BRIEFING THE PORTFOLIO COMMITTEE ON WATER AND SANITATION

ON THE

PRICING STRATEGY AND WATER TARIFFS

Presenter: Mr T BalzerDirector-General (Acting) Portfolio Committee on Water & SanitationDate: 27 August 2014

Presenter: Mr T BalzerDirector-General (Acting) Portfolio Committee on Water & SanitationDate: 27 August 2014

CONTENTS

• Background• Pricing along the value chain• Current Pricing strategy• Revision of the Pricing Strategy• Norms and standards (Section 10 Regulation)

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BACKGROUND

• Legislative mandate: Section 56 – 60 of the National Water

Act, requires DWA to establish a pricing strategy for raw

water charges.

• Section 21 outlines the uses to be charged for

• Pricing strategy for water use charges currently under review

• Section 10 of Water Services Act provides for tariff setting for

water services

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PRICING ALONG THE VALUE CHAIN

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PURPOSE OF THE WATER RESOURCE CHARGES– Funding water resource management (WRM)– Funding water resource development and use of

waterworks– Achieving the equitable and efficient allocation of water– Providing for a differential rate for waste discharges– Enabling the provision of financial assistance and the use

of water pricing to support the redress of racial and gender imbalances

– To protect; allocate, manage and control the nation`s water resources.

– To sustain the business viability of the water sector.

CURRENT PRICING STRATEGY

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PRICING STRATEGY IMPACT ON USER SECTORSSECTOR RESOURCE

MANAGEMENT CHARGES

RESOURCE DEVELOPMENT CHARGES

PHASING IN OF CHARGES

Domestic/ Industrial

Full cost recovery on abstraction and waste discharge related use

On-budget Government Water Schemes (GWS): Depreciation; Return on Asset (ROA): Operations and Maintenance (O&M)

Off-budget GWS: Capital Unit Charge ( CUC);

Refurbishment, WRD and O&M Water Management

Institution’s: Full cost recovery

Water Resource Management (WRM) charges introduced fully after registration of water use in Water Management Area (WMA)

Waste discharge related WRM charges to be implemented after registration of waste users

Annual increase on development charge will be limited to PPI + 10% until target development charge is achieved on state funded GWS.

Stream Flow Reduction ActivitiesCommercial growers

Full recovery of allocated costs.

Note: Cost of Dam Safety Control and waste discharge related costs not allocated to the forestry sector.

Not applicable, except where negotiated for new development.

WRM charges introduced fully after registration but capped to R10 per hectare (ha) plus Producer Price Index (PPI) with 2002/03 as base year.

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PRICING STRATEGY IMPACT ON USER SECTORS..SECTOR RESOURCE MANAGEMENT

CHARGESRESOURCE DEVELOPMENT CHARGES

PHASING IN OF CHARGES

Stream Flow Reduction ActivitiesResource poor growers

Full recovery of allocated costs to be achieved in 5 years.

Note: Cost of dam Safety Control and waste discharge related costs not allocated to the forestry sector.

Not applicable, except where negotiated for new development.

As above, but subsidized for 5 years from date of registration.Subsidy starts at 100% and reduces by 20% annually.No charge for forest plantation that is <= 10 hectares.

Irrigation Commercial growers

Full recovery of allocated costs

Waste discharge related cost not applicable

GWS: Full recovery of Depreciation plus O&M on existing schemesFull financial cost recovery for new schemes.Water Management Institutions (WMI): Full financial cost recovery

Depreciation charge capped to 1.5c/m³ plus PPI from 2007/08.

WRM charge introduced fully after registration of water use in WMA, but capped to 1.5c/m³plus PPI from 2007/08.

O&M cost increases limited to 50% p.a.

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SECTOR RESOURCE MANAGEMENT CHARGES

RESOURCE DEVELOPMENT CHARGES

PHASING IN OF CHARGES

Irrigation Resource poor farmers

As per above, but subsidized for a 5 year period.

Waste discharge related costs not applicable

GWS:O&M subsidized for a 5 year period on existing and new schemes.Depreciation charges waived for a 5 year period.

WMIs:Subsidies available under certain conditions.

GWS:O&M charges phased in over 5 years after registration at 20% per annum. 0% in the first year.Depreciation charge applied from year 6 onwards and capped to 1.5c/m³ plus PPI from 2007/08.

WRM charges phased in over 5 years @ 20% per annum. 0% in year one.

