

2. Prepared by: Sibusiso Dlamini2 Purpose of the Briefing Minister and the Members of Parliament raised the matter during the Budget Vote Solicit some collective and comprehensive approaches to steer the pricing regulatory framework to be pro-poor. Public outcry Portfolio committees after the Eskom presentation

3. Prepared by: Sibusiso Dlamini3 Problem Statement History of Pricing Mechanism has been blurred Establishment of Regulators in the Telecommunications and Energy sectors, DPE has a Shareholder Management responsibilities but prices are controlled and set by regulators. The current targets are for average CPIX inflation to be within the target range of 6 to 3 per cent in 2002, 2003, and 2004. SOEs should observe the policy without undermining their profit motives as well as undermining the poor citizens of South Africa A study is intended to cover areas of Pricing Mechanism of public goods within the mandate of DPE.

4. Prepared by: Sibusiso Dlamini4 What Informs Our Approach Development Role of the State and the SOEs Growth and Development Equity I.e. Universal Access to Services Investment in Infrastructure

5. Prepared by: Sibusiso Dlamini5 What the Study is not A process to undermine the country’s monetary policy i.e inflation targeting, An intent to impose on and override the Regulatory bodies,but to explore other balanced pricing alternatives

6. Prepared by: Sibusiso Dlamini6 Demand Sectors C. Sector_idSector Initial Consumption (TWh/annum) Share of System Demand (%) 1Residential29,417 2Commerce12,87 3Industry66,538 4Transport4,32 5Mining33,119 6Agriculture4,43 7Electrification4,12 8Exogenous Industry Sector21,912 TotalSystem176,5 The Exogenous Industry Sector is the demand with Special Pricing Agreements. This energy is not subject to price elasticity and is increased outside the optimisation by a monthly growth. System demand is split into eight sectors

7. Prepared by: Sibusiso Dlamini7 Rational For Regulating Pricing of Public goods Government is responding to the public outcry Govt/DPE. intends to take steps to encourage rational market behavior, in terms of minimum level of access, reliable and affordable public goods and services prices. Subsidies have a role to play for the poor; through the following Baseline tariffs, lower prices up to certain level of consumption, For the poor cross subsidies from high density areas for additional fixed costs Improve direct participation by locals in the management of the collection of payment of some public goods like electricity for keeping losses to a minimum.

8. Prepared by: Sibusiso Dlamini8 Economic and social limitations The study should acknowledge policy trade offs which need to be clearly addressed. Subsidisation of Public goods like electricity& transport may be desirable for redress and equity reason, but may discourage investment and resource development The study intends to investigate the rational for the current zonal pricing used by Eskom, which have unjustified price tariff distortions. The Regulatory regimes should propose procedures for determining the average tariff of these public goods based on estimates for their sale& expected revenue for meeting the planned investment & operating cost.

9. Prepared by: Sibusiso Dlamini9 Total Cost of Electricity The largest component is the integral of the Demand Curve. The Transport Cost component is relatively large. The Import costs and Export revenue are barely visible at the bottom of the bars in the graph. The y-axis unit is c/kWh * TWh = cent x 10 9.

10. Prepared by: Sibusiso Dlamini10 OPPORTUNITY COST PRICING Opportunity cost pricing is based on the value the energy would have if it could be offered and purchased outside the country rather than consumed within. This approach allows the setting of a standard on which policymakers can rely. In Mexico, e.g. in the determination of the internal price of oil, a calculation is made to determine what would be the net income if the barrels of oil were sold in the United States, taking into account transportation and quality. It does provides a good “sanity check” to make sure the internal pricing is not totally out of line, especially with neighbouring countries to avoid economic exploitation.

11. Prepared by: Sibusiso Dlamini11 MARKET PRICING Markets do not always provide affordable access to energy for the poorest people, or for the impact of cross subsidisation. It is in the area of appropriate regulation that issues of energy taxation and the role of subsidies find their true home. It also calls for appropriate regulation to address specific market flaws, including those which might emerge between wholesale and retail sectors.

12. Prepared by: Sibusiso Dlamini12 Way Forward Structural Arrangement The study will be thoroughly addressed within the Government Economic &Employment cluster, under Priority no.6 “Better Regulations and Management”. lead department is DPE, and other Participating Dpts are; DNT. DOC, DWAF,NDOT. Among other areas of focus will be Administered pricing which is championed by DNT this study will be incorporated into a National Pricing Policy initiative. It is important to note that these Govt.structures will not counter price hikes by SOEs but intend to develop a framework that will manage these prices hikes to a point where we do not experience increases that marginally exceed the general rate of inflation.

13. Prepared by: Sibusiso Dlamini13 STUDY RECOMMENDATIONS Government funding should come with transfer payments directly to the poor. While this avoids price distortions and generally has good targeting, the better the targeting the higher the administrative cost, Funding mandated by the government by requiring the utility to sell at a price below its costs, thereby reducing its profitability or even resulting in losses. This option is obviously unsustainable in the long run would result in losses, hence job losses

14. Prepared by: Sibusiso Dlamini14 RECOMMENDATIONS CONTINUED.. Regulated cross-subsidisation from one consumer category to another. This can be very effective as long as the demand from the funding customer category is not too price elastic and there is no available substitute. Progressive tariffs within the residential customer category, with higher consumption customers paying a higher tariff than those with low consumption. One advantage of this approach is that the differential in tariffs sometimes does not have to be very great, if the high consumption segment of the customer base is wide enough.