1. NERSA presentation at the PPC meeting held on 24 May 2006

2. Issues to be covered The Eskom price increase approach
(2)
Issues to be covered
The Eskom price increase approach
History
The pricing compact
The rate of return
The multi-year price determination
The Eskom structural adjustments
Process
The municipal tariff application process
History and challenges
The approval process
New developments

3. (3)
The pricing compact
Eskom entered into a compact to decrease the real price of electricity by 20 % by Compact achieved in Need for new regulatory pricing regime.

4. New regulatory approach
(4)
New regulatory approach
We approved a rate of return method for the regulation of Eskom in 2002
Definition: Cost to supply plus a fair rate of return on the asset base
The main components of this approach are
The appropriate rate of return as determined by the regulator (percentage)
The costs/(expenses) that the regulator allows given Eskom’s business and its challenges/requirements
The assets upon which the rate of return will be applied – this includes both existing assets and assets due to Eskom’s required investment programme for new capacity requirements
This approach attempts to determine the revenues that are adequate to allow Eskom to continue supplying electricity to its end-use customers but also that electricity prices are not overly expensive to be unaffordable to such customers
At the beginning the method applied to Eskom as a single entity without separation/(ring-fencing)
Applied to ring-fenced businesses in 2004
The methodology was used for the price determination for 2003, 2004 and 2005

5. (5)
The MYPD of Eskom
In 2005 the NER Board (now NERSA) approved a move towards a multi-year price determination of Eskom arguing that this would give customers some certainty regarding electricity prices;
A new mechanism was then developed to allow for the determination of prices over a longer period (3 years was then selected)
The mechanism is broadly based on the rate of return method as discussed above but giving careful consideration on incentives for Eskom to improve on efficiencies
The development of the mechanism involved a thorough stakeholder consultation process through a publication of various consultation papers and ultimately a public hearings held on 20 January 2006
The final determination of Eskom’s three year prices was made on 14 February 2006
This was communicated to Eskom on 15 February 2006 and to other stakeholders on 16 February 2006
The approved prices for the three years are
5.1 % increase for 2006/7;
5.9 % increase for 2007/8; and
6.2 % increase for 2008/9
Included in these prices is funds to be used for the restructuring of the distribution industry given to the EDI Holding (Pty) Ltd

6. Objectives within the mechanism
(6)
Objectives within the mechanism
The mechanism should:
Limit the risk of excess or inadequate returns;
Give incentives for new investments especially in generation;
Give reasonable tariff stability and smoothed changes over time;
Be consistent with socio-economic policies;
Give economic price signals especially at the margin;
Give a good balance of commercial risk;
Contain efficiency incentives;
Be reasonably simple to understand and apply;
Have no perverse incentives on performance;
Have systematic basis for revenue/tariff setting – without replacing need for judgement;
Ensure consistency between controls; and
Ensure legal compliance.

7. Key issues within the determination
(7)
Key issues within the determination
Appropriate asset valuation method for assets
Real rate of return on indexed assets vs nominal rate on historic asset value;
Determination re-opener: 3 % at regulator choice; 10 % mandatory;
Ensure Eskom’s ability to borrow (domestic or international capital markets);
Ensure no compromise quality and reliability of supply and that Eskom’s cash flow position does not warrant volatile price increases as with case in the 70’s and 80’s where increases were in the range of 33 % p.a.

8. Eskom’s retail tariff structural adjustments
(8)
Eskom’s retail tariff structural adjustments
While the prices determination refers to the determination of revenues that Eskom will be allowed to earn in a given period, the retail structural adjustments are for ways in which these revenues will be collected from the different customer classes based on tariffs;
Retail tariff structural adjustments should therefore, not earn any additional revenues for Eskom except that allowed through the price determination;
The retail structural adjustment are based on
The Energy white Paper;
National policies; and
Regulatory objectives and customer needs.

9. Eskom Retail Tariff Structural Adjustments
(9)
Eskom Retail Tariff Structural Adjustments
Price Determination (MYPD) vs Tariffs
Eskom’s tariffs
Tariff A
Tariff B
Tariff C
Eskom’s revenue requirement
Inflation
Volume
Eskom’s revenue requirement
Sum of all tariffs components
Tariff A
Tariff B
Tariff C
Network
R/kVA
Energy
c/kWh
Admin
R/cust
Tariff components

10. Eskom retail structural adjustments
(10)
Eskom retail structural adjustments
(process)
Regulatory Process
Stakeholder Interaction
NERSA
Eskom
Customer Groups (e.g. EIUG, Agriculture)
Other Stakeholders (e.g. SALGA; National Treasury, DPE)
All Customers

11. Eskom retail tariff structural adjustments
(11)
Eskom retail tariff structural adjustments
(Process)
Regulatory Process (contd)
Publication of proposals
Workshops
NERSA independent analysis (customer impact, economic impact, industry & govt. objectives)
Revision of proposals if necessary
NERSA public hearings
Final approval
Implementation (timing e.g. other customers 1 April; Municipalities 1 July i.t.o. MFMA

12. Eskom retail tariff structural adjustments
(12)
Eskom retail tariff structural adjustments
(Process)
Regulatory Process
Annual process starts early in the year
Time to assess impact of proposed changes, adequate stakeholder interaction
Therefore limited change implemented 2007/8 (?)
More far reaching changes 2008/9 (?)
Ongoing process due to changing industry
No major adjustments for 2006/7 and not much expected for 2007/8

13. Municipal tariff approval process
(13)
Municipal tariff approval process
A guideline increase is developed based on the Eskom price increase – Guideline for 2006/7 is 5.9 %
The guideline is then communicated to municipalities who then apply to the regulator
The regulator compares the prices applied for the benchmarks and guideline increase and where these are compliant, they are approved
Due to the MFMA municipalities are require to implement their approved increases on 1 July 2006 – no further increases will be allowed during the financial year

14. Municipal tariff approval process
(14)
Municipal tariff approval process
In 1995 – Total number of munic approx. 400
Approx tariffs in the industry
Municipalities buy from Eskom and sell to end-use customers – discrimination between Eskom and munic customers
The municipal tariff approvals are based on benchmarks developed in 1995 and adjusted 2003 and a guideline increase that is issued annually by the regulator
In 1995 the regulator also approved an Interim National Distribution Tariff Guideline to assist municipalities in the development of tariff structures
The document was then reviewed in 2003 and renamed National Retail Tariff Guideline

15. Thank you