Issues Paper
Electricity Resale in South Africa
August 2011
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Contents
1. INTRODUCTION ...................................................................................................... 2
2. BACKGROUND ....................................................................................................... 2
3. RESEARCH ON THE RESALE OF ELECTRICITY IN SOUTH AFRICA ................. 5
4. OBJECTIVES OF ELECTRICITY RESALE/TRADING GUIDELINES ..................... 5
5. CUSTOMER CATEGORIES..................................................................................... 6
7. SUPPLY AREA OF RESELLERS/TRADERS.......................................................... 8
8. INCLINING BLOCK TARIFFS (IBT) ........................................................................ 9
9. FREE BASIC ELECTRICITY (FBE) ....................................................................... 10
10.
TARIFF SETTING PRINCIPLES ......................................................................... 10
11.
METERING ......................................................................................................... 12
12.
ECONOMIC IMPACT .......................................................................................... 13
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1. INTRODUCTION
The National Energy Regulator of South Africa (NERSA or ‘the Energy Regulator’)
is a regulatory authority established as a juristic person in terms of Section 3 of the
National Energy Regulator Act, 2004 (Act No. 40 of 2004). NERSA’s mandate is to
regulate the electricity, piped-gas and petroleum pipelines industries in terms of the
Electricity Regulation Act, 2006 (Act No. 4 of 2006), Gas Act, 2001 (Act No. 48 of 2001)
and Petroleum Pipelines Act, 2003 (Act No. 60 of 2003) and the Petroleum Pipelines
Levies Act, 2004 (Act No. 28 of 2004). The structure of the Energy Regulator consists of
nine Regulator Members, five of whom are part-time and four full-time. The Energy
Regulator is supported by a secretariat under the leadership of the Chief Executive
Officer (CEO).
The Electricity Regulation Act, 2006 (Act No. 4 of 2006) (‘the Act’) gives NERSA a
mandate to regulate the Electricity Supply Industry (ESI) by ensuring that an efficient
and effective ESI is in place to meet the requirements of existing and future electricity
customers. Regulatory activities undertaken by NERSA include but are not limited to:

issuing of licences related to the electricity generation, transmission,
distribution activities/operations;

granting of licenses pertaining to electricity trading, which encompasses both
the import and export of electricity;

approval of tariffs applications; and

provision of both technical and regulatory advisory services to the Minister of
Energy on any matter relating to the Electricity Supply Industry.
2. BACKGROUND
Currently, the resale of electricity is a thriving business in South Africa and has become
a huge component of the supply and demand balance mechanism within the ESI value
chain in serving the electrical needs of the end customers. It is imperative to take note
of the fact that, under normal markets circumstances, trading in electricity by licensed
utilities is a regulated business operation in terms of the Electricity Regulation Act, 2006
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(Act No.4 of 2006). However, it must be acknowledged that electricity resale takes place
outside the scope of regulated entities to the point that unlicensed entities or agents buy
electricity in bulk and resell it to their customers, usually under captive conditions such
as in a townhouse complex; it is this kind of business/market that remains unregulated
and uncontrolled.
The latter captures the real existing situation which is mostly prevalent in most
metropolitan areas in the country. In a quest to unpack and acquire an in-depth
understanding of the extent of the problems or challenges associated with electricity
resale, NERSA commissioned a study by the NET group consultants. The findings and
recommendations of the abovementioned study revealed that there are a number of
risks and externalities which electricity resellers expose the end users to, which in a
monopolistic market of captive customers leads to numerous complaints, high tariffs,
and customer exploitation where electricity is used as leverage to compel the customer
to pay for other municipal services, etc.
NERSA as the electricity sector regulatory authority receives numerous complaints from
heterogeneous customer categories, highlighting multiple problems which often tend to
portray the reality that end users are vulnerable and at risk of being exploited without
proper systems/processes for recourse from their bona fide electricity resellers in so far
as the protection of their interests is concerned.
In terms of Section 1 of the Electricity Regulation Act of 2006 as amended, ‘trading’ is
defined as ‘the buying or selling of electricity as a commercial activity’. Simply put, the
reselling of electricity occurs when an electricity customer purchases electricity from a
licensed retailer and resells that electricity to other customers (inset customers). Inset
customers (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 resale most commonly occurs in shopping centres,
townhouse developments, office buildings, industrial parks and caravan parks, by
parties other than a local supply authority such as a municipality.
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In some instances, a reseller can be an agent who serves or is contracted as an
interface between a local authority/municipality and a consumer or group of consumers.
NERSA has not yet formulated any formal opinion or position on the issues regarding
how electricity resellers should be treated. NERSA is only raising these issues as a
gesture of providing stakeholders with an opportunity to give their opinions on matters
pertaining to electricity resale and how it affects them either positively or negatively.
In order to contribute to the overall analysis of the electricity resale business in South
Africa, NERSA is requesting stakeholders to comment on the issues raised in this
document and any other issues emanating from Electricity Resale in South Africa. You
are requested to send your comments by not later than Friday 23 September 2011 to
[email protected]
Stakeholder Question 1:
1.1 In your residential/commercial environment is your electricity supplied
directly by a licensed utility/distributor or does a private enterprise provide the
service to your household or business?
It is clear that the emergence of new energy supply models around the world represents
a new source of competition in retailing and generation, as well as distribution networks,
which have long been regarded as natural monopolies operating under various forms of
regulated franchise.
Stakeholder Question 2:
2.1 In your own understanding and within your operational/own context, what
constitutes electricity resale? You may outline or suggest an appropriate
definition in accordance with your own knowledge/perception.
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3. RESEARCH ON THE RESALE OF ELECTRICITY IN SOUTH AFRICA
In order to acquire a better understanding of the operations of electricity
resellers/traders, NERSA commissioned a research project in 2007/08 to study the
magnitude of the market and the associated regulatory implications. The research was
completed during January 2008 and some of its findings and recommendations entailed
the following:

