Municipal Electricity Tariff Regulation

1. Municipal Electricity Tariff Regulation Presentation to NEDLAC 12 JUNE 2012

2. Contents • NERSA’s role • Overview of the Electricity Industry • Determination of the guideline • Consultation Process • Above guideline applications • Eskom MYPD Process • Conclusion

3. 1. NERSA’s Role

4. Who is NERSA • 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 • Transparency: Public meetings/hearings • Significant monitoring and compliance obligation • 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); • Money Bills • Gas Regulator Levies Act, 2002 (Act No. 75 of 2002); and • Petroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004). • Policy Documents • Electricity Pricing Policy • New Generation Regulations

5. 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.”

6. Regulatory Principles Regulatory principles, which guide 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.

7. Regulatory Functions • Licensing: Construction, operations, trading; • Setting and/or approval of tariffs and price structures; • Setting of conditions of supply and standards; • Monitoring compliance with licence conditions: • separate accounting provisions; • third party access and interconnection provisions; • non-discrimination; • safety, environment, health and security standards (in collaboration with other agencies) • Responding to non-compliance • setting penalties and fines for non-compliance.

8. Regulatory Functions (contd.) • Investigating complaints; • Mediating or arbitrating in disputes; • Gathering and storing industry information; • Promoting BEE, competition and improved efficiency of the energy industry; • Consulting with government regarding industry development; and • Expropriating land as necessary to meet the objectives of the relevant legislation.

9. Developments in the Electricity Industry 2.1. General Industry Issues • There is a supply-demand mismatch; • Investments are being made to add more capacity; • Eskom : Kusile, Medupi and Ingula Power Station • A total of 28 bidders were selected for phase 1 with a total of 1406MW • A total of 19 bidders have just been selected for phase 2 with a total of 1043.9MW • CoGeneration Projects: SAPPI, IPSA, Mondi, and others • Time lag to bring new generation capacity online implies that the supply will remain tight in the short run; • New investments have to be paid for through a combination of borrowings, equity and tariffs as a general rule;

10. Developments in the Electricity Industry (contd.) • IRP2010 (Integrated Resource Plan 2010) sets out for the first time a balanced path to a low carbon future in a structured cost optimized way • It sets out a generation build time table per technology • It resulted in the Government’s first and second round of bidding for renewable energy IPPs; • NERSA has put in place streamlined mechanisms for processing the licence applications received from the selected IPPs with minimum delay, arising from each bidding round.

11. Developments in the Electricity Industry (contd.) • The Department of Energy intends to issue third bidding round in August 2012 to allocate more generation capacity as per its (DoE) published Integrated Resource Plan; • Generation from renewable energy sources will diversify South Africa’s electricity generation mix and reduction of greenhouse gas emissions; • This investment in capacity needs to be accompanied by demand side management/conservation in the short-term; • Eskom initiatives and delicate balancing act through power buyback agreements with some of the large mining and industrial customers to reduce demand • The Department of Energy has also announced that it will undertake a review the Electricity Pricing Policy before the MYPD 3 decision is made.

12. Developments in the Electricity Industry 2.2. Regulatory Considerations • NERSA electricity pricing is guided by the Electricity Pricing Policy which was approved by Cabinet in 2009. (Currently under review) • The cost of New capacity is inevitably higher (last power station built in the 1970’s) • The challenge to NERSA as Regulator to set a regulated price of electricity when the input price (price of coal) is not regulated; • NERSA required to set cost-reflective prices and tariffs to enable an efficient licensee to recover efficiently incurred costs and make a reasonable return commensurate with risk; • In executing its mandate, NERSA is enjoined to strike a fair balance between the long term financial sustainability of the utility and affordability of the electricity prices to the customers;

13. Determination of tariffs & increases • Ideally Cost of Supply (CoS) studies need to be conducted: • To determine the cost elements • To determine the cost of supplying the different customer categories • To determine the required subsidies • From the CoS studies • Determine the weighting of the cost elements in the tariffs • Determine the appropriate % increase of each element • (e.g. Manpower or maintenance costs) • Set or determine the tariffs for the different customer categories

14. Determination of the guideline % increase • Use of the current costs and cost structures of the municipalities • To determine the weighting of the costs and cost structures • Establish the appropriate ranges of the various cost structures • Power Purchase cost for electricity • Manpower costs (Salaries and wages) • Repairs and maintenance • Capital charges • Other (e.g. shared services) • Use the appropriate or determined % increases • Eskom price increase for Power Purchase costs • As determined by the MTBPS for Salaries and Wages • Inflation (as determined by NT circulars) for Repairs, Maintenance and other

15. Determination of the guideline % increase • On average the weighting of the different cost structures are:

16. Determination of the guideline % increase • For the 2012/13 financial year the % increases are as follows:

17. Other assumptions - % guideline increase • Customer mix assumes % of industrial and commercial customers at least 40% • Electricity purchased from Eskom at the Mega-Flex or similar • 50kWh of Free Basic Electricity for the indigent • Time of Use tariffs are used for customer categories that can shift load accordingly

18. Determination of benchmarks Notes: Eskom customers are connected at High voltage levels (Transmission) Municipalities buy from Eskom at Mega-Flex Eskom has a customer base and mix that allows for cross subsidies

19. Consultation processes • The determination was done in consultation with the following stakeholders: • Publication of the consultation paper for stakeholder comments • Consideration of stakeholder comments • Workshops with AMEU • Meetings with National Treasury • Public Hearing held on 18 November 2011 on the determined guideline increase • Approval of the initial guideline made on 24 January 2012 • After receipt and approval of Eskom’s revised price application a revised guideline was approved on 9 March 2012 • Decision communicated to all stakeholders

20. Timelines & processes

21. Timelines & processes

22. 5. Above guideline applications (2012/13)

23. Above guideline applications

24. Above guideline increases • Eight (8) municipalities were considered during the first Public hearing held on 29 May 2012 • Next public hearing scheduled for 22 June 2012 • An additional 12 municipalities have applied for increases that are above the guidelines • Not all municipalities applying for above guideline increase will go through a public hearing process. Municipalities whose tariffs are below NERSA’s benchmarks would not be required to go through a public hearing process.

25. Requirements for above guideline increases • Municipalities applying for an increase that is above the guideline have to justify their increases to the Energy Regulator and the following actions would be expected: • a full analysis of additional funds requested needs to be presented to NERSA as part of the motivation for above guideline increase. • the approved funds must be ring-fenced to ensure that they are strictly utilised for the identified projects; • municipalities must report to NERSA on a six-monthly basis on how the additional funds are utilised; • NERSA does do inspections to verify municipal reports • funds not utilised for the purpose for which they were approved for will be clawed back in the following financial year.

26. Review of the MYPD methodology • NERSA is awaiting the finalisation of the EPP review by government • Revaluation of the assets • Rate of return • Awaiting Eskom’s application • Length of the MYPD application • Claw-back mechanism

27. . 7. Conclusion

28. Conclusion • NERSA, through its mandate of tariff/pricing, has a critical role to manage the price paths migration during this period of necessary high capital investment in South Africa; • Pricing decisions will continue to balance between sustainability of the utilities and affordability for the consumers. • NERSA will continue to conduct its business in fair and transparent manner, within published government policy and legislation in exercising its mandate.

29. THANK YOU Website: www.nersa.org.za Tel:012- 401 4600 Fax:012- 401 4700 Email: info@nersa.org.za