ESKOM’S ELECTRICITY PRICE INCREASE FOR 2008/09 AND MUNICIPAL ELECTRICITY TARIFF GUIDELINE AND BENCHMARKS FOR 2008/9

The National Energy Regulator of South Africa (NERSA) considered and decided at its meeting this morning, Thursday, 20 December 2007, on Eskom’s application for a Multi-Year Price Determination (MYPD) rule change and on the municipal electricity tariff guideline and benchmarks for the financial year 2008/09.

MokoenaEskom’s Application for MYPD Rule Change for 2008/09

On this matter the Energy Regulator decided as follows:

  1. The rule changes applied for by Eskom in their application dated 30 April 2007 be declined and that the rule change application be considered in the second Multi-Year Price Determination (MYPD2) rule review process that is currently in progress and will be completed by September 2008 for implementation from 1 April 2009 to 30 March 2012. 
  2. Given Eskom’s capital financing needs and therefore a need for a healthy Balance Sheet, Eskom be allowed to recover additional revenue during the 2008/9 financial year as follows:
    1. An adjustment of R1.27 billion to cater for the additional return and depreciation resulting from the increased regulatory asset base in 2008/9.
    2. An adjustment of R2.4 billion to cater for the increased primary energy cost expected for 2008/9.
  3. To note that these adjustments would result in a tariff revenue of R45.449 billion and a total revenue, including special pricing agreement (SPA) sales, of R47.974 billion. Based on tariff sales of 201 503 GWh, the average tariff would be 22.61 cent per kWh, which is a 14.2% increase on the expected average tariff per kWh for 2007/8.

This decision is based on comprehensive analysis of the information received from Eskom, comments on preliminary findings and recommendations, information obtained at public consultations in selected cities throughout the country, written comments on the Energy Regulator’s consultation paper and evidence provided at the public hearing of 22 November 2007.

The decision is pursuant to an application lodged by Eskom to the Energy Regulator on 30 April 2007 requesting a change to some of the current rules under which Eskom’s electricity prices are determined in the MYPD. Eskom provided more information in support of its application to NERSA on 18 July 2007, which included among others the quantification of risks faced in terms of primary energy expenditure and capital expenditure.

The rule changes applied for would allow Eskom to pass the variances on primary energy cost and the return and depreciation on capital not included in the MYPD through to customers at the end of the Eskom 2007/8 financial year. Eskom also applied for a review of the triggers for re-opening the price determination. If approved, the rule changes applied for would have revenue implications for Eskom to the extent that the average price for electricity in 2008/9 would have to increase by 18.7%.

The Energy Regulator wishes to restate its commitment to the MYPD to ensure the predictability, certainty and stability of electricity prices. However, having analysed the Eskom’s application and the MYPD rules, the Energy Regulator came to the conclusion that given the exogenous factors that were not foreseen in 2005 when the MYPD was concluded, especially on primary energy and on capital expenditure, regulatory intervention is necessary for 2008/09 without changing the rules.

The Energy Regulator also took note of concerns regarding the possible impact of the Eskom price increase on the economy, especially on the poor. The Energy Regulator is of the view that the long run benefits to the economy far outweigh the short-term concerns. It must be noted that, notwithstanding this level of % increase, the South African electricity prices remain competitive globally.

The Energy Regulator is faced with maintaining a balance between sustainability of the utility and affordability for customers. This means some trade-off is necessary between industry sustainability and consideration over other economic and social objectives (i.e. Government objectives (ASGISA) for alleviation of poverty, universal access, security of supply etc.). As a result the role of electricity as an essential developmental tool, as suggested by stakeholders, is recognised. Thus a trade-off is necessary between addressing the energy requirements of the poor and promoting efficiency and competitiveness of the whole economy.

The decision of the Energy Regulator is a balanced view of many factors. The detailed reasons for the decision will (as required by law) be published on the NERSA website by end of January 2008.

Municipal Electricity Tariff Guideline and Benchmarks for 2008/09

The Eskom price increase will be applicable to customers other than the municipal electricity distributors from 1 April 2008. As a result the Energy Regulator also considered and decided on the municipal electricity tariff guideline and benchmarks for the financial year 2008/09. These municipal tariffs guidelines may only be implemented from 1 July 2008. The Energy Regulator decided that the Eskom tariff increase of 14.2% translates into a guideline increase of 12% in the average electricity tariffs of municipalities.

The financial benchmarks such as surplus percentage and system losses have not been revised since they are not dependent on any increases or efficiencies.

The Energy Regulator also decided on a benchmarked range of guideline tariff levels for the various customer categories supplied by municipalities. These benchmarks are used by NERSA in considering applications for tariff increases by municipal electricity distributors. These bench marks are also grouped into the envisaged six regional electricity distributors (REDs) in order to encourage rationalisation of electricity tariffs.

It is important to note that these guideline and benchmarks do not preclude the municipal electricity distributors from their legal obligation to apply individually to the Energy Regulator for tariff increases before implementation on 1 July 2008. The Energy Regulator’s decision and the detailed reasons on the guidelines and benchmarks are available on the NERSA website www.nersa.org.za.

The Energy Regulator appreciates the participation of stakeholders and the public in the decision-making processes. This public participation assisted the Energy Regulator to discharge its obligation of balancing the interests of customers and the regulated utilities.

Press release published in its entirety as provided by NERSA