The Multi- Year Price Determination MYPD

1. The Multi- Year Price DeterminationMYPD Presented by: Thembani Bukula Regulator Member – Electricity Regulation

2. Rationale for MYPD • Annual price determinations • Cumbersome process that did not enable efficiency extraction • No forward view for planning purposes • High uncertainty levels for business & investors • Generation, transmission and distribution infrastructure • 40 year old assets to be replaced or refurbished • Additional capacity required • Funding of the additional capacity • Building of reserves/retained earnings • Strengthening of the balance sheet to enable borrowing

3. Concept of MYPD • Determination of revenue required and average price from • Projected costs • Anticipated sales • For a 3 year period (targeting 5 to 7 years when matured) • Under certain assumptions (e.g. costs increase at inflation rates) • Credit ratings of Eskom remain unchanged • No Dividends paid to the Shareholder • MYPD runs for the determined period unless thresholds and/or limits set for reviewing are breached • Changes in costs in excess of 10% • Exogenous factors beyond Eskom’s control

4. MYPD1 • Determination of revenue required and average price from • From 1 April 2006 to 30 March 2009 • Projected costs • Anticipated sales • For a 3 year period (targeting 5 to 7 years when matured) • Under certain assumptions (e.g. costs increase at inflation rates) • Credit ratings of Eskom remain unchanged • No Dividends paid to the Shareholder • MYPD runs for the determined period unless thresholds and/or limits set for reviewing are breached • Changes in costs, in excess of 10%, revenue 1% • Exogenous factors beyond Eskom’s control

5. Other MYPD1 factors • The Electricity Regulation Act, 2006 • An efficient licensee must recover full costs plus reasonable return • Additional capacity allocation • Eskom to build the additional generation & transmission capacity • Funding of the additional capacity • Eskom to build additional generation & transmission capacity • RFI for Kusile & Medupi power stations at ZAR33bn each • Retained Earnings and Loans to be used (no equity required) • Claw-back • Inefficiently incurred expenses and over budgeting

6. MYPD1 determination • Credit rating of Eskom improved by a notch • Business and investors satisfied and aligned by the projections

7. Changes to the MYPD1 • In April 2007, Eskom applied for a revision of the 5.9% increase to 18.7% increase for the year 2007/8 • Primary Energy (mainly coal) cost increase • Changes in the capex (RFP indicated that the power station will double the amount allocated in MYPD1, i.e. cost ZAR 66bn each) • NERSA approved an increase of 14.2% on 20 December 2007 • Limiting the coal cost increases • Reducing the Rate of Return (RoR)

8. Additional changes to MYPD1 • On 18 March 2007, Eskom applied for a revision of the 14.2% average increase to 60% average increase • Capital expenditure of ZAR343bn (i.e. power stations cost ZAR99bn each) • Borrowing ability limited to ZAR30bn per annum vs ZAR60bn required for the above capex. • Shareholder limited its equity injection to ZAR60bn over 5 years • 10% Rate of Return required • On 18 June 2008 NERSA approved a 27.5% average increase • Limiting the RoR • Spreading the capital spend and increasing the borrowing capacity

9. Interim determination • In May 2009 Eskom made an interim application of an average increase of 34% • Awaiting the finalisation of the funding model and Electricity Pricing Policy • Catering for the 2c/kWh Environmental levy • NERSA approved an average increase of 31.3% in June 2009 • Limiting the increase to some tariffs (e.g. Home light & Life line) to less than 15% increase • Postponing the re-evaluation of assets to the MYPD2

10. MYPD2 • MYPD 2 started with an annual 45% average increase application for the period 1 April 2010 to 31 March 2013 • After consultation with NT and SALGA application was revised to an annual average increase of 35% over the 3 year period • MYPD 2 drivers • Capital expenditure ZAR302bn • Primary energy costs (mainly coal) • Asset re-evaluation (depreciation & returns) • Inclining Block tariffs • Cost reflective tariffs in 5 years

11. MYPD2 Approvals • Re-evaluation of assets phased over a 5 year period instead of full amount at the beginning • Rate of Return limited to less than 2% over the 3 year period • IBT’s limited 1st block increase to inflation (approx 6%) • Depreciation and Return on Assets increased to cater for the shortfall from equity injection, loans and retained earnings • Regulatory clearing account setting up

12. MYPD2 review • In February 2012, Eskom applied for a reduction in the average price increase from 25% to 16% • The shareholder had re-phased its return of about ZAR7,7bn • The Regulatory Clearing Account (RCA) about ZAR3bn • NERSA approved the average price increase of 16% • RCA accepted • Re-phased returns accepted • The allocations for IPP’s was not altered • ZAR12,3bn

13. MYPD3 • MYPD 3 application still with NT and SALGA • EPP as it stands • Phased re-evaluation of assets (may be different from 5 years in MYPD2) • IBT’s as determined • Cost reflectivity in within 5 years • IPP’s costs as per IRP 2010 - 2030 included in the pricing • Price increases that promote economic growth • Public consultations on both the application and changes in the rules

14. MYPD3 Approval schedule • Workshops and public consultations regarding the application will be arranged during the consultation phase

15. Thank you