ENERGY RELATED RECOMMENDATIONS OF THE COMMISSION

1. ENERGY RELATED RECOMMENDATIONS OF THE COMMISSION 21 September 2011 For an Equitable Sharing of National Revenue Energy Related Recommendations of the FFC

2. Energy Related Recommendations of the FFC Background • Financial and Fiscal Commission (FFC) • Permanent statutory body established in terms of Section 220 of Constitution • Independent and subject only to the Constitution and the law • Must function in terms of an act of Parliament • Mandate of Commission • Makes recommendations, envisaged in Chapter 13 of the Constitution or in national legislation to Parliament, Provincial Legislatures, and any other organs of state determined by national legislation • Enabling legislation: Section 214 (2), 218(2), 228 (2), 229(5), 230(2) and 230A(2) of the Constitution • FFC Act (No 99. of 1997), IGFR Act (No. 97 of 1997), Money Bills Amendment Procedure and Related Matters Act (2009) • Provincial Tax Regulation Process Act, Municipal Fiscal Powers and Functions Act, Borrowing Powers of Provincial Government Act, Municipal Finance Management Act, Municipal Systems Act Presentation to the KwaZulu Natal Provincial Legislature 22

3. Energy Related Recommendations of the FFC Background (cont.) • FFC’s primary outputs/reports in terms of Section 221 of the Constitution • Annual Submission on the DoR • Submitted 10 months prior to tabling of the DoR Bill by Minister • Contains recommendations/proposals for the following fiscal year and MTEF • Response to the DoR Bill • Submitted to Parliament in February and outlines the FFC’s response to the DoR Bill and relevant annexure • Submission on the MTBPS, Fiscal Framework and the Appropriations Bill • Contains the FFC’s response to the MTBPS and adjustments to the division of revenue, the proposed Fiscal Framework and Appropriations • Annual Report • Any other special reports made at own initiative or request by organs of state Presentation to the KwaZulu Natal Provincial Legislature 33

4. Energy Related Recommendations of the FFC FFC’s Submissions and Documents Since 1995 • Annual Submissions on the Division of Revenue (1997, 2000-2010) • Annual Report (2003-2009) • Technical Report (2007, 2009, 2010) • Responses to the Division of Revenue Bill (2005-2011) • FFC Role • Response to the MTBPS (2009, 2010) • Other submissions including the Submission on the Money Bills Amendment Procedure and Related Matters Bill (2008, 2009) • Other reports and publications including A Costed Norms Approach for the Division of Revenue (2001) Presentation to the KwaZulu Natal Provincial Legislature 44

5. Energy Related Recommendations of the FFC Outline of the Presentation • Present energy-sector related recommendations made by the Commission in the past • Provide an overview of on-going research work carried out by the Commission in Local Government and in the energy sector • Discussion Energy Related Recommendations of the FFC

6. Energy Related Recommendations of the FFC Relevance of FFC recommendations to the DoE • Water and electricity tariffs, municipal sustainability and the local government fiscal framework • Water and electricity bulk and retail tariff increases impact LG fiscal framework and vertical division • Impact of electricity reform on municipalities • Location of energy related powers and functions • Intergovernmental response to climate change • Impact of inefficient land use on energy consumption and hence climate change. • Conditional grants Energy Related Recommendations of the FFC

7. Energy Related Recommendations of the FFC Water and electricity tariffs, municipal sustainability and the local government fiscal framework • The commission proposed: • That LG be incorporated into the system of intergovernmental fiscal relations (at that stage only provincial sphere was included) • A revenue sharing & grants for Local Government & Municipalities to among others; • Provide basic services and perform other functions allocated to them for which Electricity is classified as part of. • That LG be able to spend their revenue sharing funds in terms of their own needs and priorities vis-à-vis basic services Energy Related Recommendations of the FFC

