PRESENTATION TO PARLIAMENTARY PORTFOLIO COMMITTEE ON TRADE AND INDUSTRY 2 NOVEMBER 2012 IPAP 2012/10

OUTLINE Legislative context, NERSA vision and NERSA mission Regulatory Principles Regulatory Functions Regulation of Electricity Prices- Eskom Regulation of Electricity Prices- Municipalities Conclusion

Legislative Context 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 Public meetings/hearings 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); Electricity Regulations Electricity Pricing Policy (EPP) GN1398 19 December 2008 Electricity Regulations on New Generation Capacity GN 399 4 May 2011

“To be a world-class leader in energy regulation” NERSA Vision and mission 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.”

REGULATORY PRINCIPLES Regulatory principles, which guides 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 FUNCTIONS FOR ELECTRICITY Licensing: Generation, Transmission, Distribution and Trading; Setting of tariffs; Setting of conditions of supply and standards; Monitoring compliance with licence conditions. Responding to non-compliance Investigate complaints; Mediate or arbitrate in disputes; Gather and store industry information;

REGULATION OF ELECTRICITY PRICES Electricity Regulation Act, 2006 (Act No. 4 of 2006) Section 4(a)(ii) says that the regulator must regulate prices and tariffs. Section 15 (1) (a) says:- “must enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return;”. Section 15 (1) (c) says:- “must give end users proper information regarding the costs that their consumption imposes on the licensee's business;” Section 15(1) (c) and (d) says:- “must avoid undue discrimination between customer categories” and “may permit the cross-subsidy of tariffs to certain classes of customers” NERSA also has to comply with the Principles in the Electricity Pricing Policy document because Section 4 (a) (iv) says:- “issue rules designed to implement the national government's electricity policy framework, the integrated resource plan and this Act;”

REGULATION OF ELECTRICITY PRICES:- Eskom NERSA uses a Revenue Requirement Methodology based upon the wording in the Acts which in turn leads to a rate of return methodology The rate of return formula is as follows: R = E + (V – d + w) r Where: R = required revenue E = cost to supply V = value of qualifying property, plant and equipment d = accumulated depreciation on qualifying property, plant and equipment w = allowance for working capital r = rate of return using the weighted average costs of capital (WACC)

REGULATION OF ELECTRICITY PRICES:- Eskom NERSA publishes the Methodology for comment NERSA interrogates all aspects of the application, seeks public comment and holds public hearings and publishes reasons for decision The EPP gave NERSA leeway in moving from Historic Pricing for assets to Replacement Cost based pricing and NERSA has used this leeway to soften the blow to end users. This has been interpreted by some as a “mistake” by NERSA

Eskom Price History Prices in Red actually applied MYPD 1 Decision Revision 1: 2008 price in Dec 2007 Revision 2: 2008 price in Mar 2008 Interim MYPD 2 Decision Revision: 2012 price Mar 2012 2006 2007 2008 2009 2010 2011 2012 Average Price Increase (%) 5.10% 5.90% 6.20% 14.20% 27.50% 31.30% 24.80% 25.80% 25.90% 16.00% Average Price (c/kWh) 17.91 18.09 18.27 22.61 25.24 33.14 41.57 52.30 65.85 60.66 Prices in Red actually applied Source: Eskom

REGULATION OF ELECTRICITY PRICES:- MUNICIPALITIES NERSA publishes Municipal Tariff Guidelines and Benchmarks and municipalities apply based upon these figures Approximately 60% of municipal budget is funded by electricity revenue There are structural and other issues with municipal tariffs They see industry as a source of revenue (seem to not understand impact on industry) Their customer mixes are problematic given the conflicting needs they have Their tariff structures don’t align with Eskom's They don’t have cost of supply studies done They don’t have proper information They don’t have skills Electricity Business not ring fenced

REGULATION OF ELECTRICITY PRICES:- MUNICIPALITIES NERSA is currently busy with municipalities where there are issues with the industrial tariffs but complete change cannot be effected overnight NERSA is busy with a tariff rationalization project NERSA has also arbitrated in a dispute between NCP and Ekurhuleni Municipality because the tariff made them uncompetitive when competing with manufacturer supplied by Eskom National Treasury staff have also been made aware that Municipal funding from electricity is reaching the limit (“Tipping Point”) and needs to be reduced

CONCLUSION NERSA is concerned about the general price of electricity and its impact on Industry especially in the municipal areas Particular concern is the impact on employment however it for industry to report on how they are specifically impacted NERSA’s role as an economic regulator is to set prices and tariffs that ensure the sustainability of the licensee (recovery of costs) and also affordability to the end user. To balance these conflicting objectives is not always easy. However to achieve this NERSA has taken the initiative by addressing the imbalance in the To U tariff with Eskom, implementing IBT tariffs, starting the tariff rationalization project and addressing the imbalances in the industrial tariffs with the municipalities

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