Municipal Tariff Determinations: National Energy Regulator, National Treasury, SALGA briefings; Working for Energy: SA National Energy Development Institute updates

Energy

29 July 2013
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Portfolio Committee on Energy received briefings from the National Energy Regulator of South Africa (NERSA), the South Africa Local Government Association (SALGA) and the National Treasury on the process and considerations that led to the determination of municipal electricity tariffs. Stakeholder consultations were held during the tariff determination, involving National Treasury, municipalities, and electricity consumers. NERSA would take a number of factors in account, such as weighted average increase in the benchmark municipal cost structure, including bulk purchase cost from Eskom, salaries and wages, repairs and maintenance, capital charges, Eskom increases, inflation and National Treasury guidelines, and this year, NERSA had approved a percentage guideline increase of 7.0%. Those municipalities wishing to deviate from that guideline had to make a specific application, with motivation, and public hearings would be held. If NERSA approved the applications, the funds must be ring-fenced to ensure that they were strictly utilised for the identified purposes. Municipalities had to report on how the funds were used and NERSA did inspections. 19 municipalities had s far submitted applications, and their requests and outcomes were summarised. Six had applied for a review, although NERSA said that part of their problem in determining tariffs was the inaccuracy of information submitted by the municipalities. NERSA aimed to reach pricing decisions that would result in a good balance between sustainability of utilities and affordability for the consumers. Members were concerned about poor information submitted to NERSA, asked how it monitored ring-fencing of funds, how it did inspections and ensured that funds were properly spent. They asked how government would address the R35 billion backlog in electricity distribution infrastructure, cautioning that the tariff could not deal with this, asked abut funding time of use metering systems, and pointed out that National Treasury could probably assist in getting better information. They requested clarification that the municipalities’ increases were not in addition to Eskom’s, asked for more detail on the formula, questioned whether some municipalities were not obtaining double-benefits by being involved also in other programmes, and asked when electronic monitoring might be introduced.

SALGA was in agreement with NERSA’s attempts to cater for the difference between municipalities, where they wished to deviate from the guidelines, and the public hearings. However, SALGA suggested that NERSA should classify municipalities into comparable groups, based on their underlying operating circumstances such as consumer mix and customer numbers, and ensure that all municipalities with medium to large scale industrial customers introduced energy and demand tariffs that were time and seasonally differentiated. SALGA said that the effect of the tariff increase was that municipalities would see a slight reduction in their electricity income, but most municipalities welcomed the decision as more affordable tariffs would be charged to end users. There were, however, concerns whether Eskom was able to operate a sustainable network with its reduced increase, and requested further investigation on this.  Municipalities faced challenges in complying with the tariff application process, but SALGA was assisting them. Better collaboration between SALGA, NERSA, Department of Energy, National Treasury and other stakeholders was still needed, to address the overall challenges experienced by municipalities, and there was also a need for better coordination between the finance and electricity divisions at municipalities. Training was required to address constraints.

National Treasury highlighted the role of local government in service delivery, and said that it was helping municipalities with costing. Because the norms and standards under the Municipal Fiscal Powers and Functions Act (No 12 of 2007) were not yet applied, surcharges (included under “Other Costs”) still formed part of tariffs approved by regulators. It was noted that standardised annual report frameworks were operating, but data still needed improvement and National Treasury was contemplating legislating for standardised norms. The aspects of, and linkages within local government fiscal frameworks and service delivery were explained, with specific reference to the impact of surpluses and deficits, and it was noted that one of the biggest problems was that municipalities often reduced their spending on repairs and renewal, with the gaps between community needs and real service delivery being another. Electricity was the largest component of service charges, but electricity revenue was declining, due to high bulk increases, which could lead to electricity becoming unaffordable, and there were questions around the sustainability of measures that municipalities had put in place to try to absorb losses, as well as concerns that revenue was not being properly managed. Some of the National Treasury initiatives on revenue management and modelling were outlined. Members asked whether anything was done to monitor maintenance, who would develop a policy framework, why municipalities were struggling to get their forms submitted. One Member felt that there were three interlocking problems, requiring a holistic examination, of problematic institutional structures, no incentives and inefficient electricity pricing, coupled with non-sustainable underspending.

