The dark politics of electricity

How councils milk wealthy customers

HOW much do you pay for electricity? Do you buy it from Eskom or your municipality and, if the latter, are you paying too much?

These questions, unlike many of the issues on which political parties are campaigning for the local government elections in August, are relevant to the decision of who to vote for, because, where municipalities distribute electricity, they also set the tariffs – after taking into account what they have to pay Eskom.

They don’t, for example, determine either the policy or the budget for land reform, the allocation for social grants or how many police officers are allocated to their area.

But even in the area of electricity tariffs, which is a municipal competence, there are constraints.

John Loos, a household and property strategist at First National Bank, said last week the electricity affordability component had become “the most troublesome part” of the municipal rates and tariffs bill as Eskom increasingly demanded tariff increases well above inflation.

Municipalities have no choice but to pass these increases on to their residents.

Except for the 50kWh per month free basic electricity provision to households on the indigent register – which is funded by the National Treasury – municipalities determine how much to charge per unit of electricity used on a sliding scale linked to the level of usage, known as an inclining block tariff.

This means lower-usage customers pay less per kilowatt-hour (kWh) than heavy users, which both encourages energy-saving measures and cross-subsidises the cost of energy for poorer households, who would usually use less electricity.

Policy

The weighting of this cross-subsidisation – how much more to charge the wealthy, commercial and industrial users than the poor – is a matter of municipal policy.

Energy commentator Chris Yelland compared the electricity tariffs of six metros last year and found they had different approaches to this question.

For limited capacity (or subsidised) tariffs aimed at low-income households, in 2015 eThekwini offered a tariff of 94.14c/kWh for customers on a 40 amp prepaid meter, but limited to 150kWh a month, while Nelson Mandela Bay charged 86.1c/ kWh in the usage range between 76 and 350kWh, Cape Town 96.12c/kWh up to 350kWh a month, and Ekurhuleni 98.04c/kWh up to 750kWh a month.

Tshwane, at between about R1.30 and R1.37/kWh for usage up to 650kWh a month, stood out as by far the most expensive, while Joburg’s City Power, which doesn’t have a limited-capacity tariff, offered the lowest pricing on a standard prepaid tariff up to 1000kWh a month.

On the other end of the scale, Cape Town tariffs escalated sharply above average consumption of 350kWh a month, becoming the most expensive for consumption over 750kWh a month, while Joburg customers enjoyed the lowest prices up to 1000kWh a month.

Again, between 1000 and 2000kWh amonth – medium-consumption domestic users – City Power offered the lowest prices for a 60 amp prepaid meter and Cape Town the highest.

For high-consumption users between 2000 and 4000kWh a month, Cape Town stayed the highest priced and Joburg the lowest up to 3000kWh a month, after which eThekwini took the honours.

All of this is food for thought for voters in the August 3 polls, but there are further complicating factors to be weighed, according to Yelland.

Cross-subsidy

This is because municipalities not only use higher electricity tariffs for higher-usage customers to subsidise poorer households, they also use them to cross-subsidise other municipal services, like sanitation and road maintenance, which are not profitable.

While residents might demand lower electricity tariffs, relenting might force a municipality to charge higher rates and taxes, Yelland said.

Another factor was the profile of customers. Whereas metros might enjoy a healthy mix of big industrial and commercial users, along with significant numbers of wealthier domestic users – all paying higher tariffs – smaller, especially rural, councils might be faced with a predominantly poor domestic user profile, with many households struggling to pay for services.

This not only makes it harder for such municipalities to pay Eskom what they owe for the electricity they have sold, but might force them to milk their wealthier customers (if any), driving down their ability to attract or sustain new businesses that would improve the local economy.

Large urban areas therefore have an inbuilt competitive advantage, according to Yelland, and are better able to absorb significant levels of non-payment by poorer customers, while still keeping tariffs reasonable.

“Of course it’s a political decision, that’s what city politics is all about – what is your strategy, who are your customers, who are you trying to serve?” Yelland said.

“Ultimately, it’s a big balancing act, to try and get the right balance, to achieve the most, and in that way get political mileage and get re-elected.

“It’s the way a council is held accountable, through elections.”