Presentation ti to the NATIONAL ENERGY REGULATOR OF SOUTH AFRICA Electricity Subcommittee Public Hearing 3 June 2010 1
Content of Presentation Motivation and background of Tariff Increases proposed General factors to be taken into account by NERSA Financial Risk / Implications if tariffs are not approved 2
Motivation and Background Council approved the electricity tariff increases on 27 May 2010 Tariffs to be implemented on 1 July 2010 Average increase of 28,9% on income from electricity tariff increases 3
Average increase per tariff category Tariff Type of Consumers No of Increase Category consumers Tariff A Lifeline Prepaid Tariff A Prepaid + Credit Tariff B Poorest of the poor Indigents (restricted to 20 Ampere) +100 kwh FBE Residential low income (60 Ampere), cross over with Tariff B is 655 units + 100 kwh FBE < 1 000 (numbers 0% will increase sharply) Block 1(150 (1-50 kwh) = 17,5% Block 2 (50-350 kwh) = 21,7% Block 3 (350-600 kwh) = 28,3% Block 4 (> 600 kwh) = 29,7% Average of blocks 1 and 2= 20% Average of blocks 1 to 3 = 25,7% ±210 000 100 kwh FBE Average of blocks 1 and 2= 20% Residential households, NO FBE Tariff B Business ±10 000 30% ±130 000 Average of 27,9% on consumption of 800 kwh Tariff C Large residential, 2 790 Average of 32% business & industrial Tariff D Large residential, 662 business & industrial Average of 32% 4
Previous Year s Tariff Increases Date EMM Eskom Difference Notes increase increase July 2006 6,8% 5,9% + 0,9% 2% Maintenance levy implemented and dincluded d July 2007 5,5% 5,6% - 0,1% Additional 1% Maintenance levy implemented and included July 2008 12,2% 35,9% - 25,5% 2 winter months and 1 summer month of severe under-recovery. Eskom monthly increases as follows: July 2008 = 40.72% August 2008 = 35.04% September 2008 = 37.35% October 2 20% (total 35,9% - 3,3% 008 32,6% since 1July) July 2009 30% 34% - 4% July 2010 28,9% 28,9% 0% 5
Statistics on Surplus on Electricity Service 2006/07 2007/08 2008/09 2009/10 ACTUAL BUDGET ACTUAL BUDGET ACTUAL BUDGET ACTUAL BUDGET 28/2/2010 SALES 3,207 3,074 3,650 3,235 4,513 4,001 5,848 3,817 LESS:BULK PURCHASES 1,946 1,942 2,185 2,135 2,866 2,843 3,852 2,474 GROSS PROFIT 1,261 1,132 1,465 1,100 1,647 1,158 1,996 1,343 GROSS PROFIT (% OF SALES) 39.3% 36.8% 40.1% 34.0% 36.5% 28.9% 34.1% 35.2% PLUS:OTHER INCOME 446 290 338 277 457 454 497 267 LESS:OTHER EXPENDITURE 1,048 870 1,132 1,035 2,103 1,976 2,364 1,484 NET PROFIT 659 552 671 342 1-364 129 126 NET PROFIT (% OF SALES) 20.5% 18.0% 18.4% 10.6% 0.0% -9.1% 2.2% 3.3% 6
Statistics on Expenditure on Electricity Service 2006/07 2007/08 2008/09 2009/10 2010/11 % Increase Budget ACTUAL to BUDGET ACTUAL BUDGET ACTUAL BUDGET ACTUAL BUDGET 28/2/2010 BUDGET Budget Salaries 177 186 212 199 267 231 282 139 301 7% Bad Debt Provision 210 210 212 212 242 242 364 197 472 30% Collection Costs 3 1 3 1 3 1 1-1 0% Depreciation 46 26 48 48 664 631 618 464 618 0% Repair & Maintenance External 199 178 238 225 296 298 314 241 368 17% Repair & Maintenance Internal 56 42 56 33 188 181 223 93 215-4% Interest External Borrowings 23-24 21 31 24 55 44 69 25% Contracted Services 45 33 55 54 94 91 119 99 148 24% Free Basic Electricity 27 22 35 30 37 34 44 35 54 23% General Expenditure 82 63 105 85 92 78 108 33 129 19% Internal charges 180 109 144 127 189 165 236 91 215-9% Total Other Expenditure 1,048 870 1,132 1,035 2,103 1,976 2,364 1,436 2,590 10% Bulk 1,946 1,942 2,185 2,135 2,866 2,843 3,852 2,476 4,842 26% TOTAL EXPENDITURE 2,994 2,812 3,317317 3,170 4,969 4,816 6,216 3,912 7,432 20% 7
OTHER BUDGET INFORMATION Capital Budget for Electricity 2010/11 - R293mill. 2011/12 - R308mill. 2012/13 - R299mill. Add Capital Budget for prepaid meters R50 mill per year (for next 3 years) Mainly to address to escalating problem of non-payment 8
ELECTRICITY MAINTENANCE LEVY Implemented as follows: 2005/06-0,8% Of Sales 2006/07-2,0% Of Sales 2008/09-30%OfS 3,0% Sales Budgeted amounts: 2006/07 - R64 mill. 2007/08 - R113 mill. 2008/09 - R149 mill. 2009/10 - R170 mill. 2010/11 - R222 mill. 9
