CONCEPT PAPER ON ELECTRICITY RESALE IN SOUTH AFRICA

VERSION 1.0

September 2011

Table of Contents

1.OVERVIEW – ELECTRICITY RESALE IN SOUTH AFRICA

1.1 Purpose of Document

2.SUMMARY

3.PROBLEM STATEMENT

Table 1: Customer Complaints received by NERSA 2009/2010 Financial Year

3.1 Types of Electricity Resellers/Traders

Table 2: Advantages accrued to Customers by Resellers

Table 3: Disadvantages of Resellers to customers

Table 4: Benefits accrued to Municipalities by Resellers

4.NET Group Research findings

5.LEGISLATIVE ISSUES

Constitution of the Republic of South Africa

5.1Electricity Reticulation as a Municipal Function

5.1 Standard clause in By-laws

6.ADVANTAGES AND DISADVANTAGES OF RESELLERS

Table 1: Advantages of having resellers

Table 2: Disadvantages of having resellers

Disadvantages

Table 3: Benefits accrued to Municipalities by Resellers

7.OPTIONS TO DEAL WITH THE EXISTENCE OF RESELLERS WITHIN AN ESI

7.1 Licensing/ Registration

7.1.1 Licensing

7.1.2 Registration

7.2 Municipal regulation

8.Overview of available options to address challenges relating to the existence of electricity resellers

9.Possible alternatives for consideration by the Energy Regulator

10.Other contentious issues requiring attention

10.1 Principle of Equity

10.2 Tariff Structure

10.3 Commercial perspective

11.REGULATORY ISSUES

11.1 General Considerations

1.OVERVIEW – ELECTRICITY RESALE IN SOUTH AFRICA

1.1 Purpose of Document

The aim of this concept paper is to provide an outline of the nature of practices pertaining to electricity resale in the country by assessing/examining the merits and de-merits of the existence of resellers within the South African electricity supply industry (ESI).

The concept paper also explores possible interventions which supply authorities and the Energy Regulator may institute in order to address the existing problems/challenges associated with the electricity resale business in the country.

Finally, this concept paper is construed to only serve as a basis for the compilation of an Issues Paper on ‘electricity resale’ to be circulated by NERSA for the public commentary process as a gesture of providing all interested and affected parties an opportunity to articulate their viewpoints on the subject matter.

2.SUMMARY

The concept paper examines and attempts to provide a basic definition of an electricity reseller and the roles and responsibilities associated with the electricity resale process by juxtaposing the advantages and disadvantages related to the existing practices within the electricity trading/resale environment in the ESI.

The compilation of this concept paperemanates from a careful analysis of the real (core) issues pertaining to experiences drawn from multiple sources within the electricity resale business in the South African context, by ensuring that the focus is premised on the fundamental rather than peripheral issues when dealing with electricity resale matters. As part of this process, NERSA is requesting stakeholders to comment on the issues raised in this concept paper by taking into account any other issues pertaining to experiences emanating from electricity resale/trade in South Africa. Stakeholders are requested to send their comments by not later than 15h00, on Friday, 23rd September 2011 to

3.PROBLEM STATEMENT

The resale of electricity in the South African electricity supply industry (ESI) is a growing business. With section 7 of the Electricity Regulations Act, 2006 making provision for the licensing of Generation, Transmission, Distribution, export or import and trading activities by the Energy Regulator, electricity resale by default falls under trading where the buying and/or selling actually takes place, however, it remains ‘unlicensed or unregistered’, implying that it remains an “unregulated and/or uncontrolled” business activity from a regulatory point of view.

Based on the aforementioned paragraph, the Energy Regulator is undertaking an enquiry in the form of an information gathering exercise in order to explore and quantify the magnitude of the problem by taking into account its associated implications upon all interested and affected parties.

The resale of electricity business continues to thrive in South Africa, and it has become a huge part of total gross sales to end customers, accompanied by numerous customer complaints relating to rights and responsibilities of both affected parties, and dispute resolution, quality of service, tariffs and pricing principles and billing issues, etc.

NERSA contemplates to use the outcome/s of the information gathered from this exercise to compile a discussion paper which will form the basis of developing an appropriate a regulatory framework to deal with the intricacies of electricity resale in the country by clarifying the roles and responsibilities of all parties involved.

