Data Gathering and Costing Rate Design
2.13. The History of Electricity Tariffs in the South African context
be specific factors that account for low Eskom prices compared to other international utilities and there may b little hard evidence of superior efficiency (Steyn, 2001).
From the Electricity Pricing perspectives, the role that is expected from the department is to ensure that cost reflective tariffs are in place nationwide. This can be done through rationalizing the current tariff structures as well as to impart this knowledge to relevant stakeholders. The bulk of this dissertation will focus on the Tariff Design Project currently in place in Eskom. The following paragraphs will give an overview on tariffs...
Following that, Pickering proposed the following electricity supply and pricing policies in South Africa (1994):
Just as a teaser, the EPRET project team has proposed a democratic process of creating pricing policies (Pickering, 1994):
© Centralise the domestic pricing policy process - ensure transfer of resources between regions in order to achieve the goal of increased access to;
© Involve stakeholders in policy making -broader range of stakeholder participation in the process than previously done;
© Maximise community participation - having full participation of the community earmarked for electrification projects on making decisions.
2.13.1.Review of Electricity Tariffs
A very interesting topic formulation has surfaced in a regulated monopoly such as South Africa, that is, discussion around tariffs and prices in a restructured industry (Moroeng, 2005). According to Moroeng (2005), Distribution Pricing Advisor, properly structured tariffs and prices are critical to ensure a competitive market survives but at the same time, having to cater for the poor (in terms of subsidies and electrification).
According to the World Bank policy - as stated in OMS 2.25 of March 1977 - the determination of electricity tariffs should be based on two major principles. The first is that tariffs should reflect economic efficiency prices, in terms of the structure and levels of costs for supplying electric power (Salvoldi, 2001; Moereng, 2005). The second principle is that tariffs should be set so as to make power utilities financially viable with an acceptable financial rate of return12.
A survey done by the US Industry and Energy Department (IEN) on tariffs in developing countries in the 1980s, was conducted in terms of the following criteria; (a) whether
12 A Review of World Bank Lending for Electric Power. Industry and Energy Department, Energy Series Paper No. 2. March 1988.
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tariffs have been based on long run marginal costs and, if not, what the prospects are for these countries adopting economic pricing; (b) how tariff levels in developing countries have changed in constant price terms during the 1980s13; and (c) how these tariff levels compare to levels in other countries and the average incremental economic cost of power system expansion during the 1990s in developing countries.
2.13.2.0bjectives of Tariffs
The most significant objective of is that in the short term they recover the allowed costs to supply customers in the financial cycle. Though, in the longer term, tariffs should ensure that the recovery of costs from customers is done in the most efficient manner to ensure a sustainable business promoting stable and predictable prices wherever possible.
This is probably the most significant challenge for electricity rate design and requires an effective long-term strategy. This strategy should be developed by taking into account the overall business strategy and should ensure that customer needs and requirements are always considered.
From Distribution Pricing point of view, tariff rates and prices thereof should meet customer needs while supporting overall economic efficiency (Moroeng, 2005). On that note, Salvoldi (2001) and Moroeng (2005) hold the same viewpoint that, the ideal electricity tariffs rate components should reflect the cost components of the distributor perfectly in both level and structure. That is, tariffs should cover all costs to supply customers while ensuring that the recovery of costs amongst customers is done in the most efficient manner to create stable and efficient prices. For example, where a cost is time-dependent and variable, the charge should be a time-differentiated variable charge.
However, the process of setting tariff structures, and ultimately tariff levels, is more complicated than simply following the cost drivers. How customers are charged for the
13 Trends in tariff levels are analyzed in terms of an index in local price terms adjusted by GDP deflators, and an index in US dollar terms adjusted by the UN-MUV index.
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different cost components depends on practicalities such as costs to meter complicated rate components and metering and billing system capabilities. Risk, customer needs and long-term strategies for future sustainability also have to be taken into consideration when implementing new tariff structures.
2.13.3.Policy making approach
In the absence of clear and agreed upon national economic and developmental policy goals for South Africa, several project groups have come up with common and accepted electricity pricing principles:
• Tariffs should provide the means to recover adequate revenue so that the business remains profitable and customers can receive an acceptable level of service.
• Tariffs should promote overall economic efficiency - electricity should be priced in such a way that it encourages sustainable, efficient and effective usage of electricity.
• Tariffs should be fair, equitable and transparent - where cross-subsidies exist between customers they should be justifiable and explicit (as well as access to energy services and the fulfillment of basic needs).
• Tariff rates should accurately reflect the cost to supply different customer categories and, where prudent, tariff structures should reflect the nature of costs.
• There should be stability in tariffs in order to facilitate customer choices.
• Tariffs should be sustainable both environmentally and financially.
• There should be a suite of tariffs, which give customers a choice of the most affordable tariff based on usage patterns.
The above, however, may be in conflict, e.g. tariffs cannot be cost-reflective and at the same time have subsidies for affordability purposes. All the above principles must be balanced against the needs of all the stakeholders to develop the most acceptable
compromise. In the South African context, the most important goal from the above listed
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is "achieving a more equitable position" but the key policy for electricity pricing is to maximise access to the service (Pickering, 1994).
Pickering (1994) attempted to list the policy criteria for evaluating household electricity tariffs, they are; Efficiency in location; Equity; Simplicity, Meeting revenue requirements - crucial for long-term viability of the industry, and other social, political and economic objectives - t h e redistribution of wealth and the reduction of political conflict around electricity. The designing and selection of tariffs will not be discussed at this point in more detail but in the next chapter of this dissertation.