An investigation into the present tariff cost structure and a methodology to determine the tariff increase for Ethekwini electricity.
EThekwini Electricity (EE) purchases its energy on the Megaflex tariff from Eskom which has had considerable changes in content over the years. This has caused the present tariffs offered by EE to move away from cost reflectivity. Structural changes over the years have caused distortion to even the supposedly cost reflect ‘Time of Use’ tariff (TOU) which emulated Eskom’s previous Large Power Users (LPU) tariffs. The divergence between the purchase of electricity and the method of recovery for the sales becomes a cause for concern. This opens EE to risk of not being able to offer cost reflective tariffs and diminish risks in recovery via the tariffs. This has an impact on the budgeted revenue. The primary intention of this study was to establish a formalised procedure and to develop a methodology that Ethekwini Electricity (EE) can use for the review of their tariffs. This study was necessary and extremely crucial for the mitigation of financial risk when tariffs are reviewed and restructured since the revenue recovered via the tariffs are in excess of 5 billion rand per annum. The study consisted of the development of a methodology which consists of a process flowchart and a series of Excel spreadsheets in which the analysis was done. The development of the model utilised information that were readily available and data that were extracted and manipulated from installed systems. The objectives were to determine all associated costs for the delivery of electricity, identify cost drivers, determine cost structure and finally determine applicable tariffs for EE. Issues such as customer categorisation, cross subsidisation, cost reflectivity and affordability were taken into account. This model could now be used in the future for tariff increases and applications to the regulator. This methodology was used to design of the 2009/2010 electricity tariffs for Ethekwini Electricity. The outcome of this study resulted in the re-categorisation of EE’s customer base, changes to the tariff structures and the phasing out of the non cost reflective tariffs. This study enabled the restructure of the LPU TOU tariff which was crucial for EE’s cost recovery. It also resulted in the development of two new TOU tariffs for residential and commercial customers. Whilst other municipalities experienced difficulties in recovering their revenue due to Eskom’s restructured Megaflex tariff, EE’s actual revenue differed by 1% when it was compared to the budgeted revenue towards the end of 2009.
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