CONSULTATION PAPER ON THE REVIEW OF INCLINING BLOCK TARIFFS FOR ELECTRICITY DISTRIBUTORS

Transcription

1 CONSULTATION PAPER ON THE REVIEW OF INCLINING BLOCK TARIFFS FOR ELECTRICITY DISTRIBUTORS Published on 21 September 2012 Page 1 of 41

2 TABLE OF CONTENTS 1. Introduction NERSA Mandate Background Review of compliance to the EPP Municipal Data: Development of IBTs Review of the structure of IBTs Potential Financial Implications of IBT Multiple Household Dwellings Issue regarding customers with irregular usage Issues regarding resellers Technical Challenges Alternate Options: Other tariff structures to be considered Seasonally differentiated tariffs to address cash flow issues Impact of price /tariffs signal due to customers implementing EE measures, and the impact these measures have on the licensees revenues Any Other Comments Appendix Page 2 of 41

3 Abbreviations c/kwh CPI DOE DPLG EEDSM EPP Cent per kilowatt hour Consumer Price Index Department of Energy Department of Provincial and Local Government Energy Efficiency and Demand Side Management The South African Electricity Supply Industry: Electricity Pricing Policy GN 1398 of 19 December 2008 ERA Electricity Regulation Act (Act No. 4 of 2006) FBE IBT LRAM M&V MYPD NERSA TOU WACC Free Basic Electricity Inclining Block Tariff Long Run Adjustment Mechanism Measurement & Verification Multi Year Price Determination National Electricity Regulator of South Africa Time-of-Use Weighted Average Cost of Capital Page 3 of 41

4 SECTION 1 1. Introduction The National Energy Regulator of South Africa (NERSA) has embarked on a consultation process, to review the Inclining Block Tariffs (IBT) for electricity distributors. This consultation process is in line with the Energy Regulator decision to consult on the key issues being faced by licensees with regards to IBT implementation. The aim is to finalise the review by 13 December In this consultation process and prior to the decision, the Energy Regulator will embark on a due process involving stakeholder consultation. As part of this process, NERSA is requesting stakeholders to comment on the issues raised in this consultation paper. NERSA will collate all comments received which will be taken into consideration when the decision is made. NERSA will also hold a public hearing on 24 October 2012 wherein representations may be made by interested and affected parties. The timelines for this consultation and decision-making process is outlined in the table below: TIMELINES FOR THE REVIEW OF THE INCLINING BLOCK TARIFFS FOR ELECTRICITY DISTRIBUTORS ACTIVITY/TASK DATE Publication of Inclining Block Tariff s 21 September 2012 consultation paper on the NERSA website for stakeholder comments Closing Date for stakeholder comments 11 October 2012 Public Hearing 1 24 October 2012 Electricity Subcommittee to consider 04 December 2012 the Draft Reasons for Decision on the 1 Details regarding logistics (venue and time) will be communicated in due course Page 4 of 41

5 review of the Inclining Block Tariffs Energy Regulator s Decision on the 13 December 2012 review of the Inclining Block Tariffs Table 1: Timelines for the approval of the review of IBTs Stakeholders are requested to send their comments on the issues raised in this document to the address: ibtissues@nersa.org.za 2. NERSA Mandate The National Energy Regulator of South Africa (NERSA) is a regulatory authority established as a juristic person in Terms of Section 3 of the National Energy Regulator Act, 2004 (Act No.40 of 2004). NERSA s mandate is to regulate the electricity, piped-gas and petroleum pipelines in terms of the Electricity Regulation Act, 2006(Act No.4 of 2006), Gas Act, 2001(Act No.48 of 2001)and the Petroleum Pipelines Act, 2003(Act No.60 of 2003) and the Petroleum Pipelines Levies Act, 2004 (Act No.28 of 2004) In terms of Section 4(a)(ii) of the Electricity Regulation Act (Act No.4 of 2006) the Regulator must regulate prices and tariffs. 3. Background On 25 June 2009, within Eskom s interim price increase decision, NERSA approved for Inclining Block Tariffs to be implemented in MYPD2. The decision of the Energy Regulator was as follows: The approved price increase on the average standard tariffs includes a limited price increase of 15% to both Eskom and municipalities poor customers (i.e. Homelight 1 & 2 tariffs). It must be noted that this is an interim measure until the implementation of inclining block rate tariffs for protection of the poor. The full implementation will occur in the Multi- Year price Determination 2 (MYPD2). Following the above mentioned decision, NERSA commenced with an international benchmark study on the design of an Inclining Block Tariff (IBT) for domestic/ residential customers. This study included utilities and regulators such Page 5 of 41

6 as BC Hydro, Nova Scotia Power Incorporated, Royal Thai Government (Thailand), Georgia Environmental Protection Division and locally in South Africa within the water sector. In addition, NERSA held a joint workshop with the six metropolitan municipalities, Eskom and vending system suppliers to collect their views on a range of matters from the design of the blocks, one-part tariffs versus two part tariffs, systems challenges, transition/implementation timelines and other issues. During the analysis of the MYPD 2 decision, NERSA subsequently also investigated various other options of providing protection to low-income tariff customers as proposed by Eskom in the MYPD2 application. The table below highlights these options: OPTIONS REASONS FOR NON- SELECTION 1. Capping Increase to the low income customers: Differentiated Pricing This option resulted in major revenue losses to licensees, especially licensees which have a predominantly residential customer base It also does not always target the people for whom it is intended 2. Increasing the Free Basic Electricity (FBE) Allocation from 50kWh to 70kWh or even 100 kwh The authority responsible for the FBE allocation levels is the DoE together with DPLG and the National Treasury. NERSA therefore did not have the mandate and/or authority to enforce this option 3. Introduction of Real Time Pricing This would require major system changes with regards to metering with high costs and may even result in much higher prices for low income customers Table 2: Options Considered for Low Income Customer Protection Page 6 of 41