The market for reselling is characterised by a number of complexities with
several role players being identifiable and the fact that each player has different
objectives and goals.

There is no clearly defined ring-fencing of the electricity business, as these
players also provide other services, such as water and waste removal; there is
no data integrity on the resale market information because the operation is
mostly sketchy and based on untraceable assumptions. Based on existing data,
one can easily use invalidated numbers to assume that this market affects well in
excess of 1 million end-use customers (e.g. 1 reseller has more than 30,000
customers, at least 80 third- party resellers, and more than 30,000 landlords).

Electricity resale has developed into a niche market and many resellers are
entering into the market seeking to make huge profits, capitalising on the fact that
the space constitutes an unregulated market with strong potential to generate
massive profits by exploiting the unprotected customers.

Existing international practices indicate a high degree of similarity between the
South African resale market and the situation in other countries such as Great
Britain and Australia, where tools/mechanisms have been developed to regulate
this market. Lessons can be learnt from how these countries have proceeded.
4. OBJECTIVES OF ELECTRICITY RESALE/TRADING GUIDELINES TO BE
DRAFTED BY NERSA
The objectives of the guidelines that NERSA purports to draft are set out below and are
pursuant to the objectives set out in the Electricity Regulation Act 4 of 2006 in sections
2(b), (e), (f) and (g) as outlined below:
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
ensure that the interests and needs of present and future electricity
customers and end users are safeguarded and met, having regard to the
governance, efficiency;

promote competitiveness and customer and end user choice;

facilitate a fair balance between the interests of customers and end users,
licensees, investors in the electricity supply industry and the public;

provide guidance on how best this market could be regulated while
maintaining a competitive environment;

