2 COMMENTS ON ESKOM REVENUE APPLICATION MULTI-YEAR PRICE DETERMINATION 3 PRESENTED BY MR. DENNIS GOLDMAN CONTACT SAPOA: TEL: WEB:
3 AGENDA 1. Who is SAPOA 2. Tariff structures 3. Large consumers 4. Fiscal drag 5. Accountability and transparency 6. Economic impact
4 WHO IS SAPOA? SAPOA was established in 1966 by South African s property investment organizations, to bring together all role players in the commercial property field and to create a powerful platform for property investors. As SAPOA s members control approximately 90% of all commercial, retail and industrial property in South Africa, SAPOA is recognized as the representative body and OFFICIAL voice of the property industry in this country
5 SAPOA has a strong national footprint and operates in several regions including Gauteng, Western Cape, Kwazulu Natal and Limpopo. The commercial component of the property industry represents 8-10% of the total energy consumption in South Africa. The escalating electricity increases have placed and continues to place enormous pressure on the commercial industry, on property owners and their tenants alike.
6 PROPERTY STATISTICS South African commercial property market Retail Office Industrial Total GLA m 2 million Average base rent (excluding recoveries) R/m 2 /month Average gross rent (including recoveries) R/m 2 /month Average operating costs R/m 2 /month Average electricity costs R/m 2 /month Vacancy 5,7% 15.0% 4.1% Electricity costs are already a significant portion of the cost of occupancy for a tenant and continues to escalate. This places both the tenant and landlord at risk.
7 PROPERTY STATISTICS (cont) Although the commercial sector s power consumption is approximately 8% - 10% of Eskom s generated capacity the number of people who would be directly and indirectly effected by failure of businesses in the property industry is conservatively between 3-5 million (based on 1 employee per 10 sqm)
8 TARIFF STRUCTURES We believe that NERSA s evaluation of ESKOM s price increases and the Municipalities price increase requests are not mutually exclusive. Government needs to revisit the concept of rationalised electricity tariffs which failed because the municipalities would not disclose their cross subsidisation policies. The practice of funding other services from electricity revenues should be made illegal. The following slide quite clearly highlights the problem.
9 TARIFF STRUCTURES (cont) HAS ANYTHING CHANGED? An excerpt from a report on tariffs published by National Treasury in 2003 is summarised below. Many of the problems are still evident: The number of distributing electricity municipalities is high. NERSA s approach to regulating municipal distributors has been to attempt to rationalise tariff structures and reduce the disparities in price levels. NERSA has not been able to investigate municipal costs. The finances of local authority distributors are not ring-fenced from other municipal costs and significant revenue shifting is thought to occur. NERSA has attempted to: 1. Harmonise price levels for distributors that are within the same size class. 2. To converge the price levels of distributors that will fall within the same proposed regional electricity distributor (RED). 3. The local authority distributors are subject to regulation by comparison. Currently, 60% of the 177 municipalities supplying electricity have illegal tariffs (not formally approved by NERSA).
10 TARIFF STRUCTURES (cont) There is a definite need for simplification and standardisation of tariffs in respect of Eskom and the municipalities. When assessing applications it is advisable that NERSA carefully considers the percentage increase in each tariff category as well as the percentage increase in fixed charges as the average percentage increase often conceals the true impact on the consumer.
11 TARIFF STRUCTURES (cont) The extract below illustrates the true increases experienced by both Eskom and municipal consumers:
12 TYPICAL WINTER MONTH TARIFFS 2012/13 City of Cape town Durban Ekurhuleni Polokwane Pretoria Mogale City City power Bloemfontein Eskom Pick N Pay Family R 94, R 116, R 123, R 76, R 87, R 86, R 146, R 159, R 93, Spur Family Restaurant R 33, R 39, R 41, R 26, R 29, R 30, R 51, R 54, R 33, Masion Costa Hair R 2, R 1, R 3, R 2, R 4, R 2, R 3, R 2, R 2, SA Biltong R R R R R 1, R R 1, R R 1, Total for building A = R 130, R 158, R 170, R 106, R 122, R 120, R 203, R 217, R 131, Municipality LV R 133, R 159, R 168, R 108, R 122, R 120, R 205, R 220, R 131, Municipality HV R 150, R 144, R 165, R 108, R 137, R 123, R 197, R 201, R 116,834.82
13 TARIFF STRUCTURES (cont)
14 TARIFF STRUCTURES (cont)
15 TARIFF STRUCTURES (cont)
16 TARIFF STRUCTURES (cont) TOU will assist in sending the correct pricing signals, shifting load and reducing demand. Property owners and indeed even municipalities do not have the infrastructure or budget to implement TOU downstream and these constraints must be borne in mind when approving tariffs.
