Eskom on its tariff increase and pricing for municipalities for 2016/17

Meeting report

Briefing by Eskom
Mr Anoj Singh, CFO of Eskom, spoke about the regulated environment in which tariffs are determined based on the Electricity Regulation Act. The National Energy Regulator (NERSA) is responsible for regulating electricity prices and tariffs. Eskom may only charge a tariff as determined by NERSA. The Municipal Finance Management Act (MFMA) is a regulatory tool and for municipal tariff increases, Eskom is to timeously table proposed increases in Parliament in terms of MFMA. The Promotion of Administrative Justice Act (PAJA), the judicial review of an administrative action, Government Electricity Pricing Policy (EPP), the Codes – Grid Code (Transmission) and Distribution Code, and NERSA rules and guidelines are all the tariff regulations that Eskom must comply with.

Eskom employs the Multi-Year Price Determination (MYPD) methodology for the regulation of Eskom’s required revenues. This includes the forecast of revenue, operating costs, primary energy costs, depreciation, levies and taxes and return on assets. It forms the basis on which the National Energy Regulator of South Africa (NERSA) will evaluate price and revenue applications received from Eskom. In terms of the MYPD methodology, NERSA awards Eskom an “allowed revenue” that is intended to allow Eskom to cover operating costs and earn a reasonable return. The actual determination from NERSA is for the revenue allocation for Eskom.

There will always be operating variances that are then dealt with in the Regulatory Clearing Account (RCA). RCA is a balancing mechanism between what was awarded by NERSA on the basis of a forecast (MYPD), and what actually materialised (Eskom’s audited financial statements) - a backward looking mechanism. Differences will materialise if Eskom either does not achieve or exceeds the awarded revenue (due to pricing or demand factors), or incurs costs greater or lower than those when NERSA calculated the allowable revenue in the MYPD. RCA balance could be in favour of either Eskom or NERSA (ultimately the customer). RCA is subject to approval by the regulator. Liquidation of the RCA as approved by the regulator may result in an increase or decrease in future electricity tariffs.

The Municipal Finance Management Act (MFMA) determines the annual tariff adjustment of Eskom and NERSA time-lines. MFMA creates two set of tariff rates for Eskom which is Eskom directly supplied and municipal tariff rates. Section 42 of the MFMA requires the proposed increase for municipalities must be tabled in Parliament. On 14 March 2016, Minister of Public Enterprises Lynne Brown tabled the 2016/17 Eskom schedule of standard prices for municipalities. In the submission were purpose and clarification on the tabled 2016/17 Eskom tariffs, NERSA decisions on Eskom tariffs and the schedule of standard prices for municipalities. On 1 March 2016, NERSA made a decision on Eskom’s RCA submission for year 2013/14 of MYPD 3, based on the variances on the qualifying criteria. NERSA approved 2016/17 tariff increase showed that NERSA has approved a 9.4% increase in total standard tariffs. An increase of 7.86% for the municipalities was approved effective 1 July 2016.

Affordability of electricity for the poor at a time of increasing prices is of great importance to Eskom. Reducing the impact for the poor can be achieved in partnership with local authorities as an estimated 60% of the South African consumers are supplied by the local authorities. Eskom together with government has in the past implemented several solutions to address affordability for their residential customers. The Inclining Block Tariff addresses the needs of the poor, but has unintended consequences. In 2000, Government announced a free basic service policy. In 2003 the then Department of Minerals and Energy developed the Electricity Basic Services Support Tariff (EBSST) Policy which was implemented in 2003/04. This policy prescribed an allocation of 50 kWh per month provided to all low income households to be funded through the local government equitable share. The obligation to identify indigents, in line with the Constitution, remained with municipalities even in places where Eskom is the direct supplier of energy. The equitable share is an unconditional grant given to municipalities to assist them in providing basic services to poor households. No funding is directly provided to Eskom from national government but Eskom claims the funding for Free Basic Electricity (FBE) from municipalities in terms of a funding agreement between Eskom and each municipality. Eskom has 1.15 million customers approved to receive FBE, with agreements signed with 243 municipalities. The local government decides who qualifies to receive FBE. In Eskom areas of supply, the municipality provides the names of qualifying customers to Eskom. Eskom has approximately 1.3 million residential customers configured to receive FBE, with agreements signed with 241 municipalities. Eskom’s total number of residential customers stands at 4 million. The municipalities provide FBE to their direct customers. Each month Eskom invoices and recovers from the municipality the free allocations provided at 50 kWh x FBE pre-determined “claim” rate multiplied by the number of customers. Eskom incurs costs in providing FBE. These costs are operational expenditure and the difference between the standard tariff and the “claim rate” which is determined by NERSA. Eskom claims from a municipality at this rate for all energy provided through FBE. Since FBE has been implemented, there has always been customers that receive FBE where the claim rate is lower than the standard tariff and this results in an under-recovery of revenue for Eskom. The claim rate is reviewed by NERSA annually but a shortfall remains.