The South African National Energy Development Institute (SANEDI) gave a presentation on its Working for Energy Programme, mandated by the Department of Energy, which was initiated to demonstrate the application of renewable energy to address energy poverty, especially in rural areas. It was an essential element of the job-creation drive of the government, was linked to the Expanded Public Works Programme (EPWP), and targeted at the youth, women, and people with disabilities. It focused on research into the availability and sustainability of renewable energy resources, including conversion of biomass to energy initiatives, biomass to bioenergy, waste to energy, development of mini-grid hybrid and smart grid systems from renewable resources, mini-hydro systems, and small scale solar powered electricity generation. Energy-saving initiatives were also being explored, including energy management planning, thermal efficiency, materials for poor or rural households, sustainable feedstock provisions, and alternative fuel sources for low cost housing. Although no funding had been allocated for the current year, the previous year’s activities were described. The reach was national, but with many in Eastern Cape. Flaws had been notified, but attempts made to correct them. Partnerships were used, and more were contemplated. Challenges included the lack of budget, limited regional presence, the high costs of intervention into low economies of scale, and difficulty in getting high technology interventions for rural areas. A request had been made to the Department for more certainty on funding. Members agreed that whilst the programme appeared to be useful, they needed more detail not only on this specific programme, but others that SANEDI undertook. They commended the focus on hospitals, questioned links to the Department of Agriculture’s programmes and the Council for Scientific and Industrial Research, and commented that they saw this as more of a social transformation programme.    
 

Meeting report

Municipal Electricity Tariff Determination briefings
Chairperson’s Introductory remarks

The Chairperson explained that the National Energy Regulator of South Africa (NERSA), National Treasury, and the South Africa Local Government Association (SALGA) were all present to brief the Committee on the recent determinations of municipal tariffs on electricity. The Committee played a proactive role during the processing of the Multi Year Price Determination 3 (MYPD3), to get a sense of how NERSA was going to roll out its consultation process, as well as the process of its tariff determination. It was apposite, therefore, not only to consider NERSA’s response to Eskom’s tariff application but also to take into account what NERSA’s response to municipalities was in terms of electricity pricing. It was the Committee’s duty to help highlight the outcome of NERSA’s tariff determination for the various municipalities. SALGA’s opinion was also sought on the impact of NERSA’s tariff determination on the municipalities. National Treasury had been asked to be present, as it was important for this Committee also to get its view and engage, as tariff determination was a complex financial issue. The three entities’ presentations would therefore help the Committee to understand what had changed in the municipal tariffs determination, as well as what the impacts of those changes were. The presentations would provide the Committee with a holistic view of pricing and pricing strategies.

National Energy Regulator of South Africa (NERSA) briefing
Mr Brian Sechotlho, Head of Electricity Pricing and Tariff, NERSA commenced by highlighting the electricity tariff approval process for municipalities. He noted that municipal electricity tariffs were currently being approved, on an annual basis, upon application by the licensed municipalities. The process was dependent on NERSA’s approved Eskom price under the MYPD process, and this determined the average increase in the municipal bulk purchase cost. NERSA’s determination of municipal guidelines and benchmark tariffs was based on the weighted average increase in the benchmarked municipal cost structure, including bulk purchase cost (the cost Eskom charged), salaries and wages, repairs and maintenance, as well as capital charges. Eskom increases, the expectations on other economic indicators such as inflation, and National Treasury guideline increases were also taken into consideration. He noted that tariff approval applications would have to be made to NERSA by licensees (municipalities), and these applications must be supported by financial and technical information pertinent to the individual municipality. This information was always obtained from the D-forms. NERSA would thereafter review the application and make a determination on each application.

Mr Sechotlho indicated that the guidelines were meant to assist licensed municipalities in preparing quality information to support their tariff applications. NERSA, when reviewing applications, usually considered the current municipal tariff levels, compared tariffs to NERSA approved benchmarks, and also took into account the technical and financial efficiency of municipal operations, the municipal tariff structures and the level of cross-subsidisation, other programmes, such as maintenance backlog and infrastructure refurbishment, that municipalities might be doing, as well as any assistance that might be needed by the municipalities. Where the municipalities applied for amounts in excess of the guideline, public consultation would be done.

For the 2013/14 fiscal year, the weighted percentage increase for energy purchases, salaries and wages, repairs and maintenance, capital charges and other costs were, respectively, 5.10%, 0.70%, 0.33%, 0.60%, and 0.54%. The addition of the weighted increase of all the cost categories resulted in 7.0% being set as the percentage guideline increase.

