APPENDIX APart of Solidarity’s submission to NERSA on the issue of

Eskom’s proposed MYPD2Municipal electricity redistributors’ price increases

APPENDIX A – Municipal tariff increases

 Example 1 Current scenario of a 35% increase in Eskom's tariffs

  Original tariff New tariff (35% increase)

Eskom tariff to municipality 70c per kWh 94,5c per kWh

Assume a fixed 100% profit margin

for the municipality    

Municipal tariff to consumers (70c x 2) = 140c per kWh (94,5c x 2) = 189c per kWh

Gross profit per kWh 70c 94,5c

   

 Result:

35% increase in profit for the municipality

Profit margin remains 100%

  35% increase in price for final consumers

 Example 2 Better scenario of a 35% increase in Eskom's tariffs

  Original tariff New tariff (35% increase)

Eskom tariff to municipality 70c per kWh 94,5c per kWh

Assume a variable profit margin

(being 100% originally)    

Municipal tariff to consumers (70c x 2) = 140c per kWh

(70c x 2) + (94,5c - 70c) = 164,5c

per kWh

Gross profit per kWh 70c 70c

   

 Result:

No increase in profit for the municipality

Profit margin drops to 74,1%

  17,5% increase in price for final consumers

APPENDIX A – Municipal tariff increases

 Example 3 Better scenario of a 35% increase in Eskom's tariffs and where

the municipality is allowed an 8% increase in gross profit to cover

increased cost of distribution

  Original tariff New tariff (35% increase)

Eskom tariff to municipality 70c per kWh 94,5c per kWh

Assume a variable profit margin

(being 100% originally)    

Municipal tariff to consumers (70c x 2) = 140c per kWh

(70c x 2) + (94,5c - 70c) + (70c x

0,08) = 170,1c per kWh

Gross profit per kWh 70c 75,6c

   

 Result:

8% increase in profit for the municipality

Profit margin drops to 80%

  21,5% increase in price for final consumers

APPENDIX A – Municipal tariff increases

APPENDIX A – Municipal tariff increases

APPENDIX A – Municipal tariff increases

Components of calculation Cumulative increase in three years

Example 1 (at a constant

profit margin of 100%)35% on 35% on 35% 146%

Example 2 (at an original

profit margin of 100%)17,5% on 20,1% on 22,6% 73%

Example 3 (at an original

profit margin of 100%,

adding an 8% allowance for

increased costs each year)

21,5% on 23% on 24,5% 86%

If the three different approaches are considered cumulatively over the three year period that Eskom’s MYPD2 covers, the following emerges:

Between the range of an original municipal gross profit margin of 50% and 130%, the respective cumulative increases over the three year period range from 97,4% to 63,5% for example 2 and from 106% to 78,2% for example 3. Instead of the price of electricity for customers of municipalities more than doubling over the next three years, the cumulative increase could be kept much lower than the current method’s 146% while still allowing municipalities an 8% increase in gross profit each year to compensate for possible increases in the cost of distribution. In none of the examples is Eskom’s flow of revenue or tariff increases affected – the changes are merely made at municipal level.

APPENDIX A – Municipal tariff increases