incorporate specific detailed requirements with regard to connection and
disconnection fees, meter reading, customer billing, types of meters, etc.
Stakeholder Question 3:
3.1 What are your views on the objectives highlighted above; do you feel there
are other key/fundamental additions or omissions that should be factored?
5. CUSTOMER CATEGORIES
Customer categories consist of customers who have similar patterns of use although
the profiles or patterns of use within the economic sectors might vary. Provision is made
to use a second level of categorisation, i.e. the load factor or profile of use. The cost of
supply analyst may define subcategories within a sector such as low load factor,
medium load factor and high load factor. In most instances, these sub-divisions are at
the discretion of electricity resellers.
Stakeholder Question 4:
4.1 If you are operating as reseller, you are requested to provide your list of
customer categories and the rationale for such a practice.
4.2 In order to assist NERSA in properly profiling the sector, if you are a reseller,
you are requested to provide the Energy Regulator with the number of customers
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that are on prepaid and conventional metering (you may also provide the
percentages of prepaid vs. conventional customers).
4.3 As an electricity reseller, you are kindly requested to also provide a brief
explanation on how your customers access electricity tokens, especially the
prepaid customers.
6. CUSTOMER COMPLAINTS
The concept of cluster developments, security complexes and retail centres has grown
in popularity over the years, and NERSA has received numerous complaints from end
users about unfair treatment emanating from reseller entities. Most distribution
licensees are reluctant to be involved in the dispute or complaints resolution process, by
highlighting the fact that the end users in question are not their direct customers, as
they provide a bulk supply to the landlord/reseller entity and that is where their
responsibility ends.
In an attempt to address the above shortcomings, NERSA contemplated using the
outcome of this consultation process to draft the ‘Electricity Resale Guidelines’ to serve
as a strategic intervention to militate against the current practices which often leaves the
end user in a disadvantaged position. Most complaints lodged with NERSA are
regarding: quality of service, rights and responsibilities of affected parties, dispute
resolution, tariffs and pricing principles, billing, connection and disconnection charges,
etc.
Stakeholder Question 5:
5.1 As an end user of electricity, do you have any specific concerns/complaints/
comments? Kindly list them and propose what remedial actions should be
instituted to correct the situation.
5.2 As a reseller/trader, do you receive complaints? If so, you are requested to list
the types of these complaints and their sources of origin.
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5.3 As a reseller/trader, do you have a formal dispute resolution process? Please
outline how the process works.
5.4 Should you have a dispute resolution process, you are requested to outline
what the turn-around time is to resolve a customer complaint?
5.5 As a reseller/trader, you are requested to elaborate on the process followed
prior to disconnecting a customer. What are the steps involved?
7. SUPPLY AREA OF RESELLERS/TRADERS
Stakeholder Question 6:
6.1 What is the size of your supply area in terms of your electricity resale
operation?
6.2 What is the total number of customers you serve?
6.3 Under which municipal area do you operate? Kindly provide the name and
location.
6.4 How much bulk electricity do you purchase in megawatts or kilowatt-hour and
from whom?
6.5 How much electricity do you actually sell to your customers per month?
6.6 How much does it cost you to service each customer? If there are different
costs to supply, you are requested to highlight them and their rationale.
6.7 Do you encounter any losses, whether technical or administrative? If so, how
much do these losses constitute of your overall total bulk purchases?
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8. INCLINING BLOCK TARIFFS (IBTs)
During 2010, Eskom commenced with the implementation of Inclining Block Tariffs for
its direct customers, by replacing the former residential tariff structures, i.e. Home light
or Home power. As municipalities begin revamping their systems in preparation for IBT
roll-out, the Energy Regulator determined that anyone involved in the Electricity
Resale/Trading business should implement the IBT system to all customers.
The underlying principle of this tariff structure is that ‘the more electricity you use, the
higher the price you pay’. The objective of the inclining block tariff is to provide
protection for lower usage customers against high price increases, resulting in a
reduction in tariff to these customers. The tariff is divided into four consumption blocks
and each subsequent block has a higher price per kWh of energy. The amount payable
is the sum of consumption per block multiplied by the energy rate/price per unit
associated with each block. The selection of the blocks, the limits and the prices per unit
have been set by the Energy Regulator and is to be implemented accordingly.
Stakeholder Question 7:
7.1 As a reseller/trader, are you currently trading in electricity by charging your
customers in line with the NERSA-approved IBT rate? If so, are you implementing
the IBT for all your customer categories, or if not, what is your current practice?
7.2 As a reseller/trader, do you encounter challenges in your implementation of
the IBTs? You are kindly requested to list all your challenges and suggest areas
that require improvement, as well as provide timelines on the implementation of
IBTs to your customer base.
7.3 As an electricity end user, what do you think the impact of IBTs is on your
monthly bill? Are you experiencing any differences since the introduction of IBTs
as part of a new billing system in terms of understanding your consumption and
the cost implications thereof?
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9. FREE BASIC ELECTRICITY (FBE)
Free basic electricity is a national social programme funded by national government to
provide poor households with basic electricity amounting to 50kWh per month in terms
of the Department of Energy’s Free Basic Electricity Policy. National Treasury allocates
an annual budget under the equitable share grant to the Department of Cooperative
Governance and Traditional Affairs, which is ultimately allocated to every municipality in
the country to provide free basic electricity to indigent households.
It is government’s original intention that free basic electricity should be provided to the
identified poor households within any municipal jurisdiction as part of service delivery,
hence, whether an area is supplied with electricity by a reseller or the local authority, the
end users must benefit from this social poverty relief provided by the state as part of the
developmental agenda.
Stakeholder Question 8:
8.1 As an electricity reseller/trader, do you provide/cater for the provision of free
basic electricity to eligible customers/end users? If not, why are you not
providing it and what are your plans to correct that, so that deserving
beneficiaries gain access to the basic 50kWh of free electricity?
8.2 In your bulk purchases, as a reseller/trader, do you get allocation to provide
FBE? If your answer is YES – you are requested to indicate how you pass on the
benefits of FBE to end users.
8.3 As an electricity end user/customer, you are requested to indicate whether
you receive FBE from your supplier, whether it is a reseller/trader or a supply
authority.
10. TARIFF-SETTING PRINCIPLES
It is very important for electricity resellers/traders to abide by conventional tariff-setting
principles and understand how the cost recovery methodologies operate. In order to
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ensure that the principle of fair and equitable electricity pricing is implemented, it is
crucial that each individual premise is independently metered, that each customer has
their individual meters, and that the customer has an opportunity to verify their
consumption levels so that they pay exactly for what they consume.
On the other hand, electricity consumption for common usage areas such as lifts,
electrically operated gates, air-conditioning, and complex lights, should be included in
the levy that all end users pay to the owner as part of the service costs of the entire
complex.
The resale of electricity should be based on the following principles:

