City Power has taken those opting for prepaid electricity by surprise with its inclining block tariff structure, which sees customers paying a lot more than expected. Photo: Matthews Baloyi

City Power’s prepaid electricity tariff is illegal because the details are hidden from customers, but the regulator condones this.

The Star was unable to find any written policy or decision – as legally required – explaining the way City Power charges its prepaid customers.

Both City Power and the National Energy Regulator of SA (Nersa) have told The Star that the tariff is legal, but neither has been able to produce the legally required written explanation and approval.

“City Power is implementing the Nersa approved tariff,” said Nersa spokesman Charles Hlebela on Thursday.

The problem lies in the inclining block tariff (IBT) and the method of applying the charges on it. Nersa has approved a standard IBT method and pricing that is used nationally by municipalities.

City Power has its own IBT, with different block levels and prices, approved by Nersa.

While the levels and prices are clearly listed in Nersa decisions, City Power has its own method of applying those prices on the blocks and there is nothing in writing about this. City Power’s IBT method means that customers using more electricity pay more than if they were charged on the Nersa method.

Nersa’s tariff charges a consumer for the first part of the bill at the lowest block, then additional power used at the next blocks. City Power’s tariff charges the customer the full consumption at the highest block. Every six months City Power assesses customers’ usage, assigns them to a block, and bills them at that rate.

The difference in the method of applying the IBT emerged after The Star asked City Power to explain prepaid customers’ complaints about higher-than-expected charges.

City Power does not provide customers upfront with a written explanation for the charges.

The Star had a look at the laws and national policy on electricity pricing and Nersa’s decisions on City Power’s prices. These are the problems The Star found:

* There is no Nersa written decision approving the IBT.

* Prepaid customers are not given a clear explanation of how they are charged.

* Prepaid customers are discriminated against, as postpaid customers (who get monthly bills) are charged differently on the IBT tariffs. City Power says prepaid and postpaid customers are charged the same way on the IBT, but postpaid bills don’t seem to reflect this.

* There is no clear information on the cross-subsidies between tariffs and levies added on.

* There is no written Nersa decision on the City Power method of charging the IBT.

* Neither City Power nor Nersa could provide a list of tariffs on which this IBT method applies or a date from which this was effective.

* Nersa’s approval of the tariffs was not in the public interest, because customers don’t understand the charges and prepaid and postpaid customers are charged differently.

* Nersa’s approval was not procedurally fair, as City Power customers couldn’t submit their views on the IBT method, as they didn’t know about it.

What the law says

The National Energy Regulator Act of 2004 sets up Nersa and the Electricity Regulation Act of 2006 orders it to regulate prices and tariffs.

The National Energy Regulator Act sets out how Nersa makes decisions, including those on prices.

Every decision must be in writing, in line with the law and in the public interest.

The decisions must be “taken within a procedurally fair process in which affected persons have the opportunity to submit their views and present relevant facts and evidence” to Nersa.

Those decisions must be “based on reasons, facts and evidence that must be summarised and recorded” and “explained clearly as to its factual and legal basis and the reasons therefor”.

The Nersa decisions and their reasons must be available to the public.

The Electricity Regulation Act requires utilities – like City Power – to provide information to Nersa on the tariff and price policies, as a condition of getting a licence from Nersa to sell electricity.

Although Nersa told The Star it couldn’t tell City Power how to run its IBT, the Electricity Regulation Act says Nersa may make any licence subject to a range of conditions, including “the methodology to be used in the determination of rates and tariffs which must be imposed”.

This law sets out tariff principles, which include that tariffs “must give end users proper information regarding the costs that their consumption imposes on the licensee’s business”, and “must avoid undue discrimination between customer categories”.

A licensee “may not discriminate between customers or classes of customers regarding access, tariffs, prices and conditions of services, except for objectively justifiable and identifiable differences approved by the regulator”.

This law orders Nersa to investigate complaints of discrimination in tariffs.

The Department of Minerals and Energy’s Electricity Pricing Policy of 2008 emphasises the need for transparency and clarity on tariffs. It calls transparency “the explicit reflection of all composite costs that constitute a tariff, for example: energy charges, demand charges, basic charges, levies, cross-subsidies and MSOE [municipal surcharges on electricity]”.

The policy allows for cross-subsidies and says the extent of subsidisation should be fully disclosed.

“Tariffs should be equitable and fair,” it says, and they should “prevent price shocks”.