8. Energy Related Recommendations of the FFC Water and electricity tariffs, municipal sustainability and the local government fiscal framework • Revenues should be derived from two sources: cost recovery and low-income subsidies • Subsidies should come from two sources: • National subsidy: mandate to provide lifeline tariffs comes from the national level • Subsidy can be channeled through the equitable share or through a conditional grant • Consumer cross-subsidy • Limited application in many municipalities • Government decides the proportion of national subsidy / cross-subsidy • Measurement of revenue-raising capacity (RRC) Should be based upon property rates, and LG electricity levy (when introduced) Energy Related Recommendations of the FFC

9. Energy Related Recommendations of the FFC Impact of electricity reforms on municipalities • No stakeholder should experience deterioration in its circumstances owing to the restructuring process, unless this is an explicit policy decision • Tariff support to low-income consumers be financed primarily by a national grant to Regional Electricity Distributors (REDs) for the provision of free electricity, and to a lesser extent by a consumer cross-subsidy • Capital electrification for low-income consumers be financed by National Government, and provision for this should be made in the MTEF estimates • RED boundaries be co-terminus with municipal boundaries to ensure that residents of a given municipality do not fall within different REDs and hence under different tariff structures. • Implementation of any proposal be carefully phased-in owing to the integral role played by electricity provision in the system of local government finance. • Municipalities be compensated for all losses related to the transfer of electricity distribution to REDs. Energy Related Recommendations of the FFC

10. Energy Related Recommendations of the FFC Impact of electricity reforms on municipalities • The Commission made a submission on the proposed reforms of the Electricity Distribution Industry (2005/06) • Reform of EDI could have a substantial impact on municipal finances • Various areas still need to be clarified/finalised prior to implementation • Successful EDI restructuring only possible if sound implementation strategies are developed Energy Related Recommendations of the FFC

11. Energy Related Recommendations of the FFC Impact of electricity reforms on municipalities • Restructuring will necessitate transfer of municipal and Eskom employees to relevant RED • If municipalities not adequately compensated, service delivery across the sphere may be affected in terms of loss of funding to cross-subsidise other municipal services • Recommendations: • Government must revisit Blue Print assumptions initially drawn to restructure the EDI • Underlying causes of poor performance in the EDI need to be highlighted and addressed • Conduct an up-to-date re-evaluation and analysis of the benefits of restructuring the EDI • It is important that the social objective of universalising access to electricity is not lost in the process of restructuring the EDI Energy Related Recommendations of the FFC

12. Energy Related Recommendations of the FFC In its efforts to universalize access to electricity and improve efficiency in the electricity distribution industry, government has, since the mid 1990s, attempted to create six Regional Electricity Distributors (REDs)In 2009, government tabled the Constitution Seventeenth Amendment Bill which allows national government to regionalize municipal functions listed in Part B of Schedules 4 and 5 of the Constitution. FFC submitted its submission on this bill, which opposed this approach, to the Department of Justice in March 2010 The Commission prefers a differentiated approach to reform which recognises cases of good performance so as to identify appropriate incentives and knowledge to regulate the industry. • In its efforts to universalize access to electricity and improve efficiency in the electricity distribution industry, government has, since the mid 1990s, attempted to create six Regional Electricity Distributors (REDs) • In 2009, government tabled the Constitution Seventeenth Amendment Bill which allows national government to regionalize municipal functions listed in Part B of Schedules 4 and 5 of the Constitution. FFC submitted its submission on this bill, which opposed this approach, to the Department of Justice in March 2010 • The Commission prefers a differentiated approach to reform which recognises cases of good performance so as to identify appropriate incentives and knowledge to regulate the industry. Energy Related Recommendations of the FFC 12