7 Unlike the IBT, none of the options in the table above are provided for in the Electricity Pricing Policy (EPP), although the FBE is dealt with under separate provisions of Government s social programs. The principle of an IBT is specifically provided for and supported by the South African Electricity Supply Industry: Electricity Pricing Policy GN 1398 of 19 December 2008 (EPP) which states that: : Low income tariff customer subsidization: Charging an appropriate tariff structure that allows for maximum subsidization at low consumption levels with gradually reducing cross-subsidies as the consumption levels increase. For these reasons the IBT was selected as the most preferred and viable option. Moreover, during the study on the design and structure of the IBT it was found that an IBT rate structure would allow the achievement of: 1) protecting low income tariff customers, and; 2) promoting energy efficiency. 3.1 Design Principles of an IBT The following key design principles were applied by NERSA to develop the current inclining block rate structure: the need to ensure stability, simplicity and understandability and transparency; the need to utilize appropriate metering and supply technology; the customers ability to pay; equity: preserving a degree of cross-subsidies to ensure support to low income customers; the requirement to shield low income customers from the impact of unacceptably high price increases; the need to ensure revenue neutrality to the utility i.e. the utility should neither make a profit nor a loss in revenue because of changes in tariff structures. Page 7 of 41

8 In order to keep in line with the design principle that the tariff should be easy and economical to administer/implement it was decided to limit the IBT to a 4 block tariff structure. 3.2 Development of an IBT The table below summarizes the 4 Blocks, consumptions levels, the basis for the block range used in the development of the IBT during the MYPD2 period for both Eskom and municipalities: Blocks Consumption Levels Basis of Block Range Block KWh Equal to FBE Block KWh Cushion low income large families (and multiple households) that may spill over from Block 1 Block kwh Presumed average household consumption informed by National Treasury assumption Block 4 >600kWh Remainder Table 3: Block Design The next step was to set the residential/ domestic benchmarks based on the abovementioned IBT design. In order to determine the residential benchmarks, the baseline point had to be determined. The residential/domestic benchmarks were determined on the basis as summarized below: Page 8 of 41

9 2009/10 Baseline Block Consumption Levels Benchmark per RED Block kwh Domestic Indigent Block kwh Domestic Indigent Block kwh Domestic Low Block 4 >600 kwh Domestic High Table 4: Baseline benchmarks and basis of benchmark increases Rationale for the baseline point To ensure that the increases in this benchmarks category remain within inflation level and provides protection to the low income customers. Maintain the objective of low income customer tariff subsidization for those customers who spill over from first block by retaining same baseline for both block 1 and 2. To ensure that the increases of average consumption households are limited to the average guideline increases Higher end of the residential benchmarks and representative of the marginal cost for additional supply plus a contribution to the subsidy in the lower blocks Basis of benchmark increase Limited to CPI ( as allowed for Eskom) CPI + % equal to or less than Eskom Real WACC% allowed Average (fully distributed) cost Domestic High benchmark plus guideline increase(long Run Marginal Cost + Residual Revenues)/ contribution to subsidy) 3.3 The Decision On 24 February 2010 (as part of the MYPD 2 decision), NERSA approved the implementation of Inclining Block Tariffs (IBTs) for domestic/ residential customers, concurrently with the 2010/11 price increase. The IBTs where based on the aforementioned design principles. The decision was taken in order to Page 9 of 41

10 provide for cross-subsidies for low income domestic customers and was therefore applicable to both Eskom and municipalities. The application of the above inputs resulted in the following 2011/12 benchmark energy charges for municipal distributors (i.e. excluding the fixed charges) and approved rates for Eskom (excluding VAT): c/kwh Block 1 Block 2 Block 3 Block 4 RED RED RED RED RED RED Eskom Approved Block Rates Table 5: IBT Municipal Benchmarks & Eskom approved rates (2011/12) 2 This refers to the historic Regional Electricity Distribution boundaries. Page 10 of 41

11 SECTION 2 After the aforementioned decision by NERSA, Eskom and some municipalities indicated that they faced various challenges/issues with regards to the implementation of the IBTs. NERSA therefore has decided to embark on a stakeholder consultation process in order to provide an opportunity to address issues raised by electricity distributors and other stakeholders such as the South African Local Government Association (SALGA) and the Association of Municipal Electricity Undertakers (AMEU). This section of the consultation paper therefore sets out the key issues on the Inclining Block Tariffs as raised by stakeholders. The consultation paper is structured with each issue being broken down into a discussion on the overview of the issue, NERSA research and initial views, and questions to stakeholders. Stakeholders are requested to comment particularly on the questions to stakeholders. However, comments may not be limited to these questions only. 4. Review of compliance to the EPP 4.1 Overview In developing the inclining block rate tariffs NERSA ensured that the principles of developing the IBTs does support the EPP policy principles. NERSA has also taken into consideration the challenges indicated by licensees and is willing to embark on a consultation process to this regard. Stakeholders have indicated that NERSA had not taken into consideration some of the policy positions identified in the EPP when developing the IBTs. A list of the key policy positions indentified by some of the stakeholders is as follows: Page 11 of 41

12 1. Stakeholders have indicated that in developing the IBT structures NERSA did not take into consideration the fact that the electricity tariffs should reflect the efficient costs of rendering an electricity service. 2. Stakeholders state that domestic tariffs should be cost reflective and should be able to offer a suite of supply options with progressive capacitydifferentiated tariffs and connection fees. 3. Stakeholders have outlined that cross-subsidies should have a minimal impact on price of electricity to consumers in the productive sector of the economy. 4. Stakeholders have indicated that a single energy rate tariff is NOT an IBT structure. 4.2 NERSA Research & Initial Approach One of the electricity sectors objectives is to improve social equity by addressing the requirements of the low income. The EPP states that low income customers should be charged an appropriate tariff structure that allows for maximum subsidisation at low consumption levels with gradually reducing cross subsidies as the consumption level increases. The EPP also states that the domestic tariffs should be more cost reflective, that cross subsidies should be made transparent and licensees are required to publicise the average level of cross subsidy between customer categories. 4.3 Questions to Stakeholders Stakeholder Question 1: Stakeholders are requested to comment on any other policies (e.g. the EPP) that they feel that NERSA did not consider when developing the IBT structure. Page 12 of 41

