WATER TARIFF VALUE CHAIN

Setting of Raw Water, Bulk Water and Retail Water Tariffs

Presentation to the Parliamentary Portfolio CommitteeMahomed Vawda

PRESENTATION OBJECTIVES

Objective:-

To provide the committee with a clearer understanding of how water is priced through its value chain from raw water, through to bulk water and finally retail water tariffs.

Raw Water TariffCharged by

DWAF

RAW WATER TARIFFS

• Legislative mandate: Section 56 – 60 of the National Water Act, requires DWAF to establish a pricing strategy for raw water charges.

• Raw water Pricing Strategy was first established in November 1999.

• Revised Strategy was approved (Gazetted) for implementation effective from April 2007.

OBJECTIVES OF THE PRICING STRATEGY

Raw Water Pricing Strategy

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WATER REQUIREMENTS NOT SUBJECT TO PRICING

– Permissible use in terms of Schedule 1 of the NWA

– The reserve related to basic human needs

– The ecological reserve

– Water required to meet South Africa’s commitments regarding international waters obligations.

CONTENTS OF THE PRICING STRATEGY

• Funding water resources management cost by water management institutions.

• Funding of the development and use of water works

• Established of a waste discharge charge

Water Resource Management Charges for Water Resource Management Activities

Water Resources Management

Activities in WMAs

Planning & implementation

of CMSs

Institutionaldevelopment &public partici-

pation

Water conservation &

demand management

Water use allocations

Monitoring & assessing water

resource availability and use

Management offloods, droughts,

water abstraction,Etc.

Management of water quality water

& resource protection

Budgeting for activity costs for Water Resource Management Charges

Costs ofWRM activities

in WMAUnit Cost

Registered volumes/waste

load in WMA

Costs of WRM activities will be divided between abstraction and waste related activities, both based on registered volumes.

For inter-basin transfers, the lossof income to the donor CMA will befunded by water use charges raisedIn the receiver WMA

CHARGES FOR STATE FUNDED (SOCIAL) GOVERNMENT WATER SCHEMES

Two charges applicable:

• The development (capital cost) charge, comprising:

– Depreciation component for the purposes of funding refurbishment cost

– Return on assets component for the purposes of funding development and betterment of waterworks

• O&M cost to sectors is charged pro-rata on estimated annual water use.

Methodology for determining charges for state funded (Social) GWS

Depreciation component: – Asset value as determined in 2000– Depreciate on straight line over useful

life as per table– Examples: Dams – 10% over 45y

Steel Pipes - 75% over 30y

– Asset values will annually be indexed by PPI until formal revaluation (+ every 10 years)

Return on assets: – 4% on completion cost – new

infrastructure, or– 4% on depreciated replacement cost

(asset value as determined in 2000)– Asset values will annually be inflated by

PPI until formal revaluation

(+ every 10 years)– Not applicable to existing State irrigation

schemes

Operation and maintenance charge:- Direct and indirect costs- Scheme by scheme basis

FOR REFURBISHMENT FOR NEW INFRASTRUCTURE & BETTERMENTS

WATER SCHEMES FUNDED OFF BUDGET

• DWAF is custodian of some 300 large dams contained in more than 150 Government water schemes throughout South Africa.

• The water sector requires investments in excess of R20 billion over a period of 20 years for dam and related projects.

• The fiscus cannot alone pay for these large capital outlay and the NWA allows the Minister to direct TCTA to implement and fund commercially viable schemes with non Governmental funding.

• This allows TCTA to raise loans to finance the development of new infrastructure on the understanding that the loans will be serviced through cost recovery from economic water users in terms of billable water use charges.

• The primary charge is the Capital Unit Charge (CUC)

CAPITAL UNIT CHARGE (CUC)

• Tariff will be set to ensure that the debt is fully paid by the end user within a reasonable time period (not longer than the life of the asset), after considering affordability and future augmentation of the scheme.

• Debt will not overlap unreasonably to another project causing financial strain.

• The CUC may be phased in during the construction period and interest will generally not be capitalized after completion of the construction.

• Tariffs are based on water used from the scheme.