He added that the current tariff benchmark in operation under the Inclining Block Tariffs (IBTs) system provided for differing tariffs for industrial, commercial, and domestic users of electricity in municipalities, based on cents per kilowatt hour. Subdivisions also existed in the tariffs applicable for domestic and commercial users, based on the same criteria. However, an alternative IBT structure was developed in order to assist those municipalities that were unable to implement the current IBT structure. Under the alternative, the domestic low tariff would comprise of the energy charge, while the domestic high tariff comprised of the energy charge plus a basic charge.

Mr Sechotlho stated that the electricity tariff determination for municipalities was done in consultation with stakeholders such as the National Treasury, municipalities, and electricity consumers. Several meetings were held with the National Treasury, and a consultation paper was published for stakeholder comments. The comments received were considered, while a public hearing was held on the 15th of March 2013 on the determined guideline increase. The Municipal Tariff Guideline was approved on 4 April 2013, after the receipt and approval of Eskom’s MYPD 3 price application on 28 February 2013. The decision on the guideline was communicated to all stakeholders.

Some municipalities, however, applied for tariff increases of more than the 7% stipulated in the tariff guideline and provided varying motivations for their application. Municipalities applying for an increase above the guideline had to justify their increases to NERSA through the presentation of a detailed analysis of additional funds being requested. The approved funds must also be ring-fenced to ensure that they were utilised strictly for the identified purposes. Municipalities must report to NERSA, on a biannual basis, on how the additional funds were utilised, and NERSA usually embarked on inspections to verify municipal reports. Funds not utilised for the purpose for which they were approved would be claimed back in the following year.

Mr Sechotlho stated that ten municipalities were considered during the first public hearing, which was held on 24 May. Their names, and the increases for which they applied, were as follows:
-Baviaans,16%
-Buffalo City, 10%
-City of Cape Town, 7.85%
-Kwa-Dukuza, 11%
Laingsburg, 14.4%
-Matlosana, 35%
-Matzikama, 12%
-Overstrand, 12.4%
-Witzenberg, 8%
-Umvoti, 8%.

NERSA approved the applications for Buffalo City, City of Cape Town, Kwa-Dukuza, Matzikama, Witzenberg and Umvoti. The increases requested by Baviaans, Laingsburg, Matlosana and Overstrand were reduced to 12%, 12.99%, 15% and 12.39% respectively.

Nine municipalities were considered during the second public hearing on 19 June 2013. These were:
-Blue Crane, 8.3%
-Lekwa Teemane, 10%
-Abaqullusi, 18%
-Endumeni, 13%
-Emalahleni MP, 13.4%
-Mzunduzi, 10%
-Umtshezi, 12%
-City of Umhlathuze, 8.96%
-Stellenbosch, 7.3%.

The Blue Crane application was approved, but the applications of Lekwa Teemane, Abaqulusi, Endumeni, Emalahleni, Msunduzi, Umtshezi and the City of Umhlathuze were reduced to 9.23%, 12.25%, 11%, 10.40%, 7%, 9.81% and 7.3% respectively. Stellenbosch’s application was allowed at the increased amount of 7.46%.  

NERSA had received requests from six municipalities for review of NERSA’s decisions on their respective tariff applications. These municipalities were Msunduzi (which was applying for review owing to revenue shortfall for infrastructural refurbishment projects), Beaufort West, Swellendam, Siyacuma, Sol Plaatje and Tsantsabane. He explained that NERSA published all the 2013/14 municipal approved tariffs, with all relevant and important details, on its website. However, it was confronted with some challenges on municipal tariff review, as some municipalities submitted inaccurate and unreliable financial and technical information. Late submission of municipal tariff applications and failure to ring-fence municipal electricity accounts also proved impediments in tariff reviews.

Mr Sechotlho , in concluding, noted that pricing decisions would continue to be balanced between sustainability of utilities and affordability for the consumers. NERSA, in exercising its mandate, would continue to conduct its business in a fair and transparent manner within published government policy and legislation.

Discussion
Mr K Moloto (ANC) expressed concern about the quality of information being submitted to NERSA. He asked if the municipalities had the capacity to ensure that the information presented to NERSA met its expectations and was indeed standardised. He also requested elaboration on how NERSA monitored ring-fencing. He asked if NERSA went out on site to inspect and ensure that the envisaged funds were spent on the approved purpose and or projects.

Mr Sechotlho replied that NERSA had a team of engineers that did audits on all municipalities. It was, however, a challenge for NERSA to adequately monitor the 190 licensed municipalities. NERSA relied to some extent also on consumers’ feedback from different municipalities. NERSA also ensured that funds meant for infrastructure improvement were adequately monitored. In a bid to improve the quality of information NERSA was supplied with, NERSA organised workshops at a broad scale on a regional basis and had several one-on-one meetings with the municipalities. The National Treasury, when it was approached by NERSA, engaged with the municipalities, and this had also brought about an immediate change. 