There are some challenges experienced in implementing the programmes of Eskom. The national average of customers collecting FBE tokens is at 70%. In some provinces collection rate is as low as 58% due to collection sites not being easily accessible to customers in remote area and rural areas. The district energy forums in certain districts are not always functional and not always well attended. Municipalities do not always share their FBE status with Eskom and do not always request progress statistics from Eskom. There is non-adherence by municipalities to the Indigent Register. Municipalities do not always adhere to the payment arrangements with Eskom and there are challenges with FBE being provided to farm workers as the farmer generally holds the contract of supply, and this needs to be addressed.

In order to protect the poor before the Inclining Block Tariffs (IBT), Eskom is facilitating convenient access to electricity (government grants or cross-subsidies), this is already available through the national electrification programme. For Eskom customers, provision to access with no connection fee for Homelight 20 Ampere consumers. Lower electricity prices to specific and deserving customer categories (based on poverty levels or self-targeted tariffs). Shortfall recovered from other customers through explicit levies, surcharges or from fiscal grants. The lower than average price increase to Eskom Homelight tariffs in 2008 and 2009 has resulted in significant cross-subsidies to Homelight tariff customers. Social grants are provided directly to customers (government funding or surcharge on electricity to all customers; or a combination of both). Currently 50 kWh per household per month is provided free by national government to the indigent through the Equitable Share Fund. In order to promote energy efficiency, Eskom is providing assistance to customers to implement energy efficiency initiatives such as better insulation of homes, or the use of more energy efficient appliances and lights. He concluded that the 2016/17 tariffs were tabled in compliance with the MFMA. The tariff was approved by NERSA and tabled in Parliament before implementation. Eskom will continue to collaborate with stakeholders across South Africa – engaging in discussions on the future tariff frameworks. The municipal business is a key component to Eskom’s revenues and so it is therefore proactively working together with them to address key issues around the tariff, as well as outstanding debt, while affordability of electricity for the poor at a time of increasing prices is of great importance to Eskom.

Discussion
Mr M Khawula (ANC; Gauteng) thanked Eskom. His question was on illegal electricity connections. He asked who pays the price for electricity connections not accounted for, Eskom or the municipalities. He asked how the non-payment for electricity affects the municipalities. On free basic services, he stated there were inaccuracies, instability and miscommunication in the chain and it speaks to the culture of non-payment for electricity. He asked if Eskom has taken this into consideration. On prepaid electricity, he asked for a clearer explanation on the different tariffs for people in rural and urban areas. He asked how Eskom knows when a rural person or urban person buys electricity since the selling points are usually the same.

Mr A Nyambi (ANC; Mpumalanga) stated that the NCOP deals mainly with issues affecting the provinces and their interests. He therefore appealed that whenever Eskom comes to give its presentation, it should provide information about municipalities and provinces and issues affecting them. He asked Eskom if it was satisfied with the current legislation as it affects its operations. He wanted a breakdown of the defaulting municipalities. On the approval granted by NERSA to Eskom, he asked how that would affect the operations of Eskom. Talking about the prepaid meters, he asked about the challenges facing the installation of the prepaid meters in the Soweto area, he wanted an update on this.

Mr M Sefako (ANC; North West) spoke about the availability of electricity to the rural areas, giving kudos to Eskom. He was impressed that electricity is now available to a lot of rural communities in South Africa. South Africa was an export driven economy and asked if Eskom had enough power to support the industries which are into exports as this creates wealth and employment for the people. On free basic electricity, he asked if it was partial or 100% free basic. Lastly, he asked about the security of electricity. He asked the measures put in place by Eskom to ensure that corrupt people are not selling this electricity cheaply.

Ms Z Ncitha (ANC; Eastern Cape) spoke about the unaccounted for electricity. She asked Eskom if it had any proposal or policy to deal with these illegal connections because she felt it was a collective responsibility. On ree basic electricity to rural areas, she asked Eskom to think carefully about the centres where these tokens are given because sometimes the people spend more money in travelling to get this tokens and it defeats the whole purpose. She asked why Eskom was providing rural areas with electricity from metros. She spoke about special schools in the rural areas, stating that they are complaining about the tariffs they pay because they are compared to institutions that are profit oriented.

Ms C Labuschagne (DA; Western Cape) asked Eskom the impact of the R11.4 billion it got on the next medium frame work as against the R22.8 billion it requested. On the Inclining Block Tariff, she asked for a broader explanation on what Eskom meant by “unintended consequences”. She spoke about the district energy forums and asked for an explanation on the problems associated with these and the role they play. On tariffs, she stated there was no mention about the mining industry, the business industry and other industries and the rebates being given to them. On the specific formula for determining revenue and cost, she said there was no mention of the influence of the build programme in Eskom presentation and asked the implication of the delays in the build programme and how this influences tariffs. She requested that Eskom return at a later date to give an update on the build programme. Lastly, she asked Eskom if it could assure the Committee that the financial information it provides is credible.

