Electricity distribution Constitutional challenge 1 September 2017 - - PowerPoint PPT Presentation

Electricity distribution Constitutional challenge

1 September 2017

Presenta(on purpose

• To provide overview of the Cons1tu1onal, structural and

systemic challenges in terms of electricity distribu1on

• To present recommenda1ons made
• To facilitate discussion on how these challenges manifest at

municipal level and other challenges that need to be addressed

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Macro issue

• The Cons1tu1onal, legisla1ve and fiscal frameworks are carefully

designed to ensure that local government delivers sustainable services (both in terms of the actual provision of the services and financially)

• The current dispensa-on in the Electricity Distribu-on industry is

subversive of the exis-ng legal frameworks which directly undermines municipali1es’ ability to fulfil their cons1tu1onal mandate in the provision of services

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4

Park There’s an invisible line running across municipali1es, where:

• Municipali1es’ cons1tu1onal powers are subverted
• the developmental role of local government is undermined
• some communi1es are prejudiced rela1ve to others
• municipal revenue collec1on is undermined

5

Park

If you live on this side:

• You pay a surcharge which

contributes to the basket of non-trading services such as parks, libraries, pavements

• You subsidise services for those

living on the other side

• Your electricity is used as a

credit control mechanism if you don’t pay your rates and taxes

• Your electricity tariff is probably

higher than on the other side For example ALEXANDRIA TOWNSHIP Municipality

6

Park

If you live on this side:

• You don’t pay a surcharge and

thus contribute less to non trading services

• These services are subsidised

for you

• Your electricity can’t be cut if

don’t pay your rates and taxes

• Your electricity tariff is likely to

be lower than on the other side

For example SANDTON

7

Park

ALEXANDRIA TOWNSHIP

Municipality

SANDTON Alex subsidises Sandton

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Park

Municipal collec1on rates for service charges, rates and taxes in the municipal supply areas are around:

80% 94% 94%

Municipal collec1on rates for other services (water, waste, rates, taxes etc ) in Eskom supply areas are around: 11%

40% 56%

Examples of collec(on rates

Municipali1es cannot exercise credit control in Eskom supplied areas – thus collec1on rate is lower

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Park

Municipality

Therefore in Eskom supply areas, municipali1es are deprived of their cons1tu1onal and legisla1ve powers in terms of electricity re1cula1on. Customers are also deprived of Execu1ve accountability

Meaning of Execu1ve Authority

1. The duty to develop and implement electricity services policy and by-laws and to regulate electricity distribu1on

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• 2. The duty to plan for electricity

distribu1on

• 5. The right to manage electricity

distribu1on and trading themselves and the right to appoint service providers other than the municipality.

• 3. The right to budget and set service

fees and surcharges.

• 4. The duty to ensure access through

infrastructure development

Service Provider Accountability triangle Council Municipality Ci(zens / consumer

Services provision

1

6 Payment for services (or subsidised by ES)

2 3 4 5

Good governance and services through accountability

Accountability triangle Council Municipality Ci(zens / consumer

No accountability and no governance in Eskom supply areas

Services provision Payment for services (or subsidised by ES)

• Eskom is a service provider and provides a service (electricity re1cula1on) that

a municipality must provide

• It does so as a public company (regulated by company legisla1on) without

reference to the Municipal Systems Act

• It does so without a service delivery agreement (as required by Sec1on 76(b)
• f the Municipal Systems Act)
• It does so en(rely on the strength of a licences issued to it by NERSA
• Eskom argues that it is authorised by NERSA and thus is also an authority and

not a provider on behalf of the municipali1es concerned

‘Authority’ and provider

The result …

• Cons1tu1onal authority of municipali1es is undermined by Eskom
• In the absence of a contrac1ng and regulatory mechanism (SDA) between

Eskom and municipali1es: Ø Municipali1es are unable to levy surcharges in Eskom supply areas Ø Municipali1es are unable to exercise credit control in Eskom supply areas Ø Lack of tariff parity between municipal supply areas and Eskom supply areas Ø Conflicts over supply areas

• License issued by NERSA to Eskom to re1culate electricity is defec1ve as it

bypasses the execu1ve authority of municipali1es

• Without an SDA, Eskom’s service unlawfully encroaches upon the

cons(tu(onal powers of the municipality

• There are several structural and systemic issues arising from the current

dispensa1on

• These contribute to the escala1ng debt

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.