Mr L Greyling (ID) requested clarification on how the government intended to tackle the R35 billion backlog in electricity distribution infrastructure. He asked if municipalities were saying they would be able to fund the backlog with the tariff, or if they needed loans from the national government or banks. He also asked why tariff increases for municipalities were lower than previous years, and how the increase in household charges that consumed above 350 kilowatts of electricity would play out under the IBT structure. He also asked if there was any plan in relation to funding the ‘time of use’ metering system within the municipalities and what government and NERSA’s commitment was on it.     

Mr Sechlotho replied that the tariff increases were lower than previous years, due to the fact that municipalities had to compete with Eskom. The difference between Eskom’s tariff and the municipalities’ tariff must be minimal if the municipalities were to remain in business. The IBT structure had changed, but NERSA had combined the two blocks after doing an estimate of the cost implication by averaging tariffs. Some municipalities had introduced time of use, while others were yet to introduce it. The challenge with the R35 billion maintenance backlog was that the tariff had already become too high. It was the belief of NERSA that it would not be good to shift the burden of the backlog to electricity consumers.

The Chairperson agreed that there were tough issues around the R35 billion backlog.

Mr Greyling added that the tariff alone could not tackle the backlog. He insisted that South Africa needed a comprehensive plan to address the issue.  

Mr J Smalle (DA) raised concern on issues relating to ring-fencing, as well as the monitoring of the other municipalities who had not asked for increase above the guideline, asking whether NERSA monitored in any way that the guidelines were adhered to properly. He also asked what NERSA’s involvement with the National Treasury was, especially around getting accurate information, pointing out that the National Treasury had certain regulations or guidelines, on dealing with budget, that were not credible and inadequate information. 

Mr Sechlotho replied that ring-fencing was being tackled, as NERSA had engineers monitoring the municipalities. Monitoring was being done for municipalities that were either within or above the tariff guideline.

Mr D Ross (DA) remarked that he was pleased that the proposed Eskom percentage increase was brought down from 16% to 8%, and the municipalities’ benchmark was 7.3%. However, he sought clarity on whether the municipalities’ benchmark was added to Eskom’s 8%, or if the benchmark represented an all inclusive tariff. He asked what NERSA was doing to deal with non-compliance within municipalities. He noted municipalities tended to rely heavily on electricity charges to make ends meet in their overall budgets, because their funding models were problematic. He referred to NERSA’s submission that there was no longer cross-subsidisation, and asked if that was in terms of the amount granted by NERSA in its approved tariff increase. He opined that it would be very difficult for municipalities to invest in distribution networks infrastructure, and asked NERSA what the outcome of its engagement with the National Treasury was, on infrastructure financing options.

Mr Sechlotho replied that the actual increase for municipalities was 7%, and not Eskom’s increase plus 7%. NERSA had frowned against cross-subsidisation between electricity departments of municipalities and other departments, as the funds were only mandated for the electricity departments.

Mr J Selau (ANC) referred to the formula for tariff determination which included salaries and wages, rates and taxes, and capital charges, among others, and asked what the justification for that was and why that should add up to part of the cost borne by electricity consumers.

Mr Sechlotho replied that the formula being used was only applicable to the municipalities’ electricity divisions and the cost included salaries and wages of the personnel working within those.

The Chairperson requested elaboration on what tariff reviews were and where surcharges came in. He noted that Msunduzi, because of its shortfall on infrastructure development, was receiving funds from the Approach to Distribution Asset Management (ADAM) programme, and asked if this municipality was not then accessing funds from double sources. He requested clarification on how much a typical household would pay, based on the percentage increase of Eskom and the municipalities. He further asked what NERSA considered a reasonable return for municipalities on their investment on distribution infrastructure. The Chairperson asked NERSA to elaborate on what was constraining municipalities from introducing ‘time of use’. He also asked when monitoring and evaluation would be electronic, saying that there were new technologies capable of monitoring consumption and distribution. He further asked why consultation had not taken place.  

