Post on 29-Jan-2016
Electricity Regulation and its Implications for Municpalities Electricity Regulation and its Implications for Municpalities
20 November 2003NARESH SINGH
HEAD: Compliance
20 November 2003NARESH SINGH
HEAD: Compliance
Presentation OutlinePresentation Outline
• Why Regulation?
• The NER
• Licensing
• Tariff Setting
• QoS and service
• Regulation during ESI restructuring
• Why Regulation?
• The NER
• Licensing
• Tariff Setting
• QoS and service
• Regulation during ESI restructuring
End Use171 TWh
Domestic18.0%
Agriculture3.3%
Mining18.4%
Manufact.(Industrial)43.8%
Comm.9.4%
Transport2.6%
General4.6 %
SAPPImports
Transmission
Distribution Purchasesfor End Use181 TWh
Municipal and OtherDistributors42.3%
EskomDistributors57.7%
41.4%
58.5%
.1%
Gross Generation190 TWh
Eskom 95.7%
Munic.1.5%
Private2.7%
SAPP - Exports from South Africa
Energy Flow between the role players in the Electricity Supply Industry in South Africa
Why Regulate?Why Regulate?
• There are 3 main overarching objectives (Guiding Principles) of any regulation:
ORDER IN INDUSTRY
SUSTAINABILITY of Industry
PROTECTION OF participants
• There are 3 main overarching objectives (Guiding Principles) of any regulation:
ORDER IN INDUSTRY
SUSTAINABILITY of Industry
PROTECTION OF participants
Types of Regulation in SA•Economic Regulation
–NER, ICASA, Competition Commission/Tribunal, DWAF
•Safety Regulation–Nuclear Regulator, Dept of Labour, DME
•Content Regulation–ICASA, Advertising Authority, etc.
•Environmental Regulation–DEAT
•Financial Regulation–Financial Services Board, Reserve Bank, etc.
Rationale for Economic Regulation?
Rationale for Economic Regulation?
• Monopolies – ‘enforce’ efficiency • Windfall profits - prevention• ‘Essential’ service level - enforce• Anti-competitive behaviour –
prevent/penalise
Regulation is an international best practice in monopoly industries as well as oversight in competitive industries.
• Monopolies – ‘enforce’ efficiency • Windfall profits - prevention• ‘Essential’ service level - enforce• Anti-competitive behaviour –
prevent/penalise
Regulation is an international best practice in monopoly industries as well as oversight in competitive industries.
Price Control ApproachesPrice Control Approaches
• Three alternative regulation methodologies used worldwide by regulators:
– Rate of Return Regulation– Price/revenue cap regulation– Performance Based Regulation
• Three alternative regulation methodologies used worldwide by regulators:
– Rate of Return Regulation– Price/revenue cap regulation– Performance Based Regulation
Price Control ApproachesPrice Control Approaches• Rate of return (RoR)
Fixes level of profit Regulator determines total
revenue, and allows a fair rate of return on capital employed
Advantages:• Certainty to shareholders• Allows regulator to bench-
mark• Price increases usually
‘smooth’ and predictable Disadvantages:
• Removes incentive to be cost efficient
• Tendency to ‘gold plate’• ‘Heavy’ regulatory burden
• Rate of return (RoR) Fixes level of profit Regulator determines total
revenue, and allows a fair rate of return on capital employed
Advantages:• Certainty to shareholders• Allows regulator to bench-
mark• Price increases usually
‘smooth’ and predictable Disadvantages:
• Removes incentive to be cost efficient
• Tendency to ‘gold plate’• ‘Heavy’ regulatory burden
• Price/Revenue cap Fixes price or revenue CPI - X +Z Advantages:
• Incentive to productive efficiency
• Simpler and less costly to operate
Disadvantages:• Not that different to Rate
of Return in practice• Need to ensure that cost
reductions do not compromise service and quality of supply
• Price/Revenue cap Fixes price or revenue CPI - X +Z Advantages:
• Incentive to productive efficiency
• Simpler and less costly to operate
Disadvantages:• Not that different to Rate
of Return in practice• Need to ensure that cost
reductions do not compromise service and quality of supply
Establishment of NER
• Electricity Amendment Act, 1995 established the NER on 4 October 1995
• Provision for Board and Secretariat ie CEO and staff
• Funding through licence fees (generators), donations and interest on investments
• Functions stipulated in act inter alia licensing, tarrif review and dispute resolution.
