Regulation of South Africa's Electricity Supply Industry

1. NERSA National Energy Regulator of South Africa Presentation to the Portfolio Committee on Energy 17 September 2013

2. Energy Regulator Overview Regulation of the Electricity Supply Industry Current Structure of the Electricity Supply Industry Engaging Consumers and Stakeholders Challenges AGENDA

3. The Regulatory ‘Cycle’ in South Africa Elemental parts: • Make – In South Africa this is predominantly in the Sphere of National Government • Operate – administering and enforcing regulation which is predominantly in the realm of the Energy Regulator (NERSA) • Review – assessing regulation and making any adjustments required.

4. POLICY LAW REGULATIONS RULES GOVERNANCE LEGISLATIVE EVIRONMENT PARLIAMENT/ GOVERNMENT DEPARTMENT OF ENERGY NERSA

5. National Energy Regulator Act, Act No 40 of 2004; Independent Regulator: 4 full time and 5 part time members Responsible for the regulation of three energy industries: electricity; piped gas; petroleum pipelines Decisions based on reasons, facts and evidence Public meetings/hearings Industry legislation Electricity Regulation Act, 2006 (Act No. 4 of 2006) as amended in 2007 Gas Act, 2001 (Act No. 48 of 2001); Petroleum Pipelines Act, 2003 (Act No. 60 of 2003); Electricity Regulations Electricity Pricing Policy (EPP) GN1398 19 December 2008 Electricity Regulations on New Generation Capacity GN 399 4 May 2011 Legislative Context

6. Established 1 October 2005 by the NERSA Act. The Minister of Energy designates the members as follows: One part-time member as chairperson One part-time member as deputy chairperson; One full-time member as the Chief Executive Officer (CEO) Three full-time members to be primarily responsible for each of the regulated industries. Three other part time members The National Energy Regulator

7. Budget of the Energy Regulator • The budget for the regulation of the three industries is ring-fenced in order to reflect the cost of regulating each industry appropriately as required by the NERSA Act. • The budget is funded by the industries through levies • Electricity: a levy on power generated by licensed generators and other funds • Piped-gas industry: “gigajoules (GJ) entered in the system” determine the relative percentage contribution of each pipeline licensee to the levy; • Petroleum pipelines industry: the levy is payable by the holders of the title to petroleum as it enters the system licensed by NERSA and is based on litres transported

8. The Regulatory Process • ER meetings are open to the public subject to Public Access to Information Act (PAIA) • Decisions of the Energy Regulator must be: • In writing, consistent with the Constitution and all applicable laws; • In the public interest; • Within the powers of the Energy Regulator as set out in the NERSA Act and the industry Acts. • Taken within a procedurally fair process in which affected persons have the opportunity to submit their views and present facts and evidence; • Based upon reasons, facts and evidence (summarised and recorded) • Explained clearly as to its factual and legal basis and reasons therefore • Decisions and reasons must be available to the public in terms of the PAIA • Persons affected by a decision of the ER may bring it under review by the High Court (provisions of PAJA) • Decisions of the ER sitting as a Tribunal may be appealed to the High Court

9. Regulatory Principles Regulatory principles guide the Regulator’s conduct and service delivery: • Rule of Law: Law applies to everybody and provides a clear framework for everyone to operate. Review and appeal by high court • Transparency: Reason for decisions and consultative processes; • Neutrality: Neutral to all market players without favouring one or other groups (non-discrimination) • Consistency: Explained decisions enabling stakeholders to take informed decisions – no surprises; predictability • Independence: Independence from stakeholders and politicians; within legal framework and published Government policy) • Accountability: Internal accountability – Regulator takes responsibility for actions and decisions. In addition, NERSA binds itself to carry out its business efficiently, economically and effectively, as required by legislation.

10. Electricity Regulation

11. ENERGY REGULATOR (Electricity) Custodian (stewardship), Enforcer of Framework Efficient Development of ESI ACHIEVE Effective 8 GOALS Sustainable Operation of ESI Orderly Having Regard to: Governance Efficiency Effectiveness Long term Sustainability Safeguarded Interests of Present & Future Customers ENSURE 2 Constraints Safeguarded Needs of Present & Future Customers INVESTMENT in ESI FACILITATE 3 Imperatives TO ELECTRICITY UNIVERSAL ACCESS OF INTERESTS FAIR BALANCE Diversification of Energy Sources PROMOTE 3 Tasks Efficiency of Energy Use Competitiveness Customer choice

12. Functions Prescribed in the Electricity Regulation Act • Licensing of Generation , Transmission, Distribution ,Trading, Import and Export; • Regulation of tariffs and price structures; • Setting of licence conditions and standards; • Monitoring and enforcement of compliance; • Issue rules to implement national government's electricity policy framework, the integrated resource plan and the Act; • Investigate complaints; • Mediate or arbitrate in disputes; • Gather and store industry information • Register those who need to be registered.