Mr L Gaehler (UDM; Eastern Cape) asked about the state of the defaulting municipalities. He asked Eskom about its plans to electrify rural areas without electricity from the grid and the strength of electricity supplied in the rural areas did not align with what is obtained in the urban areas. He agreed about people travelling long distances to get tokens for free basic electricity and asked Eskom to look into that.

Mr E Mlambo (ANC; Gauteng) spoke about the prepaid meters in Soweto. He stated there was confusion about who provides electricity in the Johannesburg region because there is both City Power and Eskom and the people cannot distinguish between the two. He stated that billing is a problem.

Mr O Sefako (ANC; North West) referred to slide 14 and asked Eskom what it suggested for the Committee to do in order to help it with the challenge of farm workers and non-adherence of the municipalities.

The Chairperson asked about the tariffs for municipalities because some of them were complaining about the charges from Eskom. On free basic electricity, she asked what the municipalities were contributing to address the problems associated with it. She asked how much loss in electricity is recorded in the generation of electricity and if it affected the operations of Eskom.

The Eskom Board Chairman, Dr Ben Ngubane thanked the Committee and noted that all the issues raised will be taken seriously so as to improve the customer care services of Eskom. He noted that tokens will be looked into because if people travel far to get this tokens, it cancels the benefits of the free basic electricity.

Eskom CEO, Mr Brian Molefe, thanked the Committee for their visit to the Medupi power station and stated there had been tremendous progress since the last time they visited. Medupi’s Unit 5 had been synchronised to the grid and was now being tested. Unit 5 of Eskom’s Medupi power plant will come into commercial operation by February 2017, well ahead of schedule and putting to rest all fears of load shedding in future. In his words "The day Unit 5 comes into commercial operation load shedding will no longer be a problem". Unit 5 and 6 of Medupi gives a total of 1600MW.

Speaking on the illegal connections, Mr Molefe stated this happens sometimes at the level of municipalities and sometimes where Eskom supplies directly. The solution to this in his opinion is the introduction of the prepaid meters. With prepaid meters it will be impossible to steal electricity and make illegal connections. He stressed that the culture of non-payment will be addressed by the introduction of the prepaid meters. On the question of non-alignment of the free basic services and free basic electricity, he stated the free basic services including electricity are determined by the municipalities. Eskom simply takes instructions from the municipalities on who is qualified to receive the free basic electricity.

Speaking on the prepaid service point for urban and rural households, he stated they were all the same. The account number or electricity card helps the system to differentiate between the urban and rural household.

Mr Molefe was of the view that legislation in South Africa should be changed, making it standard to use prepaid electricity. He said, “If you would allow me to just say as a lowly official – we think prepaid electricity should be standardised. If we have it through the entire country it would resolve our problems, and the shortest way is by introducing legislation on prepaid”. Mr Molefe added that Eskom would be happy if legislation is introduced that allows the utility to appeal the decisions of the energy regulator, NERSA. “Currently if one party is unhappy – Eskom in this case – about an aspect in the NERSA ruling there is no way we can appeal, except maybe to (go to) the courts. We’d be happy if we could appeal if we feel there was an error in the calculations”. Speaking about the defaulting municipalities, he listed the defaulting municipalities as being in the Free State, Northern Cape, Eastern Cape and Mpumalanga. These cases of defaulting payments were a result of lack of capacity and Eskom is proposing to be an agent for the municipalities by collecting revenue on their behalf and remitting to the municipalities what they should have.

On the installation of prepaid meters in Soweto, Mr Molefe stated there had been a lot of progress with that. However some of the people were not happy with it because it meant they now had to pay for electricity consumed. Engagements are in progress with the community leaders to sensitize the people on the advantages of the prepaid meters. He told the Committee some people have burnt store houses containing the prepaid meters and an appeal has been made to the leaders in Soweto to help in securing the lives of the people working for Eskom in those areas.

On the sufficiency of power, Mr Molefe said that electricity as a constraint to economic growth, which it had been for several years, was a problem of the past. There is now excess capacity. The excess capacity had allowed Eskom to increase its sale of electricity to Southern African countries by 12%. If there were industrial activities that needed to be carried out, Eskom had capacity for it.

Mr Deon Conradie, Eskom Senior Manager: Electricity Pricing, responded to the questions on how free is free basic electricity. Since the municipalities determine this, then it is free up to the level of approval by the municipality. Once it goes above the approval level of the municipality then it will not be free anymore.