Role ClarityRole Clarity
• Policy making is Government’s job
• Running the utility is their management’s job
• Regulator must ensure that utilities are operating their businesses in line with government’s policy for the benefit of customers and industry
•Not a policy maker
•Not a super management of utility
Licensing
• NER issues/ammends/transfers licences– offence to trade without licence
• Service providers apply
• Analysis and recommendation by Secretariat to Board
• License spells out conditions of supply
License ConsiderationsLicense Considerations
• Is application in the interest of customers and the industry
• How does license affect future prices• Does applicant possess financial
resources, human capital, and infrastructure
• Is application technically feasible• Is it aligned to restructuring
initiatives
• Is application in the interest of customers and the industry
• How does license affect future prices• Does applicant possess financial
resources, human capital, and infrastructure
• Is application technically feasible• Is it aligned to restructuring
initiatives
– Some 247 municipalities, 47 district councils and 6 metro councils after 5 December 2000
– About 210 municipalities inc metros and 1 District Council licenced, excluding those areas that are supplied by Eskom, or other distributors
– Eskom Distribution, Transmission and Generation
– 13 generation licenses– 16 private distributors
– Some 247 municipalities, 47 district councils and 6 metro councils after 5 December 2000
– About 210 municipalities inc metros and 1 District Council licenced, excluding those areas that are supplied by Eskom, or other distributors
– Eskom Distribution, Transmission and Generation
– 13 generation licenses– 16 private distributors
Licensed UtilitiesLicensed Utilities
Eskom Tariff RegulationEskom Tariff Regulation• Ringfenced applications for GX, TX and DX
• RR = OE + D +T + (RB*ROR)where:• RR = required revenue OE = operating
expenses D = depreciation expense T= tax expenses RB = rate base ROR=
rate of return • assess special pricing agreements in terms
of the risks and benefits to other customers and fairness to competitors
• Ringfenced applications for GX, TX and DX
• RR = OE + D +T + (RB*ROR)where:• RR = required revenue OE = operating
expenses D = depreciation expense T= tax expenses RB = rate base ROR=
rate of return • assess special pricing agreements in terms
of the risks and benefits to other customers and fairness to competitors
Municipal Tariff RegulationMunicipal Tariff Regulation
• Use price benchmarking – Eskom increase, established benchmarks and similar utility prices
• Limit surplus earned on electricity• Bring in line with approved tariff
structures• Reduce inappropriate cross-subsidies• Examine losses
• Use price benchmarking – Eskom increase, established benchmarks and similar utility prices
• Limit surplus earned on electricity• Bring in line with approved tariff
structures• Reduce inappropriate cross-subsidies• Examine losses
time
Customer Utility NER
operationalinterventions
Incident Report(IR)
Utility Responseon IR
Appropriateresponse
yes
no
contractualinterventions
Request forsupply
Information &Contract
Design based on information
Information / Quality Charter
regulatoryinterventions
NER
DisputeCase Preparation
DisputeCase Preparation
managerialinterventions
Non-ConformanceReport (NCR)
Utility Responseon NCR
Appropriateresponse
yes
no
NER PQ Advisory Committee
Technical standards (NER Directive, SABS/NRS, Utility, International)
Precedents
Now until REDs REDs - First 2 year Independent REDs
•EDI Holdings periodEDI Holdings period
•Temporary licencesTemporary licences
•Benchmark RED performance - RORBenchmark RED performance - ROR
•End stateEnd state
•Permanent licencesPermanent licences
•Apply IBRApply IBR
2002 - 2004 2003/5 ... 2005/7 ...