Table 1 below gives a brief statistical analysis of complaints received by NERSA during the 2009/2010 financial year.

Table 1: Customer Complaints received by NERSA 2009/2010 Financial Year

Nature of Complaint / Percentage % / Type of business
Supply discrimination / 1.52 / End user vs. Reseller
Service delivery / 6.1 / End user vs. Reseller
Bill and Tariff / 62.1 / End user vs. Reseller
Replacement of conventional meters with prepaid meters / 25.6 / End user vs. Reseller
  1. WHAT EXACTLY IS A RESELLER/TRADER?

In terms of Section 1 of the Electricity Regulation Act of 2006 - “trading” is defined as ‘the buying or selling of electricity as a commercial activity’. For the purpose of this project“Reseller means the buying of electricity from a licensed distributor and selling of electricity within the area of distribution of such distributor at the approved tariff of such distributor.” Without derogating from the definition of “trader” in the Act, for the purpose of this project a “trader” will refer to buying and selling of electricity as a commercial activity.

Basically, resale of electricity occurs when an electricity customer purchases electricity from a licensed retailer and resells that electricity to other customers (inset customers). Inset customers (i.e. end customers that are captive) are generally tenants of the operator or reseller. Reselling occurs via an electricity distribution system, or inset network (also referred to as an embedded network), owned by the operator (landlord, developer and/or reseller). Electricity reselling most commonly occurs in shopping centres, office buildings, industrial parks and caravan parks(NET Group).

In some instances, a reseller can be an agent who serves and/or is contracted as an interface between a local authority (i.e. municipality) and a consumer or group of consumers.

3.1 Types of Electricity Resellers/Traders

Model 1:Metering and Billing Functions performed by the supply contract holder*

*All functions are performed by the Supply contract holder

Model 2: Third Party Metering Services*

*Only metering services are outsourced from Third Party

Model 3: Third Party Meter Reading and Billing Services*

*Both functions (metering and billing) are performed by a Third Party

Model 4: Third Party Supply Contract Holder*

*Third Party is a supply contract holder and performs all the functions

A reseller can take either one ofthe following forms:

Case 1:Owner of a block of flats;

Case 2:Body corporate of sectional title flats or townhouses;

Case 3:Body corporate of a townhouse complex;

Case 4: Shopping centre owner;

Case 5: Industrial park owner;

Case 6: Dwelling owner who sublets ‘rooms in the back’; and

Case 7: The reseller is a “contracted” entity by the owner or body corporate to fulfil the required functions.

Case 1 is clear cut and simple. The reseller is a “trader” in terms of the ERA because all that they do is buy and sell the Electricity as a part of their commercial activity. Also the financial risk that they assume as a result of their trading is commensurate with that of their core business. That is if a tenant defaults in the payment of the electricity they would also probably default in the rent payment and provided the contract is well written the tenant can be evicted and the deposit used to recover the costs. The point is that the landlord is in control of the situation and the electrical maintenance is included with normal building maintenance.

Cases 2 and 3 are similar to each otherand here the “Body Corporate” is the reseller and is also clearly a trader in terms of the Act. The difference from case 1 is that the end user is not a tenant but an owner.

Case 4 is an enlarged version of case 3. Enlarged to the extent that this case should be treated as the emergence of a private electricity distributor. The question arises about when Case 3 becomes Case 4. The following are considerations:

  • The area (size) of supply is an issue because when it reaches a certainsize the distribution becomes a major factor and there could be some rule that should the cost of the cabling become more than some multiple of the cost of the meters then it has crossed over (as an example).
  • Another fact is establishing the quantum of the dwellings so there could be a clear determination on the number of dwellings exceed say 100 then the crossover has taken place. What the correct number would be is then a discussion point.
  • Town house complexes don’t have businesses within their boundaries so if there are businesses within the area then crossover has taken place.

If the sum of the installed supply point capacities exceeds 1 MVA then it is definitely a distribution network and not a townhouse complex because the laws require a certified engineer to be in charge of the network.

Cases 5 and 6 are similar and the onlydifference is the type of end user. However the end user is always a tenant and this impact on the risk the reseller bears.

Case 7 NERSAis currently exploring the realities associated with the existence of such practices.

