1 municipal electricity tariff regulation presentation to nedlac 12 june 2012
TRANSCRIPT
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Municipal Electricity Tariff Regulation
Presentation to NEDLAC12 JUNE 2012
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Contents
1. NERSA’s role2. Overview of the Electricity Industry3. Determination of the guideline4. Consultation Process5. Above guideline applications6. Eskom MYPD Process7. Conclusion
1. NERSA’s Role
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• 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
Who is NERSA
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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.”
NERSA Vision and Mission
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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.
Regulatory Principles
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• 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.
Regulatory Functions
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• 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.
Regulatory Functions (contd.)
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• 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;
Developments in the Electricity Industry2.1. General Industry Issues
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• 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.
Developments in the Electricity Industry(contd.)
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• 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.
Developments in the Electricity Industry(contd.)
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• 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;
Developments in the Electricity Industry2.2. Regulatory Considerations
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
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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
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Determination of the guideline % increase
• On average the weighting of the different cost structures are:
Cost Category % of total costs
Energy Purchases 70
Salaries & wages 10
Repairs & Maintenance 6
Capital Charges 4
Other costs 10
TOTAL 100
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Determination of the guideline % increase
• For the 2012/13 financial year the % increases are as follows:
Cost Category % increase Weighted % increase
Energy Purchases 13.5 9.45
Salaries & wages 5 0.50
Repairs & Maintenance
5.4 0.32
Capital Charges 5.4 0.22
Other costs 5.4 0,54
% guideline increase 11.03
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
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Determination of benchmarks
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DOMESTIC TARIFFS(IBTs) COMMERCIAL 2000 kWh INDUSTRIAL43800 kWh
(c/kWh)
ESKOM MEGA-FLEX
Domestic Block 1
0 – 50 kWh(c/kWh)
Domestic Block 2
51 – 350kWh(c/kWh)
DomesticBlock 3
351 – 600 kWh(c/kWh)
DomesticBlock 4
>600 kWh(c/kWh)
Prepaid Conventional
61 – 66 77 – 82 104 - 109 124 – 129 130 – 135 130 – 135 132 – 137 85.32
Notes:
1. Eskom customers are connected at High voltage levels (Transmission)2. Municipalities buy from Eskom at Mega-Flex3. Eskom has a customer base and mix that allows for cross subsidies
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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
Timelines & processes
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NERSA & National Treasury Municipal Tariff processes combined
30 Jul 2011 August 2011
Modelling Municipal tariff guideline + benchmark
Electricity Subcommittee approval – Draft municipal guideline + benchmarks
12 October 2011
Public Hearing for the Municipal guideline increase and the benchmarks
National Treasury process: Municipal informal public meetings with key stakeholders, government spheres and entities
November 2011
Nov/Dec 2011
Electricity Subcommittee approval – Final draft municipal guideline + communicate to munics
National Treasury issues a budget circular to all municipalities
Revised D-forms, distributed timeously to licensees
Completed D-forms are submitted to NERSA
Mayor tables in council a schedule of key deadlines for various budget activities as spelled out in section 21 of the MFMA
Communication with licensees to submit their data continues and correspondence is stored on the server as evidence
DIAGRAM: 4
Timelines & processes
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NERSA & National Treasury Municipal Tariff processes combined cont....
Evaluate and recommend tariffs for approval based on D-forms info and tariff application.
REC approval of the tariffs and communication of NERSA decision to munics
Apr – May 2012
Dec – Jun 2012
Public submissions on the draft budget. (Formal response to the draft budget)
Council hearings/meetings to consider submissions. (Amendments are made where necessary).
Mayor submit amended budget for council approval and adoption
Mar – May 2012
Public Hearings (2X) for munics with applications that are above the guideline increase
Regulator meetings to consider and approve above-guideline increases
May - Jun 2012
Considerations & Approval of revised applications (Appeals)
1 Jul 2012
Implementation of the approved budget including Nersa approved tariffs
Implementation of approved budget including NERSA approved tariffs
Nov – Mar 2012
Munics compiles and submit draft tariffs application for consideration by NERSA
Mayor table municipal and entity budgets and budget related policies (Drafts)
5. Above guideline applications
(2012/13)
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Above guideline applications
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Name of Municipality
Municipal Proposed Percentage Increase for 2012/13
Motivation provided by municipalities for above-guideline increase
City Power 14% Repairs and Maintenance
Drakenstein 13.03% Additional staffing, equipment for revenue management and increased costs for new smart metering
Gamagara 23.83% Making provision for the capital expenditure projects
Hessequa 11.5% To ensure revenue neutrality
Lesedi 20.00% To cater for the increased operational expenditure
Midvaal 25.04% Expenditure on electricity purchases is larger than anticipated income.
High increases due to a mistake on Eskom’s metering equipment
Mthonjaneni 18% Upgrading of infrastructure
Nkomazi 15% Repairs and Maintenance
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.
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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. 28
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
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7. Conclusion
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• 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.
Conclusion
