presentation to ppc on energy 24 may 2013

1PRESENTATION TO PPC ON ENERGY 24 MAY 2013

MUNICIPAL TARIFF DETERMINATION PROCESS

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CONTENT

1. Purpose and mandate2. The tariff approval process and information

requirements3. Municipal Tariff Guideline and financial

considerations4. Energy Efficiency & Demand-side Management5. Conclusion remarks

Mandate and legal requirements• The Electricity Regulation Act

– Section 4 (a) (ii) The Regulator must regulate prices and tariffs– Section 15 (1) A licence condition determined under section 14 relating to the

setting or approval of prices, charges and tariffs and regulation of revenues –

a) Must enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return

– Section 15(2) A licensee may not charge a customer any other tariff and make use of provisions in agreements other that that approved by the Regulator as part of its licensing conditions

– Section 45 (1) (b) For the purposes of this Act, any person authorised thereto in writing by the Regulator may require any person to furnish to the Regulator such information, returns or other particulars as may be necessary for the proper application of this Act

– Section 45 (2) the Regulator may require that the information, return or particular furnished under subsection (1) be verified on oath or by way of solemn declaration

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Tariff approval process

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Cat. 6Cat. 7Cat. 8Cat. 9Cat. 10Cat. 11

Cat. 12Cat. 13

Cat. 14

Cat. 15Cat. 16

Cat. 17Cat. 18 Cat. 19

Cat. 4

Cat. 3

Cat. 2

Cat. 1

Cat. 5

Involves •Tariff design•Tariff structures•Result = Suite of tariffs


Cat. 12Cat. 13

Cat. 14

Cat. 15Cat. 16


Cat. 4

Cat. 3

Cat. 2

Cat. 1

Cat. 5Cat. 6


Cat. 13Cat. 14

Cat. 15Cat. 16


Cat. 4

Cat. 3

Cat. 2

Cat. 1

Cat. 5Cat. 6


Cat. 13Cat. 14

Cat. 15Cat. 16


Cat. 4

Cat. 3

Cat. 2

Cat. 1

Cat. 5Cat. 6


Cat. 13Cat. 14

Cat. 15Cat. 16


Cat. 4

Cat. 3

Cat. 2

Cat. 1

Cat. 5

Municipal and private distributor tariffs

Municipal and private customers

Eskom’s direct customers

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Eskom’s standard tariffsEskom’s revenues - MYPD

Summary - 2013/14 Approved Eskom Tariffs

Tariff Category Percentage Increase

1. Local Authority Tariffs (Effective 01 July 2013) 7.3%

2. Non Local Authority Tariffs (Effective 01 April 2013) 8.4%

• Urban Tariffs 9.6%

• Rural Tariffs 9.3%

• Residential IBTs 5.0%

Overall Average (All Tariff Categories) – per MYPD3 8.0%

NERSA Municipal tariff approval process

• Currently municipal tariffs are approved on an annual process

• Process involves approx. 190 municipal, Eskom and private distributors

• Process is required to be finalised by 15 March of every year prior to implementation on 1 July of that year (MFMA)

• The process is dependent on the approved Eskom prices under the Multi-year Price Determination (MYPD) process

– NERSA approves the Eskom prices/revenues – this determines to average increase to municipalities and other customers but may be different for each customer/municipality

– NERSA determines the Municipal tariff increase guideline and benchmarks (based on generic assumptions)

– Licensees apply to NERSA for approval of their tariffs – this must be supported by information pertinent to the individual municipality

– NERSA reviews the applications and makes a determination on each application

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Municipal guideline and benchmarks• Municipal tariff increase guideline and benchmarks are determined based in the Eskom

approved prices and revenues together with expectations on other economic indicators (inflation, salary increases etc.)

• 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

• Guideline is not a final determination– Licensees must still apply– On reviewing applications, NERSA considers

• The current municipal tariff structure and levels• The tariffs in comparison to NERSA approved benchmarks• The efficiency of municipal operations (technical and financial). All this

information is from the municipal d-forms• The municipal tariff structures and the level of cross-subsidisation• Any programmes that the municipalities may be involved in (eg. infrastructure

refurbishment etc.)• Any assistance that may be necessary to be provided to the municipalities 7

NERSA financial benchmarks

Financial indicators Benchmark Financial benchmark Tolerable range

Percentage surplus: 15% 10 – 20%

Percentage Power Cost: (%)70%

58% - 78%

APP/ ASP Ratio: Percentage 1:1.64 1:1.5 – 1:2.1

System Losses: (%) 10% 5% - 12%

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Other considerations:•The level of debt collections•Additional projects the municipality may be involved in •Infrastructure repairs and maintenance•The municipal customer mix (ability to cross-subsidise)•Municipal size – economies of scale (operations)•Any Cost of Supply (CoS) studies that may have been performed by the municipality

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Determination of the guideline

The table below represents the analysis of costs as a percentage of total costs of municipalities (based on sample):

Cost Category As % of total costs

Energy Purchases 70

Salaries & wages 10

Repairs & Maintenance 6

Capital Charges 4

Other costs 10

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Determination of the guideline (cont..)

• Assumptions made on the approval of the municipal guideline:– Bulk purchases increased by 7.3% in line with Eskom’s

tariff increase to municipalities– CPI of 5.5% (As quoted in the Medium Term Budget

Policy Statement 2012 (MTBPS) – Salary & Wages CPI + 1.25 % (As indicated in Circular

No.6/2012: Salary and Wage Collective Agreement)– Repairs and Maintenance, capital charges and other costs

of CPI of 5.5% (as per inflation)

•The formula used for calculating the guideline

•MG = (B x BPI) + (S x SI) + (R x RI) + (C x CCI) + (OC x OCI)

= (70 x 7.3) + (10 x 6.9) + (6 x 5.5) + (4 x 5.5) + (10 x 5.5)

= 7%

– Where:

» MG = Municipal guideline increase

» B x BPI = Municipal bulk purchases times Eskom increase

» S x SI = salaries times associated salary increase

» R x RI = repairs and maintenance times associated increases

» C x CCI = capital charges times associated increases

» OC x OCI = other costs times associated increases

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Determination of the guideline (cont..)

