Electricity Regulation and its Implications for Municpalities Electricity Regulation and its Implications for Municpalities

20 November 2003NARESH SINGH

HEAD: Compliance

20 November 2003NARESH SINGH

HEAD: Compliance

Presentation OutlinePresentation Outline

• Why Regulation?

• The NER

• Licensing

• Tariff Setting

• QoS and service

• Regulation during ESI restructuring

• Why Regulation?

• The NER

• Licensing

• Tariff Setting

• QoS and service

• Regulation during ESI restructuring

WHY REGULATION?WHY REGULATION?

End Use171 TWh

Domestic18.0%

Agriculture3.3%

Mining18.4%

Manufact.(Industrial)43.8%

Comm.9.4%

Transport2.6%

General4.6 %

SAPPImports

Transmission

Distribution Purchasesfor End Use181 TWh

Municipal and OtherDistributors42.3%

EskomDistributors57.7%

41.4%

58.5%

.1%

Gross Generation190 TWh

Eskom 95.7%

Munic.1.5%

Private2.7%

SAPP - Exports from South Africa

Energy Flow between the role players in the Electricity Supply Industry in South Africa

Why Regulate?Why Regulate?

• There are 3 main overarching objectives (Guiding Principles) of any regulation:

ORDER IN INDUSTRY

SUSTAINABILITY of Industry

PROTECTION OF participants

• There are 3 main overarching objectives (Guiding Principles) of any regulation:

ORDER IN INDUSTRY

SUSTAINABILITY of Industry

PROTECTION OF participants

Types of Regulation in SA•Economic Regulation

–NER, ICASA, Competition Commission/Tribunal, DWAF

•Safety Regulation–Nuclear Regulator, Dept of Labour, DME

•Content Regulation–ICASA, Advertising Authority, etc.

•Environmental Regulation–DEAT

•Financial Regulation–Financial Services Board, Reserve Bank, etc.

Rationale for Economic Regulation?

Rationale for Economic Regulation?

• Monopolies – ‘enforce’ efficiency • Windfall profits - prevention• ‘Essential’ service level - enforce• Anti-competitive behaviour –

prevent/penalise

Regulation is an international best practice in monopoly industries as well as oversight in competitive industries.

• Monopolies – ‘enforce’ efficiency • Windfall profits - prevention• ‘Essential’ service level - enforce• Anti-competitive behaviour –

prevent/penalise

Regulation is an international best practice in monopoly industries as well as oversight in competitive industries.

Price Control ApproachesPrice Control Approaches

• Three alternative regulation methodologies used worldwide by regulators:

– Rate of Return Regulation– Price/revenue cap regulation– Performance Based Regulation

• Three alternative regulation methodologies used worldwide by regulators:

– Rate of Return Regulation– Price/revenue cap regulation– Performance Based Regulation

Price Control ApproachesPrice Control Approaches• Rate of return (RoR)

Fixes level of profit Regulator determines total

revenue, and allows a fair rate of return on capital employed

Advantages:• Certainty to shareholders• Allows regulator to bench-

mark• Price increases usually

‘smooth’ and predictable Disadvantages:

• Removes incentive to be cost efficient

• Tendency to ‘gold plate’• ‘Heavy’ regulatory burden

• Rate of return (RoR) Fixes level of profit Regulator determines total

revenue, and allows a fair rate of return on capital employed

Advantages:• Certainty to shareholders• Allows regulator to bench-

mark• Price increases usually

‘smooth’ and predictable Disadvantages:

• Removes incentive to be cost efficient

• Tendency to ‘gold plate’• ‘Heavy’ regulatory burden

• Price/Revenue cap Fixes price or revenue CPI - X +Z Advantages:

• Incentive to productive efficiency

• Simpler and less costly to operate

Disadvantages:• Not that different to Rate

of Return in practice• Need to ensure that cost

reductions do not compromise service and quality of supply

• Price/Revenue cap Fixes price or revenue CPI - X +Z Advantages:

• Incentive to productive efficiency

• Simpler and less costly to operate

Disadvantages:• Not that different to Rate

of Return in practice• Need to ensure that cost

reductions do not compromise service and quality of supply

THE NERTHE NER

Establishment of NER

• Electricity Amendment Act, 1995 established the NER on 4 October 1995

• Provision for Board and Secretariat ie CEO and staff

• Funding through licence fees (generators), donations and interest on investments

• Functions stipulated in act inter alia licensing, tarrif review and dispute resolution.

