BRIEFING THE PORTFOLIO COMMITTEE ON WATER AND SANITATION ON THE

1. BRIEFING THE PORTFOLIO COMMITTEE ON WATER AND • SANITATION • ON THE • PRICING STRATEGY AND WATER TARIFFS Presenter: Mr T Balzer Director-General (Acting) Portfolio Committee on Water & Sanitation Date: 27 August 2014

2. CONTENTS • Background • Pricing along the value chain • Current Pricing strategy • Revision of the Pricing Strategy • Norms and standards (Section 10 Regulation)

3. BACKGROUND • Legislative mandate: Section 56 – 60 of the National Water Act, requires DWA to establish a pricing strategy for raw water charges. • Section 21 outlines the uses to be charged for • Pricing strategy for water use charges currently under review • Section 10 of Water Services Act provides for tariff setting for water services

4. PRICING ALONG THE VALUE CHAIN

5. CURRENT PRICING STRATEGY PURPOSE OF THE WATER RESOURCE CHARGES • Funding water resource management (WRM) • Funding water resource development and use of waterworks • Achieving the equitable and efficient allocation of water • Providing for a differential rate for waste discharges • Enabling the provision of financial assistance and the use of water pricing to support the redress of racial and gender imbalances • To protect; allocate, manage and control the nation`s water resources. • To sustain the business viability of the water sector.

6. PRICING STRATEGY IMPACT ON USER SECTORS

7. PRICING STRATEGY IMPACT ON USER SECTORS..

8. PRICING STRATEGY IMPACT ON USER SECTORS..

9. CALCULATION METHODOLOGY Budgeting for activity costs for Water Resource Management Charges Unit Cost Costs of WRM activities in WMA Registered volumes/waste load in WMA Costs of WRM activities will be divided between abstraction Inter-basin transfers, the loss of income to the donor CMA will be funded by water use charges raised In the receiver WMA Slide: 9

10. Depreciation component: Asset value as determined in 2008 Depreciate on straight line over useful life as per table Examples: Dams – 10% over 45years (yr) Steel Pipes - 75% over 30years (yr) Asset values will annually be indexed by PPI until formal revaluation (+ every 10 years) CALCULATION METHODOLOGY….. WRI Charge Determination FOR NEW INFRASTRUCTURE & BETTERMENTS FOR REFURBISHMENT • Return on assets: • 4% on completion cost – new infrastructure, or • 4% on depreciated replacement cost • (asset value as determined in 2008) • Asset values will annually be inflated by PPI until formal revaluation (+ every 10 years) • Not applicable to existing State irrigation schemes • Operation and maintenance charge: • Direct and indirect costs • Scheme by scheme basis

11. CALCULATION METHODOLOGY….. Who pays WRM Charges • All water users pay WRM charges • Forestry sector does not pay the charges related to water quality management • Forestry and Agriculture have the WRM charges capped • R10 per hectare plus PPI for Forestry • 1.5 cent per m3 plus PPI for irrigation • Resource poor farmers and foresters charges to be phased in over 5 years

12. CALCULATION METHODOLOGY….. • WRM waste Discharge: • Total Registered load of salts/cost allocated to each activity = Unit charge of Waste • Capital Unit Charge • Is for off budget scheme and is repayable based on the loan taken taking into account the lifespan of the infrastructure

13. 2014/15 CHARGE

14. REVISION OF THE PRICING STRATEGY RATIONALE • Current pricing strategy published in March 2007 • Needs to be amended to be in line with Government priorities, e.g.: National development Plan (NDP) commitments, National Growth Path (NGP), etc. • Completion of the project will ensure Department of Water and Sanitation (DWS) has: • Good policies on pricing of water, cost reflective charges and tariffs • A good funding framework for infrastructure development, operations and maintenance; • The structure and functional framework for the economic regulator • Protection of the indigent or vulnerable

15. RATIONALE FOR REVIEW ….. • Impact of capping of charges on the revenue • How Return on Assets is calculated and who pays it • Possibility of adopting multi-year charges. • Waste Discharge Charges must be reflected in the Pricing Strategy for implementation to take place. • Must also consider the financing of the nine Catchment Management Agencies (CMAs) and function of economic regulation

16. PRINCIPLES UNDERPINNING PRICING STRATEGY Currently – four principles in the pricing strategy and will remain in this strategy • Social Equity • Ecological Sustainability • Financial Sustainability • Economic Efficiency ADDED PRINCIPLES • Economic Development • Polluter Pays and User Principles • Equity and affordability

17. EXISTING & PROPOSED PRICING STRATEGY

18. CATEGORISATION OF THE SECTORS PROPOSED Current categories: Domestic and industrial Agricultural Stream flow reduction activities New water use categories Agricultural water use Municipal water use High assurance water use (those users who have a 99.5% assurance of supply, such as Eskom and SASOL) Industrial water use Hydropower and Stream flow reduction activities