PRICING STRATEGY IMPACT ON USER SECTORS..

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Budgeting for activity costs for Water Resource Management Charges

Costs ofWRM activities in WMA

Unit CostRegistered volumes/wasteload in WMA

Costs of WRM activities will be divided between abstraction

Inter-basin transfers, the loss of income to the donor CMA will be funded by water use charges raisedIn the receiver WMA

CALCULATION METHODOLOGY

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WRI Charge Determination

• Depreciation component: – Asset value as determined in 2008– Depreciate on straight line over useful

life as per table– Examples:

• Dams – 10% over 45years (yr)• Steel Pipes - 75% over 30years (yr)

– Asset values will annually be indexed by PPI until formal revaluation (+ every 10 years)

• Return on assets:

–4% on completion cost – new infrastructure, or

–4% on depreciated replacement cost

(asset value as determined in 2008)

–Asset values will annually be inflated by PPI until formal revaluation (+ every 10 years)

–Not applicable to existing State irrigation schemes

Operation and maintenance charge:- Direct and indirect costs- Scheme by scheme basis

FOR REFURBISHMENT FOR NEW INFRASTRUCTURE & BETTERMENTS

CALCULATION METHODOLOGY…..

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Who pays WRM Charges • All water users pay WRM charges

– Forestry sector does not pay the charges related to water quality management

• Forestry and Agriculture have the WRM charges capped– R10 per hectare plus PPI for Forestry– 1.5 cent per m3 plus PPI for irrigation

• Resource poor farmers and foresters charges to be phased in over 5 years

CALCULATION METHODOLOGY…..

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CALCULATION METHODOLOGY…..

• WRM waste Discharge:– Total Registered load of salts/cost allocated to

each activity = Unit charge of Waste

• Capital Unit Charge– Is for off budget scheme and is repayable based

on the loan taken taking into account the lifespan of the infrastructure

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2014/15 CHARGE

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RATIONALE • Current pricing strategy published in March 2007

– Needs to be amended to be in line with Government priorities, e.g.: National development Plan (NDP) commitments, National Growth Path (NGP), etc.

• Completion of the project will ensure Department of Water and Sanitation (DWS) has: – Good policies on pricing of water, cost reflective charges and

tariffs – A good funding framework for infrastructure development,

operations and maintenance;– The structure and functional framework for the economic

regulator– Protection of the indigent or vulnerable

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REVISION OF THE PRICING STRATEGY

RATIONALE FOR REVIEW …..

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– Impact of capping of charges on the revenue– How Return on Assets is calculated and who pays

it– Possibility of adopting multi-year charges.– Waste Discharge Charges must be reflected in the

Pricing Strategy for implementation to take place.– Must also consider the financing of the nine

Catchment Management Agencies (CMAs) and function of economic regulation

PRINCIPLES UNDERPINNING PRICING STRATEGY

Currently – four principles in the pricing strategy and will remain in this strategy– Social Equity– Ecological Sustainability– Financial Sustainability– Economic Efficiency

ADDED PRINCIPLES– Economic Development– Polluter Pays and User Principles– Equity and affordability

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EXISTING & PROPOSED PRICING STRATEGY

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CATEGORISATION OF THE SECTORSPROPOSED

Current categories:Domestic and industrialAgriculturalStream flow reduction activities

New water use categoriesAgricultural water useMunicipal water use High assurance water use (those users who have a 99.5% assurance of supply, such as Eskom and SASOL)Industrial water use Hydropower and Stream flow reduction activities

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KEY CONSIDERATIONS IN THE REVIEW

• Return on Assets changed to Future Infrastructure Build Charge

• Multi-term tariff setting over a three years cycle• Charging for Hydro-power proposed in the

revision document• Metering vs measurement of water use• Charge structure – National vs Hybrid approach;

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HYDROPOWER• Current pricing strategy does not refer to how to price water

for hydropower use. • In addition to existing hydropower plants in South Africa, there

is further potential to develop at least twelve small hydropower plants with capacities ranging from 1 MW (megawatt) to 15 MW, generating approximately 446 000 MWh/annum.

