IMFO OCTOBER 2012 Presented by: Fred Fryer Director: Revenue Services (Energy)

1. THE EKURHULENI EXPERIENCE ON THE INCLINING BLOCK TARIFF IMFO OCTOBER 2012 Presented by: Fred Fryer Director: Revenue Services (Energy)

2. DISCUSSION POINTS

4. DISCUSSION POINTS

5. EKURHULENI ENERGY AT A GLANCE • EMM has 48 bulk infeed points from Eskom • The July 2012 account to Eskom was R1 billion (one thousand million) • Bulk purchase account from Eskom in 2012/2013 will be R6,7 billion • EMM predicted income from electricity sales is about R11 billion • The City has the following numbers of electricity meters: • Credit meters = 183 000 • Large meters = 6 000 • Prepayment meters = 206 000 • Total meters = +- 400 000 • Eskom supply areas inside EMM boundaries = +-144 000 meters • Eskom larger customer meters = +-278

6. Previous year performance • Financial targets were: • Income Budget • Budget set at R9,414,228,343 • Income achieved of R9,129,499,958 • Which is 97% • Bulk purchases of electricity • Purchase budget set at R5,957,128,828 • Actual purchases of R5,984,093,496 • Which is 100,5% • The colder winter is the most likely reason for the deviation

7. The graph shows that electricity sales have generally declined since 2007, with a slight increase in 2011 • This indicates a struggling economy or rising electricity prices forcing efficiency

8. REVENUE VALUE CHAIN COMPONENTS 1 2 3 4 5 6 7 1 8 2 9 3 4 5 6 7 8 9 10 ID2 THIRD PARTY VENDING CONTRACTOR(S) Cigicell, Easypay, Smartec WEMMC 1 (Netgroup) WEMMC 2 (Tsekema) FUTURE SMART METERS IMS (Tembisa) FUTURE METER MANAGEMENT SOFTWARE (currently at WEMMC’s) BUSINESS PROCESS MANAGEMNT SUPRIMA VENUS IMQS ELECTRICITY REVENUE MODULE Landis & Gyr Meter fault management software Pragma METER READ CONTRACTOR(S) Motla BCX REVENUE COMMUNICATIONS NETWORK (ICT) GIS METERINGONLINE CONTRACTOR Utility Risk Management NERSA CRM MATERIAL SUPPLY CONTRACTS (meters, protective structures, etc) ELECTRICITY TARIFFS IMQS PROJECT CONTROL METER REPAIR CONTRACTOR(S) One per depot ENERGY REVENUE SERVICES FINANCE INCOME SUPPLY CHAIN MANAGEMENT BUDGET MANAGEMENT REVENUE MANAGEMENT & ENHANCEMENT PROJECT ENERGY OPS & MAINTENANCE OPEX + CAPEX

9. MAIN FACTORS SUPPORTING ELECTRICITY REVENUE, including a reduction in kWh losses • A good set of electricity tariffs – EMM is fortunate to have leading talent in this regard • A very robust method of reading and managing demand meters – meteringonline, meter management consultants, Finance, Energy meter maintenance • Reliable prepayment vending systems – Suprima and IMS • Dealing with meter interference (tampering) sustainably • Automation of processes such as new meter installations, meter exchanges, etc (business process management) and tracking of progress

10. MAIN REVENUE PROJECTS • ELECTRICITY TARIFFS • Reduced risk, adequate returns, refinement, manage Inclining Block Tariff • DEMAND METERS (LARGER USERS) • AMR, tariff rules applied, refinement of supportive processes • CREDIT METERS • Maintenance managed, focus on no-access meters • Smart meters to be tested in our environment (can we manage the technology, communications, effects of lightning, reliability, etc) • PREPAYMENT METERS • Venus / Suprima integration project • Tembisa system upgrade (communications) • OTHER • Business processes, contain costs, add customers, keep networks reliable, training to improve Energy skills

11. DISCUSSION POINTS

12. INFLUENCING FACTORS ON EMM IBT • EMM has 144 000 residential customers, supplied by Eskom • These customers are spread over vast areas throughout the EMM area • In terms of previous electricity tariff charges, there was differentiation between the EMM specific IBT rates and the general Eskom IBT rates • Previously, EMM had IBT rates suitable to EMM conditions, i.e. • Two sets of residential tariffs, one for higher consuming customers, and • One for lower consuming customers, and • Both being available to any residential customer (i.e. free choice) • A cross-over point, designed at a fairly low consumption level, ideally at 500 units per month, was maintained • A high consuming customer insisting on the IBT, could change to the IBT, but • Would end up paying more for electricity • The careful design created the minimum of customer administrative management and protected EMM income, whilst also taking care of vulnerable customers with 100 units FBE coupled to the IBT