17 TARIFF STRUCTURES (cont) SAPOA supports the policy of cross-subsidisation of electricity consumers in particular the poor in South Africa. However, this policy should not unfairly discriminate against certain categories of users. To guard against this, NERSA should again interrogate the percentage increase in each consumer and in each tariff category.
18 TARIFF STRUCTURES (cont) SAPOA members and other property owners manage the downstream distribution of electricity from the bulk supply to the property to the end consumers in such a property. This is a microcosm of the Eskom and municipal distribution to consumers. We believe that property owners should be entitled to apply for the same tariff as if they were fed directly from Eskom or the relevant municipality with a reasonable markup to cover distribution costs. These would vary from area to area. The property owner has to manage and maintain the metering infrastructure to recover energy costs.
19 TARIFF STRUCTURES (cont) Management costs include: Billing and accounting systems Credit control Management systems Human resources Technical infrastructure development Maintenance on the reticulation Technical losses
20 TARIFF STRUCTURES (cont) What may be charged to the end-consumer is governed by the applicable by-laws. An endconsumer must be in the same position had he purchased the electricity from Eskom or the local authority. In recent years the bulk tariff has increased at a much higher rate than end-consumer tariffs. A property owner s ability to recover the management costs are as a result under severe strain.
21 LARGE CONSUMERS SAPOA supports the Energy Conservation Scheme and would urge for it to be implemented. SAPOA believes it is in the national interest that contracts such as the one concluded with BHP be challenged.
22 FISCAL DRAG In MYPD3, Eskom states that it considered amending the period for which the tariff increases apply so that the period is aligned with the financial periods of the municipalities who are not able to amend theirs due to the MFMA. Eskom then concludes that it cannot pursue it as it would mean a higher increase for its direct consumers who would then have to carry a 12 month increase in a 9 month period.
23 FISCAL DRAG (cont) We accept that there will be a negative impact on Eskom s direct consumers, but when weighed against the number of consumers served by the municipalities who are negatively impacted each year because of the misalignment it seems appropriate that Eskom aligns with the municipal financial periods and does so as soon as possible to minimise the impact on its direct consumers.
24 ACCOUNTABILITY AND TRANSPARENCY Accountability and transparency at Eskom and municipal level is imperative. Financial and technical audits and analyses are required to ensure that funding generated through tariffs are applied as stipulated. Energy costs, particularly at municipal level, must be ringfenced. Income derived from electricity must not be used to mask inefficiencies in management.
25 ECONOMIC IMPACT The continuing rising electricity costs are placing the commercial industry under severe pressure which in turn places the economy and job creation at risk. Property owners are impacted by the rising costs of bulk supply and tenants are battling to absorb the ever-climbing cost of occupancy.
26 ECONOMIC IMPACT (cont) SAPOA accepts that Eskom requires an increase to sustain its operations and fund its debt. However, the percentage increase approved by NERSA with MYPD3 must be as low as possible as it has a direct impact on what municipalities apply for. In view of the fact that the alternative energy sources only contribute approximately 1.5% of the total generated capacity we believe that the 3% included in the 16% should be delayed.
27 ECONOMIC IMPACT (cont) Average retail tenant s cost of occupancy Base rent Other operating costs Electricity costs
28 ECONOMIC IMPACT TYPICAL RETAILER 1.50 Electricity Cost as % of Turnover Electricity Feb-08 Feb-09 Feb-10 Feb-11 Feb-12
29 ECONOMIC IMPACT (cont) After optimising its business and introducing energy management practices the retailer s only option is to increase the price of its goods. Downstream the end consumer suffers.
30 ECONOMIC IMPACT (cont) The escalating electricity costs places downward pressure on rentals. Landlords are not able to achieve good growth in rentals. Conversely, electricity continues to rise steeply. This is not sustainable and will see many in the industry go out of business, placing the economy at risk.
31 ECONOMIC IMPACT (cont) Retailers Office tenants Rent Electricity % of Rent Rent Electricity % of Rent R R R R Year 1 R R % Year 1 R R % Year 2 R R % Year 2 R R % Year 3 R R % Year 3 R R % Year 4 R R % Year 4 R R % Year 5 R R % Year 5 R R % Escalation % 8% 16% Escalation % 8% 16%
32 ECONOMIC IMPACT (cont)
33 IN CONCLUSION We support the need for an increase but believe it should be limited to 13%. NERSA should be empowered to interrogate and regulate tariffs and hold the relevant players accountable. The Eskom and municipal increases have had a negative impact on consumers across the board therefore the requested increases must at all times be weighed and balanced against the impact on the people of South Africa.
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