Introducing NERSA’s Inclining Block Tariffs (IBT’s)

Introducing NERSA’s Inclining Block Tariffs (IBT’s)

Topics to be covered

1) Introduction of the NERSA delegate2) Mandate3) Purpose of the visit4) Background5) Introduction of IBTs6) Key Design Principles7) Development of IBTs8) Information Requirements9) Determination of the IBTs10)Challenges11)Myths12)Advantages13)Questions and Discussions

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NERSA’s PROFILE AND MANDATEThe National Energy Regulator of South Africa (NERSA) is a regulatory authority established as a juristic person in Terms of

Section 3 of the National Energy Regulator Act, 2004 (Act No.40 of 2004). NERSA’s mandate is to regulate the electricity, piped-

gas and petroleum pipelines in terms of the Electricity Regulation Act, 2006(Act No.4 of 2006), Gas Act, 2001(Act No.48 of

2001)and the Petroleum Pipelines Act, 2003(Act No.60 of 2003) and the Petroleum Pipelines Levies Act, 2004 (Act No.28 of 2004)

In terms of Section 4(a)(ii) of the Electricity Regulation Act (Act No.4 of 2006) “the Regulator must regulate prices and tariffs.”

In the approval of the prices and tariffs, the Energy Regulator enables an efficient licensee to recover the full costs of its licensed activities, including a reasonable return or margin

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The NERSA delegation

* These analysts are responsible for analysis of municipal tariff applications for RED 3

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NAME DESIGNATION

Mr Brian Sechotlho HOD: Electricity Pricing & Tariffs

Mr Vernon Gibbs* Senior Analyst: Electricity Pricing & Tariffs

Ms Maria Matlhaku* Analyst: Electricity Pricing & Tariffs

PURPOSE

“To share the information regarding the IBTs and for by municipalities to share the challenges being experienced

with regards to the implementation of IBTs to enable NERSA to assist.”

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BACKGROUND

• During the stakeholder consultation on the Eskom interim price increase application (early 2009), many stakeholders called for the introduction of “pro-poor” tariffs with some even suggesting the introduction of IBTs

• Furthermore, the mandate for the introduction of IBTs comes the Electricity Pricing Policy of the Government. This policy reads as: “Low income tariff customer tariff subsidization: Charging an appropriate tariff structure that allows for maximum subsidisation at low consumption levels with gradually reducing cross-subsidies as the consumption levels increase.” 6

BACKGROUND (Cont)• On 25 June 2010, NERSA approved a 31.3% price increase for

Eskom for 2009/10 (interim application) and further limited the increase to the poor to 15%. This method of protecting the poor (differentiated pricing) was introduced by NERSA in 2008/09.

• The abovementioned decision was stated as follows:

“The approved price increase on the average standard tariffs includes a limited price increase of 15% to both Eskom and municipalities’ poor customers (i.e. Homelight 1 & 2 tariffs). It must be noted that this is an interim measure until the implementation of inclining block rate tariffs for protection of the poor. The full implementation will occur in the Multi-Year price Determination 2 (MYPD2).”

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BACKGROUND (Cont)• During the analysis of the MYPD2 application NERSA

investigated various options of providing protection to low-income tariff customers. The table below highlights these options:

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OPTIONS REASONS FOR NON-SELECTION

1. Capping Increase to the poor: Differentiated Pricing

• This option resulted in major revenue losses to municipalities, especially municipalities which have a predominantly residential customer base

• It also does not always target the people for whom it is intended

2. Increasing the Free Basic Electricity (FBE) Allocation from 50kWh to 70kWh or even 100 kWh

• The authority responsible for the FBE allocation levels is the DoE together with COGTA and the National Treasury.

• NERSA therefore did not have the mandate and/or authority to enforce this option

3. Introduction of Real Time Pricing • This would require major system changes with regards to metering with high costs and may even results in much higher prices for the poor

BACKGROUND (Cont)• During this process, NERSA commenced with an international

benchmark study on the design of an IBT• During this study it was found that an IBT rate structure would allow

NERSA to achieve the objective of (1) protecting low-income tariff customers and (2) promoting energy efficiency. This would also allow for compliance with the EPP.

