Electricity distribution Constitutional challenge

1 September 2017

Presenta(onpurpose

•  ToprovideoverviewoftheCons1tu1onal,structuralandsystemicchallengesintermsofelectricitydistribu1on

•  Topresentrecommenda1onsmade

•  Tofacilitatediscussiononhowthesechallengesmanifestatmunicipallevelandotherchallengesthatneedtobeaddressed

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Macroissue

•  The Cons1tu1onal, legisla1ve and fiscal frameworks are carefullydesigned toensure that local governmentdelivers sustainable services(bothintermsoftheactualprovisionoftheservicesandfinancially)

•  The current dispensa-on in the Electricity Distribu-on industry issubversiveoftheexis-nglegalframeworkswhichdirectlyunderminesmunicipali1es’ ability to fulfil their cons1tu1onal mandate in theprovisionofservices

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Park

There’saninvisiblelinerunningacrossmunicipali1es,where:•  Municipali1es’cons1tu1onalpowersaresubverted•  thedevelopmentalroleoflocalgovernmentisundermined•  somecommuni1esareprejudicedrela1vetoothers•  municipalrevenuecollec1onisundermined

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ParkIfyouliveonthisside:-  Youpayasurchargewhich

contributestothebasketofnon-tradingservicessuchasparks,libraries,pavements

-  Yousubsidiseservicesforthoselivingontheotherside

-  Yourelectricityisusedasacreditcontrolmechanismifyoudon’tpayyourratesandtaxes

-  Yourelectricitytariffisprobablyhigherthanontheotherside

ForexampleALEXANDRIATOWNSHIP

Municipality

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Park

Ifyouliveonthisside:-  Youdon’tpayasurchargeand

thuscontributelesstonontradingservices

-  Theseservicesaresubsidisedforyou

-  Yourelectricitycan’tbecutifdon’tpayyourratesandtaxes

-  Yourelectricitytariffislikelytobelowerthanontheotherside

ForexampleSANDTON

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Park

ALEXANDRIATOWNSHIP

Municipality

SANDTON

AlexsubsidisesSandton

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Park

Municipalcollec1onratesforservicecharges,ratesandtaxesinthemunicipalsupplyareasarearound:80%94%94%

Municipalcollec1onratesforotherservices(water,waste,rates,taxesetc)inEskomsupplyareasarearound:11%40%56%

Examplesofcollec(onrates

Municipali1escannotexercisecreditcontrolinEskomsuppliedareas–thuscollec1onrateislower

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Park

Municipality

ThereforeinEskomsupplyareas,municipali1esaredeprivedoftheircons1tu1onalandlegisla1vepowersintermsofelectricityre1cula1on.CustomersarealsodeprivedofExecu1veaccountability

MeaningofExecu1veAuthority

1.  Thedutytodevelopandimplementelectricityservicespolicyandby-lawsandtoregulateelectricitydistribu1on

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2. Thedutytoplanforelectricitydistribu1on

5. Therighttomanageelectricitydistribu1onandtradingthemselvesandtherighttoappointserviceprovidersotherthanthemunicipality.

3.  Therighttobudgetandsetservicefeesandsurcharges.

4. Thedutytoensureaccessthroughinfrastructuredevelopment

ServiceProvider

Accountabilitytriangle

CouncilMunicipality

Ci(zens/consumer

Servicesprovision

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Paymentforservices(orsubsidisedbyES)

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Goodgovernanceandservicesthroughaccountability

Accountabilitytriangle

CouncilMunicipality

Ci(zens/consumer

NoaccountabilityandnogovernanceinEskomsupplyareas

Servicesprovision

Paymentforservices(orsubsidisedbyES)

•  Eskomisaserviceproviderandprovidesaservice(electricityre1cula1on)thatamunicipalitymustprovide

•  Itdoessoasapubliccompany(regulatedbycompanylegisla1on)withoutreferencetotheMunicipalSystemsAct

•  Itdoessowithoutaservicedeliveryagreement(asrequiredbySec1on76(b)oftheMunicipalSystemsAct)

•  Itdoessoen(relyonthestrengthofalicencesissuedtoitbyNERSA

•  EskomarguesthatitisauthorisedbyNERSAandthusisalsoanauthorityandnotaprovideronbehalfofthemunicipali1esconcerned

‘Authority’andprovider

Theresult…•  Cons1tu1onalauthorityofmunicipali1esisunderminedbyEskom•  Intheabsenceofacontrac1ngandregulatorymechanism(SDA)between

Eskomandmunicipali1es:Ø Municipali1esareunabletolevysurchargesinEskomsupplyareasØ Municipali1esareunabletoexercisecreditcontrolinEskomsupplyareasØ LackoftariffparitybetweenmunicipalsupplyareasandEskomsupplyareas

Ø Conflictsoversupplyareas•  LicenseissuedbyNERSAtoEskomtore1culateelectricityisdefec1veasit

bypassestheexecu1veauthorityofmunicipali1es•  WithoutanSDA,Eskom’sserviceunlawfullyencroachesuponthe

cons(tu(onalpowersofthemunicipality•  Thereareseveralstructuralandsystemicissuesarisingfromthecurrent

dispensa1on•  Thesecontributetotheescala1ngdebt

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.

