Nersa throws municipalities a curve ball

Energy regulator Nersa has thrown municipalities a curve ball, by benchmarking their retail electricity tariff proposal on Eskom’s retail tariffs.

This could open the door to closing the big gap between the tariffs paid by the end-user, who buys their electricity from municipalities, and those paid by Eskom’s direct customers.

According to David Mertens of the Nelson Mandela Bay Business Chamber, a large factory working five days a week, 24 hours per day, pays about R44.5 million annually for electricity if it is supplied by Eskom.

That same factory would have had to cough up R64.4 million if it bought its power from Joburg’s City Power, R54.4 million in Cape Town, R52.7 million in Tshwane and R47.4 million in Nelson Mandela Bay metro.

Nersa’s proposal is contained in the draft guideline for municipal electricity tariffs, published on its website for comment.

The regulator has invited written submissions before the deadline of April 9 and says it will announce the date for a public hearing thereafter. Nersa is currently closed due to the national Covid 19-lockdown and it is not yet clear whether the deadline and process will be affected by the current countrywide state of disaster. Nersa is due to reopen after the lockdown, on April 16.

The guideline, which Nersa publishes annually, proposes an average increase in the tariffs municipalities charge their electricity customers of 6.24%.

This is calculated taking into account, among others, the 6.9% increase in the Eskom tariff for municipal bulk purchases, increased staff cost and the cost of repairs and maintenance.

Every municipality still has to submit its own application to Nersa and increases that exceed the guideline of 6.24% will have to be very well motivated and subject to strict conditions.

The guideline however also provides for benchmark tariffs for different customer categories.

According to the Electricity Regulation Act (ERA) a licensee, be it Eskom or the municipality, is entitled to recover the efficient cost of supply as well as a reasonable margin.

Municipalities have however been using electricity revenue to subsidise other services, even though the ring-fencing of electricity revenue is one of the conditions of their distribution licenses.

Despite an obligation on municipalities to do cost of supply studies, very few have complied and that is where Nersa has changed tack.

Each benchmark provides for a tariff band, with the lower value of the band being based on the previous year’s benchmark, but the higher value based on Eskom’s retail tariff.

The regulator says in the document published for comment that it uses the Eskom tariffs because it is based on cost studies. It hopes to thereby protect consumers against too-high tariffs and compel municipalities to do their cost studies. It further hopes to ensure a competitive market in the light of plans to unbundle Eskom into three separate companies for electricity generation, transmission and distribution.

According to Mertens, a study by the Nelson Mandela Bay Business Chamber on documents that previous municipal tariff determinations were based on, showed a lack of rational basis. He has lauded Nersa’s move to base the benchmarks on Eskom retail tariffs and says it opens the door to challenge unreasonable municipal tariffs.

Morné Mostert, head of local government matters at AfriForum, says municipalities have to base their tariffs on proper cost studies. AfriForum has submitted a request in terms of the Promotion of Access to Information Act for all municipal cost studies submitted to Nersa.

He says an average tariff increase of 6.24%, which is less than 2 percentage points above inflation, is fair.

The Nersa guideline also provides for a margin of up to 20% for electricity resellers, which according to the Electricity Resellers Associations of South Africa is in line with Nersa’s earlier position that a 15% to 20% margin for resellers is sustainable.