Role ClarityRole Clarity

• Policy making is Government’s job

• Running the utility is their management’s job

• Regulator must ensure that utilities are operating their businesses in line with government’s policy for the benefit of customers and industry

•Not a policy maker

•Not a super management of utility

Licensing

• NER issues/ammends/transfers licences– offence to trade without licence

• Service providers apply

• Analysis and recommendation by Secretariat to Board

• License spells out conditions of supply

License ConsiderationsLicense Considerations

• Is application in the interest of customers and the industry

• How does license affect future prices• Does applicant possess financial

resources, human capital, and infrastructure

• Is application technically feasible• Is it aligned to restructuring

initiatives

• Is application in the interest of customers and the industry

• How does license affect future prices• Does applicant possess financial

resources, human capital, and infrastructure

• Is application technically feasible• Is it aligned to restructuring

initiatives

– Some 247 municipalities, 47 district councils and 6 metro councils after 5 December 2000

– About 210 municipalities inc metros and 1 District Council licenced, excluding those areas that are supplied by Eskom, or other distributors

– Eskom Distribution, Transmission and Generation

– 13 generation licenses– 16 private distributors

– Some 247 municipalities, 47 district councils and 6 metro councils after 5 December 2000

– About 210 municipalities inc metros and 1 District Council licenced, excluding those areas that are supplied by Eskom, or other distributors

– Eskom Distribution, Transmission and Generation

– 13 generation licenses– 16 private distributors

Licensed UtilitiesLicensed Utilities

Eskom Tariff RegulationEskom Tariff Regulation• Ringfenced applications for GX, TX and DX

• RR = OE + D +T + (RB*ROR)where:• RR = required revenue OE = operating

expenses D = depreciation expense T= tax expenses RB = rate base ROR=

rate of return • assess special pricing agreements in terms

of the risks and benefits to other customers and fairness to competitors

• Ringfenced applications for GX, TX and DX

• RR = OE + D +T + (RB*ROR)where:• RR = required revenue OE = operating

expenses D = depreciation expense T= tax expenses RB = rate base ROR=

rate of return • assess special pricing agreements in terms

of the risks and benefits to other customers and fairness to competitors

Municipal Tariff RegulationMunicipal Tariff Regulation

• Use price benchmarking – Eskom increase, established benchmarks and similar utility prices

• Limit surplus earned on electricity• Bring in line with approved tariff

structures• Reduce inappropriate cross-subsidies• Examine losses

• Use price benchmarking – Eskom increase, established benchmarks and similar utility prices

• Limit surplus earned on electricity• Bring in line with approved tariff

structures• Reduce inappropriate cross-subsidies• Examine losses

• Quality of Supply and Service• Quality of Supply and Service

time

Customer Utility NER

operationalinterventions

Incident Report(IR)

Utility Responseon IR

Appropriateresponse

yes

no

contractualinterventions

Request forsupply

Information &Contract

Design based on information

Information / Quality Charter

regulatoryinterventions

NER

DisputeCase Preparation

DisputeCase Preparation

managerialinterventions

Non-ConformanceReport (NCR)

Utility Responseon NCR

Appropriateresponse

yes

no

NER PQ Advisory Committee

Technical standards (NER Directive, SABS/NRS, Utility, International)

Precedents

Now until REDs REDs - First 2 year Independent REDs

•EDI Holdings periodEDI Holdings period

•Temporary licencesTemporary licences

•Benchmark RED performance - RORBenchmark RED performance - ROR

•End stateEnd state

•Permanent licencesPermanent licences

•Apply IBRApply IBR

2002 - 2004 2003/5 ... 2005/7 ...

