ENERGY REGULATOR OF SOUTH AFRICA

Determination of the Municipal Tariff Guideline and the Revision of Municipal Tariff Benchmarks

______________________________________________________________ NATIONAL ENERGY REGULATOR In the matter regarding DETERMINATION OF THE MUNICIPAL TARIFF GUIDELINE FOR THE FINANCIAL YEAR 2018/19 AND THE REVISION OF MUNICIPAL TARIFF BENCHMARKS

DECISION On 25 April 2018 the National Energy Regulator (NERSA) decided as follows: 1. A guideline increase of 6.84% will be approved for the 2018/19 municipal tariff review process. The guideline increase is based on the following assumptions: 1.1 bulk purchases have been increased by 7.32% in line with Eskom’s tariff increase to municipalities; 1.2 a consumer price index (CPI) of 5.1%1; 1.3 salary and wage increases of CPI plus 1%2; and 1.4 repairs and maintenance, capital charges and other costs have been increased by the CPI. 2. That the following benchmarks be approved for implementation as follows: 2.1. Domestic ( Block 1 – 4)

1

The Consumer Price Index is 5.1% as forecasted by the Bureau for Economic Research (BER) in October 2017 in line with the MYPD approval. 2 As indicated in the latest SALGA Circular No. 31/2015 Salary and Wage Collective Agreement.

Page 1 of 26


2.2. The alternative domestic Inclining Block Tariffs (IBT) benchmarks o

Domestic Low – Energy Charges

o

Domestic High

2.3. Domestic Non-IBT Benchmark

Page 2 of 26


2.4. Commercial Benchmarks o

Commercial Prepaid Single - Phase Benchmarks

2.4.1. Commercial Conventional o

Commercial Low

o

Commercial Medium

o

Commercial High

Page 3 of 26


2.4.2. Commercial Three-Phase o



Commercial Prepaid

Commercial Conventional Three-Phase

o

Commercial Low

o

Commercial Medium

o

Commercial High

Page 4 of 26


2.4.3. Agriculture Benchmarks o

Agriculture Low

o

Agriculture Medium

o

Agriculture High

2.4.4. Industrial Benchmark o

Industrial Low

Page 5 of 26


o

Industrial Medium

o

Industrial High

2.4.5. Industrial Time-of-Use Benchmark o

Time- of Use Megaflex

o

Time – of Use - Nightsave

3. The Energy Regulator will consider IBT structures that are different from the NERSA Inclining Block Tariff (IBT) structure.

Page 6 of 26


4. NERSA approved a Cost of Supply (COS) study framework as it is a requirement of the Electricity Pricing Policy (EPP). All Municipalities must undertake and submit the COS studies so that the revenue earned by the municipalities per tariff category is aligned with the cost to supply electricity. 5. The costs considered to be in the direct supply of electricity are listed below: 5.1 5.2 5.3 5.4 5.5 5.6

bulk purchases; bad debts; reasonable energy losses; direct and indirect charges; salaries and wages; and capital charges.

6. All other costs will be treated on a case-by-case basis and must be fully justified by each municipality that incurs such costs. 7. Furthermore, the municipalities’ overall financial and technical performance will be reviewed prior to a final decision on the overall increase. Indicators to be considered in this regard mainly include: 7.1 7.2 7.3 7.4 7.5 7.6

percentage surplus; percentage energy losses; percentage power costs; repairs and maintenance; bad debt provision; and average selling price/average purchase price ratio.

8. Municipalities applying for an increase that is above the guideline will have to justify their increases to the Energy Regulator and the following actions are required: 8.1 a full analysis of additional funds requested needs to be presented to NERSA as part of the motivation for the above-guideline increase. The municipality must give a detailed revenue analysis whereby it indicates the revenue based on the approved guideline percentage increase and the revenue which incorporates the list of items, i.e. repairs and maintenance, where the extra funds will be allocated; 8.2 the approved funds must be ring-fenced to ensure that it is strictly utilised for the identified projects; 8.3 municipalities must report to NERSA on a six-monthly basis on how the additional funds are utilised; and 8.4

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

Page 7 of 26


9. Municipalities applying for tariffs that are outside the approved benchmarks must justify such increases and the following information must be submitted: 9.1 the total number of customers per tariff category – municipalities that do not have an appropriate customer base must submit the full detail of its customer profile, as well as the associated revenues; 9.2 expected revenues per tariff category; 9.3 the forecasted total sales; 9.4 the average maximum demand per tariff (where applicable); 9.5 the average load factor (where applicable); and 9.6 the load profile in percentages (both summer and winter, where applicable). End.

Page 8 of 26


____________________________________________________________ REASONS FOR DECISION

BACKGROUND AND INTRODUCTION 1.

On an annual basis, NERSA determine an appropriate tariff guideline increase, which is then communicated to municipal distributors as a guide in determining their annual electricity tariffs.

