Case Study: Richards bay “Investigation of local government levy on Eskom Customers”


Short write up that contextualizes the case study.
Ntiyiso Consulting in the process of completing a “Local government Levy Study” project for the City of Umhlathuze (Richards Bay). Against the background that for the revenue generated from the sale of electricity, gross profit over the purchase cost is:
– used for both funding of the business of providing electricity and related services,
– and subsidization of the property rates tax base (Local Government Levy),
– and that some customers are supplied electricity directly from Eskom and thus not contributing to the electricity revenue base,
the municipality wanted to create legitimate policy to include all such non contributors in the Municipal tax base.

Role on Project


Ntiyiso Consulting’s role in the project was as follows:
Assist the municipality to develop a fit for purpose input driven model that will be used to construct a close-to-true-charge that must be applied to the large customers. In achieving this goal, the following needed to be done:

The Challenge

There were a few challenges in developing the project. Key amongst them was being able to show, based on income and expenditure analysis for various service categories (i.e. trading services, economic services, community services and subsidized services), that there is cross subsidization of another services by electricity income. In addition to the above, we had to establish in law whether the municipality has the right to charge Eskom customers for a service (electricity) does not provide them. These key challenges were in addition to unraveling the rest of the items in the scope relating to tehe financial effect of co-generation, Eskom and Cell Masts servitudes, the bulk services charges for new developments/connections, and a communication strategy for the potential new levy.

The Ntiyiso Solution

Our solution was based on assessing the current (2013-14) tariff structure of the City of uMhlathuze. The assessment looked at the following aspects of the tariff. Namely the different line items that are charged as well as the actual amounts charged for the line items. It also compared the tariff with Eskom one to understand the effect (to customers) of taking electricity from Eskom as opposed to taking from the Municipality.
We then did a customer analysis of the Municipal customers as defined by the different tariff bands to establish the extent of cross-subsidy between customers classes/tariff bands. The objective of this analysis was to establish whether there is a case for imposition of the similar charge to the current municipal customers as required by the project scope.
We also analyzed Customer and Billing Data as well as servitudes (spatial data) to determine if there are no obvious revenue leaks within the rates and taxes revenue base, which could soften the demand for a levy on Eskom (and municipal) customers.
Next was development of a business case to levy the Eskom customers and this was based on whether or not electricity income surplus is used to cross-subsidise other services that are enjoyed by everyone within the city of uMhlathuze. To determine this, all major services had their income and expenditure compared to determine which ones (if any) generate a surplus and which ones generate a deficit.
Based on the above analysis, we conducted a legal research in terms of what is permissible in law for municipality to impose a surcharge on customers.
Related methods were used to complete the rest of the scope items, which were basically secondary to the legal and business case to impose a levy.

The Ntiyiso Effect

From this analysis we not only proved that there is an indeed cross-subsidization of other services by electricity income, but also determined the extent of such cross-subsidisation. This allowed us to model the levy which Eskom customers are to be charged. The latter was based on simulation of the Eskom customer bill into a municipal customer bill using the tariff comparison analysis stated above. From the simulation, and the extent of the cross-subsidization already determined (as percentage of the electricity revenue), we were able to arrive at the charge Eskom customers must be levied.
With regards to the legal case, we were able to arrive at a positive legal position allowing the municipality to impose such charge, in the end.
We also provided solutions for the rest of the scope items, part of which showed that it is not possible to charge Eskom servitudes for the power lines even if they run on municipal land, among other conclusions. The study is now at its final phase to present the legal finding to the client, with the rest of the scope items, save for the communication strategy which was meant to come last, having been completed.
Contact: Tumelo Gapane, Head of Technical Services Tel. +27 35 907 5351