Waste Discharge Charge System • The waste discharge charge system comprise of two distinct water

use charges which may be applied in a specific catchment. These are:-

– Charges to cover the quantifiable cost of administratively implemented measures for the mitigation of waste discharge related impacts (mitigation charges).

– Charges that provides a disincentive or a deterrent to the discharge of waste (incentive charge).

BULK WATER TARIFFS OF

WATER BOARDS

NORMS FOR BULK POTABLE WATER TARIFFS

• Water boards– may set a single tariff for its whole supply area.– may set a separate tariff for each scheme or each water

treatment plant – motivated by differentials in the cost of supplying to different customers.

• Free basic water is only provided to households at the retail level.

• The subsidization or cross subsidization of free basic water is a municipal concern and not within the capability of water boards.

NORMS FOR BULK POTABLE WATER TARIFFS

• Municipalities are entitled to an equitable share of the national revenue in order to fulfill its function of supplying basic services.

• Accordingly stepped tariffs does not form part of the bulk potable water tariff structure.

• Tariff increases may be smoothed out over time to take into consideration projected future infrastructure development costs.

• Operating surpluses may be earned to finance future capital expansion for refurbishment, repayment of debt and contingencies.

INPUT COST OF BULK WATERRAW WATER CHARGES

COST OF RAW WATER SUPPLIED FROM DWAF

DIRECT STAFF & LABOUR COST

ALL DIRECT COST OF STAFF WHO ARE RESPONSIBLE FOR O&M OF SCHEMES & PLANT

DIRECT ELECTRICITY & ENERGY COST

ESKOM CHARGES FOR BOTH CAPACITY & USAGE FOR PUMPING, PURIFICATION & PLANT LIGHTING

CHEMICALS FULL COST OF CHEMICALS USED FOR DOZING OF WATER

MAINTENANCE COST OF ROUTINE MAINTENANCE OF PLANT & EQUIPMENT

INPUT COST OF BULK WATERREFURBISHMENT COST OF SUBSTANTIAL REPAIR OR

REPLACEMENT OF PLANT & EQUIPMENT WHICH DOES NOT FORM PART OF ROUTINE MAINTENANCE

DEPRECIATION DEPRECIATION IS MAINLY BASED ON THE GUIDELINES SUGGESTED IN THE RAW WATER PRICING STRATEGY AND COMPLIES TO INTERNATIONAL FINANCIAL REPORTING STANDARDS OR GENERALLY ACCEPTED ACCOUNTING PRACTICE

OVERHEAD ALLOCATION

PORTION OF HEAD OFFICE AND OTHER INDIRECT COSTS ALLOCATED TO EACH SCHEME

NET FINANCE CHARGES

INTEREST PAYABLE ON LOANS LESS INTEREST EARNED ON INVESTMENTS IS ALLOCATED TO EACH SCHEME UNDER THIS ITEM

RETAIL WATERTARIFF

OFWATER SERVICE

AUTHORITIES

RESPONSIBILITY FOR SETTING OF RETAIL TARIFFS

Primary responsibility for the setting of retail water and sanitation tariffs rests with the Water Services Authority

This is in terms of both the Water Services Act, 108 of 1997 and the Municipal Systems Act, No 32 of 2000

Where a WSP is appointed to provide a service responsibility for regulating and approving the tariff still rests with the WSA

ROLE OF NATIONAL WS REGULATOR

DWAF is the national regulator for water services.

DWAF exercises a regulatory oversight role over WSAs with respect to the setting of retail water tariffs.

DWAF has issued norms and standards in respect of tariffs for Water Services (S10 of WS Act).

DWAF cannot approve “Rand and cents” of tariff, but can approve tariff structure and ensure compliance with promulgated regulations.

TARIFF PRINCIPLES (1)

In terms of the WS Act and the Municipal Systems Act, each WSA must have a tariff policy based on the following key principles:

Tariffs should be applied equitably and fairly Payment for services should be in proportion to use Tariffs should be pro-poor in their orientation and

affordable to all households (especially vulnerable groups)

Tariffs must reflect all costs reasonably associated with providing the service

TARIFF PRINCIPLES (2)

Tariffs must facilitate financial sustainability of WSA

Tariffs must encourage economical, effective & efficient use of resources

Tariffs may differentiate between different categories of users, and different levels of services

All forms of subsidies must be transparent and fully disclosed

CURRENT S10 REGULATIONS (1)

Minister allowed to prescribe norms & standards of water service tariffs – (WS Act) – promulgated in 2002 commonly referred to as “S10 regulations”

S10 Regulations focuses on:REGULATION PURPOSE

Revenue Requirements

What should be taken into account in determining tariffs. These could include e.g. cost of water purchases, O&M, capital expenses, rehabilitation, replacement and access.

