TARIFF GUIDELINE NERSA SUBMISSION BY IMFO 7 OCTOBER 2010 GENERAL - PowerPoint PPT Presentation

INDICATIVE MUNICIPAL TARIFF GUIDELINE NERSA SUBMISSION BY IMFO 7 OCTOBER 2010

GENERAL  Number of customers (residential and non-residential)  Units bought/Generated  Units Sold  Units Lost in Distribution  Percentage Loss  Cost Per Unit bought/generated  (R) Loss in distribution  Operating Cost Per Unit sold (Excluding Bulk Purchase)  Income Per Unit Sold.  Total length of distribution lines  Above surface  Below surface  Load Factor

COMMENT 1  Stakeholders are invited to comment on whether the approach used in determining the guideline is appropriate, if not to propose possible alternatives.  IMFO beliefs that there should be regulating norms and standards but a one side fits all at this stage will not be possible unless burning issues such as WEPS and network configuration have not been adequately addressed. Networks should be configured alike and all distributors should buy bulk electricity at the same price this includes Eskom distribution, in order to be able to set benchmark indicators for all distributors.  The unilateral change of” Other cost” from 10% to 8% cannot be supported unless proper research in the cost that represents the 10% has been conducted.  It is proposed that Units be used to benchmark the distributorss, this is the only common dominator across the board that cannot change.

S TAKEHOLDER C OMMENT # 2  Stakeholders are invited to comment on the views of the analysis of the other costs.   It is not clear if the terminology used here refers to all other costs excluding Bulk purchases or is this referring to Other costs excluding Bulk purchases, salaries, repairs & maintenance and capital charges.   To start with it is important to note that National Treasury has already classified expenses and it will be difficult for Municipal distributors to report on a different set of classifications. A set of ratio’s can be determined to regulate expenses depending on the various cost elements in “Other Costs”. In this regard it is important that an in depth research be concluded before there is a change from current practice.

S TAKEHOLDER C OMMENT # 3  Stakeholders are invited to comment on whether the assumed arrear debt is appropriate for municipalities, if not to propose possible alternatives.   The benchmark for bad debt is unrealistic at 0.5% of the total Revenue of the Municipality, because this implies that there is a payment rate of 99.5%, a 0.5% provision for Bad debt, under the heading “Other” sounds more appropriate

S TAKEHOLDER C OMMENT # 4  Stakeholders are invited to comment on the cross- subsidisation between customers. What is the level of cross subsidisation that should be allowed and between which customer categories.  Cross subsidation is entrenched in the Municipal Systems Act, section 74 highlighted the charges for poor users of services. It is also common practice to subsidise usage from non- residential customers towards residential customers, and the reason being the ability for non-residential customers to shift their charges through product pricing, the only issue here is the impact for consumers with a cost margin of 40% and more on electricity.  Any cross subsidization has to be evaluated against the mix of the customer base and the ability to pay principles for a specific community. It would rather be a better regulatory process if the supply to a property is controlled through the Ampere usage.

S TAKEHOLDER C OMMENT # 5  Stakeholders are invited to comment on whether there are other issues that could impact on the municipal electricity price increases.  There are various issues that impact on electricity price increases.  Increase security cost due to theft of electricity assets and the lack of implementing National Legislation to curb the selling of scrap metal;  Non implementation of a standard configuration of networks;  Customer base within a Municipal boundary, high number of unemployment.  Cost of borrowing and the term on which a loan is funded. E.g. Loan is over 10 year period and useful life of the asset is 20 – 25 years. To service the debt it would be necessary to increase the tariffs to be able to pay the lender due to the shorter period of the loan compare to the borrowing.

S TAKEHOLDER C OMMENT # 6  Stakeholders are invited to comment on whether the ranges used in determining the financial benchmarks are appropriate.   The difference in the benchmarks can have a major shift in the ultimate cost. E.g. a 20% difference in the bulk purchases on R3Bn will mean a difference of R600 million. It is recommended that a weighted average be used with no tolerance. This will also show the disparity in bulk purchase cost and assist in achieving WEPS..

COMMENT #7 Stakeholders are invited to comment on whether the financial analysis  is appropriate for determining the efficiency of the municipality.  Benchmarking has a definite role to play in measuring the efficiency of a utility  but IMFO is certain with the tolerances as indicated will not achieve the desired outcomes, which ultimately defeats the objective.  It is a worldwide application that the electricity business is divided into the  three major components namely:  Generation  Transmission  Distribution   There should be price cap at Transmission point at which each distributor will  buy including Eskom.  It is further suggested that the statistics mentioned be analysed and used to  develop a formulae to measure efficiency. See study on the efficiency and regulation of the Slovenian electricity distribution companies.

S TAKEHOLDER C OMMENT # 8  Stakeholders are invited to comment on whether the approach used in determining the benchmarks is appropriate.  IMFO is of the opinion that benchmarks should be implemented but benchmark ratio’s should be develop to take in consideration the current disparity in the bulk purchase price, system configuration and the specific circumstances for each distributor with regard to topography.

S TAKEHOLDER C OMMENT # 9  Stakeholders are invited to comment on whether the approach of benchmarking the licensees’ tariff levels against some approved benchmarks based on assumed consumption levels per customer class is appropriate.  Benchmarking of tariffs against consumption levels seems to be the most logic, but it poses its own challenges to the industry and we have to acknowledge the following main issues. Distribution networks are configured differently  Density of users differ  Combination of different classes differs from distributor to distributor.  Different topography has a higher or lower impact on cost  Different bulk purchase prices which can vary up to 20%   Based on the aforementioned it is the opinion of IMFO that the benchmark on current tariffs based on consumption levels per customer is not a reliable method unless the above issues are addressed adequately.

S TAKEHOLDER C OMMENT # 10  Stakeholders are invited to comment on whether the approach of benchmarking the licensees’ tariff benchmark levels against each RED is appropriate.  The comments under #9 are applicable. Further to #9 we are of the opinion that we cannot implement a benchmark per RED area unless the networks are configured on the same basis and transmission prices are the same including for Eskom.  Any benchmarking should be for each distributor taking in consideration individual challenges facing that distributor.

S TAKEHOLDER C OMMENT # 11 Stakeholders are invited to comment on the appropriateness of the municipal tariff approval process and timelines with regard to the  MFMA prescribed budgetary process . 1. The proposed timeline for the annual municipal tariff review is not in keeping with the requirements of the Municipal Finance Management Act  (MFMA) in respect of the timeline for municipalities to get their budgets timeLy approved. 2. In this regard, the MFMA stipulates that utility final increases must be submitted by 15 March following all the necessary consultations including  the public hearings 3. Further, a municipality's draft budget has to be submitted to Council by 31 March. Accordingly, at worst we would have expected NERSA to have  wound up its processes and advised us of the revised tariff in time to input same into the budget. 4. It should be noted that the Water utility is complying with these requirements.  5. In view of the aforegoing, it would be appreciated if NERSA would change its timelines to enable municipalities to comply with the letter of the  law. 6. In terms of specifics, this means that we are requesting NERSA to go through its process and approve the new tariff by 15 March to allow us to  input this into the budget. 7. In addition, as next year is an election year, many municipalities will have to publish their budgets before the stipulated date as Council will go  into recess in the run up to the elections. Accordingly, if NERSA could bring its timeline forward to 15 February it would be greatly appreciated. 8. Finally, it is noted that Eskom has committed to the 3-year determinations. This was causing problems, and accordingly, we envisage a far more  expedient process.