Mr Sechlotho replied that tariff review was a request by municipalities to review where NERSA had approved less than they had requested. In relation to Msunduzi, he noted that NERSA would consult with the Department of Energy to clarify whether Msunduzi was accessing funds from the tariff increase as well as ADAM, and would seek to prevent this. He noted that, in relation to the reasonable return, NERSA suggested that it could be in the range of 12% to 20%; anything above 20% would mean the municipality was over-recovering, while below 12% signified under-recovering. He noted the comments in regard t new technology and said that whilst it was not yet in place, NERSA would examine the possibilities. Finally, he explained that there had been a general consultation on the new guideline, and further consultations were done with the municipalities in the form of public hearings.

South Africa Local Government Association (SALGA) briefing
Mr Tubatsi Moloi, Electricity Specialist, South African Local Government Association,reiterated NERSA’s tariff determination process, and highlighted the response of his Association (SALGA) to NERSA’s municipal tariff guideline. SALGA was in agreement with NERSA’s attempts to cater for the difference between municipalities, where they wished to deviate from the guidelines, and the public hearings. However, SALGA suggested that NERSA should classify municipalities into groups, based on their underlying operating circumstances such as consumer mix and customer numbers, that were comparable, in order to then determine comparable tariff policies and structures. NERSA must also ensure that all municipalities with medium to large scale industrial customers introduced energy and demand tariffs that were time and seasonally differentiated.

SALGA also recognised and appreciated the fact that the 2013/14 indicative guideline of NERSA was not the final approval, given the fact that the final determination for Eskom was done on 28 February 2013. The tariff benchmarking process as introduced by NERSA did, however, create a stable platform to regulate municipal finances and tariffs. SALGA encouraged an open and on-going relationship with NERSA in this regard, to change and improve the process when necessary.

SALGA was appreciative of efforts by many stakeholders to persuade NERSA to reduce the Eskom request for a 16% price increase, down to 8%, as the initial percentage could have negatively affected the nation’s socio-economic development. The average electricity price for electricity purchases from Eskom had increased to 65.51 cents per kilowatt hour in 2013/14, and this could rise to 89.13 cents per kilowatt hour in 2018. This figure had been taken into account when calculating the municipal electricity tariff increase for the 2013/14 financial year. He repeated that NERSA, on 4 April 2013, approved a 7% guideline increase for municipalities, and set out the assumptions behind it. SALGA generally agreed with the methodology and the assumptions used for this determination.

Mr Moloi indicated that the effect of the tariff increase, on municipalities’ budgeted income for 2013/14, was that they would see a slight reduction in their electricity income. The lower tariff increase was welcomed by municipalities, as it allowed for more affordable tariff rates to be passed on to their end customers. However, there were concerns whether Eskom could operate a sustainable network with the reduced increase. He requested that this be quantified by NERSA and Eskom, with a report on the analysis to be made available to stakeholders.

He stated that a key challenge for municipalities was compliance with NERSA’s tariff application process, although municipalities were now coming to grips with the process. SALGA, in consultation with NERSA and the affected municipalities, had ensured that all municipalities submitted the necessary information to NERSA. The growing strength of the relationship between SALGA and NERSA was demonstrated by the speedy application and submission of D-Forms to NERSA. SALGE was working in collaboration with NERSA and the municipalities in order to tackle non-compliance.

Mr Moloi suggested some actions that should be taken in order ensure compliance with tariff guidelines. Already, hands on support and on-going workshops, in collaboration with NERSA, were being organized to strengthen compliance. SALGA was also engaging with NERSA on the improvement of the D-Forms questionnaire. Better collaboration between SALGA, NERSA, Department of Energy, National Treasury and other stakeholders was still needed, to address the challenges experienced by municipalities. Coordination between municipal finance and electricity departments must be improved, while the municipal finance departments’ reporting systems must be aligned with NERSA and National Treasury’s reporting requirements. Metros and other performing secondary cities should partner with and support struggling and or smaller municipalities. The human resource constraints within municipalities should be addressed through the initiation of accredited training, in partnership with the Energy and Water Sector Education and Training Authority (EWSETA) and other relevant electrical engineering training institutions

Presentation by the National Treasury
Ms Judy Mboweni, Director: Local Government Finance Policy, National Treasury, commenced the presentation by highlighting the role of local government in service delivery. She stated that municipalities had been mandated by the Constitution to provide for basic needs of the community, and to promote the social and economic development of the community. The priority functions of municipalities related to basic service provision of water, electricity, sanitation and refuse removal. There were various clauses in the Constitution that allowed for national oversight, while the National Electricity Regulation Act (NERA Act No 4 of 2004) enabled oversight by national government and NERSA over municipal electricity reticulation. Various departments, through different pieces of legislation, were also responsible for the regulation of municipal service provision generally, including electricity provision.

