PRESENTATION TO THE INSTITUTE OF MUNICIPAL FINANCE OFFICERS (IMFO)

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PRESENTATION TO THE INSTITUTE OF MUNICIPAL
FINANCE OFFICERS (IMFO)
Beyond Compliance Role of Regulators when
communities cannot afford approved tariff
increases
PHINDILE NZIMANDE CEO 13 September 2011
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OUTLINE

• Legislative context, NERSA vision and NERSA
  mission
• Regulatory Principles
• Regulatory Functions
• Tenets of Economic Regulation
• Nersas Role when Communities cannot afford
  approved tariff increases
• - Policy Perspectives on Pricing
• Cross-subsidisation
• Differentiated Price Increases
• Free Basic Electricity (FBE)
• Compliance Monitoring and enforcement
• 6. Current reality in SA
• 7. Conclusion

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Legislative Context

• 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
• Significant enforcement powers
• 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)
• Money Bills
• Gas Regulator Levies Act, 2002 (Act No. 75 of
  2002) and
• Petroleum Pipelines Levies Act, 2004 (Act No. 28
  of 2004).
• Energy Pricing Policy

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NERSA Vision and mission

• NERSA strives to regulate the South African
• electricity, piped-gas and petroleum pipelines
  industries
• by ensuring that the most efficient and effective
  industries are in place
• to exceed the requirements of existing and future
  energy customers.
• This is encapsulated in its vision statement
• To be a world-class leader in energy regulation
• Further supported by this mission
• To regulate the energy industry in accordance
  with government laws and policies, standards and
  international best practices in support of
  sustainable development.

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Regulatory Principles

• Regulatory principles, which guide the
  Regulators conduct and service delivery
• Rule of Law Law applies to everybody and
  provides a clear framework for everybody 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 group (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 PFMA.
  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.

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Regulatory Functions (1 of 2)

• Licensing Construction, operations trading
• Setting of tariffs and price structures
• Setting of conditions of supply and standards
• Monitoring compliance with licence conditions
• separate accounting provisions
• third party access and interconnection
  provisions
• non-discrimination
• safety, environment, health and security
  standards (in collaboration with other agencies)
• Responding to non-compliance
• setting penalties and fines for non-compliance.

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Regulatory Functions (2 of 2)

• Investigating complaints
• Mediating or arbitrating in disputes
• Gathering and storing industry information
• Promoting BEE, competition and improved
  efficiency of the energy industry
• Consulting with government regarding industry
  development and
• Expropriating land as necessary to meet the
  objectives of the relevant legislation.

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Beyond Compliance Role of Regulators when
Communities Cannot Afford Approved Tariff
Increases
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Tenets of Economic Regulation Regulation Versus
Free-Markets Why Regulation?

• - Regulation is necessitated by the existence of
  monopoly supplier (insufficient competition) in
  the market supplying a public good
• - Regulation is intended to create an outcome
  that imitate competition in such market
  conditions where competition does not exist
• - Regulation is a substitute for competition to
  prevent rampant abuses inherent in such
  monopolistic systems
• - Regulation compels a utility to charge
  prices/tariffs (and offer quality of service
  levels) approximating those which it would offer
  if it were subject to the market forces of
  competition

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The Regulatory Dilemma in making trade-offs

• The Regulator must balance between utility and
  customer interests
• What constitutes a reasonable profit?
• What are prudently incurred costs?
• Assessing the utilitys allocation of costs among
  different customer groups (tariff design)
• Determining who caused the costs incurred (and
  therefore should pay for them) versus some
  customer groups inability who require
  cross-subsidies

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Potential Challenges to Regulation in emerging
economies

• Regulatory Legislation
• Strong laws are necessary to define an
  independent and committed regulatory body
• Administrative Procedures
• Strict procedural rules for regulatory decisions
  transparency necessary to ensure regulatory
  legitimacy and predictability
• Paths of Appeal
• An independent, functioning and respected
  judiciary is a critical component of a credible
  regulatory system

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- Challenges with pricing (1of 2)

• Prices/tariffs set in regulation should enable an
  efficient utility to recover its prudently
  incurred costs of service
• Allowing a utility to recover its costs is
  necessary for its sustainability to attract
  capital for investments
• Prices set below costs leads to resource
  allocation inefficiencies and wasteful usage by
  consumers, as well as in the long-term,
  undermines the financial stability of the utility
• Two approaches are used to determine costs- the
  Embedded Cost (accounting cost) Approach and the
  Marginal Cost Approach
• In South Africa the Embedded Cost approach is
  used, but NERSA has began training its staff and
  stakeholders on Marginal Cost approach

