Municipalities make too much money from electricity sales, which could have dire consequences for industry, national electricity regulator Nersa warned on Friday.

Nersa regulatory specialist Charles Geldard said National Treasury had been informed that the practice of cross subsidisation from electricity sales had reached a tipping point. He told Parliament’s trade and industry portfolio committee that municipalities procured around 60% of their funding from electricity distribution. The result was prohibitive energy tariffs imposed on industry and a high risk of business closures and job losses.

“In my personal view that is where the problems are lying in terms of industrial tariffs. The issue is that approximately 60% of the municipal budget is funded by electricity revenue,” he said.

“National Treasury staff have also been made aware that municipal funding from electricity is reaching a tipping point and needs to be reduced. We can’t just continue to increase the amounts they are getting.

“It seems to us that they see industry as a source of revenue and don’t understand the impact on industry… there is concern that this will force industries to close down.”

Geldard said the regulator was addressing the issue with municipalities that were charging excessive rates and working towards tariff standardisation. However, he said, the situation could not be remedied overnight.

The warning from Nersa came after the committee heard this week that certain major municipalities were adding mark-ups of several hundred percent to Eskom’s megaflex tariff. According to the Energy Intensive Users Group of Southern Africa, the figure was 692% in the City of Tshwane in the past financial year, and 548% in Nelson Mandela Bay Municipality.

Trade and industry acting director-general Garth Strachan said, such high electricity costs posed a clear threat to the manufacturing sector. Nersa is currently considering Eskom’s application for tariff increases of 16% a year for the next five years, which the utility says is needed to make its prices cost-reflective.

It is not the first time this year that the regulator voiced its frustration with the way municipalities conduct their role as electricity distributors. In July, it said municipal mismanagement was bedevilling distribution and funds allocated for maintaining ailing distribution infrastructure were often spent elsewhere.

Nersa’s Thembani Bukula cautioned that ring-fencing funds was not necessarily effective and that the sanctions the regulator could impose on errant municipalities, including revoking their distribution licences, were firstly not a fast cure, and secondly not always realistic. According to figures from the energy department, municipalities provide electricity to roughly 54% of the country’s users and had an asset maintenance backlog of R27.4-billion in 2008.

The portfolio committee this week heard repeated warnings that escalating energy prices could have dire consequences for the economy. If Nersa were to approve Eskom’s application, the price of electricity would more than double by 2018.

Several MPs on Friday queried the utility’s argument that it needed higher revenue to enable it to continue borrowing money for its build programme, pointing to its improved cash flow and captive consumer market. But Eskom corporate counsel Mohamed Adam said the company’s credit metrics were weak, and likened the revenue stream from cost-reflective tariffs to the salary a home buyer needed to earn to qualify for a bond.