2.

This guideline does not preclude a distributor from the legal obligation to apply to the Energy Regulator for tariff increases before implementation.

3.

The guideline increase assists the municipalities in the preparation of their budgets.

4.

NERSA also reviews the tariff benchmarks and recommends the new benchmarks that would be used in the evaluation of the municipal tariff applications.

5.

The revised benchmarks are used in the evaluation of the municipal tariff applications.

6.

The Energy Regulator will make decisions on the following matters: 

the determination of the 2018/19 municipal tariff guideline and ;



the revision of the municipal tariff benchmarks that are used in guiding average tariff levels.

THE DECISION-MAKING PROCESS 7.

On 15 December 2017, the Energy Regulator granted Eskom an annual average tariff increase of 5.23%. Subsequently, the Energy Regulator approved Eskom’s Retail Tariff and Structural Adjustment (ERTSA) application on the 28 February 2018, leading to a bulk purchase increase of 7.32% for municipalities. The difference between Eskom and Municipalities increase is due to the Municipal Finance Management Act, 2003 (Act No. 56 of 2003) (‘the MFMA’) time lag (the municipalities' implementation date is 01 July whereas Eskom's financial year starts on 01 April).

8.

Furthermore, the Energy Regulator approved the publication of the municipal tariff guideline and benchmarks consultation paper. This was published on the NERSA website, social media and national newspapers on 28 February 2018 with an invitation to stakeholders for comments. The closing date for comments was 20 March 2018. Page 9 of 26


9.

NERSA did not hold a public hearing on the key issues highlighted in the consultation paper but followed the notice and comment procedure in terms of Section 4(3) of the Promotion to Administration Justice Act, 2000(Act No. 3 of 2000). This is due to the fact that in the past, few to no presenters attended the public hearing to make representations to NERSA.

THE OBJECTORS AND OTHER INTERVENING PARTIES 10. NERSA published an advert in national newspapers (Business Day, Sunday Times, Sowetan and Independent Newspapers) and Government Gazette on 28 February 2018. A total of 18 written comments were received from the following stakeholders:  municipalities (3), (Drakenstein Municipality, Municipality and Mossel Bay Municipality 

Saldanha

Bay

private individuals (12) and

 other stakeholders (3). 11. The key comments received have been summarised in Annexure 1. The synopsis of the issues raised followed by the Energy Regulator’s analysis. Stakeholder Comments The stakeholder mentioned that NERSA should consider other indicators when determining the efficiency of the municipality such as Cost of Supply and Tariff Study.

NERSA Analysis In determining the efficiency of the municipality NERSA developed a framework on the COS for municipalities on 29 October 2015. This framework was developed to assist municipalities in designing tariffs that will reflect the true cost of supplying. NERSA should align their timelines with It is difficult for NERSA to align the the National Treasury (NT) Municipal timelines with the National Treasury Budget Timelines and requirements. (NT) Municipal Budget Timelines and requirements. This is due to the fact that the guideline is dependent on the Eskom approval process. Furthermore the approval of guideline has to undertake its own consultation process. As a result this leads to the misalignment of the timelines of National Treasury’s (NT) Municipal Budget requirements. Page 10 of 26


NERSA should align the inflation target as provided by National Treasury (e.g. in the NT circular the CPI is 5.3% whereas in the consultation paper is 5.1%).

It should be noted that the reason for the different CPI is due to the fact that NERSA uses the parameters provided by Bureau of Economic Research (BER). The BER was contracted by NERSA to provide the market indicators that are used by all the divisions. NERSA took a decision to utilize BER figure/indicators in order to promote consistency of the source used within the organization.

NERSA should align the Financial Information required for the D-forms to the MSCOA format. Since the Municipalities need to provide all the financial information to National Treasury in a standardised format. NERSA should consider to withdraw the financial information directly from the National Treasury’s database. The principal of determining the average percentage increase in the absence of an approved Cost of Supply Study is supported. In the Guideline, NERSA disclosed that a (COS) Study Framework is approved but did not provide a specific date.

Alignment of D-forms and MSCOA is being done through the RRM project, and NERSA is in consultation with National Treasury on this matter.

NERSA should conduct trend analysis of municipalities applying for an increase that is above the guideline or benchmarks. This should indicate the impact it has on the quality of the service to establish the necessary baselines for future reference?

NERSA acknowledges stakeholder comment.

the

The approval date for COS was 29 October 2015. This information is in the public domain, including the NERSA website. Currently NERSA has not conducted any trend analysis on the municipalities that apply for tariffs that are above the guideline, but will consider doing that in future.

APPLICABLE LAW 12. The National Energy Regulator is the regulatory authority over the energy sector in South Africa and its mandate includes the regulation of the electricity supply industry. In terms of section 4(ii) of the Electricity Regulation Act, 2006 (Act No. 4 of 2006) (‘the ERA’), the Energy Regulator must regulate electricity prices and tariffs.