Cons1tu1onal authority not recognised – No SDA Structural and systemic challenges – nega1vely impact

• n revenue

collec1on

Increasing debt

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NERSA License Condi(on

• Eskom re1culates electricity to its customers en1rely on the

strength of the licence issued by NERSA

• The licence issued to ESKOM does not require Eskom to provide

the service in terms of a service delivery agreement

• In the absence of an SDA as required by the Systems Act, the

licence is uncons1tu1onal and defec1ve

• NERSA is empowered by the Electricity Regula1on Act to issue

an electricity distribu1on license with condi-ons

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

licence condi1ons need to include the requirement of an SDA

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SDA would facilitate

• Expenditure more fairly distributed over all consumers.
• All consumers contribu1ng to all services rendered by a

municipality.

• Improved credit control of municipal services
• Reduc1on of the massive billions of municipal debt
• Reduc1on of the debt owed to Eskom
• Greater financial sustainability for municipali1es and the

electricity industry

Eskom has higher electricity users

• Although electricity distribu1on is cons1tu1onally a municipal competency,

Eskom s1ll plays a huge role in electricity distribu1on in South Africa.

• Eskom distributed 212 107 GWh or 66% of total electricity distributed to

customers in the 2011/12 financial year (NERSA, 2012) to 15% of the total customers

• Municipali1es only distributed 96 537 GWh or 30% of total electricity

distributed, even though they deliver to 85% of total customers

• Although Eskom serves fewer customers, the sta1s1cs indicate that Eskom

customers are rela1vely higher electricity users, driven mainly by the energy intensive mines and industries (NERSA, 2012).

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This current dispensa(on is subversive of:

• the right of municipali1es to administer the trading and distribu1on of electricity

(electricity re1cula1on) within the Eskom supply area,

• municipality’s right to govern, on its own ini1a1ve, local government affairs of

its community;

• an object of local government, namely to ensure that provision of services to

communi1es a done in a sustainable manner;

• Municipal credit control ac1on in Eskom Areas of Electricity Supply
• the implicit cons1tu1onal power of the municipali1es to charge fees for an

electricity service; and

• the municipality’s cons1tu1onally entrenched fiscal power to impose surcharges
• n fees for electricity re1cula1on services rendered on behalf of the

municipality.

Recommenda(on to PCC: On the Cons(tu(onal Challenge

• That the PCC notes that no resolu1on was found in terms of the

cons1tu1onal challenges whereby the execu1ve authority of municipali1es for electricity re1cula1on is not recognised

• That the PCC endorse the resolu1on of the IMTT that the High Court be

approached for a declaratory order to express itself on the two opposing views with regard to the cons1tu1onal challenges rela1ng to electricity re1cula1on. PCC PCC referred the maier back to the IMTT to resolve amongst Ministers and Deputy Ministers and to report back a solu1on by end of October 2017

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Cons(tu(onal issue: lack of tariff parity

• Impact of lack of tariff parity

– Different tariffs undermine equity – The differences in pricing result in some enterprises having to absorb municipal costs, whilst others (where Eskom provides services) operate at an advantage – Impacts on the actual and poten1al economic development of each area – Compromises the cons1tu1onal object of local government to ensure that it provides services to its local community in a sustainable and equitable manner – Impairs economic development

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Structural challenge: public ligh(ng

• The purpose of street ligh1ng is to contribute to the safety of the public
• Public ligh1ng is part of the package of electricity re1cula1on services
• However, Eskom in its areas of supply does not provide public ligh1ng

(installa1on) and maintains it is a municipal func1on

• Where municipali1es install streetlights, Eskom at 1mes delays the

energising of these streetlights, ci1ng reasons such as misalignment of specifica1ons, standards and capacity, which compromises public safety

• Where municipali1es install energy efficient ligh1ng (through the Energy

Efficiency Demand Side Management Grant) in Eskom areas, Eskom con1nues to charge a high flat rate tariff IMTT view:

• The maier of street and public ligh1ng needs to be further addressed in

the Technical Commiiee as the Department of Energy has specific aspects it wants to address.

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Structural challenge: role of municipali(es in renewable energy

• The role of municipali1es in renewable energy requires a policy interven1on

in order to provide guidance on the maier

• The City of Cape Town ini1ated legal proceedings against the Minister of

Energy, challenging her refusal to approve the request by the City to buy renewable energy from independent power producers IMTT view

• The maier should be considered at the policy level with DOE

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Recommenda(on to PCC: Structural Challenges

• That the PCC notes that the resolu1on of a number of the structural

challenges are dependent on the resolu1on of the Cons1tu1onal challenges.

• That the PCC notes that the maier of public and street ligh1ng must be

resolved by the Technical Task Team

• That the role of municipali1es in renewable energy be reconsidered as a

policy issue by the Department of Energy, to allow municipality direct access to independent power producers.