  1. ADVANTAGES AND DISADVANTAGES OF RESELLERS

The underlying tables although not exhaustive, attempt to outline the advantages and disadvantages of the existence of electricity resellers. Eventually, it becomes apparent that the biggest beneficiary in the situation relating to electricity resale is the municipality which gains increased revenue at reduced cost and minimal risk.

Whilst on the other hand, the electricity consumer becomes the biggest loser. The body corporate will generally attempts to recover its operating costs by charging higher/unrealistic/ unfair tariffs to recover/recoup their operational costs, whilst the municipality is not necessary directly affected by such a practice, except, the consumer footing the bill.

Table 2: Advantages accrued to Customers by Resellers

Advantages / COMMENTS
Job Creation / They provide employment in line with services they are contracted to render
Customer interface / Resellers are thought to provide the following advantages; Quality, efficiency, Enterprise agility and customer attention
Administrative efficiencies / It becomes their responsibility to do the meter reading /management of associated accounts and payments.
Technical support / They provide fast efficient support to their end users whenever a call is logged. Problems can be addressed pro-actively.
1-stop service to customers / The reselling entity is often also responsible the delivery of other services such as refuse, water and security.

Table 3: Disadvantages of Resellers to customers

Disadvantages / COMMENTS
Numerous Complaints on dispute resolution, quality of service, tariffs and pricing principles, and billing / A Number of complaints received by NERSA are from Resellers Customers (see customer complaints above)
Use of Electricity is leverage for non-payment of other service i.e. Water and Refuse collection / Resellers often cut off Electricity to a house that has deferred payments on other services offered within the Resellers supply area.
Resellers operates outside the Energy Regulator’s radar screen / It almost impossible for the end user to receive the benefits of programs such as Free Basic Electricity even eligible, to the detriment of poor customers.
Activities of resellers are currently unregulated / This means that the end user is at the mercy of the reseller. It also means that the Energy Regulator has no sight of their business, the customer and tariff data.
Pricing structure/ Excessive Tariffs / Their customer base is captive and vulnerable to being charged exorbitant prices with minimal prospects for recourse. Most Resellers charge tariffs above the approved tariffs by NERSA.
Activities of resellers are currently unregulated / This means that the end user is at the mercy of the reseller. It also means that the Energy Regulator has no sight of their business, the customer and tariff data.

Table 4: Benefits accrued to Municipalities by Resellers

Advantages / COMMENTS
Application of TOU tariff to Resellers / It enables the licensee to charge a Time of Use (TOU) to residential end user load.
Administration of Accounts / All the account administration of the end users is undertaken by the reseller. The municipality only deals with one account of the reseller.
Meter Reading services / There is one meter to read instead of many end user meters. That burden is shifted to the reseller.
Reduced Risk / The collection of monies due is simplified to one customer. The reseller is burdened with collecting the amounts due from the end users.
Maintenance / Unless there is a maintenance agreement with the municipality that burden is carried by the reseller as a contractually appointed building management agent.

4.NET Group Research findings

During2007, NERSA commissioned consultants (viz. the NetGroup SA) to undertake research into the size and scope of the resale market, and some of the pricing and metering practices currently used. The research was intended to gather the most accurate data possible, and get input from all interested parties, to feed into NERSA’s regulatory mechanisms to gain better insight into the business of electricity resale with an intention to position the Energy Regulator to maintain a proper balance between the multiple interests of all affected parties.

Customers always raise their concerns relating to the appropriate approved tariff which a municipal authority should charge a reseller. There is also the emergence of wrong perceptions that a reseller should charge a higher tariff in order to break-even. Hence, this is a matter that requires extensive debate by all interested and affected parties, and it is critically important that all key stakeholders are encouraged and afforded an opportunity to provide comprehensive written submissions/comments on the Issues Paper compiled by NERSA to complement this concept paper.

It is imperative that all parties are given an opportunity to acquire some understanding of the components of a basic tariff structure including aspects of time of use and energy efficiency targets. The NET Group research findings showed that the overall profit margin was stated to be between 10% and 20% for all customer categories. It further highlighted that the smallest profits are made on residential customers and the biggest on the industrial and/or commercial customer mixes.