Page 11 of 26


METHOD USED IN DETERMINING THE MUNICIPAL GUIDELINE Determination of the municipal guideline 13. In developing the guideline increase, NERSA takes into consideration the proposed Eskom bulk price of electricity to municipalities, and the increase on the municipalities’ cost structures. 14. When determining the guideline for the 2018/19 financial year, the following issues were also considered: 14.1

14.2

14.3

The 2015/16 D-form data used was based on the audited financial statements to determine whether there would be changes to the municipality’s cost structures. The reason for using the 2015/16 Dforms was for the purpose of modelling weights of the cost structures. Whilst the deadline for the D-forms submission for 2016/17 was due by 31 October 2017. However, for the purpose of tariff reviews, NERSA will take into consideration the 2016/17 Dforms. A stratified random sampling amounting to 163 D-forms was done to determine the financial indicators. The increase in the sample was due to the accurate number of D-forms submitted by the municipalities. The chosen sample would be useful in determining whether the weights of the cost drivers that have been developed need to be revised or maintained.

15. The tables below indicate the findings from the analysis done from the sample of municipalities. Table 21: The 2017/18 Average Cost Structure Cost element Purchases Salaries & Wages Percentage

75%

10%

Table 22: The 2018/19 Average Cost Structure Cost element Purchases Salaries & Wages Percentage

74%

10%

Repairs

Capital Charges

Other Costs

6%

4%

5%

Repairs

6%

Capital Charges

5%

Other Costs

5%

15.1 the data from the sample of municipalities indicated a change in the weights of the cost structures. The municipal bulk purchases have Page 12 of 26


reduced to 74%, this is due to the declining trend in bulk purchase as municipalities are purchasing less electricity from Eskom. 15.2 the average share for salaries and wages has been maintained at 10% in order for municipalities to incorporate the skilled staff, recruitment of additional staff and the allowance for paying scarce skills. 15.3 NERSA requires municipalities to spend 6% of their total electricity sales on repairs and maintenance to ensure a sustainable electricity supply system. Therefore, municipalities are urged to implement the Energy Regulator's decision. 15.4 the capital charges increased from 4% to 5% as a result of debt repayments due to municipal repairs of a capital nature and other costs remain unchanged at 5% in order for the municipalities to allocate their costs accordingly. 16. In developing the guideline, the following assumptions on cost increases were made: 16.1 bulk purchases will increase by 7.32%3 as per the Energy Regulator decision for the 2018/19 financial year; 16.2 Consumer Price Index (CPI) – 5.1%4; 16.3 salary increases – CPI plus 1%5; 16.4 repairs and maintenance, capital charges and other costs will increase by CPI.

3

The decision is in line with Eskom’s Standard Retail Tariff for the 2018/19 financial year as approved by the Energy Regulator 4 The Consumer Price Index is 5.1% as indicated in the forecasted Bureau for Economic Research (BER) of October 2017 5 As indicated in the latest SALGA Circular No. 31/2015 Salary and Wage Collective Agreement

Page 13 of 26


17. The guideline is calculated as follows: Table 23: Calculation of the guideline for the 2018/19 financial year

REVISED MUNIC % OF TOTAL COST COST LINE ITEM Purchases Salaries and wages Repairs & Maintenance Capital charges in total Other Costs6 % increase

74 10 6 5 5

EXPECTED INCREASE %

7.32 6.1 5.1 5.1 5.1

WEIGHTED AVERAGE EXPECTED INCREASE % 5.417 0.610 0.306 0.255 0.255 6.84

18. The formula for calculating the guideline is as follows: MG = (BP x BPI) + (S x SI) + (R x RI) + (CC x CCI) + (OC x OCI) = 74 x 0.0732) + (10 x 0.061) + (6 x 0.051) + (5 x 0.051) + (5 x 0.051) = 5.417 + 0.610 + 0.306 + 0.255 + 0.255 = 6.84%

Where:MG = % Municipal Guideline increase BP = % Bulk purchases BPI =% Bulk purchase increase S = % Salaries SI = %Salary increase R = % Repairs RI = %Repairs increase CC = % Capital charges CCI =% Capital charges increase OC = % Other Charges OCI =% Other Charges increase

6

Charges allocated from and to municipal departments, general expenses (costs related to the Municipal Electricity Department but not indicated on the D-forms).