Ms Mboweni noted that NERSA had taken steps, since 2011/12, to issue guidelines for municipal tariffs that required municipalities to submit distribution forms (D-forms) by 30 October. NERSA usually communicated a guideline price increase to municipal distributors, and considered applications on a case-by-case basis, based on the information in the D-forms. Municipalities could not impose any tariff that was not approved by NERSA, nor could they increase their tariffs in the middle of the financial year. Tariffs could only be increased before the start of the financial year. The National Treasury was still assisting the municipalities with the costing. Because National Treasury had not applied the norms and standards provided for by the Municipal Fiscal Powers and Functions Act (No 12 of 2007), surcharges currently still formed part of tariffs approved by regulators such as NERSA, and were included under the 10% ‘other costs’ in the overall tariff plan. The surcharges would continue to be lumped together with until the norms and standards were promulgated.   

Mr Carl Stroud, Local Government Specialist: Costing and Tariff, National Treasury indicated that the National Treasury had a constitutional mandate to monitor and oversee local government’s finances. Out of the 278 municipalities in South Africa, 17, comprising metros and big secondary cities, were non-delegated, but handled about 71% of local governments’ spending power. 15 out of the 17 non-delegated structures were electricity licensed distributors. National Treasury, through provincial treasuries, tried to replicate the support offered at the national level to these 15 licensed distributors.

National Treasury had institutionalised the annual report framework set out in section 71 of the Municipal Finance Management Act (MFMA) No 56 of 2003. All 278 municipalities would be reporting according to the framework. However, the credibility, reliability and validity of the data obtained from municipalities were still questionable, so Treasury was busy engaging with stakeholders to try to introduce legislation that would set standardised norms and standards for local governments’ reporting.

Mr Stroud remarked that the whole local government fiscal framework was designed to finance municipal service delivery. The municipal operating budget comprised transfers and grants, and operating revenues. A key consideration for any municipality was whether it had a surplus or deficit budget, and any deficit may have to be funded by municipal borrowing. A surplus, however, needed to go to the municipal capital budget for refurbishment and asset renewal of key municipal infrastructure, such as the electricity reticulation network. This posed a challenge, as municipalities found themselves under pressure from competing priorities, and their easiest solution was to reduce their spending on repairs and renewal, which resulted in poor maintenance of infrastructure. Managing finances to deliver services was at the heart of local government, and budget would have to be matched with available revenue. There was a large gap between, on the one hand, community needs and wants, and actual service delivery. Factors influencing this included policy constraints on fiscal potential, revenue loss due to lack of fiscal effort, and leakages caused by bad management or inefficient procurement.

Mr Stroud expounded on how the local government fiscal framework (LGFF) was structured. Municipalities’ own revenues were used to fund services for the non-poor and businesses, and he suggested that the reliance on “own revenue” promoted accountability and responsiveness. On the other hand, transfers, which comprised about 15% of operating budgets for most metros, but could rise to 75% for rural municipalities, were intended to fund services to the poor. Cumulatively, they accounted for a much higher proportion of capital budgets in all municipalities. Revenues from service charges were the largest source of municipal revenue, but net revenue calculation meant that expenditures first needed to be deducted. Service charges accounted for about 50% of municipal revenue in 2010/11. Electricity was the biggest component of the service charges, so its functioning was critical. The total expenditure on electricity by municipalities comprised of estimated bulk purchases. The electricity revenue was declining, due to high bulk increases. Bulk purchases had a direct input on the cost because the higher the bulk purchase price from Eskom, the more flexibility for local government to use its own tariffs to pay. The scope for surcharges had also diminished over the years.

Mr Stroud also noted that although metros were still generating surpluses from electricity, their operating surpluses had started to diminish. Other categories of municipalities were operating at a loss. The rapid increase in bulk tariffs had impacted on their revenue. This might affect customers negatively, as they may find electricity unaffordable. Municipalities had consequently started buffering the impact of bulk tariff increases and absorbing the impact of bad debt. Large municipal surcharges on electricity had been valid concerns in the past, but electricity bulk increases had limited the ability of municipalities to levy surcharges.  This development, however, was raising a sustainability issue and the National Treasury was developing a policy response.