General factors affecting the determination of tariffs Income from investments 2009/10 Original Budget = R179 mill 2010/11 Approved Budget = R56 mill. Depreciation 2009/10 Original Budget = R306 mill. (Nett) 2010/11 Approved Budget = R712 mill. Interest on loans 2009/10 Original Budget = R275 mill 2010/11 Approved Budget = R470 mill. Bad Debt Provision 2009/10 Original Budget = R1 143 mill. 2010/11 Approved Budget = R1 373 mill. Negative impact (net) from 09/10 to 2010/11 Budget = R 954 mill. 10
MFMA Guidelines regarding Electricity tariff increases The National Treasury s Annexure to MFMA Circular No. 51, dated 23 March 2010, amongst other things, state the following:.. however, in their tariff applications to NERSA municipalities may motivate for higher increases, after considering all factors that impact on their electricity services, including: ensuring a reasonable rate of return on electricity assets; previous under- or over-recovery due to last year s increase being less than or greater than the actual 31,3 per cent increase; the cost of capital expansion programmes and repairs and maintenance; the labour (i.e. the wage agreements with unions) and other input costs or services provided by the municipality or entity; the need to ensure financial sustainability; local economic conditions, and the affordability of electricity services, taking into consideration the municipality s indigent policy. 11
Free Basic Services Service Number of Households Free Units Income Foregone Indigent Support Water - householdsh 426,784 6 227,390,515 Water - indigents (additional) 50,000 3 13,320,000 Sewerage - households 426,784 6 173,308,447 Sewerage - indigents (additional) 50,000 3 10,152,000 Refuse Removal - indigents 50,000 36,966,000 Electricity: Conventional Meters High Season (3 months) 48,262 100 17,435,130 Low Season (9 months) 48,262 100 43,392,364 Electricity: Pre-paid High Season (3 months) 160,000 100 57,801,600 Low Season (9 months) 160,000 100 143,856,000 FBE payable to Eskom consumers 107,000 100 54,000,000 Assessment Rates Residential Exclusions 465,778 150,000 461,119,900 Assessment Rates - Indigents 50,000 150,000 49,500,000 TOTAL 1,227,803,956 60,438,000 12
Service Delivery Backlogs: Electricity Item Units Cost Electrification 121 000 Formal Households R2 billion Network Upgrade - R800 million Street Lighting 16 000 Poles R20 million Highmast Lighting 500 Masts R30 million Maintenance - R785 million Protective Structures Installed Number of Meters Protected 1 000 Structures R60 million 13
Impact for City of Ekurhuleni if proposed tariff increases are not approved. - Current Surplus of Electricity = R508 mill. - Every 1% decrease in tariff represents R60 mill. loss in income (excluding adjustment of maintenance levy). - To counteract the loss of R60 mill. it would require Council to increase assessment rates with 2,5% - If average increase must decrease from 28,9% to 22%, the surplus from the Electricity Service will reduce with approximately R414 mill. to R94 mill. 14
Legal problems to amend approved Council tariffs - Council approved tariffs on 27 May 2010. - Increases must be published 30 days prior to implementation - I.t.o MFMA, tariffs can only be amended once par year. - Any reduction of the electricity tariffs would result in a budgeted loss - Other tariffs cannot be amended to accommodate loss of income - MFMA does not permit Council to budget for a loss. - Council would not be in a position to amend the budget before 1 July 2010. - Council would not be able to conduct any public participation resulting from the amendment of the tariffs. - NERSA is requested to approve the proposed tariffs with the condition that Council will apply the claw back principle in the following financial year. - If the proposed tariffs are not approved, NERSA is requested to indicate the specific tariff categories that should be amended. 15
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