19. KEY CONSIDERATIONS IN THE REVIEW • Return on Assets changed to Future Infrastructure Build Charge • Multi-term tariff setting over a three years cycle • Charging for Hydro-power proposed in the revision document • Metering vs measurement of water use • Charge structure – National vs Hybrid approach;

20. HYDROPOWER • Current pricing strategy does not refer to how to price water for hydropower use. • In addition to existing hydropower plants in South Africa, there is further potential to develop at least twelve small hydropower plants with capacities ranging from 1 MW (megawatt) to 15 MW, generating approximately 446 000 MWh/annum. • Water use by hydropower is largely non-consumptive • Can’t charge the same way as other sectors, on the volume of water passing through the turbines. • inappropriate and unaffordable • New strategy proposed charges for hydropower generation based on • c/kWh (cent per kilowatt hour) of energy generated • fixed charge based on kW installed

21. Metering and measuring water use • Current water use charges calculation method incentivises full use of registered water • Water use should be billed against actual water use • Requires the introduction of water metering/measuring - to be phased in over time • WRM charges to be charged against registered use still • DWA to install meters – users to pay for the cost of installation through water use charges

22. PROPOSED CHARGE STRUCTURE PROS AND CONS OF A NATIONAL CHARGE Pros: • It’s easier to administer • It leads to increased cross-subsidization • Ensures that everyone pays the same charges, avoiding some people paying for more expensive water than others Cons: • It’s less cost reflective • Can lead to reduced water use efficiency • Potentially subsidises larger users

23. PROPOSED CHARGE STRUCTURE...... PROS AND CONS OF A SYSTEM CHARGE... Pros: • More cost reflective – reduced economic distortions • Negligible impact on water use efficiency • Better Water Conservation and Demand Management • Reduces potential of cross-subsidizing large users Cons: • More complex to administer • Decreased potential for cross-subsidization

24. NATIONAL CHARGE OUTPUT COMPARISON Gauteng

25. NATIONAL CHARGE OUTPUT COMPARISON.. Free State

26. NATIONAL CHARGE OUTPUT COMPARISON Mpumalanga

27. PROPOSED CHARGE STRUCTURE Hybrid approach • Future Infrastructure Build Charge – national charge • Operations &Maintenance, depreciation – system/scheme charge • Water Resource Management Charge – water management area charge • Waste Discharge Charge System – water management area charge (levy) – needing a money bill

28. IMPLICATIONS FOR SECTORS Mining and Industry (M&I) • The national charge (total) will result in: • a decrease in charges in most schemes in the Eastern Cape and some in Limpopo • an increase in charges in most schemes in the Free State, Mpumalanga, Western Cape and some in KZN, North West • little change in most charges within the Gauteng province

29. IMPLICATIONS FOR SECTORS... Irrigation sector • The national charge (total) will result in: • a decrease in charges in most schemes within Gauteng, KZN, Limpopo and some in EC • an increase in charges in most schemes within the Free State and some in Mpumalanga, North West and WC • 95% of irrigation water in South Africa is still in the hands of white farmers

30. NORMS AND STANDARDS FOR TARIFFS SECTION 10 of WATER SERVICES ACT 108 OF 1997 • Norms and standards for tariffs may:- •  Differentiate on an equitable basis between - • Different users of water services • Different types of water services • Different geographic areas • Socio-economic • Physical attributes • of each area • Place limitations on surplus or profit • Place limitations on the use of income generated by the recovery of water charges • Provide for tariffs to be used to promote or achieve water conservation

31. NORMS AND STANDARDS...... Shortfall of current Norms and standards • Existing Section 10 Norms & Standards • Did not take into account – • Municipal Fiscal Powers and Functions Act (2007) • Local Government: Municipal Systems Act (2000) • Local Government: Municipal Finance Management Act (2003) • Various National Treasury Circulars in terms of MFMA (13, 23, 31, 42, 55) • Need was identified to separate between:- • Water Services Authorities (WSA) and Water Services Providers (WSP) • Need was identified to regulate complete water value chain; as much of the process to be included in Norms and Standards: • Raw water pricing • Water Boards tariffs • Municipality tariffs (water supply and sanitation)

32. NORMS AND STANDARDS....Proposed structure of new Norms & Standards Existing S10 Norms & Standards New Norms & Standards • Definitions • Determination of revenue requirements • Subsidization of tariffs • Categories and levels of water services • Supply water to households (controlled volume of water) • Supply water to households (uncontrolled volume of water) • Provision of sanitation services to households • Fixed charge • Connection fee • Fee for upgrading an unauthorized connection Legislative requirements Definitions Separation of functions and ring-fencing Compulsory metering Procedure for setting tariffs Revenue required to provide services Categories and levels of services Allocate required revenue for providing services to each category Tariffs for household water services Tariffs for industrial and other non-household water services Seasonal tariffs Fixed charge Disclosure

33. Both the Pricing Strategy and the Norms & Standards – complete the entire value chain pricing

34. CONCLUSIONS • The revised pricing strategy will be gazetted for public consultation • The hybrid charge is the preferred charge structure • The revision of the act will lead to the merge of the pricing strategy and the norms and standards

35. THANK YOU