Nersa proposes 15.1% hike in municipal electricity tariffs

Energy regulator Nersa has asked stakeholders to comment on its proposed guideline for municipalities to increase electricity tariffs by an average 15.1% on 1 July.

This is largely based on the 18.49% increase in bulk electricity purchases from Eskom. Bulk purchases represent 74.23% of the expenditure municipalities incur in the Nersa model to supply electricity in their distribution areas.

Nersa’s municipal guideline

This coming financial year is the last in which Nersa will be allowed to use its controversial municipal guideline and benchmark methodology to determine municipal tariffs, after two court rulings declared it unlawful and invalid. In one case Nersa was given 12 months – ending after 2023/24 – to switch to a lawful methodology.

It is however clear that many municipalities will not be ready to reliably determine their true cost of supply.

This will make it difficult to comply – from the next financial year – with legislation that provides for a licensee to recover its efficient cost plus a reasonable margin from electricity tariffs.

In a discussion document published on its website, Nersa shows the following calculation of its municipal tariff guideline for the 2023/24 financial year.

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Nersa will hold a public hearing about the consultation paper on 24 April, before the 28 April deadline for comments.

Once finalised Nersa will publish the guideline and benchmarks. Municipalities must still apply individually for Nersa to approve their specific set of tariffs.

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Non-compliant municipalities

The discussion document does not disclose the benchmark tariffs Nersa is considering for different consumer groups.

When approving Eskom’s retail tariffs, Nersa increased the extent of the subsidy large power users pay to limit the increase for low-income users – despite its earlier intention to phase out this subsidy.

In its discussion document, Nersa asks for input regarding the challenges expected in implementing the tariff-setting method based on the cost of supply from 2024. It states that municipalities are slow to comply with the current requirement to do a cost-of-supply study every five years.

Currently only four municipalities (2%) are implementing cost of supply studies as the following table shows – these are the Nelson Mandela Bay metro and George, Modimolle-Mookgophong and Theewaterskloof local municipalities.

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“Migrating fully to this approach will pose a risk since Nersa is battling to attain 100% compliance,” the regulator says.

These studies require collection and analysis of data and proper accounting and asset records, which most municipalities don’t have at hand, according to Nersa. This includes physical asset registers with asset replacement costs, useful lives, correcting sales and purchase metering data as well as the conducting of meter audits.

Nersa has developed a simplified cost-of-supply tool to assist municipalities, but says this should not replace proper studies.

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To expedite the migration to a cost-of-supply method of tariff setting in line with the court ruling, Nersa has already asked municipalities to report on their ability to do so and to complete the simplified tool as part of their tariff applications for 2023/24.

In the meantime, Nersa says it is proceeding with the overhaul of electricity regulation and revising its tariff methodology.

This envisaged methodology, which will apply to all licences, will consist of five steps:

• Determine revenue requirement
  
• Functionalise costs
  
• Classify costs
  
• Allocate costs
  
• Establish rates and charges forming part of tariffs.

This will apply to all licensed activities. It is, however, reliant on intensive data collection by municipalities and will need to be phased in, says Nersa.

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Nersa provides the following timetable:

Phase 1: Development of a regulatory report that provides a framework necessary for the development of the electricity price determination methodology (EPDM) rules. This is envisaged to be concluded in the first quarter of 2023, and by the end of June including the consultation process.

Phase 2: Application of EPDM: Develop tariff/price model and simulate the impact. The process is envisaged to be finalised in the first quarter of 2024, by the beginning of April.

Phase 3: Final stage of setting tariffs and prices. This is planned to be done in March 2026.

This article originally appeared on Moneyweb and was republished with permission.
Read the original article here.