Municipal Electricity tariff increases: South African Local Government Association briefing

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Trade and Industry

15 November 2012
Chairperson: Mr B Radebe (ANC)
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Meeting Summary

The South African Local Government Association, with input also from representatives of the eThekwini, Ekurhuleni and Johannesburg Metros, briefed the Committee on municipal electricity tariff increases. Although the National Energy Regulator of South Africa (NERSA) had the general power to regulate prices and tariffs charged by licensees under the Electricity Regulation Act, municipalities were also empowered to set municipal tariffs under the Municipal Finance Management Act and Municipal Systems Act. There was recognition that NERSA determined tariffs, but municipalities levied them. None of the five major metros, who constituted more than 80% of municipal electricity distribution, ever imposed tariffs that were not approved by NERSA, although it was acknowledged that there could be isolated cases of smaller municipalities not complying. When determining the municipal increases, in line with the NERSA guidelines, the municipalities would take into account the costs of bulk purchases, repairs and maintenance, salaries, interest charges and other cost, and then would have to justify their requests for increases to NERSA. Rates varied according to individual circumstances, which included variations in customer mix, cross subsidy frameworks, network age and social responsibilities and contribution rates. The guiding principles for tariff-setting were outlined, including the ability to have transparent cross-subsidisation. It would not be possible to have one set tariff, in view of the individual circumstances. The Independent System and Market Operator (ISMO) would allow Eskom and municipal distributors to be treated as peers, with all distributors purchasing from the ISMO at wholesale rates. It was noted that municipalities and metros still faced a general shortage of skills in the engineering sector, and were unable to attract and retain specialist skills, particularly since they also faced competition from private industries. A Business-Adopt-a-Municipality programme had been initiated to address the skills gap. SALGA was trying to partner smaller and larger municipalities to assist in getting conformity to the Guidelines. It must be remembered that the ability of municipalities to cushion increases was limited, as they could not control bulk energy costs. Some consideration had to be given to the impact of the increases on the manufacturing sector, and whether addressing tariffs would also solve competition challenges.

Members pointed out that one of the problems was that South Africa’s coal was being imported at cheap prices by other countries who then had the competitive edge in manufacturing. They were worried about the overlap between the electricity and municipal legislation, and commented that the current increases were burdensome to commercial and residential users. They questioned if there were ways of decreasing tariffs to encourage investment in municipalities, including the possibility or mergers, and whether all distribution should be done by Eskom. They urged that there be education campaigns to promote energy efficiency, suggested measures for recruitment of scarce skills from universities, and asked about the role of NERSA, and of SALGA, in helping municipalities with their challenges.

Meeting report

Municipal Electricity tariff increases: South African Local Government Association briefing
Mr Mthobeli Kolisa, Executive Director: Municipal Infrastructure Services, South African Local Government Association, briefed the Committee on electricity tariff increases in municipalities. He explained that the National Energy Regulator of South Africa (NERSA) had the general power to regulate prices and tariffs charged by licensees under the Electricity Regulation Act. NERSA was also empowered to subject any licence issued by it o a number of conditions, including conditions relating to the setting and approval (by NERSA) of prices, charges, rates and tariffs imposed by licensees in accordance with the Electricity Regulation Act.

Mr Kolisa added that the Municipal Finance Management Act (MFMA), in section 24(2)(c)(ii), referred to the ‘setting’ of municipal tariffs in a general sense by municipalities. Section 75A(1) of the Municipal Systems Act (MSA) empowered a municipality to levy and recover fees, charges or tariffs in respect of any function or service of the municipality. There was an apparent overlap in the provisions of the Electricity Regulation Act and the Municipal Finance Management Act, in that both Acts dealt with the imposition of tariffs, although the Electricity Regulation Act dealt specifically with tariffs charged by its licensees, while the Municipal Finance Management Act dealt generally with municipal tariffs.

Mr Kolisa said that in dealing with this overlap, local governments recognised that NERSA determined the national tariffs while municipalities set or levied tariffs. These would not be determined in the same way as NERSA, but would essentially be imposed. However, none of the major metros, constituting more than 80% of municipal electricity distribution, ever imposed tariffs that had not been approved by NERSA, although it was acknowledged that there could be isolated cases of smaller municipalities not complying with this principle.