Cons1tu1onalauthoritynotrecognised–

NoSDA

Structuralandsystemic

challenges–nega1velyimpact

onrevenuecollec1on

Increasingdebt

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NERSALicenseCondi(on

•  Eskom re1culates electricity to its customers en1rely on thestrengthofthelicenceissuedbyNERSA

•  ThelicenceissuedtoESKOMdoesnotrequireEskomtoprovidetheserviceintermsofaservicedeliveryagreement

•  In the absence of an SDA as required by the SystemsAct, thelicenceisuncons1tu1onalanddefec1ve

•  NERSA is empoweredby the ElectricityRegula1onAct to issueanelectricitydistribu1onlicensewithcondi-ons

•  It is also empowered to amend condi1ons if necessary – thelicencecondi1onsneedtoincludetherequirementofanSDA

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SDAwouldfacilitate

•  Expendituremorefairlydistributedoverallconsumers.

•  Allconsumerscontribu1ngtoallservicesrenderedbyamunicipality.

•  Improvedcreditcontrolofmunicipalservices

•  Reduc1onofthemassivebillionsofmunicipaldebt

•  Reduc1onofthedebtowedtoEskom

•  Greaterfinancialsustainabilityformunicipali1esandtheelectricityindustry

Eskomhashigherelectricityusers

•  Althoughelectricitydistribu1oniscons1tu1onallyamunicipalcompetency,Eskoms1llplaysahugeroleinelectricitydistribu1oninSouthAfrica.

•  Eskomdistributed212107GWhor66%oftotalelectricitydistributedtocustomersinthe2011/12financialyear(NERSA,2012)to15%ofthetotalcustomers

•  Municipali1esonlydistributed96537GWhor30%oftotalelectricitydistributed,eventhoughtheydeliverto85%oftotalcustomers

•  AlthoughEskomservesfewercustomers,thesta1s1csindicatethatEskomcustomersarerela1velyhigherelectricityusers,drivenmainlybytheenergyintensiveminesandindustries(NERSA,2012).

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Thiscurrentdispensa(onissubversiveof:•  therightofmunicipali1estoadministerthetradinganddistribu1onofelectricity

(electricityre1cula1on)withintheEskomsupplyarea,•  municipality’srighttogovern,onitsownini1a1ve,localgovernmentaffairsof

itscommunity;•  anobjectoflocalgovernment,namelytoensurethatprovisionofservicesto

communi1esadoneinasustainablemanner;•  Municipalcreditcontrolac1oninEskomAreasofElectricitySupply•  theimplicitcons1tu1onalpowerofthemunicipali1estochargefeesforan

electricityservice;and•  themunicipality’scons1tu1onallyentrenchedfiscalpowertoimposesurcharges

onfeesforelectricityre1cula1onservicesrenderedonbehalfofthemunicipality.

Recommenda(ontoPCC:OntheCons(tu(onalChallenge

•  ThatthePCCnotesthatnoresolu1onwasfoundintermsofthecons1tu1onalchallengeswherebytheexecu1veauthorityofmunicipali1esforelectricityre1cula1onisnotrecognised

•  ThatthePCCendorsetheresolu1onoftheIMTTthattheHighCourtbeapproachedforadeclaratoryordertoexpressitselfonthetwoopposingviewswithregardtothecons1tu1onalchallengesrela1ngtoelectricityre1cula1on.