13 5. Municipal Data: Development of IBTs 5.1 Overview In order to ensure that proper analysis and approval of municipal tariff applications is achieved, NERSA requires correct and complete information on which the tariffs are to be based (or determined). To this end, a need for consistent and quality information is imperative. The required information for tariff analysis and approval includes both qualitative and quantitative data and must be in a form that is consistent with NERSA s objectives in so far as tariff principles are concerned and as stipulated in the ERA. Stakeholders have advised that one of the shortcomings of the current IBT design is the fact that Eskom data was used to develop a national strategy on IBTs and that this data is not relevant to the individual municipalities. 5.2 NERSA Research & Initial Approach It must be noted that it is a great challenge collecting relevant and accurate information from municipalities that could be utilized by NERSA in conducting studies for purposes of IBT implementation. This is particularly the case with medium and small sized municipalities. Data for the six metros is normally available and reliable however using this data alone would also not be an ideal representative of all municipalities. The NEDLAC paper (A study into approaches to minimize the impact of electricity price increases on the poor) further supports the issue regarding the lack of quality data from municipalities and states that the quality of data for Eskom was generally good although the availability of data on electricity prices, costs consumption and subsidies for municipal distributors by category of consumer was generally very poor. Appendix 1 is an example of the quality of data that NERSA currently receives from municipal distributors. The data submitted was inaccurate and incomplete for purposes of tariff analysis. For example: The Market Information Form (D2 Page 13 of 41

14 Form) under the breakdown of consumer classification, requires that the municipality input information regarding its customer numbers and consumption (split into the various customer categories). This information is vital in tariff setting as it allows NERSA to determine the customer category in which the municipality recovers most of its revenues. In this case, the municipality only reflects having domestic prepaid customers; however the actual tariff application submitted by the municipality requests for approval for domestic conventional metered customers, commercial and industrial customers. Also on the Income Statement Form (D1 Form) although in the D2 Form the municipality reflected having only domestic prepaid customers, the D1 Form shows revenue from sale of electricity for both prepaid and conventional meters. The information also shows that the municipality experiences high level of deficits whereas revenues from sale of electricity for other customer categories are not accounted for. This is but one of the many inaccuracies and inconsistent information that is submitted by municipalities. Consequently, in the absence of quality information from municipalities, NERSA uses the best available estimates to analyse and determine appropriate tariff levels and structures for the specific municipalities. Furthermore, NERSA does consider a municipality s unique characteristics and challenges as presented by various municipalities during the tariff approval process. NERSA allows deviations to the benchmarks, guideline and even IBT structures. Municipalities that have presented extraordinary cases to NERSA, supported by appropriate data, facts, reason and evidence have always been granted approval to deviate from the set levels and structures. Information(or closest estimates) that would be required from municipalities needing to deviate from the benchmarks, guideline, IBT structures and those Page 14 of 41

15 experiencing revenue losses as a result of IBT implementation include (but is not limited to) the following: 1. Customer numbers (split into the IBT blocks) 2. Consumption levels (e.g. broken down into the different customer groupings and consumption split into the blocks) 3. Revenues collected from the various IBT blocks 4. Subsidies for municipal distributors by category of consumer 5.3 Questions to Stakeholders Stakeholder Question 2: What data will be ideal to build a representative benchmark consumption level for municipalities? Should NERSA use the data of the metropolitan municipalities to determine the IBT structures? Should NERSA consider a municipality s individual circumstances? Or due to the lack of quality data, should NERSA use a national average based on Eskom s data? 6. Review of the structure of IBTs 6.1 Overview There are various stakeholder views with regard to the number of blocks in the current IBT structure. One view is that the current IBT structure has too many blocks and the rates have not been optimally determined. Some stakeholders are also of the view that the current structure of the IBT results in it not reaching the poorest of the poor and also results in affluent customers being subsidized. The other view is that the blocks are too few and that additional blocks should be incorporated into the IBT structure. This section discusses the issues relating to the structure of the IBT i.e. the number of blocks, the consumption levels set for each block and the associated rate levels set for each block. Page 15 of 41

16 6.2 NERSA Research & Initial Approach The NERSA IBT structure was based on international best practice where it was found that countries that implemented IBTs opted for a tariff structure ranging from two blocks to four blocks, in accordance with the principles of simplicity and economical administration. During the workshop alluded to earlier in this document with the six metropolitan municipalities, Eskom and meter vendors on the Inclining Block Tariff (prior to approval of the structure by NERSA), the metropolitan municipalities indicated that they preferred a tariff structure with more than four blocks, or/ and raising the fourth block from 600kWh/month to a higher monthly consumption amount, but no consensus was reached on what the consumption level should be increased to. In order to maintain the design principle that the tariff should be easy and economical to administer/implement NERSA decided to limit the IBT to a 4 block telescopic tariff structure. The telescopic IBT structure allows for consumers to get the first block at the low price with large customers seeing a more efficient (higher) price in the higher blocks. A non-telescopic IBT structure is one where the low consumption customers pay the lower price for all units consumed whilst the large consumption users pay the higher price for all units consumed. The IBT was furthermore structured to ensure protection to low income consumers who are generally also classified as low consumption customers. Other low consumption customers (whether affluent or not) would also benefit from the IBT structure, which is a tariff principle which is supported as this means that these customers are placing less pressure on the electricity system. The lower consumption by these customers leads to lower costs for the licensee. It must further be noted that the IBT structure allows for quantified crosssubsidies to be spread across the customer base. The differentiated pricing mechanisms used previously (i.e. were increases to low income customers were capped at 15% etc), which most licensees implemented to offer protection to low Page 16 of 41

