The National Energy Regulator of South Africa (Nersa) indicated on Monday that it would not draft new guidelines for the country's municipalities directing them to pass on only justifiable electricity-price increases once the recently approved Eskom increase came into force as from Wednesday, July 1.

However, the regulator agreed with the head of a leading electrical engineering business, who said it would be "unfair" for large local authorities to add the full 31,3% increase to the power that they purchased from Eskom, but sold at a substantial premium to business and residential consumers.

In fact, Savcio Holdings CEO Robert Spoon argued that, if municipalities were directed to limit their power-rate increases to the "absolute" increase, in the cents-a-kWh terms, increase granted to the national utility last week, the overall rise would be limited to around 10% for municipal customers.

But, Nersa's regulator member responsible for electricity generation Thembani Bukula told Engineering News Online that, while the argument was "valid", the regulator would only be in a position to "claw back the additional funds from the municipalities next year".

He said that, owing to the late application by Eskom, it had not been in a position to provide the municipalities with the appropriate guideline in this regard. "They [the municipalities] had to use the guide from the National Treasury of 34%, based on the Eskom application they were anticipating," he explained.

As with previous determinations, the municipalities could probably only justifiably increase rates by between 67% and 70% of the increase extended to Eskom. But, unlike previous determinations, there would be no new guidelines to the municipalities to ensure that only the "correct" increase was applied.

"The existing legislation does not allow for changes at this stage and the only remedy we have is to claw back the monies next year," Bukula cautioned, noting, too, that municipalities still had the authority to add levies over and above whatever was determined.

Last week Thursday, the Nersa granted Eskom a 31,3% price increase on the average standard tariff for the nine months from July 1, 2009, to March 31, 2010. It indicated that the adjustment would result in an increase in the average standard tariff from 25,24c/kWh to 33,14c/kWh. The approved price increase on the average standard tariffs included a limited price increase of 15% to both Eskom and the municipalities' poor customers, covering 'Homelight 1 and 2 tariffs'.

However, many larger municipalities are understood to purchase power from Eskom at a discount to the standard tariff, and have a large pool of customers, business and residential, which fell outside the "poor-customers" category.

Accurate numbers were difficult to secure, but assuming that Eskom charged large municipal customers 20c/kWh, and that these municipalities then sold that power on to households at 60c/kWh, Spoon calculated a "gross profit" of 40c/kWh.

With the 31,3% increase sanctioned, Eskom's charge to such municipalities would rise by about 6c/kWh, which is what Spoon argued should be passed through to end-users.

It is anticipated, however, that municipalities could pass on the full percentage increase received by Eskom, which, under the theoretical example articulated, will translate into a 26c/kWh increase and a gross profit of around 52 c/kWh.

"We noticed last year, that all tariffs from the municipalities increased by the same amount, in percentage terms, by which Eskom's tariffs rose.

"In this equation, the absolute profit extracted by municipalities on the sale of electricity increased by significantly more than the increase that Eskom was granted," Spoon highlights.

But municipalities were not in the same capital-recovery dilemma as the national utility and, therefore, could not necessarily justify the additional revenue.

"In fact, the additional revenue is a bonus out of budget," Spoon asserts, adding that it would, therefore, be unfair if South African consumers had their municipal electricity rates adjusted upwards by 31,3%.

Instead, Spoon believes that the local authorities should only be allowed to raise their tariffs be the same "absolute value" that Eskom raised its rates, by, thus limiting the overall increase to end-users to about 10%.

Spoon believes the issue should be pursued by business organisations and by Nersa and was actively canvassing the matter with such organisations. Spoon also questioned why it was not possible for Nersa to send out a notice to municipalities, in which it highlighted the fact that municipalities could not justifiably consume the full percentage increase and that they should, therefore, moderate their hikes.

Business Unity South Africa's Dr Laurraine Lotter concurred, saying that business had fully expected some kind of guidance to be given to municipalities, the timing difficulty notwithstanding.

She suggested that it would be a "real problem" should municipalities move ahead with the implementation of a 31,3% increase and that it was a "pity" that there was not going to be a stronger signal being given by Nersa.

"We clearly hope that municipalities don't use this as an opportunity to generate further revenue from electricity, which is not actually used for electricity," Lotter said, adding that she was not convinced that municipalities would exercise restraint in the absence of clear guidance from the regulator in this regard.

Lotter also noted that Reserve Bank governor Tito Mboweni had explicitly highlighted the threat that administered prices, especially electricity-price hikes, posed to inflation when deciding, earlier in June, not to lower interest rates further.