Phase 1 Phase 2 Phase 3

Regulation during EDI restructuring

Regulation during EDI restructuring

REGULATION DURING ESI RESTRUCTURING

REGULATION DURING ESI RESTRUCTURING

GovernanceGovernance

• A market governance body (MGB) required to– Determine admission & exit procedures

– Manage rule making process

– Administer decision rights

– Provide dispute resolution process

– Ensure administration of all above functions

• Self-governance, but with a clearly defined role for NER

• A market governance body (MGB) required to– Determine admission & exit procedures

– Manage rule making process

– Administer decision rights

– Provide dispute resolution process

– Ensure administration of all above functions

• Self-governance, but with a clearly defined role for NER

Role of the regulator (1)Role of the regulator (1)• Regulation of monopoly elements largely

unchanged –incentive based regulation preferred– Development of grid code and advisory

structures– Monitor compliance with grid code– Transparent and consistent pricing– Approval of transmission expansion and

congestion management plans• Overall accountability of functioning of market

and ultimate sanction to suspend• Critical institution in transition for administration

of certain functions and oversight of transition

• Regulation of monopoly elements largely unchanged –incentive based regulation preferred– Development of grid code and advisory

structures– Monitor compliance with grid code– Transparent and consistent pricing– Approval of transmission expansion and

congestion management plans• Overall accountability of functioning of market

and ultimate sanction to suspend• Critical institution in transition for administration

of certain functions and oversight of transition

Role of the regulator (2)Role of the regulator (2)

• Oversight of information gathering by the Systems Operator for integrated resource plan

• Management of the supplier of last resort process through IRP – particularly important during transition when market is not mature enough for correct signals

• Role of regulator in competitive aspects changes

• Agreement on concurrent jurisdiction with Competition Commission

• Oversight of information gathering by the Systems Operator for integrated resource plan

• Management of the supplier of last resort process through IRP – particularly important during transition when market is not mature enough for correct signals

• Role of regulator in competitive aspects changes

• Agreement on concurrent jurisdiction with Competition Commission

Role of the regulator (3)Role of the regulator (3)

• Approval/veto of amendments of market rules referred by the Market Governance Body

• Consideration of reported cases of alleged rules violations (from Market Surveillance Unit/Panel)

• Regulation and oversight of ancillary services contracts – specifically that of monopoly service providers

• Regulation of generator contracts (with SO) to meet Transmission constraints

• Approval/veto of amendments of market rules referred by the Market Governance Body

• Consideration of reported cases of alleged rules violations (from Market Surveillance Unit/Panel)

• Regulation and oversight of ancillary services contracts – specifically that of monopoly service providers

• Regulation of generator contracts (with SO) to meet Transmission constraints

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• Regulation of captive customers• Oversight of cartel behaviour (in

concurrence with Competition Commissions) and abuse of market power (close scrutiny of state owned 70% that is fire-walled through a clustering relationship)

• Regulation of peaking plant• Controlling the entry and exit of market

participants through licensing

• Regulation of captive customers• Oversight of cartel behaviour (in

concurrence with Competition Commissions) and abuse of market power (close scrutiny of state owned 70% that is fire-walled through a clustering relationship)

• Regulation of peaking plant• Controlling the entry and exit of market

participants through licensing

Future Price RegulationFuture Price Regulation

SectorSector Product or Product or ServiceService

Pricing Pricing mechanismechanis

mmGenerationGeneration EnergyEnergy CompetitiveCompetitive

TransmissionTransmission Wires (HV Wires (HV Transport)Transport)

RegulatedRegulated

DistributionDistribution

ContestableContestable EnergyEnergy CompetitiveCompetitive

ContestableContestable Wires (MV & LV Wires (MV & LV Transport)Transport)

RegulatedRegulated

CaptiveCaptive EnergyEnergy RegulatedRegulated

CaptiveCaptive Wires (MV & LV Wires (MV & LV Transport)Transport)

RegulatedRegulated

Regulatory ResponsibilityRegulatory Responsibility

Regulatory ResponsibilityRegulatory Responsibility

Regulation should take note of: • Institutional framework of ESI• Economic, legal, socio-economic etc.

circumstances of country/ESI• Policy directions of Government• Independence and neutrality• Restructuring implementation

(California Power crises as an example)

Regulation should take note of: • Institutional framework of ESI• Economic, legal, socio-economic etc.

circumstances of country/ESI• Policy directions of Government• Independence and neutrality• Restructuring implementation

(California Power crises as an example)

ConclusionsConclusions

• Regulation is essential• NER – economic regulator• Primarily Rate of Return

methodology • Regulatory focus will change as ESI is

restructured• Regulatory responsibility critical –

particularly during transition

• Regulation is essential• NER – economic regulator• Primarily Rate of Return

methodology • Regulatory focus will change as ESI is

restructured• Regulatory responsibility critical –

particularly during transition

THANK YOUTHANK YOU