PRESENTATION TO PARLIAMENTARY PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY 6 March 2013

OUTLINE Legislative context, NERSA vision and NERSA mission Regulatory Principles Regulatory Functions Regulation of Electricity Prices- Eskom Eskom MYPD3 application Regulation of Electricity Prices- Municipalities Conclusion

Legislative Context 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 Public meetings/hearings 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); Electricity Regulations Electricity Pricing Policy (EPP) GN1398 19 December 2008 Electricity Regulations on New Generation Capacity GN 399 4 May 2011

“To be a world-class leader in energy regulation” NERSA Vision and mission 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.”

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 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 FUNCTIONS FOR ELECTRICITY Licensing: Generation, Transmission, Distribution and Trading; Setting of tariffs; Setting of conditions of supply and standards; Monitoring compliance with licence conditions. Responding to non-compliance Investigate complaints; Mediate or arbitrate in disputes; Gather and store industry information;

REGULATION OF ELECTRICITY PRICES Electricity Regulation Act, 2006 (Act No. 4 of 2006) Section 4(a)(ii) says that the regulator must regulate prices and tariffs. Section 15 (1) (a) says:- “must enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return;”. Section 15 (1) (c) says:- “must give end users proper information regarding the costs that their consumption imposes on the licensee's business;” Section 15(1) (c) and (d) says:- “must avoid undue discrimination between customer categories” and “may permit the cross-subsidy of tariffs to certain classes of customers” NERSA also has to comply with the Principles in the Electricity Pricing Policy document because Section 4 (a) (iv) says:- “issue rules designed to implement the national government's electricity policy framework, the integrated resource plan and this Act;”

REGULATION OF ELECTRICITY PRICES:- Eskom NERSA uses a Revenue Requirement Methodology based upon the wording in the Acts which in turn leads to a rate of return methodology The rate of return formula is as follows: R = E + (V – d + w) r Where: R = required revenue E = cost to supply V = value of qualifying property, plant and equipment d = accumulated depreciation on qualifying property, plant and equipment w = allowance for working capital r = rate of return using the weighted average costs of capital (WACC)

Eskom’s MYPD3 Application NERSA published the MYPD3 Application for comment and received over 200 comments from individuals, organisations and NGO’s Public Hearings were held in 9 provinces The Energy Regulator thanks and appreciated those who took the time and effort to submit written comments and who made presentations The overwhelming weight of the comments and submissions were that the requested increases were unaffordable

Eskom’s MYPD3 Application On 28 February 2013 the Energy Regulator made a decision on the average price increase and Eskom must now submit tariff tables in line with the decision for approval NERSA has requested an alternative tariff to the ToU tariff for municipalities with predominantly residential load to be available as an option In the Time of Use tariff the ratio between Winter Peak to Summer Minimum is more than 9 to 1 and this will be reduced to 8 to 1 as the first phase . International norms are about 5 to 1

Source: Eskom and NERSA Eskom Price History MYPD 1 Decision Revision 1: 2008 price in Dec 2007 Revision 2: 2008 price in Mar 2008 Interim MYPD 2 Decision Revision: 2012 price Mar 2012 MYPD3 Decision 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Average Price Increase (%) 5.10 5.90 6.20 14.20 27.50 31.30 24.80 25.80 25.90 16.00 8 Average Price (c/kWh) 17.91 18.09 18.27 22.61 25.24 33.14 41.57 52.30 65.85 60.66 65.51 70.75 76.41 82.53 89.13 Prices in Red actually applied Source: Eskom and NERSA

REGULATION OF ELECTRICITY PRICES:- MUNICIPALITIES NERSA publishes Municipal Tariff Guidelines and Benchmarks and municipalities apply based upon these figures In terms of section 73 and 74 of the Municipal systems Act No 32 of 2000 they are allowed to add a surcharge for commercial and industrial customers Currently NERSA gives the municipalities guidelines and benchmarks to assist them with their application but look at each municipality on a case by case basis NERSA wants to move to a revenue requirement methodology similar to Eskom’s but this will need a properly ring fenced electricity business and up to date and correct asset registers and recent cost of supply studies NERSA is currently busy with municipalities where there are issues with the industrial tariffs

CONCLUSION NERSA is concerned about the general price of electricity and its impact on Industry especially in the municipal areas and is addressing the issue within its mandate however the funding model of the municipalities needs to be addressed as for example all Metro budgets forecast a steadily increasing reliance on revenue from electricity. The proportion is increasing by about 2 to 3 percentage points a year Particular concern is the impact on employment and impact on the poor and NERSA will continue to act within its mandate to take this into account

THANK YOU