17 income households, also required for levels of cross-subsidies but did not allow for these cross-subsidy levels to be quantified and transparent. The IBT therefore allows for a more transparent pricing mechanism. With regards to the current structure of the IBT (i.e. no of blocks etc), during the analysis of municipal tariffs for the 2010/11 and 2011/12 financial year, it was found that some municipalities requested for different IBT structures. These structures have been based on additional blocks but no requests were made for fewer IBT blocks. NERSA acknowledges that a one size fits all approach is not the ideal situation. However, in the absence of quality information from municipalities, and in order to determine the most appropriate IBT structure, NERSA opted for the approach of using the NERSA IBT structure as a guideline. This approach has been practiced by NERSA in the assessment of the IBTs in the 2011/12 financial year, whereby NERSA has approved different IBT structures for some municipalities (based on the motivation for the differing structure as provided by the municipality and supported by quality data). Although the IBT structure of the municipality may have been different, NERSA ensured that the tariff still supported the primary objective of ensuring protection to low income customers. This was done by ensuring that the Block 1 and/ or Block 2 rates were increased by the basis of the block increases as illustrated in Table 4 above (i.e. Block 1 increased by CPI and Block 2 increased by CPI plus % equal to Eskom s Real WACC% allowed). One approach or option to be considered with regards to the structure of the Inclining Block Tariff would be to maintain the existing IBT block structure as a guideline in determining IBTs. NERSA would however consider alternative IBT structures (i.e. more or less blocks) provided that the municipality is able give sufficient motivation for the deviation from the guideline. This motivation must be supported by sufficient evidence and adequate data and information. This Page 17 of 41

18 standardization will also allow for rationalization of tariff structures in place by electricity distributors and will also allow for the like-for-like comparison of tariffs amongst the various licensees/distributors. 6.3 Questions to Stakeholders Stakeholder Question 3: What in your views would be the ideal IBT tariff structure for implementation by licensees and why? Stakeholder Question 4: Do licensees prefer an IBT structure with fewer or more blocks? Please motivate accordingly. Stakeholder Question 5: If NERSA continues with issuing the IBT guidelines and benchmarks, would the approach of using the 4 block IBT structure as a guideline be acceptable (with those licensees requiring a different tariff structure motivating for such a structure)? Would it not be beneficial to have a standard IBT structure to allow for comparison of tariffs between licensees? Stakeholder Question 6: What would be the ideal approach to be adopted by NERSA in setting the benchmark rates for the blocks (NERSA current approach highlighted in Table 4 above)? What would be the principles that should be adopted in order to set these benchmark rates whilst still achieving the objective of protection of low income customers? 7. Potential Financial Implications of IBT 7.1 Overview Licensees are concerned that the introduction of the NERSA IBT structure/guideline may potentially result in direct revenue losses due to apparent inconsistencies with current revenue management practices. The following are Page 18 of 41

19 some of the revenue management practices that according to licensees may potentially be negatively impacted. 1. The implementation of the NERSA IBT guideline without allowance for some level of discretion may potentially lead to direct revenue losses to licensees due to the fact that the unit prices (bands) for respective blocks may in some cases be lower than what some licensees historically charge their respective sub-categories of domestic customers for consumption within the respective bands. 2. Licensees further claim that such potential revenue losses may directly affect their surplus from electricity sales unless mechanisms are put in place to compensate them through various forms of cross subsidization. Licensees are also concerned that their lack of an appropriate domestic customer mix results in revenue losses due to the low cost of electricity at low levels of electricity consumption by domestic customers. In terms of the current IBT guidelines, domestic customers should get the first 350kWh/ month at relatively low tariffs. The tariff is slightly higher for customer consumption between the 350kWh/month and 600kWh/month and even higher for units consumption in excess of the threshold of 600kWh/month to compensate for low end tariffs. Licensees may suffer further revenue losses because the tariffs in terms of the IBT guidelines for consumption in excess of the threshold of 600kWh/ month may well be below respective historic tariffs to such high end customers. This may therefore potentially result in unintentional subsidies to high end customers at the expense of the licensees revenues. 3. Licensees are also concerned that they may potentially lose revenue in cases where they have a large number of domestic customers with Page 19 of 41

20 irregular consumption patterns (should the IBT guideline restrict them to single energy rate consumption based tariffs). Similarly licensees are concerned that a single energy rate domestic tariff will potentially inhibit their ability to effectively respond to their own successes in implementing Energy Efficient Demand Side Management (EEDSM). Effective implementation of EEDSM will inevitably result in reduced demand and associated reduction in bulk purchases costs. Implementation of EEDSM normally results in reduction in sales volume which unless the licensee has an effective two part tariff may result in disproportional loss in revenue. While successful implementation of EEDSM will inevitably lead to revenue loss it should also lead to a proportional reduction in the bulk purchase cost such that the licensee remains revenue neutral, net revenue that is. 7.2 NERSA Research & Initial Approach The initial design of the IBT structure was based on a licensee with a certain profile in mind i.e. the appropriate customer mix and numbers, etc. Due to differences in domestic customer mix, individual licensees were allowed discretion in implementing the IBT guideline. Individual licensees were on condition that they provided supporting documents, in accordance with their special circumstances allowed some discretion in implementing the NERSA IBT guideline/structure. Some licensees therefore applied for higher tariffs per block. The main reason for this was due to licensees arguing that the consumption of majority of their residential customers generally do not consume greater than 350kWh/month (Block 2) whereas they historically charged such customers tariffs higher than the prescribed IBT guideline. Licensees further argued that this is the range were they generate more than 50% of their revenue from domestic customers. Page 20 of 41