Page 14 of 26


THE CURRENT MUNICIPAL ELECTRICITY TARIFF BENCHMARKS FOR THE 2016/17 FINANCIAL YEAR 19. The current municipal electricity tariff benchmarks 19.1. Domestic (Block 1 – 4)

The alternative domestic Inclining Block Tariff (IBT) structures and benchmarks are as indicated below. 19.2. Domestic Low

19.3. Domestic High

Page 15 of 26


19.4. Domestic Non-IBT Benchmark

19.5. Commercial Benchmarks Single Phase 

Commercial Prepaid

19.6. Commercial Conventional Single 

Commercial Low



Commercial Medium

Page 16 of 26




Commercial High

19.7. Commercial Benchmarks Three Phase 

Commercial Prepaid Three Phase



Commercial Conventional Three Phase – Low



Commercial Conventional Three Phase – Medium

Page 17 of 26




19.8.

Commercial Conventional Three Phase – High

Agriculture Benchmarks



Agriculture Low



Agriculture Medium



Agriculture High

Page 18 of 26


19.9.

Industrial Benchmark



Industrial Low



Industrial Medium



Industrial High

19.10. Time-of-Use Benchmark Megaflex

Page 19 of 26


19.11. Time-of-Use Benchmark Megaflex

20. THE FINANCIAL AND TECHNICAL BENCHMARKS The table below indicates the financial and technical benchmarks to be used by NERSA to evaluate the performance of licensed distributors. The municipalities that operate within these benchmarks are considered to run an efficient electricity business. Financial benchmarks 2017/18

2018/19

Benchmarks

Benchmarks

( Acceptable Range)7

Percentage Power cost

75%

74%8

58% - 78%

Percentage Surplus

15%

15%9

10% - 20%

System losses

10%

10%10

5% - 12%

1:1.58

1:1.58

1:1.58 – 1:1.62

Average Price/Average Price ratio

Sales Purchase

Repairs & Maintenance Debt collection rate

Minimum of 6% 95%

20.1 the municipalities are encouraged to improve their debt collection rate, as this will assist them in collecting revenue that will enable them to be efficient and effective, as well as sustainable. 20.2 the acceptable range was done based on the stratified random sampling to determine the acceptable level of the financial benchmarks.

7

The acceptable ranges are NERSA’s allowable ranges. In accordance with the municipal cost structure as indicated in the municipal tariff guideline consultation paper. 9 The applicable financial benchmark for municipalities. 10 The applicable technical benchmark for municipalities. 8

Page 20 of 26


21. THE REVISED MUNICIPAL ELECTRICITY TARIFF BENCHMARKS FOR THE 2018/19 FINANCIAL YEAR11 The benchmarks for the 2018/19 financial year have been developed as follows for the different tariff categories.

21.1.

Domestic Benchmarks (Block 1 – 4)

The domestic tariffs for the 2017/18 benchmark were adjusted upwards by the municipal tariff guideline increase of 6.84%.

21.2.

The alternative domestic IBT benchmarks



Domestic Low



Domestic High

11

For the purpose of the publication of this document, the benchmarks have been rounded off to two decimal places after the comma.

Page 21 of 26


21.3.

The domestic Non-IBT tariffs

21.4.

Commercial Benchmarks

o

Commercial Benchmarks Prepaid and Single Phase benchmarks

The commercial single phase tariffs for the 2017/18 benchmark were adjusted upwards by the municipal tariff guideline increase of 6.84%.

o

Commercial Prepaid Single Phase

o

Commercial Low

Page 22 of 26


o

Commercial Medium

o

Commercial High

Commercial Benchmarks Prepaid and Conventional Three Phase benchmarks The commercial three phase tariffs for the 2017/18 benchmark were adjusted upwards by the municipal tariff guideline increase of 6.84%.

o

Commercial Prepaid Three Phase

o

Commercial Conventional Three Phase – Low

Page 23 of 26


o

Commercial Conventional Three Phase – Medium

Commercial Conventional Three Phase – High

21.5.

Agriculture Benchmarks

The agriculture tariffs for the 2017/18 benchmark were adjusted upwards by the municipal tariff guideline increase of 6.84%.

o

Agriculture Low

o

Agriculture Medium

Page 24 of 26


o

21.6.

Agriculture High

Industrial Benchmark

The industrial tariffs for the 2017/18 benchmarks were adjusted upwards by the municipal tariff guideline increase of 6.84%.

o

Industrial Low

o

Industrial Medium

o

Industrial High

Page 25 of 26


21.7.

Industrial Time-of-Use Megaflex and Nightsave

The industrial Time-of- Use tariffs for the 2017/18 benchmarks were adjusted upwards by the municipal tariff guideline increase of 6.84%. o

Industrial Time-of-Use Megaflex

o

Industrial Time-of-Use Nightsave

CONCLUSION: 22. On the conspectus of the facts and evidence presented to the Energy Regulator, the determination of the municipal tariff benchmarks for the 2018/19 financial year complies with the requirements of the National Energy Regulator Act, 2004 (Act No. 40 of 2006) and the Electricity Regulation Act, 2006 (Act No. 4 of 2006). It is thus appropriate to make the decision set out above.

Page 26 of 26