The Multi- Year Price DeterminationMYPD

Presented by: Thembani BukulaRegulator Member – Electricity Regulation

Rationale for MYPD

• Annual price determinations – Cumbersome process that did not enable efficiency extraction– No forward view for planning purposes– High uncertainty levels for business & investors

• Generation, transmission and distribution infrastructure– 40 year old assets to be replaced or refurbished– Additional capacity required

• Funding of the additional capacity– Building of reserves/retained earnings– Strengthening of the balance sheet to enable borrowing

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Concept of MYPD

• Determination of revenue required and average price from– Projected costs– Anticipated sales

• For a 3 year period (targeting 5 to 7 years when matured)– Under certain assumptions (e.g. costs increase at inflation rates)– Credit ratings of Eskom remain unchanged– No Dividends paid to the Shareholder

• MYPD runs for the determined period unless thresholds and/or limits set for reviewing are breached– Changes in costs in excess of 10%– Exogenous factors beyond Eskom’s control 3

MYPD1 • Determination of revenue required and average price from

– From 1 April 2006 to 30 March 2009– Projected costs– Anticipated sales

• For a 3 year period (targeting 5 to 7 years when matured)– Under certain assumptions (e.g. costs increase at inflation rates)– Credit ratings of Eskom remain unchanged– No Dividends paid to the Shareholder

• MYPD runs for the determined period unless thresholds and/or limits set for reviewing are breached– Changes in costs, in excess of 10%, revenue 1%– Exogenous factors beyond Eskom’s control 4

Other MYPD1 factors

• The Electricity Regulation Act, 2006 – An efficient licensee must recover full costs plus reasonable return

• Additional capacity allocation– Eskom to build the additional generation & transmission capacity

• Funding of the additional capacity– Eskom to build additional generation & transmission capacity– RFI for Kusile & Medupi power stations at ZAR33bn each– Retained Earnings and Loans to be used (no equity required)

• Claw-back – Inefficiently incurred expenses and over budgeting

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MYPD1 determination

• Credit rating of Eskom improved by a notch

• Business and investors satisfied and aligned by the projections

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2006/7 2007/8 2008/9

Revenue (R’m) 36 693 40 084 44 506

% Increase (CPI + 1) 5.1% 5.9% 6.2%

Coal costs (R’m) 11.6 12.1 13.3

Ave price (c/kWh) 17 18 19

Changes to the MYPD1

• In April 2007, Eskom applied for a revision of the 5.9% increase to 18.7% increase for the year 2007/8– Primary Energy (mainly coal) cost increase– Changes in the capex (RFP indicated that the power station will

double the amount allocated in MYPD1, i.e. cost ZAR 66bn each)

• NERSA approved an increase of 14.2% on 20 December 2007– Limiting the coal cost increases – Reducing the Rate of Return (RoR)

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Additional changes to MYPD1

• On 18 March 2007, Eskom applied for a revision of the 14.2% average increase to 60% average increase– Capital expenditure of ZAR343bn (i.e. power stations cost

ZAR99bn each)– Borrowing ability limited to ZAR30bn per annum vs ZAR60bn

required for the above capex.– Shareholder limited its equity injection to ZAR60bn over 5 years– 10% Rate of Return required

• On 18 June 2008 NERSA approved a 27.5% average increase– Limiting the RoR– Spreading the capital spend and increasing the borrowing capacity 8

Interim determination

• In May 2009 Eskom made an interim application of an average increase of 34%– Awaiting the finalisation of the funding model and Electricity Pricing

Policy– Catering for the 2c/kWh Environmental levy

• NERSA approved an average increase of 31.3% in June 2009– Limiting the increase to some tariffs (e.g. Home light & Life line) to

less than 15% increase– Postponing the re-evaluation of assets to the MYPD2

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MYPD2

• MYPD 2 started with an annual 45% average increase application for the period 1 April 2010 to 31 March 2013

• After consultation with NT and SALGA application was revised to an annual average increase of 35% over the 3 year period

• MYPD 2 drivers

– Capital expenditure ZAR302bn

– Primary energy costs (mainly coal)

– Asset re-evaluation (depreciation & returns)

– Inclining Block tariffs

– Cost reflective tariffs in 5 years10

MYPD2 Approvals

• Re-evaluation of assets phased over a 5 year period instead of full amount at the beginning

• Rate of Return limited to less than 2% over the 3 year period

• IBT’s limited 1st block increase to inflation (approx 6%)

• Depreciation and Return on Assets increased to cater for the shortfall from equity injection, loans and retained earnings

• Regulatory clearing account setting up 11

2010/11 2011/12 2012/13

Revenue (R’m) 90 927 116 152 148 378

% increase 24.8 % 25.8 % 25.9 %

Coal costs (R’m) 28 33 36

Ave. price (c/kWh) 41.57 52.30 65.85

MYPD2 review

• In February 2012, Eskom applied for a reduction in the average price increase from 25% to 16%– The shareholder had re-phased its return of about ZAR7,7bn– The Regulatory Clearing Account (RCA) about ZAR3bn

• NERSA approved the average price increase of 16%– RCA accepted– Re-phased returns accepted–

• The allocations for IPP’s was not altered– ZAR12,3bn

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MYPD3

• MYPD 3 application still with NT and SALGA

• EPP as it stands – Phased re-evaluation of assets (may be different from 5 years in

MYPD2)– IBT’s as determined– Cost reflectivity in within 5 years– IPP’s costs as per IRP 2010 - 2030 included in the pricing– Price increases that promote economic growth

• Public consultations on both the application and changes in the rules

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MYPD3 Approval schedule

• Workshops and public consultations regarding the application will be arranged during the consultation phase

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Action Date

Receive MYPD3 application from Eskom August 2012

Publish application for consultation (45 to 60 days)

31 August 2012

Collated and analysed inputs 30 November 2012

Public hearings 14 – 30 January 2012

Finalisation and approval of application 28 February 2013

Thank you

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