21 The potential revenue loss stems from the fact that a particular licensee for example, has a lifeline tariff for qualifying customers of 78.52c/kWh whereas the corresponding IBT guideline ranges between 68.00c/kWh to 71.00c/kWh for all domestic customers. The guideline therefore extends the benefit to customers that would otherwise not have been on a lifeline tariff. NERSA has therefore allowed these licensees to exercise discretion in implementing the IBT guidelines to ensure that the licensee does not potentially suffer some form of revenue loss with respect to the price and to ensure that a larger number of domestic customers do not benefit from the subsidized price instead of only customers on the lifeline tariff of the licensee concerned. Similarly customers on a domestic tariff of a well known licensee with an assumed average consumption of 725kWh/month would have paid a weighted average price of c/kwh only (as illustrated in Table 7 below) had the licensee concerned not have applied for discretion in implementing the IBT guideline. Assumed usage 725 Size Usage Tariff (/kwh) Block Block Block Block Sub-total DSM Levy Total Charge for the Month Average Tariff Table 6: Tariff based on the IBT guideline The licensee concerned was however allowed to implement the IBT guideline with variation whereby it was allowed higher block sizes and higher tariffs per block as well as a fixed basic charge. As a result the licensee will sell the same 725kWh/month at an average tariff of c/kWh as illustrated in Table 8 below. The licensee will as a result not suffer any revenue loss Page 21 of 41

22 directly attributable to the IBT guideline due to the fact that NERSA allows some flexibility in the implementation of the IBT guideline. Assumed usage 725 Size Usage Remainder Tariff (c/kwh) Price (H) Block Block 2 1, Block 3 2, Block 4 3, Basic Fixed Charge Sub-total DSM Lvey (c/kwh Total Charge for the months Average Tariff c/kwh Table 7: Tariff based on variation on IBT guideline With regards to IBTs and the need for a cross-subsidy mechanism, the intention with the IBT design was that the high-end domestic tariffs would compensate for the low-end tariffs. This however is dependent on an appropriate level of domestic customer mix and the licensees marginal cost being in line with upper limit of the IBT band for consumption in excess of the monthly threshold of 600kWh/month. Licensees with a high proportion of low consumption domestic customers may potentially suffer net revenue losses as they may not have sufficient numbers of high consumption domestic customers to compensate for subsidized prices at lower levels of consumption. In this regard, NERSA further allowed for cross-subsidies from the rest of the customer base to deal with such revenue losses (i.e. crosssubsidies from the commercial and industrial customer base). In terms of revenue losses due to customers with irregular usage 3 and EEDSM measures being implemented, NERSA has allowed licensees to implement two part IBT 4 tariffs. This tariff structure was allowed to ensure that 3 This refers to customers such as holiday homes etc. 4 A tariff structure with a fixed monthly charge plus energy charges with IBT blocks Page 22 of 41

23 the licensee was still able to maintain the ability to effectively compensate for both the variable and fixed cost components of its cost structure. The above approaches used indicates that NERSA has allowed such arguments on a case by case basis based on the soundness of each business case provided and on condition that the licensee provided NERSA with the necessary information (as per the information requirements set out in Section 4: Municipal Data Development of IBTs) in order for NERSA to undertake its own independent analysis. Furthermore, these above the benchmark level rates were accepted on the basis that the objectives of the IBTs were still maintained. In the interest of ensuring revenue neutrality licensees were for example allowed variations to the block sizes, the maximum tariff per block and even allowed a two-tier tariff for higher end customers. 7.3 Questions to Stakeholders Stakeholder Question 7: What are other mechanisms that can be used to protect under/over recovery of revenue due the implementation of IBTs? Does the IBT guideline unintentionally benefit high-end domestic customers? If so, how can this be dealt with? Stakeholder Question 8: In cases where the licensees customers are disproportionately distributed (majority customers falling in a certain block), how should the blocks be structured without losing the IBTs primary objectives of protection of low income households? Page 23 of 41

24 8. Multiple Household Dwellings 8.1 Overview In South Africa, many low income customer areas have multiple family households i.e. there are many families living in one household. These households are supplied by a single electricity supply point which results into a higher combined usage. Due to there being multiple families in one household, it leads to the household having high levels of consumption. With the current IBT structure, it means that these customers (if these households remain connected through to one meter per multiple family household) will be consuming in either block 3 or 4 which has higher tariff rates associated with it. These customers will therefore not necessarily receive the benefit of the protection from high prices as intended by the IBT while there consumption is read as that of one customer. 8.2 NERSA Research & Initial Approach The supply of electricity to multiple households in South Africa has various challenges. As highlighted above, one of the challenges is passing on the intended benefits of the IBTs to these customers. Another challenge is that, due to these customers having only one meter per household, they are not able to receive the benefits of the FBE mechanism (i.e. these multiple households only receive 50kWh/ month free, rather than each family or dwelling receiving the FBE units). However, the issue regarding multiple household dwellings is an issue that is not unique to South Africa. This issue has been raised in many countries, during the introduction of IBTs, in both the electricity and water sectors. These countries include Australia (Victoria), United Kingdom (Wales). The approaches adopted by these Regulators together with other approaches are discussed below: Page 24 of 41

25 1. The Essential Services Commission (The Regulator in Victoria) dealt with the issue of multiple households that are being serviced by a single meter by applying the consumption tiers/levels on a pro-rata basis (Pro rata option). This essentially means that the Regulator had to determine or approximate how many families existed per multiple family household. Each family/customer within the household was then billed separately i.e. the IBT was then applied for each family thus allowing each family to benefit from the IBT structure. This therefore allowed for these multiple households not to be burdened with high electricity bills. This option is considered acceptable as it will allow for each multiple family to receive the intended benefits of the IBT tariff structure. However, one of the practical challenges of adopting this approach would be the detailed administration required. This approach would require that the licensee have a detailed understanding of each multiple family household (i.e. number of families in each household etc.) and would further require that the licensee verify this information on an ongoing basis. 2. Other regulators in the United Kingdom opted for increasing the consumption levels of its Block 1 or 2 to ensure that the lower prices applicable in these blocks would ensure that the multiple households are not unduly punished for consumption that falls out of their control (alternate tariff structure option). This option would allow for the setting of the consumption level at an average level. Due to the average levels of consumption set, this option would not allow for each family to be accurately billed. This option would however be more practical and easier to implement. 3. Another option to be considered in South Africa would be to ensure that each family with the multiple household dwelling has its own meter installed in order to track consumption per family unit. This will allow for proper Page 25 of 41

