Presentation to PPC on Municipal Electricity Tariff Determination

1. Presentation to PPC on Municipal Electricity Tariff Determination 30 JULY 2013

2. Contents • Introduction • Vision and mission • Values • Regulatory Principles • Mandate • Determination of the guideline • Consultation Process • Above guideline applications • Municipal tariff reviews & challenges • Conclusion

3. Introduction • The National Energy Regulator of South Africa (NERSA) was established on 01 October 2005 in terms of the National Energy Regulator Act, 2004 (Act No. 40 of 2004) to regulate the: • Electricity Industry [Electricity Regulation Act, 2006 (Act No. 4 of 2006)] • Piped-Gas Industry [Gas Act, 2001 (Act No. 48 of 2001)] • Petroleum Pipelines Industry [Petroleum Pipelines Act, 2003 (Act No. 60 of 2003)] • In executing its mandate, NERSA endeavours to balance the interest of both licensed entities and end users/consumers

4. Vision ‘To be a world-class leader in energy regulation’ Mission ‘To regulate the energy industry in accordance with government laws and policies, standards and international best practices in support of sustainable development’

5. Values • Passion • Spirit of Partnership • Excellence • Innovation • Integrity • Responsibility • Professionalism

6. Regulatory Principles NERSA adopted the following internationally accepted regulatory principles to underpin its regulatory approach: • Transparency • Neutrality • Consistency and Predictability • Independence • Accountability • Integrity • Efficiency

7. Mandate (1) NERSA’s Mandate is anchored in: • 4 Primary Acts: • National Energy Regulator Act, 2004 (Act No. 40 of 2004) • Electricity Regulation Act, 2006 (Act No. 4 of 2006) • Gas Act, 2001 (Act No. 48 of 2001) • Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) • 3 Levies Acts: • Gas Regulator Levies Act, 2002 (Act No. 75 of 2002) • Petroleum Pipelines Levies Act, 2004 (Act No. 28 of 2004) • Section 5B of the Electricity Act, 1987 (Act No. 41 of 1987)

8. Mandate (2) • 3 Facilitating Acts: • Public Finance Management Act, 1999 (Act No. 1 of 1999) (PFMA) • Promotion of Access to Information Act, 2000 (Act No. 2 of 2000) (PAIA) • Promotion of Administrative Justice Act, 2000 (Act No. 3 of 2000) (PAJA)

9. NERSA municipal tariff approval process • Currently municipal tariffs are approved on an annual basis upon application by the licensees • The process is dependent on the approved Eskom price under the Multi-year Price Determination (MYPD) process • NERSA approves the Eskom revenues – this determines the average increase in the municipal bulk purchase cost. • NERSA determines the Municipal guideline and benchmark tariffs • Based on the weighted average increase in the benchmark municipal cost structure including bulk purchase cost (Eskom), salaries & wages , repairs & maintenance and capital charges. (Using Eskom increase and expectations on other economic indicators like inflation, National Treasury guideline increases etc.) • Licensees make an application to NERSA for approval of their tariffs – this must be supported by financial and technical information (obtained from the D-forms) pertinent to the individual municipality • NERSA reviews the applications and makes a determination on each application

10. Municipal guideline & benchmarks • The guideline is meant to assist municipalities in preparing their tariff applications – licensees are therefore expected to provide NERSA with quality information that supports their applications • On reviewing applications, NERSA considers • The current municipal tariff levels • The tariffs in comparison to NERSA approved benchmarks • The efficiency of municipal operations (technical and financial benchmarking) • The municipal tariff structures and the level of cross-subsidisation • Any programmes that the municipalities may be involved in (ie. infrastructure refurbishment, maintenance backlog, capital expansion etc.) • Any assistance that may be necessary to be provided to the municipalities • Only municipalities applying for increases above the NERSA guideline are subjected to public consultation process.

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

12. Determination of the guideline % increase • For the 2013/14 financial year the % increases are as follows:

13. Current tariff benchmarks

14. Alternative IBT Structure • Domestic Low Tariff • The alternative IBT structure was developed in order to assist the municipalities that are unable to implement the current IBT structure • The domestic low tariff will comprise of the energy charge • Domestic High Tariff • A basic charge has been introduced for the domestic high tariff • The domestic high tariff will therefore comprise of the energy charge plus a basic charge

15. Consultation processes • The determination was done in consultation with the following stakeholders: • Meetings with National Treasury • Publication of the consultation paper for stakeholder comments • Consideration of stakeholder comments • Public Hearing held on 15 March 2013 on the determined guideline increase • After receipt and approval of Eskom’s MYPD 3 price application (on 28 February 2013) municipal guideline was approved on 4 April 2013 • Decision communicated to all stakeholders

16. 4. Above guideline applications (2013/14)

17. Above guideline applications 1st Public Hearing

18. Above guideline applications 2nd Public Hearing

19. Above guideline increases • Ten (10) municipalities were considered during the first Public hearing held on 24 May 2013 • Nine (9) municipalities were considered during the second Public hearing was held on 19 June 2013

20. 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.

21. . 5. Municipal tariff review & Challenges

22. Municipal tariff review & challenges Challenges • Municipalities submitting inaccurate and unreliable financial/technical information • Late submission of municipal tariff applications (Dipaleseng submitted its tariff application after 1 July implementation date) • Municipal electricity accounts not ring-fenced

23. Municipal tariff review & challenges Municipal tariff reviews • NERSA is currently considering 6 tariff reviews from the following municipalities. The reason for the reviews are listed as follows; • Msunduzi – revenue shortfall for infrastructural refurbishment projects • Beaufort West – revenue shortfall • Swellendam – customer resistance on the new tariff structure • Siyacuma – revision of its application to correct commercial & industrial tariffs • Sol Plaatje – implementation of IBTs for all domestic customers • Tsantsabane – tariff restructuring (i.e. reduction in the demand charge and the introduction of a fixed monthly charge for industrial customers) • NERSA has published all the 2013/14 municipal approved tariffs on its website

24. . 6. Conclusion

25. 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.

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