Mr Leshan Moodliar, Senior Engineer: eThekwini Municipality, set out the process followed in the eThekwini Metro in determining its tariff increases, in line with NERSA guidelines. The Metro would look at five main components: bulk purchases, repairs and maintenance, salaries, interest charges and other costs. Applications forwarded to NERSA had to be broken down to show the five components, with a motivation for a percentage increase for each cost item. NERSA would then regulate each cost item in line with cost causation drivers and approve an average tariff increase per municipality.

Mr Moodliar said that electricity purchases made up the largest percentage of the budget of the Metro. For a municipality whose electricity purchases constituted 64% of its budget, Eskom would charge a percentage increase of 13.5%. This would contribute 8.6% to the total average increase of 11%, which was a direct pass-through cost for the municipality. Even if the municipal cost did not go up, the increase would still be 8.6% to the end customer, as a direct result of Eskom’s increase. As a result of the municipal cost increases, a further 2.4% was added onto the total increase for the year, as a result of the increases in salaries and wages, repairs and maintenance amongst other cost items.

Mr Stephen Delport, Chief Engineer, City of Ekurhuleni, spoke on the average sales price and average purchase price ratio. He confirmed that all the major municipalities complied with the NERSA guidelines. Municipalities purchased electricity in bulk, on the megaflex rate. When Eskom was running short on generation capacity, which happened during the winter months of June, July and August, there was a strong signal during peak hours. Although it might cause customers to complain, municipalities would not work against the national objective.

Mr Delport said that an annual survey was carried out to compare municipal tariff structures. An analysis of the Eskom Megaflex tariff indicated that energy was 90% of the cost, and demand constituted 10%, with the mark-up at zero (as Eskom was the baseline tariff for a municipality). The Tshwane tariff, on the other hand, indicated that energy was 62% of the cost, demand at 38% and mark-up at 9%.

Mr Kolisa said that the five metros represented more than 80% of the electricity consumed by all municipalities. A review of their tariff structures indicated compliance to Eskom’s tariff structures. Rates varied in individual circumstances, which included variation in customer mix, cross subsidy frameworks, network age and social responsibilities and contribution rates.  He said that South African Local Government Association (SALGA) recognised that there could be small municipal distributors who were not conforming to Eskom’s tariff structure, due to implementation challenges. SALGA would like to be informed of these individual cases so that it could assist them in conforming to the Guidelines, by partnering them with bigger municipalities.

Mr Paul Vermeulen, Manager: Load Power, City Power, Johannesburg explained the alignment of tariffs with Eskom structures versus the rates. Eskom tariffs to municipalities included a 4,17 c/kWh (cents per kilowatt hour) cross subsidy towards Eskom’s residential customers, and a cross subsidy for electrification in Eskom supply areas (3,59 c/kWh). He added that one rate or tariff would not fit all municipalities, for a number of reasons, including their size.

Mr Vermeulen said that there was a government initiative to establish an Independent System and Market Operator (ISMO) where Eskom and Municipal distributors would be treated as peers and all distributors would be purchasing from the ISMO at wholesale rates. He added that tariff alignment was possible in the absence of cross-subsidisation.

Mr Kolisa explained the guiding principles for tariff setting. There should be social, economic and financial norms where tariffs were equitable and affordable. The tariffs should allow for provision of basic services to everyone, and provide for transparent cross-subsidisation of poor households. The tariff structure and levying process should be simple, encourage local economic development, have a positive influence on economic input factor costs for industrial and commercial firms, align with economic policies of the country, be cost reflective and have an effective link into the municipal financial framework. Finally, it should promote sustainability and extension of service provision.  

Mr Kolisa said that tariff design process, as carried out by the five metros, took into consideration the principles of the cost of supply and this was why they were in compliance. Metropolitan distributors and a significant portion of the larger Municipal distributors were working towards detailed cost of supply analysis.

Mr Kolisa outlined the challenges faced. There was a general shortage of skills in the engineering sector, as a result of the industry’s and Metros’ inability to attract and retain specialised skills. There was also competition from private industries. In an effort to deal with the skills gap, SALGA had initiated a Business-Adopt-a-Municipality programme, and was also considering the prospect of Metros partnering with and supporting small municipalities.