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- Challenges with pricing (2of 2)

• Setting pricing/tariffs for a utility with
  efficiency incentive is necessary for the utility
  to operate its system efficiently
• Price-cap regulation is one form of price/tariff
  regulation used in some jurisdictions to
  encourage utility efficiency
• Price cap regulation benefits both the utility,
  who see additional profit from achieved
  efficiencies, as well as regulators who see the
  benefit of potentially lower prices/tariff s as
  the efficiencies are shared with the customers

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NERSAs Role when Communities Cannot Afford
Approved Tariff Increases

• I. POLICY PERSPECTIVE ON PRICING
  Cross-Subsidisation
• NERSA role emanates from legislated mandate
• - Energy White Paper of 1998 acknowledges the
  presence of cross-subsidies between industrial
  and domestic customers, and that they should have
  a minimal impact on price of electricity
• - Electricity Pricing Policy No 44 and 45 allows
  for specific cross-subsidisation and
  developmental programs that are transparently
  reflected
• - Electricity Regulation Act disallows
  undesirable cross-subsidies

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NERSAs Role when Communities Cannot Afford
Approved Tariff Increases

• Setting/Approving Prices and tariffs
• NERSA required to set cost-reflective prices and
  tariffs to enable an efficient licensee to
  recover efficiently incurred costs and make a
  profit commensurate with risk
• In doing this NERSA must balance between the long
  term financial sustainability of the utility and
  affordability of the services to customers
• Period of high investment cycle like the one
  South Africa is facing now come with high
  prices/tariffs increases that affect the low
  income communities

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NERSAs Role when Communities Cannot Afford
Approved Tariff Increases

• II. DIFFERENTIATED PRICE INCREASES
• Setting/Approving Prices and tariffs
• NERSA reviews tariff levels and structures from
  licensees to ensure the financial sustainability
  of licensees and affordability to all customers
• The vulnerable consumer groups are protected
  through differentiated price increases
• In 2009, NERSA approved the Inclining Block
  Tariff (IBT) to protect the low income group
• Effective targeting of these kind of
  interventions to benefit the intended vulnerable
  groups remains to be a challenge that NERSA is
  working with stakeholders to address
• IBT consultation paper is to follow in October
  2011

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NERSAs Role when Communities Cannot Afford
Approved Tariff Increases

• III. FREE BASIC ELECTRICITY
• Setting/Approving Prices and tariffs
• Equitable share grants toward Free Basic
  Electricity (FBE) by the National Government is
  another mechanism to protect the communities that
  cannot afford approved tariffs
• NERSA assists in administering the Free basic
  Electricity (FBE) policy
• NERSA sets the FBE rate for Eskom for recovery in
  areas where Eskom supplies the poor on behalf of
  municipalities.
• Rural electrification and electricity connection
  grant also assist the low income consumer groups

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NERSAs Role when Communities Cannot Afford
Approved Tariff Increases

• IV . COMPLIANCE MONITORING AND ENFORCEMENT
• Mechanisms available for NERSA to ensure licensee
  implement approved tariffs and structures to
  protect vulnerable customer groups
• Compliance monitoring happens through data
  submissions to NERSA through the D-Forms and RRM
  for Metros.
• Electricity Regulation Act contains penalty
  provisions to discourage non-compliance
• Technical Audits being conducted and increasing
  interest by the Auditor General on compliance
  audits will further strengthen compliance.

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Current Reality of SA

• Electricity demand outstrips supply
• Huge investments are necessary in Generation
• Time period for investment is congested due to
  untimely investment decisions
• Global financial crisis
• Compounded by economic recession, therefore
  higher unaffordability levels

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Conclusion

• NERSA tariff/pricing decision have recognized and
  provided for the communities that cannot afford
  approved tariffs during this transition period of
  high increases
• NERSA is implementing this in accordance with the
  provisions of the relevant legislation and policy
• NERSA will continue to engage with stakeholders
  to ensure these interventions are more targeted
  to benefit the intended most vulnerable customer
  groups

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• THANK YOU
• www.nersa.org.za