• For these reasons, the IBT was selected as the most preferred and viable option

• On 24 February 2010, the Energy Regulator approved the implementation of IBTs concurrently with the 2010/11 price increase, in order to provide for cross-subsidies for low income domestic customers, as required by the Electricity Pricing Policy (EPP)

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INTRODUCTION

What is an IBT?• An Inclining Block Tariff is a tariff structure where the

customers’ consumption is divided into blocks. Each block has a price per unit of energy consumed; which increases with each succeeding block i.e. it consists of different prices for different energy consumption levels. For example: a low block rate for the first 100kWh of consumption and a higher block rate for the balance of consumption

N.B It must be noted that the IBT is only applicable for residential/domestic customers (for now) 10

ILLUSTRATIVE EXAMPLE

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Block 10 – 50kWk54.0c/kWh

Block 251 –

350kWh58.0c/kWh

Block 3 351 –

600kWh74.0c/kWh

Block 4 >600kWh88.0c/kWh

ILLUSTRATIVE EXAMPLE (Cont)

• Example: Thabo consumes 650kWh/month. In 2009/10 the tariff applicable to him is 73.0c/kWh. His monthly bill is therefore R474.50. In month 1 of 2010/11 he again consumes 650kWh. This time he is charged according to the IBT rates as follows:

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Block 1 Block 2 Block 3 Block 4 Total

IBT blocks 0 - 50 51 - 350 351 - 600 600

Consumption (kWh)

50 300 250 50 650

Tariff Rate (c/kWh)

0.54 0.58 0.74 0.88

Charge to the customer

50*54 300*58 250*74 50*88

Total (R) 27.00 174.00 185.00 44.00 430.00

ILLUSTRATIVE EXAMPLE (Cont)

• This example illustrates that the IBT is based on the principle of incremental pricing i.e. the user is charged incrementally on the block rates as consumption increases. This is similar to the progressive tax system

• Therefore if Thabo reduces his consumption by 50kWh – his bill will reduce to R386.00

• Now what if Ntombi consumes consumes 1200 kWh– Her bill on the previous standard rate of 73 c/kWh

• R876.00: Average 73 c/kWh

– Her bill on the IBT structure• R914.00: Average 76.17 c/kWh 13

KEY DESIGN PRINCIPLES1. The need to be easy and economical to implement/ administer

2. The need to ensure stability, simplicity and understandability and transparency

3. The need to utilize appropriate metering and supply technology

4. The customer’s ability to pay

5. Equity: preserving a degree of cross-subsidies to ensure support to low income customers

6. The requirement to shield the poor from the impact of unacceptably high price increases

7. The need to ensure revenue neutrality to the utility

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DEVELOPMENT OF IBTs • The number of blocks and consumption levels were determined as

per the table below for both Eskom and municipalities. The tariff was limited to 4 blocks in keeping with the design principle of being easy and economical to implement.

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Block Consumption Levels

Basis of Block Range

Basis of price increase

Block 1 1-50 KWh Equal to FBE Limited to CPI

Block 2 51-350 KWh Break even point (BEP) and cushion low income large families that may spill over from Block 1

CPI + % equal to or less than Real WACC% allowed

Block 3 351-600 kWh Presumed average household consumption

Average (fully distributed) cost

Block 4 >600kWh Remainder Long Run Marginal Cost + Residual Revenues

DEVELOPMENT OF IBTs (Cont)

• The “basis for the price increase” resulted in the tariff benchmark levels as illustrated in the next 2 slides.

• For 2010/11 two sets of benchmarks (19% and 22%) are applicable. The “19% guideline” refers to municipalities who implemented 34% in 2009/10. The “22% guideline” refers to municipalities who implemented 25%.

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DEVELOPMENT OF IBTs (Cont)

19% Benchmark Levelsc/kWh Block

1Block

2Block

3Block

4

RED 1 54-60 58-64 74-79 88-93

RED 2 54-60 58-64 74-79 89-94

RED 3 54-60 58-64 74-79 88-93

RED 4 54-60 58-63 72-77 88-93

RED 5 54-60 58-64 74-79 88-93

RED 6 54-60 58-62 72-77 83-93

22% Benchmark Levelsc/kWh Block

1Block

2Block

3Block

4

RED 1 54-60 58-64 76-81 90-95

RED 2 54-60 58-64 76-81 91-96

RED 3 54-60 58-64 76-81 90-95

RED 4 54-60 58-63 74-79 90-95

RED 5 54-60 58-64 76-81 90-95

RED 6 54-60 58-62 74-79 90-95

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INFORMATION REQUIREMENTS• In order to assess the IBT structure the following data/

information is required from the municipalities: Proposed block energy rate tariffs for the 4 blocks in

accordance with the benchmarks Proposed fixed charge Customer numbers as per existing domestic tariff

categories together with the related consumption Provide details regarding impact on revenues and

calculations thereof

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DETERMINATION OF IBT’sConventional Meters

• The IBTs are assessed for the domestic high and domestic low tariff categories. The domestic low is based on the average consumption of 400kWh and domestic high on the average consumption of 800kWh. The IBTs are determined as follows:

Test 1: Comparison of the energy rates to the NERSA approved benchmarks in order to assess the proposed IBT energy rates.