Mr Kolisa said that municipalities were also concerned about the rising electricity prices but added that the municipalities were mere transporters of electricity, and not generators, and for this reason the increase in bulk energy cost had to be a pass-through cost to the customer. The ability of the municipalities to cushion these high increases was limited, as they had no control over the bulk energy costs.

He noted the impact of the electricity tariff increase on the manufacturing sector and questioned if electricity tariffs were the best method of addressing the economic competitiveness challenges of the country. He suggested that perhaps the country could consider developing a comprehensive framework for retaining its economic competitiveness, in the context of increasing electricity prices and other prices such as water prices.
 
Discussion
The Acting Chairperson noted that China’s economy had quadrupled when it focused on exports, which was also a drive that promoted manufacturing. South Africa had to create an environment that was conducive for competition with other countries that were doing well.

Mr G Selau (ANC) said that it was NERSA’s role to ensure that regulations were adhered to by all relevant parties, including licensees. He cautioned that the overlap between municipal legislation and the Electricity Regulation Act would cause problems, if not addressed.  

Mr Selau pointed out that the Eskom price for electricity was different from that of municipalities, and furthermore the price at which Eskom sold to household users and to municipalities was the same.  He proposed that the role of distributing electricity should be confined to Eskom, and not extended to municipalities. He also asked how municipalities with serious challenges would be brought on board.

Mr Kolisa responded that Eskom and the municipalities seemed to be competing. He highlighted that, under the fiscal framework of local government, municipalities were required, from their own sources, 90% of the revenue needed for operational requirements. They could not get this from provincial government. Their “own sources” included charges for electricity, rates, water, sanitation and others. Generation of own revenue also informed the choice of tariff. Some municipalities had electricity as their major source of revenue. The question was always whether to push up water and sanitation rates or electricity rates.

Mr Kolisa said that some of the information published in the media was misleading as it related to the prices at which Eskom sold electricity to municipalities and households.

Mr Kolisa commented that cutting municipalities out of the distribution lines would not be feasible. It was still necessary for them to distribute electricity. Firstly, they had the infrastructure and secondly, Eskom would still have to factor into the price the cost of other services, if it were to be the sole distributor.

Mr N Gcwabaza (ANC) sought clarification on what drove tariff increases, commenting that the increases were often burdensome to commercial and residential users, and were even leading to the closing down of some companies. He wondered if there was any way to decrease tariffs to encourage investment in municipalities. He asked if any education campaigns had been carried out, to promote energy efficiency, and what measures were in place to recruit scarce skills from universities.

Mr Moodliar responded that the tariff increase was dependant on the costs of the municipality, which would include
bulk purchases, repairs and maintenance, salaries, interest charges and other costs. The power of municipalities to bring down the tariffs was limited.

Mr Delport said, in relation to the decrease of tariffs, that it might be possible to set a uniform tariff structure was possible, but this drive required financing. Some users were using conventional meters that were outdated. There was a need to move on to better technology. He noted the reference to China, and said it relied on coal that it imported at a lower cost, because South Africa was exporting it at cheap prices. This was something that needed to be addressed.  Local government did not regulate coal exports.  

Mr Delport added, in relation to education campaigns to promote energy efficiency, that the efficiency signal was weak, and there SALGA would work with the Department of Energy to try to correct this.

Mr Kolisa explained that SALGA had an apprenticeship programme for sourcing electricians and engineers from universities. 170 engineers had been sourced so far, and Durban had trained more than 50 technicians. Johannesburg had a fully-fledged training centre that was fully accredited by the relevant Sector Education Training Authority (SETA). Bursary schemes and on job training were other measures in place. He added that small municipalities could not attract skills because of low pay and other social factors.


Mr X Mabasa (ANC) sought clarity whether the 20% of municipalities listed as facing challenges got their licences from NERSA, and if there was a relationship with SALGA.  

Mr Kolisa confirmed that these 20% of municipalities also got their licences from NERSA as the national regulator. The question of municipalities facing financial challenges should be dealt with through national interventions. It would not necessary work to merely merge municipalities, because this would transfer the burden of one that was struggling to another that was financially sound.

Mr Mabasa said that there should be a system to charge sub-tenants living in backyard dwellings, who were also consuming electricity.

Mr Kolisa agreed that currently there was no mechanism in place to pass on the cost to the shelters by the main households.

The meeting was adjourned.


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