Impact of Administered Prices on Manufacturing Sector: Factors and Challenges

1. Portfolio Committee on Trade and IndustryColloquium on the Impact of Administered Prices on the Manufacturing Sector06 March 2013

2. Presentation Content SALGA was invited to respond on the following Questions: - • What are the factors that influenced the divergence of electricity prices charged by municipalities in relation to Eskom? • Who is responsible for considering the broader economic impact of NERSA’s approval of electricity price increases in manufacturing? • What interventions or measures is the State implementing to facilitate energy efficiency among all users especially industry? • What is the policy, legislative and regulatory impediments to maintaining low cost electricity for the manufacturing sector? • What are the challenges that inhibit the provision of low cost electricity to the manufacturing sector? • What instruments do municipalities use to determine the monthly electricity bills for various sectors? • What is SALGA’s role in capacitating municipalities to address inconsistencies in billing industry and implementing appropriate systems? • What immediate and short-term measures would you propose to address the current challenges with respect to electricity prices faced by the manufacturing sector?

3. What are the factors that influenced the divergence of electricity prices charged by municipalities in relation to Eskom? • One important principle around electricity tariff design is to ensure that the tariffs are adequately priced so as to ensure total cost recovery of the utility. • There are 189 utilities in the country and they are all unique in terms of their financial requirements. They also differ in terms of the following: - • Cost Structures • Sales Volumes • Types / Costs of Networks • Varying Socio Economic Requirements

4. What are the factors that influenced the divergence of electricity prices charged by municipalities in relation to Eskom? (Cont…) • Municipalities do not purchase electricity from Eskom Transmission at a price that is comparable to Eskom distribution • In fact municipalities purchase electricity at the same rate as Eskom direct customers with similar use patterns as municipalities (e.g. megaflex consumers) • This is despite the fact that Eskom distribution is operating under a separate distribution license condition • To allow for the better alignment between Eskom and Municipal tariffs Eskom Distribution and Distributing municipalities should have access to similar purchasing tariffs (i.e. from Eskom Transmission)

5. What are the factors that influenced the divergence of electricity prices charged by municipalities in relation to Eskom? (Cont…) • The figure below highlights the current scenario as well as an alternative one. The proposed will ensure that Eskom distribution and distributor municipalities are treated alike ensuring minimal tariff mismatching.

6. What are the factors that influenced the divergence of electricity prices charged by municipalities in relation to Eskom? (Cont…) • Current only consumers supplied by municipalities cross subsidize other municipal developmental services that are not revenue raising by way of a surcharge contribution to the general rates account • Consumers supplied by municipalities cross subsidize low income residential consumers in the municipal area of supply • They also cross subsidize low income residential users in the Eskom area of supply because Eskom big consumer tariffs (which Include municipalities) cross subsidise low income residential consumers

7. What are the factors that influenced the divergence of electricity prices charged by municipalities in relation to Eskom? (Cont…) • In order for municipalities to match Eskom prices, they may have to do the following:

8. Who is responsible for considering the broader economic impact of NERSA’s approval of electricity price increases in manufacturing? • NERSA • Based on national government policies

9. What interventions or measures is the State implementing to facilitate Energy Efficiency among all users especially industry? • Types of interventions at local level • Urban planning and building control – e.g. COJ • Promotion of energy efficiency in new developments • Criteria for assessing energy efficiency in applications • Conditions for development to take place • Densification • Building design • SANS 204 • SWH • Street lighting • EE in municipal buildings – lighting, HVAC, energy management • Water services - Improvements in EE in pumping • Renewable energy/EE in waste water treatment facilities – e.g. COJ electricity from sewage sludge

10. What is the policy, legislative and regulatory impediments to maintaining low cost electricity to all? • Measures to facilitate introduction of competition in the national system – however there is a belief that prices are low anyway. Therefore competition may not necessarily lead lowering of price • Introduction of the Independent System and Market Operator (ISMO) is underway through the ISMO Bill. • At local level, municipal distributors currently constrained in terms of being able to contract directly with IPPs on an avoided Eskom cost basis • Metro distributors may have the capacity to connect IPPs capable of generating in the 100+MW range • Ironically low prices may be an impediment to entry of IPPs • However, high prices may lead to those who can afford (industries, businesses, and high income households) opting out of the grid leading to loss of cross subsidy base for poor households

11. What are the challenges that inhibit the provision of low cost electricity to the manufacturing sector? (Cont…) Low costs electricity is essentially: • Below cost electricity - Below cost electricity sales will not allow for sufficient maintenance and repairs to the network Or • Subsidised electricity • Providing electricity below cost to one sector means that another sector will have to be charged above costs. Which sector will this be? How will it be justified? • Eskom is currently moving towards Cost of Supply tariff rates and they are moving away from “special pricing agreements” • If municipalities were to do any different there would be even greater tariff mismatch between Eskom tariffs and that of the municipality (especially to customers that will be offering the cross subsidy) • The special pricing tariff agreement would be at the unfair cost to other industries/customers