Test 2: Compare weighted average tariff to guideline increase – For the domestic high category, the proposed fixed charges of the municipality is added to the average energy rate. This results in an average tariff rate after the fixed charges.

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DETERMINATION OF IBTs (Cont)Conventional Meters

Test 3: Revenue Protection: The final test is to ensure that the introduction of IBTs does not result in unintended revenue losses or windfall gains. The 2009/10 domestic residential revenues are compared to the revenues achieved with the IBTs to ensure that this result is achieved.

Where introduction of the IBT’s results in a shortfall for the municipality, a revenue allowance protection is built in to ensure that the shortfall in revenues does not occur.

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DETERMINATION OF IBTsPrepaid Meters

• WEIGHTED AVERAGE INCREASES For municipalities that are unable to implement IBTs, a weighted

average increase is calculated. This is mostly utilised for the prepaid tariff categories due to system challenges.

The weighted average is calculated using the customer’s monthly bill at the previous year’s bill (2009/10 tariff) compared with the estimated average monthly bill calculated based on block rates for 2010/11 financial year

Note: There must be significant and compelling reasons provided by the municipality as to why IBTs cannot be implemented (especially for conventional metered customers) before NERSA considers the calculation of the weighted average increases.

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CALCULATION OF IBT EXAMPLE: PROPOSAL BY MUNIC

Comparison of Average Tariff (inclusive of fixed charge) to guideline increase

Total before fixed charge 596.50

Average energy charge (c/kWh) 0.75

Service Charge (R/month) 25.00Average tariff after fixed/basic charge - 2010/11 (c/kWh) 0.78 Average 2009/10 Tariff (NERSA Approved) (c/kWh) 0.78

Percentage Increase/Decrease(-) -0.40%Guideline i.e. 19% or 22% 19.00%

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REVENUE CALCULATION (500 customers)

2009/10 Total Revenues R 3 744 000.00

2010/11 Total Revenues R 3 729 000.00

Revenue Increase/(Shortfall) R -15 000.00

CALCULATION OF IBT EXAMPLE: WITH REVENUE PROTECTION

Comparison of Average Tariff (inclusive of fixed charge) to guideline increase

Total before fixed charge 596.50

Average energy charge (c/kWh) 0.75Service Charge & Revenue Protection (R/month) 146.06Average tariff after fixed/basic charge - 2010/11 (c/kWh) 0.93 Average 2009/10 Tariff (NERSA Approved) (c/kWh) 0.78

Percentage Increase/Decrease(-) 19.00%Guideline i.e. 19% or 22% 19.00%

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REVENUE CALCULATION ( 500 customers)

2009/10 Total Revenues R 3 744 000.00

2010/11 Total Revenues R 4 455 360.00

Revenue Increase/(Shortfall) R 711 360.00

CHALLENGES

CHALLENGES MITIGATION STRATEGIES

• Prepaid Meter Challenges: Some municipalities need to update vending software to enable implementation on prepaid customers

• For 2010/11 a weighted average increase will be calculated for implementation

• These municipalities must liaise with their metering vendors to ensure that these systems are updated for 2011/12 implementation

• Billing Systems: The billing systems of municipalities are currently not compatible with the NERSA IBT structure

• Municipalities must ensure that systems are updated to allow for billing on IBTs

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MYTHS• Municipalities believe that implementation of IBTs will

result in revenue losses. However, it is evident (from previous slides - examples) that the IBTs are structured to ensure revenue protection (revenue protection fee)

• NERSA is not approving tariffs of municipalities that are not implementing IBTs. For municipalities that are unable to implement IBTs, NERSA is considering the implementation of weighted average increases. No application has been rejected on the basis of non-implementation of IBTS.

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ADVANTAGES• In the past (2008/09 and 2009/10) NERSA limited the

increases to the domestic low customers (last year the increase was limited to15%). This resulted in revenue losses for municipalities – especially municipalities with a predominantly domestic customer base.

• The IBTs ensures the revenue protection of the municipality and it is therefore considered a optimum method of protecting low-income tariff customers whilst also ensuring the sustainability of the municipality.

THE END !26

Feel it, it is here!!!

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