13. GRAPH ILLUSTRATING A CROSS-OVER POINT DESIGNED INTO TWO RESIDENTIAL TARIFFS

14. INFLUENCING FACTORS ON EMM IBT • EMM customers and Eskom customers inside EMM boundaries questioned the tariff differentiation (One City, two tariffs?) • EMM, from 1 July 2012, adopted the exact Eskom IBT rates • Which will now form the status quo for the City • One change was made to a final block, creating a financial barrier to deter higher consuming customers from migrating to the subsidized IBT • This was done to maintain a second tariff for higher consuming customers, in order to deal with multiple households on one stand • EMM also engaged with customers to explore a reduction of the FBE allocation (100 units per month), or to target the FBE allocation • EMM customers were opposed to this and FBE of 100 units per month continues, coupled to the IBT in a broad-based manner • Effectively, FBE subsidizes block 1 and part of block 2

15. DISCUSSION POINTS

16. EKURHULENI AND ESKOM RATES

17. DISCUSSION POINTS

18. PLACING THE EMM IBT LEVELS IN CONTEXT • The next few slides are unique to EMM in that: • The IBT is at the same level as Eskom, for reasons provided • The IBT tariff receives a broad-based allocation of 100 units of FBE • The average bulk purchase rate from Eskom, will vary from City to City, as well as in the case of smaller municipal distributors. In this case, the EMM purchase rate was used to illustrate the principle

19. PLACING THE EMM IBT LEVELS IN CONTEXT • EMM will purchase from Eskom at 60c per kWh • Technical and non-technical losses, conservatively, are 10% (see next slide) • The City can, therefore, only sell 90% of units purchased from Eskom • The value of 60c, now becomes 67c • The first and second block of the IBT are:

20. PLACING THE EMM IBT LEVELS IN CONTEXT • Average consumption for September is 315 kWh, for a low consumption customer base of 142 000 • 100 units are FBE, EMM sells 215 units per customer • EMM income from this customer is R161. Eskom account is R211.* * ignoring external subsidization AND ignoring theft of electricity.

21. VANDALISM AND THEFT • The photo was taken in July 2012, in Villa Liza x2, Boksburg • 6 prepayment meters in one pole top box, all bypassed, at least 4 meters destroyed • A capital intervention is required involving protective structures and new meters • The uncontrolled electricity consumption destroys transformer and cable insulation, even to the point that they catch fire

22. SUCCESS IS POSSIBLE • Our experience in Langaville (and other areas) shows that creating a commercially viable area (i.e. electrical network restored and protected) can result in excellent payment levels in EMM • Our experience indicate that a significant amount of work and other resources are required to reach the stage depicted in the next slide

23. LANGAVILLE IN EMM • Langaville proper has 2 038 active meters • EMM electricity income was at a low of R2 300 per month for Langaville • Average account of R1,13c per month • Post intervention – income is R280 000 (or an average account of R138 pm, ave 250 units pm) • The R138 per month is payable after 100 units FBE were received, which = R67

24. DISCUSSION POINTS

25. DISCUSSION POINTS • Vulnerable electricity customers should be protected against high electricity costs. • The assumption is underpinned by an acknowledgement that access to electricity is an important instrument in alleviating poverty. No access to electricity to a large extent denies access to safe cooking, lighting, knowledge acquisition and communication. • Municipalities and Eskom should also be protected from over-extending their social responsibility related to the levels of the IBT. Block 1 of the IBT should be set at a level comprising at least the average annual bulk purchase cost of municipalities plus 10%, to practically compensate for technical losses and a small percentage of non-technical losses. • The subsidy to the IBT customers will still be considerable, given that no maintenance and refurbishment costs, or administrative costs (such as vending costs, human resources, etc) are recovered, nor any surplus contribution.

26. DISCUSSION POINTS (2) • Supplementing the IBT with a second tariff, i.e. by creating two tariffs, catering for two very different sectors of electricity users, several major problems are averted. • Two tariffs avoid negative factors such as: • income levels that must be protected; • placing additional burden on business and industry to make up for shortfalls in income; • the dilemma created by IBT and multiple households; • the dilemma created by intermittent users, and • a lack of choice in tariffs for residential users. • The IBT is often relevant in areas where non-technical losses are very high. If these are not controlled, the IBT levels may become very critical in terms of the survival of the distributor.

27. Ngiyabonga