Subsidization of tariffs

Encourages use of available subsidies. Assists in determining what proportion of costs needs to be recovered and make recommendation on what portion of cost should be subsidized.

Categories & levels of water services

Allows for differentiation of tariffs between different categories of users and also between different levels of service.

CURRENT S10 REGULATIONS (2)

REGULATION PURPOSE

Supply of water to a household (communal tap / controlled volume)

Regulation requires that tariff in this case be set at the lowest amount including zero, to ensure that the service is affordable to even the very poor.

Supply of water to a household (network / uncontrolled)

Requires rising block tariff structure consisting of 3 or more blocks – purpose is to ensure that tariff is related to amount of water being used.

Sanitation services Tariffs must support viability and sustainability of service, recognize public health benefits and discourage practices which degrade environment.

Fixed charge and connection fees and fee for unauthorized connection

Fixed charges and connection fees may be levied.Fees for upgrading of services and unauthorized connection may also be levied.

COMMON PROBEMS IN WSA APPROACHES TO TARIFF SETTING

In the absence of financial ring-fencing, many WSAs do not know how much it costs to provide the service.

Tariff sometimes linked to overall increase in revenue requirements for all services (Water services tariffs – sometimes viewed as “cash cow”).

Tariff increases are estimated and not calculated scientifically / objectively.

Inefficient and ineffective use of subsidies also impacts on tariff setting.

Strive to keep tariff increases low – impacts on service quality e.g. maintenance usually neglected.

TARIFF DATA BASE FOR 2006-07

Regulation unit embarked on WSAs tariff assessment to broadly determine compliance with Sect 10 regulation particularly the rising block tariff

This will enable the regulator to see how many WSAs have tariff structures that cater for the poor or indigent

236 municipalities participated in the survey Only 183 municipalities which represent 78%

municipalities have already implemented 3 or rising blocks tariffs .

Gauteng has complete rising block tariff structure, whereas EC (59%) & KZN (69%) falling behind on the implementation of rising block tariff structure

TARIFF DATA BASE FOR 2006-07

MP&FS are between 76% and 80% of rising block tariff implementation whereas Limp; WC; NW & NC range between 82% and 92% of implementation

However, most of the municipalities are not reporting on the criteria used in setting their block tariffs

There is currently no direct correlation between implementation of rising block tariffs with realization of profit margins

In most cases the defined blocks developed by the municipalities are too wide & defeats the purpose of the rising block tariff structure.

This means that in some cases the blocks become regressive- the more you use the less you pay

CHALLENGES

Difficult to set tariffs if cost of service provision cannot be accurately ascertained, this makes it difficult for the regulator to approve tariff.

Increasing number of indigent households – require greater and more efficient use of subsidies and targeting mechanisms.

Attempts to keep tariff increases to a minimum results in insufficient revenue for O& M.

Increasing bad debt and poor cost recovery places a burden on the financial viability of WSA.

Inappropriate use of the equitable share.

Revenue generated from water not invested back into the business.

CHALLENGES

Municipal tariffs cannot be evaluated in isolation of the total sequence of charges (tariff chain)

The end user in effect pays for all up stream charges (WRM levy; raw water abstraction cost; and the bulk water distribution cost)

Municipal tariffs could not be evaluated comprehensively without knowing the volume of water used per tariff block and the success of billing recovered

WAY FORWARD

WSAs should be required to financially ring-fence their business, this process should enable WSA to reveal true cost of service provided.

Continues communication of S10 regulations and subsequent monitoring and analysis of tariff structures to ensure compliance with S10 regulations.

Appropriate use of the equitable share must be encouraged.

Support should be provided to municipalities around credit control and debt collection issues.

THANK YOU