national electricity regulator (ner) overview of the ner and its business activities presentation 25...

National Electricity Regulator

(NER)

Overview of the NER and its Business Activities

Presentation25 October 2002

Background

The NER protects the interests of electricity customers by ensuring low prices and good service

WHILEmaking sure that suppliers can continue to provide this service in a sustainable way

Role of NER• Approve tariffs and prices• Set and monitor compliance with quality

of supply and standards• Dispute resolution• Social & national objectives involving

electricity– e.g. electrification, energy

conservation, regional and industrial development

• Advise government on electricity policy matters

Value Added by NER• Protect customers through low prices and good service• Supporting DME with ESI policy development and

legislation• Member of team investigating the electricity

distribution industry restructuring to accelerate rationalisation

• Requiring licensees to move towards cost - reflective tariffs

• Data base and information resource• Allocation of electrification funds and supporting DME

with establishment of INEP • Building HR capacity in utility regulation in South Africa

2003/4 Business Plan and Budget

• NER will focus on doing its regulatory activities well … while preparing itself for regulating a changing environment

• All operational activities and processes come under scrutiny

• Task of the NER to ensure that it has a framework in place for REDs, and generation and transmission restructuring

• Business Plan and Three – Year Strategic Plan therefore completed

• Approved by NER Board at its meeting on 25 October 2002

Work Programme 2003/4• Support for electricity industry reform process

– NER represented on ESI and EDI working groups

• Generation– Investment based on IRP– Completion of compliance monitoring framework

• Transmission and systems operations– Develop economic framework for transmission

• Wholesale trading and market operation– Oversee WEPS preparation and implementation

• Distribution and retail– Develop detailed conditions of RED’s licences– Standards and compliance monitoring systems

Work programme for 2003/4• Contestable and special customers

– Develop licensing framework

• International, regional and national regulatory initiatives– Support for NEPAD through AFUR and RERA

• NER capacity building– Building energy regulatory skills through HR strategy– Candidate regulators programme

• NER strategic positioning– Clear understanding from stakeholders of NER’s role– BSC in place to measure performance

Budget 2003/4• Total budget = R66,3 million• Average cost to domestic consumers of 17c/month• Increase of 29%• Reasons for increase

– Not a ‘business as usual’ budget– Appointment of 13 additional staff– Lump-sum payment for building– Increase in communications and consultants budget– Increase allocation for regional and continental

initiatives– Increase in travel costs (board and staff)– Increase in legal fees

Eskom Price Application

• NER receives application from Eskom on an annual basis

• Purpose is to understand Eskom costs so that tariffs cover costs

• Eskom applied for price increase equal to CPI + 3%– 9% at a projected CPI of 6% for 2003

• Price increase for Eskom’s three businesses calculated, as well as consolidated calculation

Methodology used• NER uses a Rate of Return (ROR)

methodology• Follows international best practice• Benchmarks levels locally and against

other countries• Allows Eskom to earn a reasonable

return on its assets, and to recover the reasonable expenses in running its business

• Agreed with Eskom that will move towards incentive based regulation

Decision on application• NER modeling showed Eskom entitled to

a ROR of 13,31%• This translates to a price increase of

11,3%• However, NER believed this was to steep,

and should be phased in over 2 years• Therefore allowed ROR of 12%, = price

increase of 8,4%• Appropriate balance between Eskom

financial viability and affordable tariffs for consumers

Price Issues

• Price increase conditional on Eskom– Undertaking Demand Side Management

programmes– Incurring costs in transmission and

distribution restructuring

• Poverty tariff (EBST) to protect low income households– DME piloting– Assistance to the indigent

Conclusion

• NER focusing on priorities for changing ESI• Lot of work done in putting in place

Business Plan• NER will focus its efforts on governments

priorities for the sector• Insufficient budget to skill up totally, but

best effort will be made • NER committed to serve ESI and its

stakeholders, especially customers• Dedicated to role in SADC / NEPAD

NER view on restructuring…NER view on restructuring…

ESI market reform: International Experience

Monopolies

Single Buyer?

Wholesale Competition

RetailCompetition

A transition process

from single buyer? towholesale

competition,to retail

competition,monitored by a

regulator

Drivers for change• Maximise financial and economic returns to the state

– Fiscal revenue, debt reduction

• The need to demonstrate economic efficiency– Allocative efficiency, next investment in generation capacity– Driving operational costs down

• Widened resource availability and technological change– Competitive imports from SAPP– Natural gas from Namibia and Mozambique and CCGTs– Information and computer technologies

• Opportunity for black economic empowerment (BEE)

• International environmental concerns

• Need for improved customer service and choice

But protect…

• Electrification programme

• Cross-subsidies for poor (but more transparent)

