Data Gathering and Costing Rate Design
3. CHAPTER 3: RESEARCH METHODOLOGY
3.10. Tariff Alignment and Cost-based Design (pilot) Project - Pricing perspective
3.10.1.Project Background and introduction:
After examining the many reports, documents, proposals and blueprints (mentioned earlier) on the EDI restructuring, the Eskom Distribution Electricity Pricing department team, with the support of the EDI Holdings Company, analyzed their position in the business to come to the realization of a need for a Tariff Alignment and Cost-based project.
To further motivate their cause, they identified some key issues which they considered required immediate attention and thus should be addressed in anticipation for the implementation of future REDs:16:
• Eskom and local authorities (per RED boundary) to begin discussions on the move towards a common tariff framework as required by NERSA.
• Once a common ground is reached, it is imperative that a generic tariff design methodology exists throughout the country
• There must be alignment/understanding of this generic methodology - that calls for combined training sessions with all RED stakeholders.
'6 Tariff Alignment and Cost based Design Project Overview presentation, June 2005. Half-day introduction Module: Understanding the EDI environment and Simulation introduction.
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• Competency Building and Skills Transfer must take place during this process.
• With all the above attended to, it is important for the business leaders to ensure that there is retention of the core critical skills (whether trained at the workshops or acquired from experience) as there is already a void for such skills in the entire industry.
During the "buy-in" or the marketing phase of the project, the latter were presented to all stakeholders during introductory sessions. During these presentations, the Eskom Distribution Electricity Pricing project team pledged to find solutions to address the above-mentioned key issues. Following from the above-mentioned key issues to be addressed by the proposed pilot project, the Eskom Distribution Electricity Pricing project team offered the following stance to the industry to address these issues:
The Eskom Distribution Electricity Pricing team will assume a stance where they assist regions in the development of a RED tariff restructuring plan (Tariff Alignment presentation, 2005):
• that will consist of:
• Cost of Supply (COS) studies per RED, in accordance with the procedure set out in NRS05817 standard
• RED tariff structures - appropriately designed and based on cost of supply
• A RED Tariff Implementation Plan taking cognisance of the impact of the new tariffs on customers.
• that will lead to:
• Competency building and knowledge transfer to the RED employees
• Better understanding of the fundamentals of tariffs
• A better understanding of data necessary to design tariffs per RED
• The latter should thus lead to better customer service delivery in the long run
17 NRS058 standard is a document that sets out the cost of supply methodology for application in the ESI.
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3.10.2.Rationale for information sharing
The Eskom Distribution Electricity Pricing team has to date been working independently on ensuring tariff structures are in place annually. This entails; reviewing of tariffs, cost of supply studies, collection of data from all regions, and lastly, presenting their proposals (on changes, modifications or price structural changes) to the National Energy Regulator of South Africa (NERSA). This, as one can imagine, is a daunting task for a small group of intellects to undertake, thus the team has been under a lot of strain due to the lack of knowledge in the business, that is, the lack of resources who know the fundamentals of this process. The latter scenario has been in place for too long, hence the decision to re-distribute this scarce knowledge as wide as possible in the distribution industry. According to Compass (an Organisational Development (OD) specialist), OD is concerned with trying to build capacity within a certain group of people to raise their morale and the feeling of recognition in an organisational setup. This reiterates the objective of retention of employees through this training intervention. From the latter discussion, it is clear that this intervention has a much broader future vision that will indefinitely benefit the entire country financially and will align with global approaches.
3.10.3.Summary of all Tariff Alignment Project Phases (pilot)
Before one continues to elaborate on the focus of this paper, the Cost-based tariff design course, it is necessary that one also reflects on the entire project to see holistically how all the systems relate and interact with each other (as well as focus on the sample population).
There are several steps to be followed in this project (inclusive of the simulations course) for one to arrive at the "end-state". As we embark on this journey into the Tariff Alignment and Cost-based Design project, one should bear in mind that the project is operating under the notion that the EDI restructuring "end-state" is a fully rationalised distribution business in South Africa. The latter scenario requires the delivery of tariff design knowledge and training thereof throughout the country to ensure that these skills
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are available per RED and can be utilised where necessary. This will allow for efficient governance of future distributors, and one should realise that the implications of such an intervention could in turn, contribute to improving our economy. A bold statement to make, though it is based on the concept that the distributors will be financially viable in the (near) future, without financial assistance from government. This implies that the only revenue income distributors will receive would be through customer payments, which would be managed independently (and efficiently), ensuring that customers are constantly satisfied with services received.
Below is an overview of the Tariff Alignment and Cost-Based Design pilot project over a five-year period (not absolute but subject to change) - see Figure 11. Following that is a summary of each phase together with its expected outcomes. As the process progresses or evolves, one will notice that the complexities of the project also increase. As the project evolves, the following become apparent; the expected impact in future tariff planning and not forgetting the impact of the ultimate RED structures on this project (success and completion). This can only be determined as soon as a final decision (expected March, 2005) is in place on RED boundaries and confirmed through the legislative framework for RED formation18.
City Power - Johannesburg, 2005.
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Phase ^ project Launch & Tariff Simulation
Phase 2 Data Gathering and formatting
Costing
Rate Design Phase 4
Tariff Restructuring Plans Phase 5 Figure 11: Tariff Alignment and Cost-based Design pilot project overview
As stipulated in the above-figure, the Tariff Alignment and Cost-based (pilot) project is separated into five phases as stipulated in the above Figure 11. There are essentially, two elements; Competency Building and RED Tariff Design and Implementation. Below is a brief description of each element with its different phases. This will clearly highlight what each phase entails. For the holistic view of the project and its elements, refer to the attached (Annexure B & C). The following information was collated from various stakeholder management workshops held by the Eskom Distribution Pricing Department team to introduce the concept and get stakeholder buy-in and support.
3.10.3.1. COMPONENT 1: COMPETENCY BUILDING