NERSA changes unlawful benchmarking method to cost of supply framework when approving municipal electricity tariffs

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  • South Africa’s energy regulator, NERSA, has approved the reviewed cost of supply (COS) framework.
  • The reviewed COS Framework seeks to address numerous challenges facing the South African electricity supply industry, which include ageing infrastructure, capacity constraints, financial viability, tariff structure and affordability.
  • Additionally, since the framework was last reviewed in 2016, there was a need to consider the lessons learnt from the efforts to assist licensees in submitting cost of supply studies to be used as a basis for the tariff applications.

Several opportunities have been identified to improve the previous COS framework, some of them include the following:

  • There is no provision in the framework on the approach to properly ring fence accounts for electricity and allocation of overheads.
  • There is no provision in the framework to determine or verify asset values or to benchmark asset values.
  • The framework is limited on how prudency and efficiency of costs should be tested.
  • Does not provide a mechanism for escalating revenues and tariffs annually (index). This is currently dealt with through the guideline and benchmarks framework.

Furthermore, on 20 October 2022, the High Court of South Africa ordered that the Guideline and Benchmarking Method used by NERSA when approving municipal electricity tariffs is unlawful, invalid and of no force and effect. In this regard, NERSA is prohibited from applying the Guideline and Benchmarking Method when considering and approving municipal electricity tariffs with effect from the 2024/2025 municipal financial year.

Based on this judgement, NERSA had to review the existing cost of supply framework to address the gaps identified in the court papers and to address the deficiencies emanating from the guideline and benchmarks methodology. The review of the cost of supply framework was considered the most practical path to comply with the court judgement as NERSA had put a lot of effort in ensuring that licensees submit the compliant cost of supply-based studies and licensees have also invested resources to ensure that they comply with the Energy Regulator decision of 2016 for licensees to conduct cost of supply studies.

Author: Bryan Groenendaal


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