1PRESENTATION TO SALGA, AMEU & NT

02 DECEMBER 2014

OVERVIEW ON THE MUNICIPAL GUIDELINE,BENCHMARKS

& PROPOSED TIMELINE FOR THE 2015/16 FINANCIAL YEAR

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Contents

• Mandate and legal requirements• NERSA’s municipal tariff approval process• Determination of the tariff guideline increase• Requirements for tariffs above guideline• Development of the municipal tariff benchmarks• Stakeholder consultation process• Proposed timelines

Mandate and legal requirements• The Electricity Regulation Act

– Section 4 (a) (ii) The Regulator must regulate prices and tariffs– Section 15 (1) A licence condition determined under section 14 relating to the

setting or approval of prices, charges and tariffs and regulation of revenues –

a) Must enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return

– Section 15 (2) A licensee may not charge a customer any other tariff and make use of provisions in agreement other than that approved by the Regulator as part of its licensing conditions

– Section 45 (1) (b) For the purposes of this Act, any person authorised thereto in writing by the Regulator may require any person to furnish to the Regulator such information, returns or other particulars as may be necessary for the proper application of this Act

– Section 45 (2) the Regulator may require that the information, return or particulars furnished under subsection (1) be verified on oath or by way of solemn declaration

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NERSA’s Municipal tariff approval process

• Currently municipal tariffs are approved on an annual basis upon application by the licensees

• Licensees apply to NERSA for the approval of their tariffs – this must be supported by information pertinent to the individual municipality

• There are 186 licensed distributors - 174 municipalities and 12 private distributors• The process is dependent on the approved Eskom prices under the Multi-year Price

Determination (MYPD) process– NERSA approved the Eskom prices/revenues on 27 November 2014

• In accordance with the MFMA the municipal tariff application process must be finalised by 15 March annually , to allow for the municipal budgetary processes and public consultations

• Approved tariffs are communicated to the municipalities and are published on the NERSA website

• SALGA and other stakeholders to encourage municipalities to apply on time for the 2015/16 financial year tariff review in order to meet the 15 March deadline

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Municipal Tariff Guideline

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Determination of the tariff guideline

• When determining the guideline percentage increase the following issues were considered:– The information from the 2012/13 distribution forms

was used to determine the changes of the cost structures.

– The selection of the D-forms was based on the availability of the required data used in the model for the revision of the municipal cost structure weights.

– A stratified random sampling of municipalities was used to determine the weights of the cost structures.

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Determination of the tariff guideline cont….

• The table below represents the revised weights of the cost drivers used in determining the electricity costs of supply:

Cost Category % of total costs

Energy Purchases 73

Salaries & wages 10

Repairs & Maintenance 6

Capital Charges 4

Other costs 7

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Determination of the tariff guideline cont….

• Assumptions made on the weighted average cost increases:– Bulk purchase based on Eskom’s approved price

increase of 14.24% to municipalities– CPI ( As indicated in the Medium Term Budget Policy

Statement 2014)– Salary & Wages (As indicated in Circular No. 6/2012:

Salary and Wage Collective Agreements indicated in the wage settlement agreement)

– Repairs and maintenance, capital charges and other costs have been increased by CPI

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Determination of the guideline cont.

–The formula used for calculating the guideline

MG = (B x BPI) + (S x SI) + (R x RI) + (C x CCI) + (OC x OCI)

Where:– MG = Municipal guideline increase– B & BPI = Municipal bulk purchases and its increase– S & SI = salaries & salary increase– R & RI = repairs & maintenance and its increases– C & CCI = capital charges & its increases– OC & OCI = other costs and its increases

– ;

Requirements for tariffs above the guideline increase

• Municipalities applying for an increase that is above the guideline have to justify their increases to the Energy Regulator and the following actions would be expected: – a detailed plan on the additional funds requested needs to be

presented to NERSA as part of the motivation for above guideline increase.

– the approved funds must be ring-fenced to ensure that it is strictly utilised for the identified projects;

– municipalities must report to NERSA on a six-monthly basis on how the additional funds are utilised;

– funds not utilised for the purpose for which they were approved for will be clawed back in the following financial year.

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Municipal Tariff Benchmarks

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Municipal Tariff Benchmarks - Purpose

• NERSA develops benchmarks in order for municipalities to charge reasonable prices

• The benchmark levels are developed in order to ensure that tariffs across municipalities are not vastly different

• This assists in the rationalisation of prices• Eskom’s tariffs were considered in developing the

benchmarks and a mark-up added where necessary

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The municipal tariffs and customer categories

For the purpose of benchmarking NERSA considers the following customer and tariff classes:

• Domestic Tariffs ( with IBT & without IBT)– Domestic Low : low residential consumption users– Domestic High : high residential consumption users

• Commercial Tariffs – Prepaid: business customers that are connected on single and three phase – Conventional : business customers that are connected on conventional phase

• Industrial Tariffs– Based on Eskom’s Nightsave– Based on Eskom’s Megaflex– Time of Use ( TOU)

• Agriculture– Prepaid : customers with single phase metered supplies– Conventional: customers with dual or three phase metered supplies

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The municipal assumed consumption levels

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The review of the municipal tariff applications

– Municipal tariffs are approved on an annual basis– On reviewing tariff applications, NERSA considers

• The current municipal tariff levels• The tariffs in comparison to NERSA approved benchmarks• The efficiency of municipal operations (technical and

financial). All this information is from the municipal d-forms

• The proposed municipal tariff structures and the level of cross-subsidisation

• Any assistance that may be necessary to be provided to the municipalities

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NERSA’s financial benchmarks

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• Municipalities are currently regulated using the following predefined financial and technical

benchmarks

• These ratios/benchmarks give a view on the overall performance of the municipality

• They also allow one to determine the efficiency within which the applicant is performing

Revised and New benchmarks

• The 2014/15 average tariffs were increased by the municipal tariff guideline increase

• NERSA has developed new benchmarks for the three-phase commercial tariffs, holiday homes, churches, schools, halls, clinics, old age homes and similar supplies.

• A formula together with Eskom’s respective rates were used to determine the average consumptions and benchmark levels.

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Revised and New benchmarks Cont.

• The formula used for calculating the average consumption levels:

AC= (LF*A*V/1000*1.732*24*30.34)

Where: • AC = Average Consumption• LF = Load Factor • A = Ampere • V = Volt• 1.732= Square root of 3• 24 = Hours in a day• 30.34 = Number of days in a month 18

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Stakeholder consultation process• The determination is done in consultation with the

following stakeholders:– A meeting was held with National Treasury– Publication of the consultation paper for stakeholder

comments– Workshops with AMEU , SALGA & National Treasury– Consideration of stakeholder comments– Energy Regulator approves the guideline,

benchmarks and proposed timelines– Decision communicated to all stakeholders

Proposed Timelines

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Timelines for municipal tariff Guideline & Benchmark

Timelines for municipal tariff approval process

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Timelines for municipal tariff approval process cont.

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Questions

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Thank You