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Approved Benchmarks

The benchmarks were approved as follows:

NERSA also approved a revision of IBT structure and Benchmarks as follows:

Industrial

Block 1 Block 2 Block 3 Block 4

0 - 50 kWh 51 - 350 kWh 351- 600 kWh >600 kWh Prepaid Conventional43800 kWh

(c/kWh) (c/kWh) (c/kWh) (c/kWh) (c/kWh) (c/kWh) (c/kWh)64 - 70 82 - 87 111 - 117 133 - 138 139 - 144 140 - 145 142 - 147

Domestic Inclining Block Tariffs (IBTs) Commercial 2000kWh

Block 1 Block 2

0 - 350 kWh > 350kWh

(c/kWh) (c/kWh)80 - 85 110 - 115

Domestic Inclining Block Tariffs (IBTs)Block 2

> 350kWh

(c/kWh)78 - 83

Domestic Inclining Block Tariffs (IBTs)

Block 1

0 - 350 kWh

(c/kWh)108 - 113

Basic Charge (R/month)

Table1:Overall approved IDM Costs for MYPD3

2012/13 Approved Expenditure

Applied for Approved Applied for Approved Applied for Approved Applied for Approved Applied for Approved Applied for Approved2 351 2 941 1 455 2 709 953 1 862 819 1 966 712 3 612 1 244 13 090 5 183

447 458 379 358 294 221 187 232 196 461 415 1 730 1 471

1 815 2 245 1 853 1 361 1 204 826 763 1 016 939 2 283 2 132 7 731 6 891- 2 660 1 107 2 419 612 1 581 468 1 652 348 3 033 834 11 345 3 369

- 464 348 481 341 485 351 519 365 581 410 2 530 1 815- (183) - (191) - (204) - (205) - (2) - (785) -

5.26 6.42 3.84 7.57 3.24 8.42 4.38 8.48 3.64 7.83 3.00 7.74 3.521.30 1.31 0.79 1.99 0.79 2.25 1.07 1.94 0.76 1.58 0.58 1.81 0.75

2017/18 MYPD3 Total`

R/kWh

Programmes - Peak Demand Savings(MW) Programmes - Annualised Energy Savings(GWh) Programme Costs

Operating Costs including DepreciationOther costsR/MW

Funding

2013/14 2014/15 2015/16 2016/17

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Table 1 explanatory notes:

Eskom requested R13bn and was allowed R5bn.

Eskom requested costs were adjusted based on MYPD2 historical performance and then escalated by inflation.

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Table 2: Allowed IDM programmes costs

R'm IDM Applied for IDM Adjustments Approved IDM

Lighting & Heating, Ventilation, and Air Conditioning HVAC (Industrial & Commercial) 1 800 (621) 1 179

Lighting (LED - Residential) 886 (52) 834

Process Optimisation 1 350 (1 219) 131

Compressed Air 696 (496) 200

Heat Pumps 619 (619) -

Demand Reduction 2 031 (1 828) 203

Shower Heads 159 (151) 8

Solar Water Heaters (SWH) 2 410 (2 410) -

Sustainability Programmes 339 (323) 16

Greenfields & Renewables 1 057 (533) 524

Power Alert 390 (117) 273

Total 11 737 (8 369) 3 368

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Waste Heat Recovery(WHR) and Cogeneration projects applied for under process optimisation were disallowed since these programmes target large industrial enterprises that can self-fund improvement for their energy intensity resulting in turn in higher economic efficiency.

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Solar Water Heaters (SWH) are disallowed as the MYPD2 M&V history proved that these programmes achieve little demand savings at high cost.

All SWH shall be funded through the fiscus. National Treasury allocated funds for SWH in Medium Term Expenditure Framework FYE2014-16.

Table 3 :Approved Demand Market Participation (DMP) Expenditure for MYPD3

R'm

2012/13 Approved

Expenditure 2013/14 2014/15 2015/16 2016/17 2017/18MYPD Total

DMP and Power buy-back Applied forFunding 726 3 275 1 973 1 972 1 835 2 001 11 056Demand Savings(MW) 3 205 3 355 3 355 3 855 3 855 17 625R/MW 1.02 0.59 0.59 0.48 0.52 0.63DMP and Power buy-back AdjustmentsFunding (75) (2 108) (1 285) (1 972) (1 835) (2 001) (9 201)Demand Savings(MW) (97) (1 618) (3 355) (3 855) (3 855) (12 781)R/MW (0.65) (0.19) (0.59) (0.48) (0.52) (0.24)Approved DMPFunding 651 1 167 688 - - - 1 855 Demand Savings(MW) 3 108 1 737 - - - 4 844 R/MW 0.38 0.40 0.00 0.00 0.00 0.38

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According to the IRP 2010, beyond 2016 there will be

enough capacity due to the introduction of Medupi and

Kusile power stations on the national grid. Therefore it was necessary to adjust the DMP and power buy-back

programmes accordingly. It should be noted that the power buy-backs programme is disallowed as the initiative is covered by the DMP.

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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

Thank You

Tel: 012 401 4600

Fax: 012 401 4700Website: www.nersa.org.za

Physical Address:Kulawula House526 Madiba StreetArcadia,0083Pretoria

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http://www.nersa.org.za/

presentation to ppc on energy 24 may 2013

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