Minerals & Energy Parliamentary Portfolio Committee Electricity Pricing Minerals & Energy Parliamentary Portfolio Committee Thembani Bukula - Regulator Member: Electricity

Policies and Drivers White Paper on Energy Policy of 1998 Cost reflective electricity prices Transparent subsidies Access to affordable electricity services National policies Inflation targeting 6% growth Future generation capacity requirements Funding and financing of debt Regulatory objectives Economic efficiency Reasonable returns Stable and predictable regulatory framework

Price Regulation method Rate of return (RoR) Methodology with incentives and penalties R = Revenue allowed E = Operating expenses V = Asset base (property, plant and equipment) d = Depreciation w = Working Capital allowance (including Capital Work in Progress - CWIP) R = Calculated RoR using Weighted Average Cost of Capital (WACC) R = E + (V – d + w) x r

Target debt:equity rate (Eskom) Key inputs Allowed rate of return 11.76% Finance Charges rate 8.0% Effective Average Tax rate 20% Dividends rate Inflation rate 4.0% Efficiency gains per year 2.0% Target debt:equity rate (Eskom) 60.0%  

Allowed revenues 2006/7 2007/8 2008/9 Allowed revenue 36 693 40 084 44 506 Percentage price increase 5.1 % 5.9 % 6.2 % The above percentage increases are to be effected on 1 April each year; The 2006/7 and 2007/8 percentage increases were effected as shown above.

Historic and Long-term Price path

Typical Price Curve/Path Price curves under 4 scenarios Typical Price Curve/Path

Typical Price Curve/Path Price curves under 2 scenarios Typical Price Curve/Path

30 April 2007 Eskom application Eskom has applied for: An increase in the Primary Energy costs The Acceleration Capital Expansion program An increase on operating expenditure The Accelerated Demand Side Management (DSM) program Changes to the Multi-Year Price Determination (MYPD) rules The effective date of the changes be 1 April 2008

Project Plan 30 April Stage 1 Stage 2 Stage 3 Stage 4 Application received from Eskom Stage 1 Stage 2 Stage 3 Stage 4 Analysis and evaluation: Primary energy CAPEX OPEX DSM 18 July 2007 Price modeling and recommendations Model various scenarios and select the best based on regulatory objectives 31 August 2007 Stakeholder consultation: Publication of draft determination (7 – 21 September 2007) Stakeholder workshop (26 September 2007) and update of draft Approval by Regulator: Approve first draft report Publish for public hearings Public hearings Approve final report and determination December 2007