13. Energy Related Recommendations of the FFC A blanket regionalisation approach, as proposed in the 17th amendment to the Constitution, is not supported. Current legislative provisions allow for alternative service delivery arrangements that do not dilute municipal authorityGovernment should Revisit the Blue Print assumptions initially made to restructure the EDI. Clarify whether it is necessary to change ownership and structure in order to ensure efficiency, economies of scale, robust regulations and to deal with management challenges in the sectorConduct an up-to-date re-evaluation and analysis of the benefits of restructuring the EDI. Finalise EDI Restructuring Bill and practical guidelines (Asset Transfer Guide) related to the shifting of municipal/Eskom distribution assets first before moving towards more advanced stages of restructuringEnsure compatibility of operating systems that will underpin REDs activitiesUniversal access to electricity should not be lost in EDI restructuring process • A blanket regionalisation approach, as proposed in the 17th amendment to the Constitution, is not supported. Current legislative provisions allow for alternative service delivery arrangements that do not dilute municipal authority • Government should • Revisit the Blue Print assumptions initially made to restructure the EDI. Clarify whether it is necessary to change ownership and structure in order to ensure efficiency, economies of scale, robust regulations and to deal with management challenges in the sector • Conduct an up-to-date re-evaluation and analysis of the benefits of restructuring the EDI. • Finalise EDI Restructuring Bill and practical guidelines (Asset Transfer Guide) related to the shifting of municipal/Eskom distribution assets first before moving towards more advanced stages of restructuring • Ensure compatibility of operating systems that will underpin REDs activities • Universal access to electricity should not be lost in EDI restructuring process 13 Energy Related Recommendations of the FFC

14. Energy Related Recommendations of the FFC Need Vibrant urban economies to spur local economic developmentClimate change could undermine this Cost of climate change to local economies not well understoodChapter evaluates costs associated with climate change and focus on LG sectorUsing econometric model, findings show that climate change is a real threat to energy security in Local Government sectorClimate change induces increases in electricity infrastructure expendituresMunicipalities forgo provision of essential services as they stretch budgets to cater for climate change consequences • Need Vibrant urban economies to spur local economic development • Climate change could undermine this • Cost of climate change to local economies not well understood • Chapter evaluates costs associated with climate change and focus on LG sector • Using econometric model, findings show that climate change is a real threat to energy security in Local Government sector • Climate change induces increases in electricity infrastructure expenditures • Municipalities forgo provision of essential services as they stretch budgets to cater for climate change consequences Energy Related Recommendations of the FFC 14

15. Energy Related Recommendations of the FFC Government should ensure that municipalities develop their own climate change mitigation and adaptation strategies and plans for climate change as part of the Integrated Development Planning process. Government should provide support in this respect to municipalities over the next three years, distinguishing between different types of municipalities by both location and capacity in terms of the mandatory requirements placed on them • Government should ensure that municipalities develop their own climate change mitigation and adaptation strategies and plans for climate change as part of the Integrated Development Planning process. • Government should provide support in this respect to municipalities over the next three years, distinguishing between different types of municipalities by both location and capacity in terms of the mandatory requirements placed on them Energy Related Recommendations of the FFC 15

16. Energy Related Recommendations of the FFC Government should consider providing municipalities with a performance-based conditional grant which rewards or incentivises actions that are environmentally efficient and responsive to adaptation and mitigation challenges of climate change Design of proposed grant should pay attention to municipal-specific factors, such as the area, topography, coastal/or otherwise, and vulnerability to climate change Specific focus areas for this grant should include:  Efficient water management practices, including minimisation of water losses, effective asset management or rehabilitation programmes, and demand management Efficient energy management practices, including minimisation of electricity losses (unaccounted for electricity), elimination of illegal connections and energy savings by households and industry  Implementation of green procurement principles • Government should consider providing municipalities with a performance-based conditional grant which rewards or incentivises actions that are environmentally efficient and responsive to adaptation and mitigation challenges of climate change • Design of proposed grant should pay attention to municipal-specific factors, such as the area, topography, coastal/or otherwise, and vulnerability to climate change • Specific focus areas for this grant should include: •  Efficient water management practices, including minimisation of water losses, effective asset management or rehabilitation programmes, and demand management •  Efficient energy management practices, including minimisation of electricity losses (unaccounted for electricity), elimination of illegal connections and energy savings by households and industry •  Implementation of green procurement principles 16 Energy Related Recommendations of the FFC