Mr Kevin Venter, Local Government Specialist: Costing and Tariff, National Treasury, highlighted the challenges confronting municipalities as they related to municipal tariff setting, revenue management and budgeting. Most municipalities were failing to get the basics of revenue management right. Municipalities lacked accurate billing systems and information, and dedicated and competent managers, and some were struggling to collect outstanding debts. Municipalities also lacked cost-reflective tariffs, as their taxes and tariffs were inappropriately structured, and he reiterated that some had not been funding repairs and maintenance of infrastructure adequately. Services such as electricity were therefore being subsidised through property taxes. This was a fundamentally flawed economic principle which may result in the poor subsidising the rich.

Mr Venter noted that the National Treasury had taken various initiatives to address the challenges being faced by the municipalities. A revenue management initiative was being set up to create awareness and guide municipalities with practical solutions to improve their business processes, specifically addressing the root causes of poor data integrity, inaccurate billing, customer queries and ineffective policy implementation. The Standard Chart of Accounts for Local Government was being developed, in line with the Municipal Budget and Reporting Regulations, to improve the quality of municipal financial information. Financial modelling had also been introduced to assist municipalities with management accounting or costing, tariff determination, and cost benefit analysis for capital projects.

National Treasury, as part of the measures to tackle the municipalities’ fiscal challenges on electricity, recommended that the Department of Energy should monitor and enforce the implementation of NERSA approved tariffs. There was a need to improve the consultation processes when municipalities were drafting their annual budget. It was also expedient to improve the public understanding of NERSA process and linkages with municipal budgeting process.

Discussion
Mr Moloto referred to the Life Cycle Management of Infrastructure, and asked if there was any empowerment initiative on infrastructure to help the municipalities. He also asked if there was any structure within government to monitor assets, and ascertain when maintenance should be carried out. He asked who was supposed to determine the policy framework for ensuring that the cost of services was reflective. He requested clarification on why municipalities’ operating revenue was decreasing, and what led to the decrease in surcharges.

Mr Stroud replied that the Life Cycle Management improvement initiative was in place. Engineers were placed in municipalities, to help them improve their asset management. The decrease witnessed in surcharges was as a result of affordability constraints.   

Ms Mboweni added that each sector department was responsible for the development of its own part of the policy framework. Water would thus be developed by the Department of Water Affairs, while refuse would be developed by the Department of Environmental Affairs.

Mr Moloto asked SALGA whether the municipalities advanced credible reasons for their late submission of the D-forms.

Mr Moloi replied that some of the reasons advanced by the municipalities were human resource capacity constraints and communication gap.

Mr Greyling stated that there were three interlocking problems that would need to be look at holistically. The institutional structure of municipalities was problematic, as there were some municipalities that were not generally viable, and specifically lacking in ability to run an electricity division. Incentive structures to address the infrastructure backlog were not available. Electricity pricing was also inefficient.

Mr Stroud replied that the issue with the under-pricing called for a comprehensive policy response. Any incentives structures should not merely offer risk and reward to consumer, but must ultimately change behaviour.

Mr Greyling noted that the amount of under-spending was not viable, and was indicative of the capacities of the municipalities. He suggested it was apposite to take a critical look at the financial model being used by the municipalities. For instance, he questioned why their wage bill was going up by 15% and why municipalities were allowing their other costs to increase at a faster rate than inflation.

Mr G Selau (ANC) cautioned that service delivery must not be sacrificed on the altar of profit making. He asked if electricity was the only means of raising revenue, and stated that good governance was also about delivering service to people. He added that revenue from electricity must not be used to subsidise other costs that were not associated with electricity.

Mr Stroud replied that there were other revenue streams, apart from electricity. The principle that must guide government whenever doing service delivery was that affordability and ability to pay for services must be balanced. People who had the ability to pay for a service should pay, but the poor must be protected.

The Chairperson noted that the engagement with the National Treasury had shifted the focus from electricity only to service delivery in general. However, he accepted that challenges and solutions to the electricity problems were, in a sense, broader than electricity only.

Working for Energy Programme: South Africa National Energy Department Institute (SANEDI) update
Mr David Nahuma, Senior Manager: Working for Energy Project, South Africa National Energy Department Institute (SANEDI) commenced his presentation on the Working for Energy Programme with a brief introduction of the programme. The Working for Energy Programme, according to Mr Nahuma, was a mandate of the Department of Energy and was set in a predominantly grid-based environment of the National Electrification Programme. The programme was initiated to demonstrate the application of renewable energy to address energy poverty, especially in rural areas. It was an essential element of the job-creation drive of the government, under the incentivised Expanded Public Works Programme (EPWP), and was targeted at the youth, women, and people with disabilities.