transparency;

fair recovery of costs;

protection of end users;

passing on of benefits like FBE; and

promotion of access to affordable electricity.
Stakeholder Question 9:
9.1 As a key stakeholder in the electricity supply industry (ESI), you are requested
to indicate whether you do undertake ‘Cost of Supply Studies’ for your electricity
business.
9.2 As a reseller/trader, you are requested to indicate how many tariff categories
do you have and to kindly provide a brief description of how each category is
determined and the financial implications to your revenue requirements thereof.
9.3 Stakeholders undertaking the resale/trading function are requested to indicate
their overall profit margins on residential, industrial and commercial customers
per each category. You may provide the percentages.
9.4 As an end user/customer, how do you rate the service you receive from your
reseller/trader on a scale of 1 to 5, with 1 being the worst and 5 the best service?
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How does it compare with the service previously received from your municipality
in case that it has changed historically?
9.5 As a Reseller/trader do you want to have a special tariff? If so what would be
the components of such a tariff?
11. METERING
In order to make an accurate determination of how much electricity is consumed by
each customer or end user, individual metering is of critical importance. Metering and
sub-metering are the most appropriate ways to measure the amount of electricity
bought and resold. It is very important that metering equipment is accredited and
approved by the South African Bureau of Standards (SABS) and is installed and
programmed in accordance with the set standards in order to comply with the municipal
by-laws.
Stakeholder Question 10
10.1. As a reseller/trader, what types of metering equipment do you use to
measure consumption of your customers?
10.2. How do you discharge the meter-reading function? Stakeholders are
requested to elaborate on the process and the intervals involved in doing
consumption verification. Are customers allowed to do their own meter readings?
10.3. How visible and accessible are your meter(s) to the end users and your
meter reading staff?
10.4. As a reseller/trader, how do you deal with the costs related to the
maintenance of your meter(s)? Do you use a maintenance schedule? Elaborate
and outline what kind of maintenance is done on your meters.
10.5 How often is your meter calibrated to ensure accuracy in readings? Is your
metering staff accredited to do the calibration and metering maintenance? If not,
who does it for you?
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10.6 As a reseller/trader, what are the accuracy levels of your metering
equipment? Do you sometimes encounter malfunctioning leading to escalated
prices charged to end users and what remedial measures are in place to effect
necessary corrections? Please elaborate on the process.
10.7 As a service provider, do you conduct customer awareness? Do your
customers understand your metering system for own self reading? If not, do you
have measures in place to attempt to educate them to understand your metering
system and what is the cost calculation thereof?
10.8 As a reseller/trader, do your metering systems have the capability to do realtime energy usage recording/reading?
10.9 As part of your asset management framework, what is your strategy to grade
your metering life cycle and is there a strategy for upgrading or replacing those
that have come to the end of their life? What is the life cycle of your meters?
10.10 As a service provider, how do you ensure that your meters are SABS
accredited? You are kindly requested to elaborate.
12. ECONOMIC IMPACT
The emergence of the electricity resale business like any other business venture, brings
with it opportunities for both the skilled and unskilled job seekers in the South African
economy. However, it has not been realistically quantified how many jobs have been
created and lost over time, as more and more electricity resellers/traders enter this
vibrant market.
Stakeholder Question 11:
11.1 As a key stakeholder in the electricity resale business, you are requested to
provide the total number of people your business employs (both technical and
non-technical).
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Stakeholder Question 12
12.1. For you as an end user/customer, do you think there are benefits you could
derive from the presence of electricity resellers/traders? Kindly elaborate in terms
of your own understanding.
12.2. For you as a reseller/trader, do you think there are benefits accrued from the
presence of electricity resellers/traders within the ESI? Kindly elaborate in terms
of your own perspective.
12.3. From the point of view of both end users/customers and resellers/traders,
please list what you deem as existing advantages and disadvantages of having
electricity resellers/traders in the Electricity Supply Industry.
Stakeholder Question 13
13.1. From your own conviction and understanding of the subject relating to the
current reality that there are electricity resellers/traders within the ESI and they
are rendering a service which could be beneficial while at the same time, the
customer could be enduring the negative external consequences of high prices,
etc,
provide
your
own
BOLD
opinion
on
legitimising
the
electricity
resellers/traders’ business – SHOULD THE ENERGY REGULATOR LICENSE OR
REGISTER THEIR BUSINESS ACTIVITIES? Stakeholders are requested to provide
an elaborative motivation for their preference.
13.2. Given that NERSA is seeking information from the interested and affected
parties within the Electricity Supply Industry (ESI), is there anything that you
would like to bring to the attention of the Energy Regulator?
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