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Systemic challenges

The Systemic challenges include the following: 1. Eskom credit control policy for municipal bulk accounts 2. Unsustainable payment agreements between Eskom and municipali1es 3. Reconcilia1on of municipal debt to Eskom 4. No1fied maximum demand 5. The historical debt owed to and by municipali1es 6. NERSA review of areas of supply

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Eskom’s credit control policy

• Eskom’s credit control policy for municipal bulk accounts is not aligned to

the Local Government Municipal Finance Management Act (MFMA) In June 2017 the following concessions were secured:

• Ra1onalisa1on of municipal tariffs to reduce tariff op1ons from 11 to 3;
• Decrease the interest rate charged on overdue balances from prime plus 5%

to prime plus 2.5%;

• Change the payment period on municipal bulk accounts from 15 to 30 days
• Change Eskom payment alloca1on policy to allocate payments to capital

debts first before alloca1ng payments to interest charged SALGA has further proposed:

• a complete review of the Eskom credit policy
• interest to be charged at prime (with possible sliding scale of prime plus 1%

for con1nuous late payment)

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Recommenda(on: Systemic Challenges

• That Eskom align its credit control policies to that of municipali1es to ensure

that Eskom supports and assists municipali1es with credit control with the Eskom supply areas.

• That Na1onal Treasury undertake a compara1ve study on the debt owed to

municipali1es by na1onal and provincial government and how this impacts

• n the most indebted municipali1es in terms of bulk electricity accounts.
• That an independent company be appointed and funded by Na1onal

Treasury, to do a full diagnos1c of the 62 highest owing municipali1es to determine affordable and sustainable repayment arrangements for each municipality

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Recommenda(on: Systemic Issues

• That all interest on the historical debt owed by municipali1es to Eskom be

waived

• That any payment made in terms of the payment agreements between

Eskom and municipali1es be allocated to the outstanding capital.

• That Na1onal Treasury and SALGA assist municipali1es to undertake a

reconsolida1on of all amounts due to Eskom to (a) determine the capital and interest due; and (b) to determine the amount legally recoverable by Eskom, taking into account prescrip1on and the principle of quantum duplum.

• That the PCC note that the maier of No1fied Maximum Demand will be

resolved by the Technical Team

• That policy direc1ves be issued with regard to:

– The calcula1on of interest on outstanding bulk municipal accounts be charged as single interest only on the outstanding capital – The historical debt of municipali1es for bulk municipal accounts be wriien off.

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NERSA license applica(on process

That an urgent technical mee1ng take place with NERSA to address (i) the areas covered by the relevant re1cula1on licences; and (ii) the process of licencing and report back to the next PCC

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• NERSA is currently upda1ng their Geographic Informa1on System (GIS) to

review the supply areas (Schedule 1) of electricity distribu1on licences of Eskom and municipali1es in the Free State and Northern Cape

• Municipali1es are concerned that this ‘due diligence exercise’ by NERSA is

predominantly increasing re1cula1on areas of Eskom.

• In addi1on the NERSA licence applica1on procedures are not in accordance

with the defini1ons or the processes as prescribed in the founding legisla1on

• It is therefore unclear as to whether the rules of natural jus1ce are being fully

complied with in the process , and thus the administra1ve fairness of the process is also doublul. Recommenda(on

ESKOM revenue collec(on ini(a(ve

• Whist SALGA welcomes any ini1a1ve or innova1on to assist municipali1es

with revenue collec1on, we do not support Eskom taking over municipal revenue collec1on, where Eskom vendors are u1lized.

• This approach will not only undermine the accountability rela1onships

between customers and the municipality (as both service authority and provider) but will also seriously impact upon municipal management and control of their own finances.

• If Eskom is to assist with the installa1on of prepaid meters, their role

should rather be that of implemen1ng agent and not undertake the actual revenue collec1on func1on

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Eskom Response

• 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.

SALGA Posi(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.

SALGA Posi(on

• Eskom’s costs to produce less output should be coming down, not

increasing.

• Eskom repor1ng reduc1on in electricity sales as one of the reasons

prices must increase – Not acceptable as the reduc1on also affects municipali1es who cannot increase electricity prices on that basis.

• Despite lower u1liza1on factors, the Eskom employee related
• pera1ng costs s1ll increasing,
• The Employee Benefit Costs of 45% of the budget is totally

unsustainable

Recommenda(on

• SALGA rejects the 27.29% increase on the basis that a long term

pricing approach must be adopted where prices are gradually amended at least at an infla1on rate, allowing for the market and role-players to adjust accordingly.

• In essence SALGA s1ll supports a mul1year pricing methodology as it

aiempts to provide the price stability and predictability also prevents from price shocks in the economy.

Thank you