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Intended use of bailout money crux of Eskom’s case against Nersa

Utility will need to convince the courts that Nersa’s methodology in determining the electricity price increase was flawed.

NOMPU SIZIBA: Eskom is taking energy regulator Nersa to court. Its argument is that the regulator undercompensated it in awarding the latest tariff hikes, as it factored in the R23 billion assistance from National Treasury that was announced in the national budget in February. As early as February this year it was reported that Eskom approached the court to set aside three of Nersa’s decisions in respect of clearing amounts for the years 2014-2015, 2015-2016 and 2016-2017.

To break down the issues for us I’m joined on the line by Chris Yelland, an energy expert from EE Publishers. Thanks very much for joining us, Chris. What’s Eskom’s beef with the energy regulator on the tariffs? Essentially it seems like a government entity taking on another one.

CHRIS YELLAND: Well, indeed it is, but everybody and every organisation has the right to take administrative decisions on review in the courts. And certainly that is what Eskom is doing. The regulator made a ruling based on its calculations and its determinations that Eskom could get a certain price increase. Eskom is saying, no, Nersa, you didn’t do this properly. We expected and asked for a higher price and you cut us back, but we deserve the higher price.

Eskom is now effectively taking Nersa’s decision on review, and will need to convince the courts that Nersa’s methodology was wrong and that its [Eskom’s] view of the matter is right.

NOMPU SIZIBA: Do you think that perhaps the regulator didn’t follow its methodology properly, and that Eskom may have a case?

CHRIS YELLAND: It’s a complex issue; it’s a complex question. Nersa has come out categorically to say that it is confident that it has followed the right methodology, and Eskom has come out and said it [Nersa] followed the wrong methodology. Ultimately the judges have to decide after hearing all the arguments.

The crux of Eskom’s argument is that it was given a R69 billion bailout by government – R23 billion a year for three years. You can’t say that Eskom has said it is going to use this money to cover operating expenses. Nersa looks at this and says, well, then your operating expenses are going to be R69 billion less that what they would have been because of this bailout. Therefore you don’t need the price increase as much as you did before because you are getting this bailout, which is effectively going to reduce your operating costs. That is Nersa’s argument.

Eskom’s argument is hang on, we were given a bailout. If you do this to us you are negating the effect of the bailout and you are passing the benefit on to the customer to reduce the prices. Eskom wants the benefit to go to its balance sheet and bottom line and income statement. Effectively Nersa is passing this R69 billion through to the customer by a lower-than-usual tariff increase, or one lower than Eskom applied for. The economy will get the benefit, the customers will get the benefit, but Eskom is not getting the benefit of the bailout.

NOMPU SIZIBA: You’ve explained that really well and, rather than going into the more complex side of the issues, based on what you’ve explained do you think Nersa should have included the R23 billion per year or not?

CHRIS YELLAND: Okay. If a government has said this R23 billion a year is equity, it’s going to be used to pay back debt, then I think Eskom will be on very strong grounds, because paying back the debt is not an operating cost. But the point is that the ministers at the time – when they gave this bailout – and the Eskom executives at the time indicated that they needed this money for operational purposes. Now, Nersa’s job is to look at Eskom’s operating costs and to allow it to recover its operating costs from the tariff. If Eskom is going to use this money to pay for operating costs, it means that Eskom’s operating costs are going to be lower that they would have been had they not had this bailout.

So, either way, it’s all to do with how the money is going to be used. I think if it’s all going to be used for operating costs, I think Nersa is right. On the other had, if an equity lever is going to be used to pay back debt to effectively increase Eskom’s balance sheet, or improve its balance sheet, then I think Eskom is right. But the reality is I think this money is going to be used for operational purposes. That’s why I had to read it.

NOMPU SIZIBA: Okay, let’s see what the courts decide. What about the regulatory clearing account [RCA]– very fancy terminology? Just break down that concept for us and explain the issue that Eskom has on that front.

CHRIS YELLAND: I think this is something that may confuse the listeners even more. But, effectively, the way it works is that each year Nersa looks at the revenue that Eskom has generated and its costs, and compares it to what was stated in the revenue application. If they have sold less electricity or if they have over-accounted on the costs, then they do a retrospective adjustment of Eskom’s prices. That is just a mechanism by which the prices get adjusted year by year.

I’ve tried to describe the principles behind why Eskom feels that it was not given the price increase that it deserves, and why Nersa believes that it has given the price increase. The RCA mechanism is just a mechanism by which they retrospectively, year by year, look at Eskom’s over-recovery or under-recovery and then make an interim adjustment. It’s a complex measure.

NOMPU SIZIBA: You’ve explained it perfectly, very clearly. My question is, is Eskom disputing that RCA process – that is, the amount that they are given retrospectively? Are they also disputing that?

CHRIS YELLAND: Yes, it is being disputed in other court actions, not the latest court action. But there are some previous RCA awards that Eskom is disputing. They say that Nersa is not giving them what they should be getting. It all kind of boils down to what are prudent expenses, and what are not prudent expenses. In terms of the law Nersa is obliged to cover Eskom’s prudently incurred expenses. The question is: what is prudent and what is not prudent? Therein lies the argument.

NOMPU SIZIBA: Chris, bottom line – is this process, this whole situation, sustainable? Eskom is basically saying that it has been short-changed to the tune of R69 billion over the next three years. Is it sustainable because ultimately you and I and everybody else has to pay for this?

CHRIS YELLAND: My personal view is that the entire regulatory process is completely inadequate and no longer fit for purpose, and needs to be fundamentally overhauled and re-looked at from scratch. This is a kind of a throwback to what I call a command-and-control approach to the economy, the old Soviet way of having central planner planning. It doesn’t work like that anymore. The regulatory process is far too slow and unresponsive to a much more dynamic and fast-moving electricity supply industry, and the needs of the customers are radically changing.

I believe we need to move away from a cost-plus regulatory mechanism, which is what we have at the moment, where Eskom is allowed to recover all of its costs through the tariff. That is not putting the right incentives on Eskom and some people believe the price of electricity is way too high. Eskom believes that the price of electricity is 25% too low.

This just gives you the disconnect in this whole situation, which indicates that the customers of electricity and Eskom are speaking different languages. The regulatory process is not fit for purpose, is not achieving what it should do. It’s not giving Eskom what it wants and it’s not giving customers what they want. I believe we need to look at a more market-related regulatory process where competition determines the price of electricity – and not some regulator.

The role of the regulator should shift from the process of setting the prices – in other words, price controls – to ensuring that the market operates efficiently and that there is no collusion between players in the market. We need to move from a monopoly electricity-supply industry to a competitive electricity-supply industry, where competition determines the price and not some regulator.

NOMPU SIZIBA: I hear you. Thanks very much, Chris, for your time.

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