Cross subsidisation from electricity sales had reached a tipping point

Municipalities make too much money from
electricity sales, which could have dire
consequences for industry, national electricity
regulator Nersa warned on Friday.
Nersa regulatory specialist Charles Geldard
said National Treasury had been informed that
the practice of cross subsidisation from
electricity sales had reached a tipping point.
He told Parliament’s trade and industry
portfolio committee that municipalities
procured around 60% of their funding from
electricity distribution.
The result was prohibitive energy tariffs
imposed on industry and a high risk of
business closures and job losses.
"In my personal view that is where the
problems are lying in terms of industrial
tariffs. The issue is that approximately 60% of
the municipal budget is funded by electricity
revenue," he said.
"National Treasury staff have also been made
aware that municipal funding from electricity
is reaching a tipping point and needs to be
reduced. We can’t just continue to increase
the amounts they are getting.
"It seems to us that they see industry as a
source of revenue and don’t understand the
impact on industry… there is concern that this
will force industries to close down."
Geldard said the regulator was addressing the
issue with municipalities that were charging
excessive rates and working towards tariff
However, he said, the situation could not be
remedied overnight.
The warning from Nersa came after the
committee heard this week that certain major
municipalities were adding mark-ups of
several hundred percent to Eskom’s megaflex
According to the Energy Intensive Users
Group of Southern Africa, the figure was
692% in the City of Tshwane in the past
financial year, and 548% in Nelson Mandela
Bay Municipality.
Trade and industry acting director-general
Garth Strachan said, such high electricity
costs posed a clear threat to the
manufacturing sector.
Nersa is currently considering Eskom’s
application for tariff increases of 16% a year
for the next five years, which the utility says is
needed to make its prices cost-reflective.
It is not the first time this year that the
regulator voiced its frustration with the way
municipalities conduct their role as electricity
In July, it said municipal mismanagement was
bedevilling distribution and funds allocated for
maintaining ailing distribution infrastructure
were often spent elsewhere.
Nersa’s Thembani Bukula cautioned that
ring-fencing funds was not necessarily
effective and that the sanctions the regulator
could impose on errant municipalities,
including revoking their distribution licences,
were firstly not a fast cure, and secondly not
always realistic.
According to figures from the energy
department, municipalities provide electricity
to roughly 54% of the country’s users and had
an asset maintenance backlog of R27.4-billion
in 2008.
The portfolio committee this week heard
repeated warnings that escalating energy
prices could have dire consequences for the
economy. If Nersa were to approve Eskom’s
application, the price of electricity would more
than double by 2018.
Several MPs on Friday queried the utility’s
argument that it needed higher revenue to
enable it to continue borrowing money for its
build programme, pointing to its improved
cash flow and captive consumer market.
But Eskom corporate counsel Mohamed
Adam said the company’s credit metrics were
weak, and likened the revenue stream from
cost-reflective tariffs to the salary a home
buyer needed to earn to qualify for a bond.


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