1 Electricity Industry – Municipal Tariff Issues and NERSA Approval Processes Compiled by Nhlanhla Ngidi

Current SA Electricity Industry Structure Eskom Transmission – 100% Eskom Distribution – Supply bulk to Municipalities 100% and +/-40% distributed to customers Customers Supplied directly by Municipalities Customers Within Municipal Areas supplied by Eskom Customers Supplied Directly by Municipalities Eskom Generation 95% of Generation for the Country Large Power Users/ Energy Intensive Users Group e.g Mines, Smelters MunicD1MunicD3MunicD2MunicDn International trading Imports /Exports IPPs Renewable or Thermal Municipal Generators – Own Generation or Sell to Eskom on Short Term Power Purchase Programmes Municipal or Local Authority Distributors NERSA- Regulation of Industry DoE – Policy Formulation

Slide 3 Unfair and inequitable treatment of consumers across the country –Significant variance in average tariffs by Distributors –Unfair discrepancies exist between Eskom Distribution and Municipal Distribution purchasing tariffs from Eskom Transmission Eskom Distribution gets better deals from Eskom Transmission since its all Eskom but Municipalities do not. Tariffs at Municipalities have not yet reached a level of being cost reflective –NERSA is left with no choice but to use benchmarking methodology for municipal tariff approvals –This is not a very efficient way of setting tariffs as some municipalities may not accurately quantify the costs considered in the methodology –This may lead to municipalities undercharging or overcharging its customers Key Challenges Facing the Industry on Tariffs

Slide 4 Municipalities buys Bulk Electricity from Eskom mostly at Megaflex Tariffs which are more or less at Wholesale prices o In most cases the real cost to supply and serve electricity to the customers is not correctly quantified at a municipal level o Very high non-technical losses e.g. theft, non payment, vandalism is one of the main drivers for most municipalities in setting their tariffs - This is also the main issue on under recovery – credit control issues o Sometimes the tariff setting regime is not well understood at all – Capacity issues o Municipalities who have lower non-technical losses tend to have lower tariffs because of their high collection rates which also yield some good profit margins after they have recovered all their costs to serve electricity Once the level of cost reflectivity of tariffs is reached at municipalities, this may even benefit customers in not being overcharged and also help municipalities in setting tariffs that will make them recover all their costs and make reasonable profit margins Key Challenges Facing the Industry on Tariffs

NERSA Municipal Tariff Benchmark Methodology The main drivers which are taken into account are: o Bulk Purchases, o Bad Debts, o Reasonable Energy Losses, o Salaries and Wages, and o Capital Charges Furthermore, the municipalities’ overall financial and technical performance will be reviewed prior to a final decision on the overall increase. Indicators considered in this regard mainly include; o percentage surplus; o percentage energy losses, o percentage power costs, o bad debt provision and average purchase price/ average selling ratio 5

NERSA Municipal Tariff Guideline In order to ensure that a proper analysis is done and approval of tariff applications is achieved, NERSA requires correct and complete information by which the tariffs are to be determined. o To this end, a need for consistent and high quality information has been identified through the information supplied by municipalities. o The required information for tariff analysis and approval includes both qualitative and quantitative data and must be in a form that is consistent with NERSA’s objectives insofar as tariff principles are concerned and as stipulated in the Electricity Regulation Act. For municipal tariff applications to be properly analysed, NERSA depends entirely on the accurately completed information provided in the Distribution forms (D-forms). o D-forms that are primarily used for tariff approval processes are D1 (Financial information), D2 (Market information) and D3 (Human Resources information). o These forms contain information regarding the financial health and efficiency levels of the municipality, and also provide data regarding consumption and number of customers per tariff category, which will assist NERSA in its tariff setting 6

NERSA Municipal Tariff Guideline One of the most important drivers for the development of Municipal tariff guideline and benchmarks the determination made for Eskom’s Multi Year Price Determination. Assumptions are made on the weighted average cost increases on Eskom bulk purchase percentage, CPI etc. Based on the above assumptions the municipal cost structures used for are currently as per the table below: 7

NERSA Municipal Tariff Guideline – The NERSA Approval Process The first draft consultation paper on Municipal Tariff Guidelines and Benchmarks is published for stakeholder comments and inputs. After all stakeholder inputs are consolidated, the public hearing is held by NERSA After the public hearing NERSA will consider all the comments and inputs and approved the Municipal Benchmarks /Guideline and this will be communicated to the municipalities D-forms are then submitted by municipalities to NERSA containing all the information to be used to analyse and approval their tariff increase applications o The analysis will be done based on the information in these D-Form which is why the municipalities must make sure that the information is if not accurate at least close to accurate. NERSA will then check and analysed if tariff structures, tariff levels, financial performance and system losses fall within the approved benchmarks. If any of these falls outside the benchmarks, the overall performance of the municipality is considered based on facts, reasons and evidence submitted by the municipality. The overall percentage increase is also compared to the guideline increase as issued by NERSA every year. The turnaround period for the evaluation of tariff applications is two weeks UPON RECEIPT OF ALL THE REQUIRED INFORMATION FROM MUNICIPALITIES. 8

NERSA Municipal Tariff Guideline – The NERSA Approval Process Applications where the average price increase is within the guideline and price levels within benchmarks –Approvals are done and communicated with the municipalities Applications where the average price increase is within the guideline and some tariffs above the benchmarks –Approvals are done and communicated with the municipalities Applications where the average price increase is above the municipal guideline –NERSA will arrange public hearings for these –Municipalities are informed to come and motivate for the tariff increase above guideline –The public hearing panel makes recommendations to the Energy Regulator –The decision is then made. Energy Regulator decision is then communicated to the municipalities, to the provincial Auditor-General for the respective municipalities. Implementation without approval of the Energy Regulator is a contravention of the license issued to the municipality. Such a contravention could result in the revocation of the municipality’s distribution license or a criminal conviction, which could result in the imposition of a fine by NERSA. 9