26 implementation of the IBT structure and will further facilitate the administration of the FBE mechanism as each family will then be able to receive the FBE benefits it is entitled to. The benefits of this option needs to be considered together with the challenges and costs associated with it. Licensees state that the challenge they face is that the licensee has to incur costs to reconfigure circuits to cater for individual metering and customers cannot afford the added costs to embrace the benefits of IBTs. 8.3 Questions to Stakeholders Stakeholder Question 9: What is the most practical solution that licensees would consider to enable multiple household customers to benefit from the IBT, as those that are individually metered do? Stakeholder Question 10: How do licensees currently apply the FBE mechanism to this customer group and would this solution (if any) also work in resolving the challenge around the implementation of IBTs for this customer category? Stakeholder Question 11: Are multiple households easily identifiable by licensees, in order for these customers to be placed on an alternate tariff structure? Stakeholder Question 12: What are the estimated costs associated with reconfiguring circuits to allow for individual metering? Would the benefits outweigh the costs? Page 26 of 41

27 9. Issue regarding customers with irregular usage 9.1 Overview Various municipal areas in South Africa have customers with irregular or intermittent usage. These are normally holiday homes etc, where customers use their households for very few months of the year. However, during these months of occupation, consumption can be high. Stakeholders argue that with the IBT structure, these customers will enjoy the benefit of low electricity bills during months where there is little or no usage thereby creating a revenue shortfall. 9.2 NERSA Research & Initial Approach This category of customers have a historic (i.e. prior to the implementation of IBTs) pattern of irregular and intermittent usage. It is therefore evident that even in the past, during months of low or intermittent usage, the revenues collected from the energy charge component of the tariff would still have been limited. The revenue required from this customer category is therefore maintained through the fixed charge component of the tariff. With regards to this challenge, NERSA would prefer to draw knowledge from how this issue was dealt with by electricity distributors/licensees in South Africa that have customers with irregular usage. For the 2011/12 financial year, distributors that faced this challenge of introducing IBTs for customers with intermittent usage opted for an IBT tariff structure with a fixed charge. Some licensees opted to embed the fixed charge into the block rates whilst some opted for the simpler approach of retaining a separate fixed charge component to the tariff structure. These licensees have identified this customer group and set an IBT tariff specifically for this group of customers. By retaining the fixed charge component in their tariff structure the licensee was able to ensure revenue neutrality. Page 27 of 41

28 NERSA s initial approach is therefore that the IBT is a structure that can be implemented for this customer category provided that the cost to supply these customers is retained through the fixed charge. 9.3 Questions to Stakeholders Stakeholder Question 13: Is the aforementioned approach of retaining the fixed charge in the tariff structure appropriate in resolving the issue regarding customers with intermittent usage? Alternatively, is there any other approach that should be considered to deal with this challenge? 10. Issues regarding resellers 10.1 Overview The following is a summary of the issues regarding IBTs and resellers: 1. A block of flats where the landlord contracts for a point of supply with the supply authority and sells on to the tenants who are metered by the landlord. 2. A complex of dwellings (townhouses) where the supply authority gives one point of supply and the developer/body corporate then takes the responsibility to supply, meter and bill the tenants/subtitle owners. This is done directly or by using a contracted agent. In the above cases the supply authority in past times might have given the supply on a Home Bulk tariff which was designed for this situation or if the supply point was big enough a Bulk supply tariff similar in structure to the Megaflex tariff. The problems arise when the Home Bulk tariff has been converted to an IBT tariff. This means that in these cases where the old flat rate has been converted to an IBT the largest part of the usage will be billed at the highest (Block 4) rate to the landlord who then must somehow pass this on to the end user who is then effectively charged for all usage at a rate close to the block 4 rate. The more end Page 28 of 41

29 users there are the more closely their rate will move towards the block 4 rate because the higher the percentage of the landlords power will be in the block 4 rate. At this point there are two important points need to be made. 1. NERSA s initial position is that the end user supplied by a reseller should be no worse off than if directly supplied by the supply authority. 2. IBT s were designed for single dwellings or a single user behind the meter. Therefore any solution needs to take this into account NERSA Research & Initial Approach NERSA is currently busy with the issue of Resellers and is busy holding stakeholder workshops prior to publishing a consultation paper on the whole reseller issue and inputs from both will be considered in resolving the problems stated above. In terms of possible solutions to the above problems there seem to be the following options: 1. Just simply rule that IBT s will not apply where there are multiple end users behind the supply authority meter. 2. Specify that the supply authority has an appropriate tariff/ special tariff as for the reseller is in fact not a domestic customer and should not be treated as though it is a special domestic customer who has to be on the IBT tariff. The reseller customers as domestic end users can best be suited on tariffs in line with the IBT structure/guideline. The reseller should be on a tariff commensurate to its profile as a customer taking delivery at a higher volumes such that it is in a position to charge the final consumers tariffs in line with the IBT guideline and still been able to recover its cost. This is based on the presumption that it is indeed the cost of supply to a customer while a profile similar to the reseller is lower than the cost of supply to traditional domestic customers. Page 29 of 41