12. What instruments do municipalities use to determine the monthly electricity bills for various sectors? • Municipal Tariffs are designed to recover 2 distinct components:- • Variable Energy Costs • These costs are recovered via Time of Use (ToU) energy rates. The energy units that are consumed are charged for. • This cost is generally a pass through cost for the municipality and this revenue will be paid over to Eskom. • Fixed Network Costs • This is the cost that is charged for maintaining and repairing the network as well as for service related costs. • These will include network demand charges, service charges and network access charges. • These costs are not dependent on the energy usage of the customer. The above tariff structure is generally implemented for large commercial and industrial customers (For residential customers that require a simple tariff, the energy and demand components are recovered via a single rate energy charge).

13. What instruments do municipalities use to determine the monthly electricity bills for various sectors? • Often suggested that municipalities add huge surcharges on electricity prices • Fact: Municipal electricity prices are approved by NERSA after careful/ if not conservative scrutiny • Fact: Municipal tariffs are mostly (all metros) are within the NERSA’s Tariff Guidelines and Benchmarks

14. What is SALGA’s role in capacitating municipalities to address inconsistencies in billing industry and implementing appropriate systems? • In the context of the role of SALGA; representing, supporting, advising and facilitating knowledge sharing: • Encouraging all municipalities to ensure that there are suitable tariff structures for all categories within a municipality. This includes Time of Use tariffs, Single Rate tariffs, Free Basic Electricity etc. There has been lack of regulation in this sector for many years and the tariff structures among different municipalities vary as a result. • The shortage of skills within smaller municipalities is another reason for the deviations. • However Metros, which account for almost 80% of reticulation by municipalities comply with the relevant tariff guidelines and are in line with NERSA’s guidelines for municipal tariff structures. • SALGA available to facilitate deployment of officials from better capacitated municipalities to assist and advise where there are challenges • SALGA welcomes information from customers where they believe that there are tariff / billing discrepancies and will take the necessary steps facilitate support to the municipality to remedy and rectify these issues.

15. What immediate and short-term measures would you propose to address the current challenges with respect to electricity prices faced by the manufacturing sector ? • At the level of the energy sector: • Regulator should to try and manage the transition to cost reflective tariffs as, as required by Energy Policy, to be in tandem with industry adjustments to high electricity price environment • This could be facilitated by continued provision of government guarantees and even equity investment by national government as a shareholder to ESKOM • The industry adjustments should largely be towards energy • The energy efficiency component of the MYPD must not be an Eskom resource • A different administrative arrangement must be established that will facilitate all distributors to support energy efficiency changes by consumers in their areas of distribution • The Trade and Industry Department best placed to talk about how its programs can support vulnerable industries to adapt to a high electricity prices environment

16. What immediate and short-term measures would you propose to address the current challenges with respect to electricity prices faced by the manufacturing sector? (Cont…) • NERSA announcement of the 28th of February appears to have misled many into believing that price increases for all will be 8% or less • However this may not necessarily be the case because NERSA has granted ESKOM about 84% of the more than R1 trillion revenue amount it applied for • Can this be raised from half the tariff increase that ESKOM applied for if this applied to all its consumer categories? • NERSA announced an average tariff increase of 8% • Which other consumer categories other than ESKOM directly supplied residential consumers will get a lower than 8% increase and which ones will get more in order to achieve the average and the allowed revenue? • The tariff to municipalities must be such that it allows them to keep their increases to their customers around 8% if there has to be no unfair treatment of municipal residential consumers and give industries a lower increase • This will all depend on the decision that NERSA will post on its website on the 13th of March – this must be the immediate area of focus that will affect the majority of electricity users

17. Conclusion • Municipalities are also concerned about the escalating electricity prices. • However, it must be noted that municipalities are mere transporters of electricity and not generators, hence the increase in bulk energy cost must be a pass through cost to the customer. • The ability of the municipality to cushion these high increases is limited as they have no control over the bulk energy costs. • Which customers would cross-subsidise the Foundries, Agriculture, Manufactures, NGO’s, Public Service etc.? • If a sector is chosen as to be subsidised, on what basis would a municipality decide it could not provide a similar subsidy to any other sector? • Are the electricity tariffs the best method of addressing economic challenges to the country? • It is important to note that not only the manufacturing sector is negatively impacted by the increases, where relief is required a comprehensive framework should be developed to deal with these issues at a national level.

18. Thank you