The Association of Municipal Electricity Undertakings (Southern Africa) NERSA Public Hearing Municipal Tariff Guideline, Benchmarks and Timelines /12 Peter Fowles 7 October 2010

The Association of Municipal Electricity Undertakings (Southern Africa) Contents General Stakeholder comments #1 to #11

The Association of Municipal Electricity Undertakings (Southern Africa) General Conflicting interpretations of legislation covering legal competence to regulate municipal electricity tariffs - SALGA opinion Initiative from NERSA to assist municipalities in meeting budget deadlines is appreciated NERSA officials met with AMEU representatives on 21 September 2010 – Sufficient interaction with municipalities? NERSA media statement – 24 February 2010

The Association of Municipal Electricity Undertakings (Southern Africa) Comment #1: Approach in determining guideline Cost structure analysis based on sample of 60 municipalities to arrive at weighting – Results inaccurate and misleading – Significant variation due to size of municipalities – Recommend range of weights based on grouping Eskom increase of 25.8% to result in municipal bulk tariff increase of 26.71%? – Actual cost increase not always at average level – Remove claw back mechanism

The Association of Municipal Electricity Undertakings (Southern Africa) Comment #2: Analysis of other costs Benchmark level reduced from 11% to 8% to rectify a situation? No breakdown of these costs – Services by other municipal functions –financial, meter reading, billing, legal, admin etc – Contributions to capital development – Contribution to rates (surplus?) - %age of revenue Can NERSA regulate municipal surpluses? Unlikely that reduction can be achieved

The Association of Municipal Electricity Undertakings (Southern Africa) Assumed bad (arrear) debt at 0.5% of total revenue of municipality? – Based on Eskom’s approved arrear debt in MYPD2 – Level differs significantly among municipalities – Beyond control of distributors as decision of financial and political components – Electricity arrear debt of the order of 1% to 10% Comment #3: Arrear (bad)debt

The Association of Municipal Electricity Undertakings (Southern Africa) There already exists a significant level of cross- subsidisation in many tariffs Paper quotes the range of cross-subsidisation ratios for `suitable customer base/mix’? NERSA moving away from principle of cost reflectivity in EPP Should NERSA be involved with socio- economic engineering IBT – subsidising customers that do not need Comment #4: Cross-subsidisation

The Association of Municipal Electricity Undertakings (Southern Africa) Cash flow – Eskom seasonal rates and differences in billing and payment policies Theft/vandalism of cables, conductors, equipment Pressures to introduce EEDSM initiatives – capital cost and reduction in kWh sales Comment #5: Other Issues

The Association of Municipal Electricity Undertakings (Southern Africa) Ranges quoted are for purchases, surplus, losses, cross-subsidisation ratios – Nothing for salaries, R&M, capital charges, other? Presumably these ranges affect the benchmark limits Not clear how if this is achieved Suggest that these ranges may not apply to all municipalities – again suggest grouping Comment #6: Are ranges appropriate?

The Association of Municipal Electricity Undertakings (Southern Africa) What financial analysis and what is “efficiency of the municipality”? – Are “surplus percentage” or “system losses” indicators of municipal (electricity) efficiency? – Have cost of supply studies been carried out to justify cross subsidisation ratios and are these ratios used in assessing municipal applications? – What is the `appropriate customer base/mix’ to justify the ratios? Comment #7: Is financial analysis appropriate to determine efficiency?

The Association of Municipal Electricity Undertakings (Southern Africa) No – approach is not appropriate – Uses unconfirmed bulk increase with debatable expense weightings to arrive at benchmarks for assumed group of customers – No apparent attempt to consider financial viability of distributors 20.74% average will result in much higher increases for some customers to subsidise ±8% for IBT Has impact of IBT been considered in proposals? Comment #8: Is approach to determine benchmarks appropriate?

The Association of Municipal Electricity Undertakings (Southern Africa) Theoretically - Yes – Provided that these factors are reflective of the customer bases in municipalities – Emphasis would appear to be on IBT customers – Significant number of munics applied for different tariff increases in 2010 that were approved by NERSA – are benchmarks appropriate? Comment #9: Is benchmarking to assumed consumption per customer class appropriate?

The Association of Municipal Electricity Undertakings (Southern Africa) Understand objective to harmonise tariffs EDI restructuring process has stalled and future uncertain Municipalities within RED areas have different cost structures Differences in benchmarks is minimal and not appropriate Comment #10: Is benchmarking according to RED areas appropriate?

The Association of Municipal Electricity Undertakings (Southern Africa) Comment #11: Timelines to assist with budget process Appreciation for efforts to assist Approved tariff guidelines by November is essential Ideally, munics to submit initial applications and receive NERSA decision before end of March 2011 Resubmissions and public hearings during April with final decisions by May 2011

The Association of Municipal Electricity Undertakings (Southern Africa) Thank you QUESTIONS?