PCC

PCCreferredthemaierbacktotheIMTTtoresolveamongstMinistersandDeputyMinistersandtoreportbackasolu1onbyendofOctober2017

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Cons(tu(onalissue:lackoftariffparity

•  Impactoflackoftariffparity

–  Differenttariffsundermineequity–  Thedifferencesinpricingresultinsomeenterpriseshavingtoabsorb

municipalcosts,whilstothers(whereEskomprovidesservices)operateatanadvantage

–  Impactsontheactualandpoten1aleconomicdevelopmentofeacharea–  Compromisesthecons1tu1onalobjectoflocalgovernmenttoensurethat

itprovidesservicestoitslocalcommunityinasustainableandequitablemanner

–  Impairseconomicdevelopment

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Structuralchallenge:publicligh(ng

•  Thepurposeofstreetligh1ngistocontributetothesafetyofthepublic•  Publicligh1ngispartofthepackageofelectricityre1cula1onservices•  However,Eskominitsareasofsupplydoesnotprovidepublicligh1ng

(installa1on)andmaintainsitisamunicipalfunc1on•  Wheremunicipali1esinstallstreetlights,Eskomat1mesdelaysthe

energisingofthesestreetlights,ci1ngreasonssuchasmisalignmentofspecifica1ons,standardsandcapacity,whichcompromisespublicsafety

•  Wheremunicipali1esinstallenergyefficientligh1ng(throughtheEnergyEfficiencyDemandSideManagementGrant)inEskomareas,Eskomcon1nuestochargeahighflatratetariff

IMTTview:•  Themaierofstreetandpublicligh1ngneedstobefurtheraddressedin

theTechnicalCommiieeastheDepartmentofEnergyhasspecificaspectsitwantstoaddress.

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Structuralchallenge:roleofmunicipali(esinrenewableenergy

•  Theroleofmunicipali1esinrenewableenergyrequiresapolicyinterven1oninordertoprovideguidanceonthemaier

•  TheCityofCapeTownini1atedlegalproceedingsagainsttheMinisterofEnergy,challengingherrefusaltoapprovetherequestbytheCitytobuyrenewableenergyfromindependentpowerproducers

IMTTview

•  ThemaiershouldbeconsideredatthepolicylevelwithDOE

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Recommenda(ontoPCC:StructuralChallenges

•  ThatthePCCnotesthattheresolu1onofanumberofthestructuralchallengesaredependentontheresolu1onoftheCons1tu1onalchallenges.

•  ThatthePCCnotesthatthemaierofpublicandstreetligh1ngmustberesolvedbytheTechnicalTaskTeam

•  Thattheroleofmunicipali1esinrenewableenergybereconsideredasapolicyissuebytheDepartmentofEnergy,toallowmunicipalitydirectaccesstoindependentpowerproducers.

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Systemicchallenges

TheSystemicchallengesincludethefollowing:1.  Eskomcreditcontrolpolicyformunicipalbulkaccounts2.  UnsustainablepaymentagreementsbetweenEskomandmunicipali1es3.  Reconcilia1onofmunicipaldebttoEskom4.  No1fiedmaximumdemand5.  Thehistoricaldebtowedtoandbymunicipali1es6.  NERSAreviewofareasofsupply

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Eskom’screditcontrolpolicy

•  Eskom’s credit controlpolicy formunicipalbulkaccounts isnotaligned totheLocalGovernmentMunicipalFinanceManagementAct(MFMA)

InJune2017thefollowingconcessionsweresecured:•  Ra1onalisa1onofmunicipaltariffstoreducetariffop1onsfrom11to3;•  Decreasetheinterestratechargedonoverduebalancesfromprimeplus5%

toprimeplus2.5%;•  Changethepaymentperiodonmunicipalbulkaccountsfrom15to30days•  ChangeEskompaymentalloca1onpolicytoallocatepaymentstocapital

debtsfirstbeforealloca1ngpaymentstointerestchargedSALGAhasfurtherproposed:•  acompletereviewoftheEskomcreditpolicy•  interesttobechargedatprime(withpossibleslidingscaleofprimeplus1%

forcon1nuouslatepayment)

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Recommenda(on:SystemicChallenges

•  ThatEskomalignitscreditcontrolpoliciestothatofmunicipali1estoensurethatEskomsupportsandassistsmunicipali1eswithcreditcontrolwiththeEskomsupplyareas.

•  ThatNa1onalTreasuryundertakeacompara1vestudyonthedebtowedtomunicipali1esbyna1onalandprovincialgovernmentandhowthisimpactsonthemostindebtedmunicipali1esintermsofbulkelectricityaccounts.

•  ThatanindependentcompanybeappointedandfundedbyNa1onalTreasury,todoafulldiagnos1cofthe62highestowingmunicipali1estodetermineaffordableandsustainablerepaymentarrangementsforeachmunicipality

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Recommenda(on:SystemicIssues

•  Thatallinterestonthehistoricaldebtowedbymunicipali1estoEskombewaived

•  ThatanypaymentmadeintermsofthepaymentagreementsbetweenEskomandmunicipali1esbeallocatedtotheoutstandingcapital.