Mr Molefe replied on securing electricity infrastructure, saying there has been strengthening of the security of electricity and action against illegal connections has been carried out.

Eskom divisional executive for security, Brigadier General (Ret.) Tebogo Rakau, spoke on security. The Criminal Matters Amendment Act that commenced in June had empowered Eskom in dealing with security matters that affect its installations.

Mr Molefe spoke on the tokens for free basic electricity. He accepted the comments as constructive criticism and this would be looked into and properly investigated so that poor people do not incur huge logistical costs in procuring electricity.

Mr Thys Moller, General Manager in Office of Group Executive for Customer Service, speaking about the special schools stated that the fault lies with the Department of Education because some of these schools have conventional meters installed and the Department of Education is responsible for covering these costs. He stated that the problem might be a policy one.

Mr Anoj Singh talked about the cost base, saying this was determined by the cost drivers and these are maintenance costs, costs of the independent power producers, manpower costs, and taxes paid by Eskom, and money paid to the borrowers of the build programme. The build programme was expected to be within the R343bn budget assigned to it.

Mr Molefe spoke on the need for South Africa to embrace the nuclear programme. Nuclear energy in the first instance is cleaner than coal-fired power stations and secondly it is ideal for base load electricity generation. Speaking on the current renewable energy programme, he said “the current renewable energy programme has a 30% availability factor. You have to wait for the sun to shine or the wind to blow if you want to make use of wind or solar power”. Mr Molefe cited Koeberg’s reliability as a base load power station as one of the reasons why nuclear is the route to follow. According to him, “the best performing power station this winter was Koeberg. It had the least breakdowns and had the best power reliability. It broke the record in South Africa — it operated non-stop for 470 days”. He reiterated calls for urgency on making decisions about nuclear energy. “At the moment we have a surplus in electricity generation and we won’t need extra electricity until 2022. But we need it for 2028 and 2030. “Remember, five to six years of a nuclear build programme is required solely for planning purposes. Another five years are required for implementation”. He referred to the financial information of Eskom and stated that all information given by Eskom is credible.

Mr Molefe referred to the areas without electricity, saying that compared to 1994 when only 34% of the country had access to electricity, 90% of South Africans now had access to electricity and hopefully by 2022 the whole country would be electrified. The areas without electricity are in the Eastern Cape, Limpopo and Kwazulu Nutal. Provinces with 100% electricity include the Free State, Gauteng and the Northern Cape while the North West is 95% electrified.

On the quality of electricity, he acknowledged there may be quality issues in certain rural areas but pleaded for the need to concentrate on those areas without electricity and when the whole nation is electrified then quality and the strength of electricity provided will be looked into.

Mr Khawula asked about the difference between load shedding and load shifting. He asked Eskom to align itself with the Department of Energy.

Ms Ncitha spoke about load shifting and asked for an explanation. She was worried about the security of infrastructure of Eskom and asked what measures were being put in place to deal with security. She noted that in some areas some of the people responsible for electricity theft were staff of Eskom.

Mr Sefako asked if the pre-paid meters being installed were locally produced or imported because local production of the meters would boost job creation and improve the economy.

Ms Labuschagne asked how much of the profit made by Eskom was reinvested back into the company. She asked about the plan by Eskom for sustainability of electricity using cheaper sources.

Mr Gaehler noted his area was part of the 10% populace without electricity and asked when the areas in darkness would be connected.

Mr Molefe explained load shedding and load shifting were two distinct terms. On those areas which currently have no infrastructure for electricity, the immediate problem was to build infrastructure there first.

Brig Gen (Ret) Rakau replied that there was a budget for infrastructure security upgrade and this would be done over the next three years. On cases of illegal connection by Eskom employees, he remarked that Eskom was aware of this and had successfully prosecuted those involved.

Mr Moller replied on the production of the prepaid meters that the meters are partly produced locally and partly imported.

Mr Molefe again reiterated his earlier call for South Africa to embrace nuclear energy.Nuclear energy in the first instance is cleaner than coal-fired power stations and secondly it is ideal for base load electricity generation. Speaking on the current renewable energy programme, he said “the current renewable energy programme has a 30% availability factor. You have to wait for the sun to shine or the wind to blow if you want to make use of wind or solar power”. Mr Molefe cited Koeberg’s reliability as a base load power station as one of the reasons why nuclear is the route to follow. According to him, “the best performing power station this winter was Koeberg. It had the least breakdowns and had the best power reliability. It broke the record in South Africa — it operated non-stop for 470 days”. He reiterated calls for urgency about making decisions about nuclear energy. “At the moment we have a surplus in electricity generation and we won’t need extra electricity until 2022. But we need it for 2028 and 2030. “Remember, five to six years of a nuclear build programme is required solely for planning purposes. Another five years are required for implementation”.

 The meeting was adjourned.