17. Energy Related Recommendations of the FFC Impact of inefficient land use on energy consumption • Vibrant urban economy is key for sustainable development and economic growth • Optimum land use has potential to unleash growth potential of the economy • In South African cities, land is used inefficiently as characterised by low density levels • This challenge needs to be addressed, as it has direct impact on sustainability of resources such as land and is costly to overall economy • Objective of research was to establish fiscal and economic costs of inefficient land use patterns in country’s major cities Energy Related Recommendations of the FFC 17

18. Energy Related Recommendations of the FFC Various pieces of legislation acknowledge importance of densification to promote efficiency, but there are no incentivesCurrent funding for built environment is uncoordinated and does not support delivery of integrated and sustainable human settlements with all basic infrastructureThe CECM has shown that a sprawling city is more costly than a compact city--Costs savings in a compact relative to sprawling city amount to 7% after 10 yearsIf this is extrapolated to 6 metros, saving amounts to approximately 1.4% of GDP by year 10Energy savings in a compact city compared to a sprawling urban form22% less carbon emission resulting from more efficient public transport and less travelling • Various pieces of legislation acknowledge importance of densification to promote efficiency, but there are no incentives • Current funding for built environment is uncoordinated and does not support delivery of integrated and sustainable human settlements with all basic infrastructure • The CECM has shown that a sprawling city is more costly than a compact city-- • Costs savings in a compact relative to sprawling city amount to 7% after 10 years • If this is extrapolated to 6 metros, saving amounts to approximately 1.4% of GDP by year 10 • Energy savings in a compact city compared to a sprawling urban form • 22% less carbon emission resulting from more efficient public transport and less travelling Energy Related Recommendations of the FFC 18

19. Energy Related Recommendations of the FFC Impact of inefficient land use on energy consumption • Government should actively and specifically pursue development of a more spatially compact urban form for cities, by developing and adopting appropriate policies and financing instruments • Specific fiscal instruments include • Wider use of development charges in financing infrastructure associated with the land development process • Public transport subsidies that specifically target high density low-income areas • Fiscal incentives for urban land development projects located within the existing urban form Energy Related Recommendations of the FFC 19

20. Energy Related Recommendations of the FFC Government should conduct a broad-based review of the efficacy of current housing finance arrangements in meeting housing needs within the context of creating sustainable and more compact human settlements • Government should conduct a broad-based review of the efficacy of current housing finance arrangements in meeting housing needs within the context of creating sustainable and more compact human settlements Energy Related Recommendations of the FFC 20

21. Energy Related Recommendations of the FFC Recommendations on Conditional Grants affecting DoE • When introducing and terminating conditional grants, national departments must ensure there is an independent evaluation of the grant performance at entry, midterm and end of the grant • The DoE has and is administering a few CG e.g backlogs in the electrification of schools and clinic phased out in 2009/10 Energy Related Recommendations of the FFC

22. Energy Related Recommendations of the FFC On-Going Policy Research Work Carried out by Commission • Local government fiscal framework • Estimating costs of municipal services • Household energy usage for cooking and heating: what do we know and the way forward. • Fiscal implications of climate change in rural areas (mitigation and adaptation strategies) • Housing finance and associated costs • Disaster Management Energy Related Recommendations of the FFC 22

23. Energy Related Recommendations of the FFC Way forward • FFC resources available • Policy briefs • Annual Submission • Technical Reports • FFC website www.ffc.co.za • Invite the Committee to deliberate on these issues in anticipation of the budget recommendations and review reports after the 2011 MTBPS Energy Related Recommendations of the FFC

24. Energy Related Recommendations of the FFC • Thank You. Financial and Fiscal Commission Montrose Place (2nd Floor), Bekker Street, Waterfall Park, Vorna Valley, Midrand, Private Bag X69, Halfway House 1685 www.ffc.co.za Tel: +27 11 207 2300 Fax: +27 86 589 1038 Energy Related Recommendations of the FFC