Phase 1 Phase 2 Phase 3
Regulation during EDI restructuring
Regulation during EDI restructuring
GovernanceGovernance
• A market governance body (MGB) required to– Determine admission & exit procedures
– Manage rule making process
– Administer decision rights
– Provide dispute resolution process
– Ensure administration of all above functions
• Self-governance, but with a clearly defined role for NER
• A market governance body (MGB) required to– Determine admission & exit procedures
– Manage rule making process
– Administer decision rights
– Provide dispute resolution process
– Ensure administration of all above functions
• Self-governance, but with a clearly defined role for NER
Role of the regulator (1)Role of the regulator (1)• Regulation of monopoly elements largely
unchanged –incentive based regulation preferred– Development of grid code and advisory
structures– Monitor compliance with grid code– Transparent and consistent pricing– Approval of transmission expansion and
congestion management plans• Overall accountability of functioning of market
and ultimate sanction to suspend• Critical institution in transition for administration
of certain functions and oversight of transition
• Regulation of monopoly elements largely unchanged –incentive based regulation preferred– Development of grid code and advisory
structures– Monitor compliance with grid code– Transparent and consistent pricing– Approval of transmission expansion and
congestion management plans• Overall accountability of functioning of market
and ultimate sanction to suspend• Critical institution in transition for administration
of certain functions and oversight of transition
Role of the regulator (2)Role of the regulator (2)
• Oversight of information gathering by the Systems Operator for integrated resource plan
• Management of the supplier of last resort process through IRP – particularly important during transition when market is not mature enough for correct signals
• Role of regulator in competitive aspects changes
• Agreement on concurrent jurisdiction with Competition Commission
• Oversight of information gathering by the Systems Operator for integrated resource plan
• Management of the supplier of last resort process through IRP – particularly important during transition when market is not mature enough for correct signals
• Role of regulator in competitive aspects changes
• Agreement on concurrent jurisdiction with Competition Commission
Role of the regulator (3)Role of the regulator (3)
• Approval/veto of amendments of market rules referred by the Market Governance Body
• Consideration of reported cases of alleged rules violations (from Market Surveillance Unit/Panel)
• Regulation and oversight of ancillary services contracts – specifically that of monopoly service providers
• Regulation of generator contracts (with SO) to meet Transmission constraints
• Approval/veto of amendments of market rules referred by the Market Governance Body
• Consideration of reported cases of alleged rules violations (from Market Surveillance Unit/Panel)
• Regulation and oversight of ancillary services contracts – specifically that of monopoly service providers
• Regulation of generator contracts (with SO) to meet Transmission constraints
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• Regulation of captive customers• Oversight of cartel behaviour (in
concurrence with Competition Commissions) and abuse of market power (close scrutiny of state owned 70% that is fire-walled through a clustering relationship)
• Regulation of peaking plant• Controlling the entry and exit of market
participants through licensing
• Regulation of captive customers• Oversight of cartel behaviour (in
concurrence with Competition Commissions) and abuse of market power (close scrutiny of state owned 70% that is fire-walled through a clustering relationship)
• Regulation of peaking plant• Controlling the entry and exit of market
participants through licensing
Future Price RegulationFuture Price Regulation
SectorSector Product or Product or ServiceService
Pricing Pricing mechanismechanis
mmGenerationGeneration EnergyEnergy CompetitiveCompetitive
TransmissionTransmission Wires (HV Wires (HV Transport)Transport)
RegulatedRegulated
DistributionDistribution
ContestableContestable EnergyEnergy CompetitiveCompetitive
ContestableContestable Wires (MV & LV Wires (MV & LV Transport)Transport)
RegulatedRegulated
CaptiveCaptive EnergyEnergy RegulatedRegulated
CaptiveCaptive Wires (MV & LV Wires (MV & LV Transport)Transport)
RegulatedRegulated
Regulatory ResponsibilityRegulatory Responsibility
Regulation should take note of: • Institutional framework of ESI• Economic, legal, socio-economic etc.
circumstances of country/ESI• Policy directions of Government• Independence and neutrality• Restructuring implementation
(California Power crises as an example)
Regulation should take note of: • Institutional framework of ESI• Economic, legal, socio-economic etc.
circumstances of country/ESI• Policy directions of Government• Independence and neutrality• Restructuring implementation
(California Power crises as an example)
ConclusionsConclusions
• Regulation is essential• NER – economic regulator• Primarily Rate of Return
methodology • Regulatory focus will change as ESI is
restructured• Regulatory responsibility critical –
particularly during transition
• Regulation is essential• NER – economic regulator• Primarily Rate of Return
methodology • Regulatory focus will change as ESI is
restructured• Regulatory responsibility critical –
particularly during transition