• Internationally competitive electricity prices

• Management, technical and R&D competencies in ESI

• Security of supply

• Potential for demand-side management and energy efficiency investments

• National regulatory oversight and control

• Globally competitive business for the African Renaissance

Government’s goals for restructuring state owned

enterprises (SOEs)• Boost economic growth• Create wider ownership in the economy• Fund basic needs programmes• Mobilise private sector capital and foreign

direct investment• Enhance competitiveness of state enterprises• Promote fair competition• Finance growth and requirements for

competitiveness

1998 White Paper on Energy Policy

• Introduce competition to the industry, especially the generation sector

• Give customers the right to choose their electricity supplier

• Permit open, non-discriminatory access to the transmission system

• Encourage private sector participation in the industry• Eskom will have to be restructured into separate

generation and transmission companies• Government intends to separate power stations into a

number of companies

Customers (000’s)1400Load (TWh)29Electrified (%)56


RED 3RED 3

East RandEast Rand

Bloemfontein Pietermaritzburg

Witbank

DurbanDurban

Port Elizabeth

Port Elizabeth

Cape TownCape Town

Johannesburg

Johannesburg

Pretoria

Pretoria

Calvinia

Upington

Vryburg

Prieska

Rustenburg

Kroonstad

Lichtenberg

Pietersburg

Kimberley

Nelspruit

Lydenburg

Harrismith

De Aar

Newcastle

Bergville Richards

Bay

Ulundi

Umtata

East London

Graaf Reinet

Victoria West

Pretoria

Pretoria

East RandEast Rand

Johannesburg

Johannesburg



RED 4RED 4



RED 6RED 6



RED 5RED 5



RED 2RED 2



RED 1RED 1

Phase I: Eskom CorporatisationImmediate - 2002

– Formation of Eskom Holdings Limited with subsidiaries• Generation, Transmission, Distribution and Enterprises

– Ringfence clusters of generators into divisions of generation for internal competition

– Transmission ringfences operations into wires, system operations, trader and EPP (as divisions of Transmission)

– Continuing development of EPP to allow progress to power exchange

– All sales through EPP (mandatory) but CFD in place between Generation and Distribution to guarantee minimum revenue

– Ringfencing of Eskom Distribution into proposed REDs continues, and municipalities continue to ringfence their electricity businesses away from other municipal activities

Eskom TransmissionEPP Wires SO Trader

Eskom Generation

Clusters

Customers

Eskom

Distribution

Municipal Distributors

Eskom Enterprises

Eskom Holdings

Phase II: Corporatisation of generation and independent power exchange

2002/3– Eskom Generation creates separate generation

companies (GenCos) following portfolios – Separate Independent Power Exchange established

• Under State ownership• Mandatory competitive pool

– All sales through IPE but CFDs in place between Gencos and REDs/contestable customers, with progressively reducing minimum revenue guarantees

– REDs established at distribution level

GenCo2GenCo1 GenCon

Eskom Holdings

Eskom Enterprises

Independent Power Exchange

RED2RED1 RED6

Contestable Customers

Customers

State Transmission Co Trader Wires SO

Phase III: Private sector and competition2003/4…

– Transmission company separated from Eskom Holdings and put into state-owned company

– IPE continues, but now operated as MMM and minimum revenue guarantees phased out

– Opportunities for BEE to buy mothballed power stations (about 10% of Eskom’s capacity)

– Additional sale of one or more generation clusters (portfolios) of up to 20% of Eskom’s capacity

– Private sector encouraged to invest in new capacity – Eskom to be left in the end with a 70% share of the

market

TraderGenco A

Eskom Holdings

Eskom EnterprisesPower

Exchange

RED2RED1 RED6

Special Customers

State Transmission Co Wires SO

Customers

EskomGenCo

EskomGenCo

Results of restructuring the ESI

• Achieves government’s policy goals• Competition results in improved efficiency and lower prices

than would have been the case• Less market power to control prices• Significant BEE is achieved• Fiscal revenue for debt reduction• Considerable inward investment• Private sector participation attracts international strategic

investors• Ease of regulation• Benefits to electricity consumers

New legislative developments…New legislative developments…

New Legislation Proposed

• Regulation Bill– Out for public comment– Provides for full time board

• Eskom Corporatisation Act now put into full operation– Corporatisation of Eskom underway

• EDI Restructuring Bill – Sets up EDI Holdings and provides for

establishment of REDs– To be published shortly

New role for NER in transition to energy

regulator…

Background to energy regulator

• Adam Smith’s recommendation for a single energy regulator

• Proposed implementation plan for the energy regulator

• Current status on enabling legislation Electricity Act No.41 of 1987 (as amended) Electricity Regulation Bill Gas Act No. 48 of 2001 Petroleum Pipelines Bill

Regulation of the Gas Industry

• Gas Act of 2001, Energy White Paper of 1998 & Ministerial directives

- Make provisions for the regulatory mandate of the NGR

- Came into effect on 21 February 2002• Regulatory activities of the NGR:

Issue licenses or make registrations Consider and approve prices, tariffs and charges Promote competition Promote optimal use of gas resources Make rules

Cont.

Gather and store information;Investigate and make inquiries into

activities of licensees;Resolve disputes;Ensure safety, health and

environmental standards;Ensure access to gas in an affordable

manner

Cape Town court caseCape Town court case

Background

• NER disallowed Cape Town’s 2002 price increase– Increase in tariffs to fund EBSST

• Cape Town implemented illegal tariff, then sued NER in High Court

• Cape Town argues– National regulation over municipal price

setting is unconstitutional– Have the right to set own tariffs

NER’s case• The powers that the Applicant claims for itself do

not fall under the rubric of ‘electricity reticulation’ (Schedule 4B to the Constitution).

• If those powers do involve ‘electricity reticulation’, then:

• - Parliament has the competence to enact legislation that regulates the exercise of municipal authority in relation to ‘electricity reticulation’

• -The Electricity Act constitutes legislation that is authorized by chapter 7 and s 229 of the Constitution

• The Electricity Act does not violate any provisions of the Constitution

national electricity regulator (ner) overview of the ner and its business activities presentation 25...

Documents

ner board

regulatory activities

backgroundthe ner

price increase

year strategic plan

esi policy development

monitor compliance

low prices