Saturday, 28 April 2012

How municipalities profit from electricity.

Extracted from Moneyweb. 

Author: Malcolm Rees |

28 March 2012 14:40

JOHANNESBURG - Electricity surcharges by municipalities have become yet another "tax" for businesses in the country.
According to lead economist and an expert on SA’s electricity prices, Mike Schüssler, municipalities in the country are charging consumers for electricity at prices well in excess of the base price they pay for to Eskom.
The average domestic gross operating margin for municipalities on electricity (the difference between the price paid for electricity and the price charged for it) sits in the region of 40%, says Schüssler.
“I can promise you that Spar doesn’t have that sort of a margin, nor does Pick n Pay or anybody else,” he notes.
“For the municipalities and local government electricity is a big source of revenue.”
The latest data from Statistics South Africa indicate that in the last financial year municipalities received R61.9bn from customers (excluding non payments) and paid R40.7bn for that electricity indicating that municipalities get nearly 52% more for electricity than they pay for it.
That is a gross operating margin of 34%, according to Schüssler  “which is lower than was the case some years ago”.
However, exacerbating the price discrepancy the fact that the calculated margin excludes money lost to bad debt.
Adding about R6.8bn in unpaid electricity bills (over 90 days old) would indicate that the actual operating margin is over 40%
“What happens is that business tariffs in a place like Johannesburg are more expensive than those of Eskom; that fact is that businesses are used as a way to get taxes,” says Schüssler.
“Effectively, on a local level, electricity is a tax collection exercise.”
But the price discrepancy “is also true of people who pay electricity on a household side”, he says.
For the financial year ending June 2011, municipalities generated an combined revenue in the region of R204bn, according to Schüssler.
Of that, R58bn is outstanding revenue (unpaid bills aged over 90 days) some of which has been accumulated in years prior.
A significant component of the net revenue is attributable to electricity revenue, while water, which has also been increasing in double digits for the past three years, takes up another large chunk.
Based on these figures “you could say that overall municipalities generate very close to 7% of SA’s gross domestic product (GDP)”, according to Schüssler.
Considering what municipalities charge for water and electricity and the margins they add to the cost of water and electricity, “they don’t just have a 1% tax rate on the economy as we thought but its probably closer to between 3% and 4%”, he says.