30 3. Use a Home Bulk type tariff which adjusts the block sizes to the number of end users. Option 1 does not meet the requirement of the end user being treated the same. Option 2 is not as unreasonable as it sounds and some licensees have adopted this approach recognizing that the reseller to provide a service which the licensee would otherwise have to provide. Therefore they give them a discount on their tariff. This actually seems to be the simplest and fairest method. Option 3 would be very complex to administer and use and in addition would eliminate individual price signals Questions to Stakeholders Stakeholder Question 14: As a reseller/trader, do you encounter any challenges in your implementation of the NERSA approved IBTs rates? You are kindly requested to list all your challenges and suggest possible solutions to those problems. Stakeholder Question 15: As a reseller/trader, are you currently charging your customers in line with the NERSA-approved IBT rate? If so, are you implementing the IBT for all your customer categories, or if not, what is your current practice? Stakeholder Question 16: Which option stated above is considered acceptable and practical to implement? 11. Technical Challenges 11.1 Overview The IBT requires that customer consumption needs to be tracked on a monthly basis in order to allocate the consumption to the relevant block. This would allow for customers to be charged at the rates applicable to their consumption levels Page 30 of 41

31 and to be billed accurately. Prepaid vending systems and billing systems therefore need to be able to accommodate for these requirements. Furthermore, it has been stated that the IBT creates further billing issues as at least 10% of all conventional domestic meter readings are being estimated each month. The application of IBT rates makes the process of estimation and correction more complex NERSA Research & Initial Approach During consultation with various meter suppliers in South Africa, it was identified that current vending systems that most licensees have would be able to support IBTs. However, the vending system software would need to be updated in order to record consumption. Updating the vendor software would require less time and results in lower costs to amend vending systems to accommodate for IBTs, than originally estimated. The aforementioned points raised by the meter suppliers are acknowledged. NERSA does however note that there are some (albeit few) licensees that still have old vending systems in place that would not be able to accommodate the IBTs. Furthermore, the billing systems of some licensees also require updating in order to accommodate for billing of conventional metered customers. Due consideration will be given to those licensees still struggling to upgrade its systems, however this will be assessed in line with the fact that licensees have had sufficient time to upgrade their systems (NERSA decision to introduce IBTs announced in February 2010). Licensees are urged to engage with their vending suppliers to find suitable solutions to these vending issues. Liaising with other licensees that have successfully upgraded systems for implementation of IBTs is also encouraged. Page 31 of 41

32 With regards to the issue regarding the reading of meters, there are various options to consider in addressing this issue: 1. Option 1: Reading of meters on a monthly basis 2. Option 2: Approach adopted by Eskom. 3. Option 3: Installation of smart meters Option 1 would be an acceptable approach and would allow for customers to be billed based on actual consumption every month and there would therefore be no need for estimates, etc. However, given the current challenges with meter readings (gaining entry into properties etc), the practicality of implementing such an option should be considered. Option 2 refers to the current method adopted by Eskom. Eskom reads meters every 3 months in line with the requirements of its Electricity Supply contract. For month 1 and 2 Eskom bills the customer based on estimates. In month 3, the actual meter reading occurs. Eskom then re-bills the customer for the three months based on the actual results. The re-billing is system generated and therefore there is no complexity in this regard. However, the bill to the customer for month 3 contains all the calculations regarding the re-billing and therefore does create a level of complexity as it could create customer confusion. NERSA notes this challenge but views it as a challenge that could be overcome. Option 3 is considered as an ideal approach and would allow electricity distributors to read meters as and when required. This option would also allow for accurate meter readings and billing on a monthly basis, with no adjustments to bills being required. Although the cost of smart meters may be significantly high, this option is considered, as the more effective and efficient way forward. Licensees should therefore consider this option as a long term solution. Page 32 of 41

33 11.3 Questions to Stakeholders Stakeholder Question 17: For those licensees still experiencing system challenges please provide the details regarding such challenges (with the exception of those highlighted above). What is considered as sufficient time to address vendor/system challenges? (i.e. 2 years, 3 years etc). Stakeholder Question 18: With regards to the reading of meters, which option is considered the most appropriate way forward? Please provide reasons for the option selected. 12. Alternate Options: Other tariff structures to be considered 12.1 Overview This section aims to deal with whether the IBT is appropriate as the only tariff structure for residential customers or whether the IBT should be considered along with a suite of other residential tariffs. This could include a single energy rate tariff, a two part tariff (energy rates and fixed charges and the Time-of-Use tariff (TOU) for residential customers consuming more than 1000kWH. Stakeholders have also supported the need for additional tariff structures to be made available for residential customers. It has also been stated that FBE allocation to customers should be increased from 50kWh/month to increase relief to these customers NERSA Research & Initial Approach The IBT has been proven by various international utilities to be an appropriate and effective tariff structure to protect customers from high price increases. Page 33 of 41

34 Keeping this in mind, it is also necessary to ensure that customers have a choice of the tariff structures available to them. The need to offer customers a suite of supply options therefore needs to be explored and considered. Government Gazette No states that An end user or customer with a monthly consumption of 1000kWh and above must have smart system and be on time of use tariff no later than 01 January This therefore means that alternate tariff structures need to be in place for residential customers. Based on the above requirement and other aforementioned issues, it is suggested that the following tariff structures be considered for residential customers: 1. Single energy rate life line tariff: This is applicable for customers consuming below 1000kWh per month and where it is impossible to implement IBTs. This tariff structure will only be considered as a last resort and where it has been proven that due to exceptional circumstances the licensee is unable to implement IBTs. 2. Inclining Block Tariffs: This tariff structure is applicable for all residential customers consuming less than 1000kWh per month, with the exception of the above. 3. Time-of-Use Tariffs: As per the aforementioned regulations, this tariff is applicable for residential customers consuming more than 1000kWh per month. With regards to the issues on increasing the FBE allocation to customers, it must be stated that the Free-Basic Electricity (FBE) policy consumption level is currently set at 50kWh/month. The FBE policy states that the Department of Energy (DoE) in consultation with the Department of Provincial and Local Government (DPLG) and the National Treasury (NT) will determine the extent of provision of free basic electricity which can be funded through inter-governmental Page 34 of 41