Mr Nahuma indicated that the Working for Energy Programme fell within the purview of applied research, and particularly focused on research into the availability and sustainability of renewable energy resources in targeted areas. The renewable energy technology applications currently being explored included the conversion of biomass to energy initiatives, biomass to bioenergy, waste to energy, development of mini-grid hybrid and smart grid systems from renewable resources, mini-hydro systems, and small scale solar powered electricity generation.

The Working for Energy Programme was also exploring some energy saving initiatives. These included energy management planning and methodology framework for social facilities, homes and small businesses; thermal efficiency and energy management for the development and installation of biomass insulation and other materials for application in poor or rural households, energy management planning methodology and framework for the provision of energy. Research studies were also being undertaken on energy poverty eradication, sustainable feedstock provisions, and alternative fuel sources for low cost housing low-carbon space heating, cooking and water heating. There was also a Working for Energy Outreach.

The programme had not being allocated any funding since 2012/13, but there were discussions on this point with the Department of Energy. Up to 2012/13, the incentivised projects had focused on the bio-energy cluster, bio-energy to power, carbon fuel tablet, concentrated photo voltaic (CPV) plant, greening of schools and clinics. These projects were spread throughout South Africa, but a significant number were in Eastern Cape. Many of these projects were flawed because of challenges but this had been investigated and work was still progressing on some. Some of the challenges were not technical, but environmental, in nature, such as the project in Phillipi that had insufficient biomass. A successful programme was the CPV plant, and this had been linked to the EPWP programme.

Mr Nahuma further stated that the programmes were in some cases run in partnership.  The Working for Energy Programme was in partnership with the Switzerland Development Corporation (SDC), researching into the availability, feasibility and sustainability of renewable energy resources and energy saving measures to address identified energy poverty and proposed interventions. There was a partnership with the National Development Agency (NDA) for the provision of food-energy nexus in public and community based projects. There was a partnership with the Gauteng Department of Infrastructure Development, embarking on the greening of schools in Gauteng province. Future partnerships in the greening of schools, clinics, green transport, waste to energy, solar roof tops, and fuel substitution were being considered.

The Working for Energy Programme was also focused on capacity building, awareness and skills development, and it was fulfilling the objectives of the EPWP. This programme (WFE) was looking at collaborating with the Integrated National Electrification Programme (INEP) to determine new and renewable energy options for hot and arid areas such as the Northern Cape. It would also be exploring green village initiatives, waste-to-energy options, solar refrigeration and solar PV paints.

Mr Nahuma highlighted the challenges of the Programme as including inadequate budgetary allocation, lack of regional presence, the prohibitive unit cost of intervention in low economies of scale intervention, and the difficulty in procuring high technology interventions for rural areas. He therefore suggested that the Department of Energy needed to create funding certainty, to convince SANEDI on to the sustainability of the Working for Energy Programme. Capacity to undertake contract management, procurement management, monitoring and evaluation and post implementation support must also be strengthened.

Discussion       
Mr Selau stated that the Working for Energy Programme was doing a lot, but felt that insufficient detail had been provided to the Committee. He requested a detailed documentation of what exactly the programme was doing, to help the Committee in its deliberations and work.

The Chairperson commended the presentation and the focus on hospitals. He asked why the presentation did not include the cost and benefit analysis of the some projects undertaken, as that would have helped the Committee to fully grasp the impact of the projects. He asked if the Programme had any links to the Department of Agriculture, Forestry and Fisheries. He also asked if the programme was working with the Council for Scientific and Industrial Research (CSIR), as well as municipalities, who were in charge of waste management.

Mr Nahuma replied that the perspective given today was specifically for the Working for Energy Programme, and confirmed that there were other divisions in SANEDI working with the municipalities, especially on co-generation. The focus of this Programme was on the rural and low income areas, and it was intended that it continue as essentially a welfare-improvement programme. The Department of Agriculture, Forestry and Fisheries focused more on food production, and the Working for Energy Programme would come in at the tail end when waste was produced. CSIR focused more on basic research, while SANEDI’s research was more of an applied nature, although there was a partnership being developed with CSIR. SANEDI initially wanted to work on the project to get out reports on the prospects. However, he agreed to give more details to the committee, which would help to enhance Members’ understanding.

The Chairperson had the impression that the programme was more of social transformation programme than a welfarist programme. However, he noted that what SANEDI was doing through the Working for Energy Programme was significant, and would be taken into critical consideration.

The meeting was adjourned.
 

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