There should be “full disclosure”, the costs should be “unbundled” and tariffs “easy to understand and apply”.

The policy says tariffs should not discriminate and warns of cross-subsidies (a situation where those charged at the highest rates end up paying for those charged the lowest) “which have created a situation where similar customers are subject to significantly different tariffs without any real differences in the cost of supply”.

The policy also urges national standards for tariffs.

“Nersa, together with the industry, should develop a national set of tariff structures for the industry. All utilities then need to adapt their tariffs in terms of the approved national structure.

“The tariff levels would remain different for each utility to match the local circumstances,” it says.

The policy approves cross-subsidies but urges transparency.

“One of the disadvantages of applying non-transparent cross-subsidies is that customers often forget about these and very soon more subsidies are demanded,” it says.

“Licensees are required to establish and publicise the average level of cross-subsidy between customer categories.”

The policy expects that cross-subsidies for low-income customers will be needed for at least a decade.

It proposes “charging an appropriate tariff structure that allows for maximum subsidisation at low consumption levels with gradually reducing cross-subsidies as the consumption level increases”.

What the nersa decisions on city power prices say

None of Nersa’s decisions on City Power’s prices explain how the inclining block tariff (IBT) is applied, or that it is different to Nersa’s standard method.

2010: The tariffs approved to start in July 2010 – the earliest decision Nersa provides – notes briefly on the question of whether IBTs are implemented: “Yes [as per City Power proposal]”, but does not indicate what that proposal is or how it applies the IBTs.

That year the residential Lifeline tariffs had flat rates and the residential prepaid tariffs had large blocks of 1 000kWh per block, with small price increases per block, so customers may not have been affected by a different billing method.

June 2011: Nersa’s first decision for City Power simply notes that IBTs are implemented. It lists three residential prepaid tariffs each with a single flat rate charge, so there was no IBT that year. The commercial prepaid tariff gives no details.

July 2011: The Nersa decision on a revised City Power application lists domestic prepaid tariffs with different blocks at different prices. It’s not clear if these are six consecutive blocks in the same tariff or six different tariffs, and there’s no IBT explanation.

The business prepaid tariff has no details.

Nersa said the City Power IBT tariff was cheaper, but The Star’s calculations show otherwise, so it seems Nersa didn’t understand the IBT differences either.

“Nersa has investigated the six-block IBT structure as proposed by City Power and compared it to the four-block IBT structure that was previously approved by Nersa, and has concluded that the proposed structure by City Power would be more beneficial to the end user [as most] customers consume between 300 and 600kWh,” said the Nersa decision.

The Star calculated that a customer using 350kWh a month would pay slightly more on the City Power tariffs, and for 500kWh the bills would be about the same.

At 600kWh, Nersa’s tariff would charge R482, City Power’s charge would be R447 calculated on Nersa’s method, but on City Power’s tariff, on the utility’s method of running that tariff, the bill would be R569.

There is no indication that an alternative method of IBT billing by City Power was raised in this application.

2012: The decision for City Power’s prices from July this year lists a single flat charge for each of the Lifeline tariffs.

The domestic prepaid tariff lists two blocks, starting at 500kWh.

Business prepaid is listed as a single rate.

There’s no explanation for how the charges are calculated.

What city power and Nersa say

“All tariffs as implemented by City Power are approved by Nersa,” said Nersa spokesman Charles Hlebela.

“While municipalities are [urged] to implement IBT in line with the Nersa-approved design structure and methodology, it remains a guideline that cannot be imposed on municipalities as long as it is in line with the Nersa intent in designing IBTs. The Nersa-designed IBT methodology is specifically approved as a guideline to allow for consideration that may be specific to the needs, customer profile and revenue requirements of the utility/ municipality while complying with the prescriptions as per the [Electricity Pricing Policy].

“While the City Power-designed IBT is different from the design as per the Nersa guideline, it is still in compliance with the broader principle of subsidisation at low consumption level and charging appropriately at low consumption levels while gradually reducing cross-subsidisation as consumption level increases.

“In any case, even though all customers in terms of the guideline design methodology are subsidised at low level of consumption, the same customers start to cross-subsidise themselves as soon as their consumption level exceeds the break-even point. Therefore the overall average tariff at high consumption is commensurate with the cost of serving such high consumption customers.”

City Power left it to Nersa to comment.

The Star