•  ThatNa1onalTreasuryandSALGAassistmunicipali1estoundertakeareconsolida1onofallamountsduetoEskomto(a)determinethecapitalandinterestdue;and(b)todeterminetheamountlegallyrecoverablebyEskom,takingintoaccountprescrip1onandtheprincipleofquantumduplum.

•  ThatthePCCnotethatthemaierofNo1fiedMaximumDemandwillberesolvedbytheTechnicalTeam

•  Thatpolicydirec1vesbeissuedwithregardto:–  Thecalcula1onofinterestonoutstandingbulkmunicipalaccountsbe

chargedassingleinterestonlyontheoutstandingcapital–  Thehistoricaldebtofmunicipali1esforbulkmunicipalaccountsbe

wriienoff.26

NERSAlicenseapplica(onprocess

Thatanurgenttechnicalmee1ngtakeplacewithNERSAtoaddress(i)theareascoveredbytherelevantre1cula1onlicences;and(ii)theprocessoflicencingandreportbacktothenextPCC

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•  NERSAiscurrentlyupda1ngtheirGeographicInforma1onSystem(GIS)toreviewthesupplyareas(Schedule1)ofelectricitydistribu1onlicencesofEskomandmunicipali1esintheFreeStateandNorthernCape

•  Municipali1esareconcernedthatthis‘duediligenceexercise’byNERSAispredominantlyincreasingre1cula1onareasofEskom.

•  Inaddi1ontheNERSAlicenceapplica1onproceduresarenotinaccordancewiththedefini1onsortheprocessesasprescribedinthefoundinglegisla1on

•  Itisthereforeunclearastowhethertherulesofnaturaljus1cearebeingfullycompliedwithintheprocess,andthustheadministra1vefairnessoftheprocessisalsodoublul.

Recommenda(on

ESKOMrevenuecollec(onini(a(ve

•  WhistSALGAwelcomesanyini1a1veorinnova1ontoassistmunicipali1eswithrevenuecollec1on,wedonotsupportEskomtakingovermunicipalrevenuecollec1on,whereEskomvendorsareu1lized.

•  Thisapproachwillnotonlyunderminetheaccountabilityrela1onshipsbetweencustomersandthemunicipality(asbothserviceauthorityandprovider)butwillalsoseriouslyimpactuponmunicipalmanagementandcontroloftheirownfinances.

•  IfEskomistoassistwiththeinstalla1onofprepaidmeters,theirroleshouldratherbethatofimplemen1ngagentandnotundertaketheactualrevenuecollec1onfunc1on

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EskomResponse•  Eskom applying for a 19.9% average increase translating to a 1 July

2018 local-authority tariff increase of 27.29% to municipalities.

•  Municipalities continue to pay at the 2017/18 rates for the period 1 April 2018 to 30 June 2018 as per the Municipal Finance Management Act (MFMA).

•  Eskom reports that although sales volumes have dropped,

•  Primary energy costs has increased due to a combination of coal mix changes, use of more IPPs and operating costs growth.

•  Eskom’s claims that the above has been understated in the MYPD3 decision.

SALGAPosi(on•  SALGA rejects the 27.29% increase

•  Long term pricing approach must be adopted where prices are gradually increased or amended, allowing for the market and role-players to adjust accordingly.

•  The 27.29% price shock effect on the market is unaffordable and indefensible.

•  SALGA also questions the process of a one-year Revenue Application given the significant non-compliance with the Multi-Year Price Determination (MYPD) Methodology.

•  The reduction of consumption as a result of introduction of renewable energy is perceived as pushing up the price per unit by Eskom.

SALGAPosi(on

•  Eskom’scoststoproducelessoutputshouldbecomingdown,notincreasing.

•  Eskomrepor1ngreduc1oninelectricitysalesasoneofthereasonspricesmustincrease–  Notacceptableasthereduc1onalsoaffectsmunicipali1eswhocannotincreaseelectricitypricesonthatbasis.

•  Despiteloweru1liza1onfactors,theEskomemployeerelatedopera1ngcostss1llincreasing,

•  TheEmployeeBenefitCostsof45%ofthebudgetistotallyunsustainable

Recommenda(on

•  SALGArejectsthe27.29%increaseonthebasisthatalongtermpricingapproachmustbeadoptedwherepricesaregraduallyamendedatleastataninfla1onrate,allowingforthemarketandrole-playerstoadjustaccordingly.

•  InessenceSALGAs1llsupportsamul1yearpricingmethodologyasitaiemptstoprovidethepricestabilityandpredictabilityalsopreventsfrompriceshocksintheeconomy.

Thankyou