• Water use by hydropower is largely non-consumptive– Can’t charge the same way as other sectors, on the volume of water

passing through the turbines. – inappropriate and unaffordable

• New strategy proposed charges for hydropower generation based on – c/kWh (cent per kilowatt hour) of energy generated – fixed charge based on kW installed

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Metering and measuring water use • Current water use charges calculation method

incentivises full use of registered water• Water use should be billed against actual water

use– Requires the introduction of water

metering/measuring - to be phased in over time

• WRM charges to be charged against registered use still– DWA to install meters – users to pay for the cost of

installation through water use charges

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PROS AND CONS OF A NATIONAL CHARGEPros:•It’s easier to administer•It leads to increased cross-subsidization•Ensures that everyone pays the same charges, avoiding some people paying for more expensive water than othersCons:•It’s less cost reflective•Can lead to reduced water use efficiency•Potentially subsidises larger users

PROPOSED CHARGE STRUCTURE

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PROS AND CONS OF A SYSTEM CHARGE...Pros:•More cost reflective – reduced economic distortions•Negligible impact on water use efficiency•Better Water Conservation and Demand Management•Reduces potential of cross-subsidizing large usersCons:•More complex to administer•Decreased potential for cross-subsidization

PROPOSED CHARGE STRUCTURE......

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NATIONAL CHARGE OUTPUT COMPARISON

Gauteng

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NATIONAL CHARGE OUTPUT COMPARISON..

Free State

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NATIONAL CHARGE OUTPUT COMPARISON

Mpumalanga

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Hybrid approach PROPOSED CHARGE STRUCTURE

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• Future Infrastructure Build Charge – national charge

• Operations &Maintenance, depreciation – system/scheme charge

• Water Resource Management Charge – water management area charge

• Waste Discharge Charge System – water management area charge (levy) – needing a money bill

IMPLICATIONS FOR SECTORSMining and Industry (M&I)• The national charge (total) will result in:

– a decrease in charges in most schemes in the Eastern Cape and some in Limpopo

– an increase in charges in most schemes in the Free State, Mpumalanga, Western Cape and some in KZN, North West

– little change in most charges within the Gauteng province

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IMPLICATIONS FOR SECTORS...Irrigation sector• The national charge (total) will result in:

– a decrease in charges in most schemes within Gauteng, KZN, Limpopo and some in EC

– an increase in charges in most schemes within the Free State and some in Mpumalanga, North West and WC

– 95% of irrigation water in South Africa is still in the hands of white farmers

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NORMS AND STANDARDS FOR TARIFFS SECTION 10 of WATER SERVICES ACT 108 OF 1997• Norms and standards for tariffs may:-• Differentiate on an equitable basis between -

Different users of water services Different types of water services Different geographic areas

Socio-economic Physical attributes• of each area

• Place limitations on surplus or profit• Place limitations on the use of income generated by the recovery of

water charges• Provide for tariffs to be used to promote or achieve water conservation

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NORMS AND STANDARDS...... Shortfall of current Norms and standards• Existing Section 10 Norms & Standards• Did not take into account –

Municipal Fiscal Powers and Functions Act (2007) Local Government: Municipal Systems Act (2000) Local Government: Municipal Finance Management Act (2003) Various National Treasury Circulars in terms of MFMA (13, 23, 31, 42, 55)

• Need was identified to separate between:- Water Services Authorities (WSA) and Water Services Providers (WSP)

• Need was identified to regulate complete water value chain; as much of the process to be included in Norms and Standards:

Raw water pricing Water Boards tariffs Municipality tariffs (water supply and sanitation)

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NORMS AND STANDARDS....

Proposed structure of new Norms & Standards

1. Definitions2. Determination of revenue requirements3. Subsidization of tariffs4. Categories and levels of water services5. Supply water to households (controlled

volume of water)6. Supply water to households

(uncontrolled volume of water)7. Provision of sanitation services to

households8. Fixed charge9. Connection fee10.Fee for upgrading an unauthorized

connection

1. Legislative requirements2. Definitions3. Separation of functions and ring-fencing4. Compulsory metering5. Procedure for setting tariffs6. Revenue required to provide services7. Categories and levels of services8. Allocate required revenue for providing

services to each category9. Tariffs for household water services10.Tariffs for industrial and other non-

household water services11.Seasonal tariffs12.Fixed charge13.Disclosure

New Norms & StandardsExisting S10 Norms & Standards

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Both the Pricing Strategy and the Norms & Standards – complete the entire value chain pricing

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CONCLUSIONS

• The revised pricing strategy will be gazetted for public consultation

• The hybrid charge is the preferred charge structure

• The revision of the act will lead to the merge of the pricing strategy and the norms and standards

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THANK YOU

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