13. Electricity Regulation Act, 2006 (Act No. 4 of 2006) Section 4(a)(ii) says that the regulator must regulate prices and tariffs. Section 15 (1) (a) says:- “must enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return;”. Section 15 (1) (c) says:- “must give end users proper information regarding the costs that their consumption imposes on the licensee's business;” Section 15(1) (c) and (d) says:- “must avoid undue discrimination between customer categories” and “may permit the cross-subsidy of tariffs to certain classes of customers” NERSA also has to comply with the Principles in the Electricity Pricing Policy document because Section 4 (a) (iv) says:- “issue rules designed to implement the national government's electricity policy framework, the integrated resource plan and this Act;” REGULATION OF ELECTRICITY PRICES

14. REGULATION OF ELECTRICITY PRICES NERSA uses a Revenue Requirement Methodology based upon the wording in the Acts which in turn leads to a rate of return methodology The rate of return formula is as follows: R = E + (V – d + w) r Where: R = required revenue E = cost to supply V = value of qualifying property, plant and equipment d = accumulated depreciation on qualifying property, plant and equipment w = allowance for working capital r = rate of return using the weighted average costs of capital (WACC)

15. Eskom Price History Prices in Red actually applied Source: Eskom and NERSA

16. The Act requires that anyone who is involved in Generation (Gx), Transmission (Tx), Distribution (Dx), Import/Exports and Trading should be licensed by NERSA With each and every licence granted NERSA imposes licence conditions which should be complied with. The ERA stipulates that the licensing process should not exceed 120 days After a licence has been issued NERSA has to monitor for compliance – more than 200 licensees. The Electricity Licensing and Compliance Department is responsible for these functions within NERSA. Licensing and Compliance Monitoring

17. Industry Structure

18. It is dominated by the vertically integrated incumbent – Eskom Eskom is responsible for the generation of 96% (~26 Power stations) of electricity in the RSA and 60% of Distribution There are 188 licensed distributors, including Eskom Distribution IPPs will sell to Eskom and not compete directly Total licensees = 188 including Eskom : 174 Municipalities 13 Private Distributor 1 Eskom Eskom Dx - distributes 60 % to end user customers Municipalities and some private distributors distribute 40 % to end user customers Industry Structure

19. Municipal generator Municipal generator Eskom generation Eskom transmission Local authority distributors D 1 D 2 D 3 D n Eskom distribution Customers a Customers b Customers n Generation oligopoly Transmission monopoly Distribution fragmentation Current Structure IPP’s

20. SA Power Grid

21. Existing grid system Possible future grid system Future hydroelectric power station Future thermal power station Hydroelectric power station Interconnection substation Thermal power station Future interconnection substation Nuclear power station Future gas station Gas power station Town Eskom Power Grid(1) • Eskom : Strategic 100% state owned electricity utility, strongly supported by the government • Vertically integrated across generation, transmission and distribution • Supplies approximately 95% of South Africa’s electricity (45% of the total electricity consumed in Africa) • 40,165 employees as at 30 September 2010 • Serves 3,000 industrial, 1,000 mining, 48,000 commercial, 84,000 agricultural and more than 4 million residential customers • 27 (including 1 nuclear) operational power stations with a net maximum capacity of 40.87GW as at 31 March 2010 • Total electricity sales of 218,591GWh • Infrastructure includes 390,338km of power lines and cables (all voltages) as at 31 March 2010 • Committed to build17GW new generation capacity, including 4,905MW already commissioned, expected by 31 March 2018 Eskom’s Net Capacity Mix – 31 March 2010 Source: Eskom

22. South Africa Electricity Industry Statistics Source: Eskom Figures as at March 2011

23. Engaging Consumers and Stakeholders

24. The Engagement Process Engagement takes the following forms: • Customer Education Forums • NERSA staff conduct customer education forums where the customer is • Complaints resolution • NERSA has a department which sets out to resolve customer complaints and queries • This also tells us where the problems are

25. The Engagement Process Cont. • Public Consultation • Important decisions are preceded by a public consultation paper and the opportunity to submit written comment • Public Hearings follow • Public consultation is very beneficial and a great source of information and NERSA pays attention to what is submitted and presented • Decisions are then published on the website

26. Challenges

27. Challenges • Municipal Tariffs • Resellers • Accurate Information • Information Asymmetry with Eskom

28. THANK YOU Website: www.nersa.org.za Tel: 012- 401 4600 Fax: 012- 401 4700 Email: info@nersa.org.za Kulawula House 526 Madiba Street Arcadia 0007