35 transfers on an annual basis. The abovementioned authorities are therefore responsible for the final decision on the increase in consumption levels for FBE. This therefore falls outside the mandate of NERSA Questions to Stakeholders Stakeholder Question 19: Are the aforementioned tariff structures considered appropriate for implementation for residential customers? Should the suite of tariffs include other options? If yes, what should these options be? Stakeholder Question 20: Would the introduction of many tariff structures for residential customers not defeat the aim of rationalization of tariffs, as required by the EPP? 13. Seasonally differentiated tariffs to address cash flow issues 13.1 Overview This section aims to discuss the issues regarding the Eskom Time-of-Use (TOU) tariffs and the cash-flow impact this creates for municipalities. Municipalities state that the high Eskom price differentiation, which reflects the Eskom cost differences between high demand and low demand season, causes major cash flow problems. Municipalities further advise that for this reason they have been applying seasonally differentiated tariffs to address cash flow issues and to signal to customers the higher electricity costs associated with the high demand season. It is further stated that the domestic consumption in the high demand season (winter) makes up close to 50% of total. The NERSA IBT does not cater for this necessary feature. Page 35 of 41

36 13.2 NERSA Research & Initial Approach The NERSA understanding of the aforementioned issue is that municipalities purchase from Eskom on a TOU tariff are passing on the TOU signals onto domestic customers to address cash flow issues. The NERSA analysis of tariff applications from municipalities prior to the introduction of IBTs indicates that most municipalities did not have time-of-use tariffs for domestic/ residential customers. The residential tariffs implemented by municipalities therefore did not allow for the TOU signals to be passed through to the end consumer. The introduction of IBTs therefore does not exacerbate the cash flow issues of municipalities and that this issue would have existed had the single and two part tariffs still been in place. As discussed in Section 11: Alternate Options: Other tariff structures to be considered, NERSA supports the introduction of TOU tariffs for domestic customers consuming more than 1000kWh/month. NERSA acknowledges the issue of seasonally differentiated or cash flow problems but is of the view that this is not due to the introduction of IBTs. This issue can be addressed more successfully through the introduction of TOU tariffs for larger users Questions to Stakeholders Stakeholder Question 21: How does the introduction of IBTs further affect the cash flow situation of municipalities? Would this issue not have prevailed even with the single and two part tariff structures in place? Please also suggest ways in which municipalities with majority low consumption (residential) users could address this issue. Page 36 of 41

37 14. Impact of price /tariffs signal due to customers implementing EE measures, and the impact these measures have on the licensees revenues 14.1 Overview NERSA through tariff determination must enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return based on forecasted sales. With the impact of the implementation of EEDSM measures and high price increases, the actual sales decrease below the forecasted levels and the licensee/ electricity distributor earns less revenue. Due to this licensees may not be able to recover all of its fixed costs and could result in the licensee not encouraging energy efficiency NERSA Research & Initial Approach The issue regarding migration of customers to alternate energy sources and the effects of EEDSM are considered to be challenges faced by licensees, irrespective of the tariff structure in place (i.e. this is not specifically created by IBTs). The research below therefore aims to address the issue from an overall tariff perspective. It is common that all over the world that the successful implementation of energy efficiency programs lowers a licensees revenues and it is clear that this will discourage licensees to invest in EE programs. There are about three major approaches for dealing with loss revenue due to EEDSM: 1. Full or Per-Customer Adjustment Revenue Decoupling 5 : Full or Per- Customer Adjustment Revenue Decoupling adjusts a licensees revenues for any deviation between expected and actual sales regardless of the reason (technical losses or EEDSM) for the deviation. 5 NARUC: Decoupling For Electric & Gas Utilities: Frequently Asked Questions (FAQ) Page 37 of 41

38 2. Net Lost Revenue Recovery, Lost Revenue Adjustments, or Conservation and Load Management Adjustment Clauses: This mechanism adjusts net changes in revenues only for sales deviations that can be proven or demonstrated to have resulted from conservation and load- management programs. 3. Straight-Fixed Variable Rate Design: This mechanism eliminates all variable distribution charges and costs are recovered through a fixed delivery services charge or an increase in the fixed customer charge alone. In the event of decreased sales due to EEDSM, NERSA is considering implementation of the decoupling mechanism. The Decoupling mechanism is the rate adjustment mechanism that separates an electric utility s fixed cost recovery from amount of electricity it sells. If sales increase, rates drop in the next period; if sales decrease, rates increase to compensate. Out of other available methods, NERSA will also consider the Lost Revenue Adjustment Mechanism (LRAM).LRAM is where the licensee is compensated for the lost margins resulting from its programs to promote EE. The LRAM can be implemented at the end of each financial year of the licensee and allow the licensee to recover a portion of loss revenue due to the implementation of EEDSM. This will be tracked programs which can be measured and verified. The cost of M&V shall be included in all EEDSM cost allocation Questions to Stakeholders Stakeholder Question 22: What is the best method that can be adopted by NERSA to assist licensees, in case of any revenue loss due to EEDSM? Stakeholder Question 23: Who should pay the cost of doing M&V, if the project is funded outside MYPD budget? Page 38 of 41

39 Stakeholder Question 24: If sales decrease, should the price per unit of energy go up and when should the price be adjusted? 15. Any Other Comments Stakeholder Question 25: Stakeholders are requested to make any other comments on issues relating to Inclining Block tariffs, not addressed elsewhere in the consultation paper. Stakeholders are requested to comment in writing on the Review of the Inclining Block Tariffs Consultation Paper for Electricity Distributors. Written comments can be forwarded to handdelivered to 526 Vermeulen (Madiba) Street, Arcadia, Pretoria or posted to P.O Box 40343, Arcadia, 0083, Pretoria, South Africa. The closing date for the comments is the 11 October 2012 at 16H00. For more information and queries on the above please contact Ms Porcia Makgopela and Ms Priya Singh at the National Energy Regulator of South Africa, Kulawula House, 526 Vermeulen (Madiba) Street, Arcadia, Pretoria. Tel: Fax: End. Page 39 of 41

40 16. Appendix 1 Financial Information D1 Form Page 40 of 41

41 Appendix 1 (continued) Market Information D2 Form Page 41 of 41