Interviews conducted with some of the resellers revealed that theyoften need to use the profit they make on electricity to subsidise their work on water and other services which they supply.The difference between a reseller and Eskom or a municipality is that the profits that are generated from electricity is either re-invested into the electricity business, or in the case of the municipalities ploughed back into the communities as a tax relief to the rates and tax services. On the contrary where resellers do make profits (in the 10-20 % margin) it can be viewed as a direct reward for their business effort and the risk undertaken but is not guaranteed to be either invested back to the communities, or in the electricity business.

Through the interrogation of the electricity resale business, evidence shows that resellers make most of their profits from the prevalence of non-cost reflective municipal tariffs and the diversity between customers in the complexes. In case of evident excessive profits being earned by resellers, this clearly warrants regulatory intervention from the Energy Regulator.

With regards to tariff differentials for resellers between purchasing and selling electricity to end customer, the NET Group study found that questions were posed to the utilities to understand whether they did try and take care of the tariff differential between the ‘buying and selling’ tariff of the reseller. They established that only one utility takes into consideration differentials when compiling annual tariffs to end customers.

The NET Group study accepted that:

Some of the municipalities may have increased their tariffs and others not, at the particular point in time of the comparison, or

That different tariff choices do exist that resellers may charge their end customers,

Not all licensees have comparable tariffs for sub classes of customers, like a domestic bulk tariff and not all information was available from all licensees,

Diversity within the embedded network and economies of scale does play a role and

Sometimes resellers are forced to take on other non- profitable services (like refuse removal, water management, etc) to be contracted to manage the electricity reselling.

5.LEGISLATIVE ISSUES

Constitution of the Republic of South Africa

5.1Electricity Reticulation as a Municipal Function

According to Schedule 4B of the Constitution of the Republic of South Africa - electricity reticulation is listed as a functional matter of local government in South Africa. There has been much legal debate as to the meaning of ‘reticulation’. Some scholars have argued that the term is synonymous with distribution and/or energy trading, whilst others have argued that reticulation should be viewed as a sub-set of distribution and/or energy trading in accordance with various boundary criteria, such as customer types, voltage levels, levels of energy consumption and so on. However, Parliament has proposed to define reticulation as follows:

  • ‘Reticulation’ means trading or distribution of electricity and includes services associated therewith. In effect this definition will confirm local government’s legislative and executive authority over both distribution networks and the trading of electrical energy over these networks within a municipal area.
  • Each municipality is a service authority for the electricity reticulation function for the whole of its jurisdictional area. This means that the municipality bears the responsibility to ensure that electricity reticulation services are provided to all consumers within its area/s of jurisdiction.
  • Each municipality has the right within its area/s of jurisdiction, to decide who will distribute electricity in its area/s (for example whether the municipality will do so itself, whether it will establish a municipal entity to do so or whether it will appoint an appropriately licensed third party to do so, for example ESKOM, etc.). Because electricity reticulation is a municipal service, each municipality must follow the procedure and apply the criteria set out in section 78 of the Municipal Systems Act when it makes that decision.
  • Each municipality has the right to pass by-laws relating to electricity reticulation in its area/s of jurisdiction.
  • Each municipality has the right to set tariffs in respect of electricity in its area/s of jurisdiction. Municipalities are obliged in terms of section 74 of the Municipal Systems Act to adopt and implement a tariff policy on the levying of fees for services, whether provided by or on behalf of the municipality. The Municipal Systems Act Section 74(2) prescribes certain principles which tariff policies are obliged to reflect.
  • Each municipality has the right within its area/s of jurisdiction to determine the conditions on which electricity is supplied and the circumstances in which the supply of electricity will be limited or discontinued.

5.2.The National Energy Regulator Act (Act 40 of 2004) serves as the establishing legislation of the Energy Regulator and promotes the protectionof the interests of vulnerable groups within the ESI. The Electricity Regulation Act (no. 4 of 2006) (ERA) assigns powers to the Energy Regulatorto regulate prices and tariffs within the electricity industry value chain. The Electricity Regulation Act of 2006, (Act No 4 of 2006) repealed the 1987 Electricity Act and brought challenges which the Regulator has to address. However, the new Act does not provide for the resale of electricity per se, but does specify “trading in electricity”, wherein resale is implied.