Eskom has just announced that it has submitted a tariff application to National Energy Regulator (Nersa). Economist Mike Schüssler says it may lead to an increase of 17% in electricity tariffs next year.
It may ask for even more in the following year, but that submission will only be made at a later stage.
In a departure from previous practices, Eskom has announced the submission of its latest application publicly. The utility said it has applied to Nersa “for the evaluation and approval of the regulatory clearing account (RCA) balance for the first year (2013/14 period) of the third multi-year price determination (MYPD3) amounting to R22.8 billion.”
This means Eskom has asked Nersa to reimburse it for the financial shortfall in the first year of its current tariff period (MYPD3), namely 20013/14.
In terms of the prescribed methodology used to determine electricity tariffs Nersa may adjust tariffs after the end of every financial year with regard to the over- or under-recovery of Eskom’s costs from the tariffs. If there is a over-recovery the adjustment may be in favour of the consumer, but under-recoveries may trigger an adjustment in favour of Eskom. This mechanism is called the Regulatory Clearing Account (RCA).
Eskom is therefore saying it under-recovered costs by R22.8 billion in 2013/14 and is asking Nersa to compensate it by adding the amount to future tariffs.
If approved, the R22.8 billion will translate into a tariff increase of about 14%, says Schüssler. This increase will be over and above the 3.5% increase granted to Eskom in terms of earlier Nersa decisions.
Initially Nersa determined that electricity tariffs would increase by 8% per year in every year of MYPD3, which stretches from April 1 2013 to March 31 2018. On April 1 2015 however, tariffs increased by 12.69% instead of 8%, after an adjustment was made for under-recovery in the previous tariff period (MYPD2).
This increased the base amount for the next year, with the result that the expected 8% increase next year decreased in percentage terms (in comparison with the current year) to 3.5%.
The increase applied for now will be in addition to the 3.5%, which indicates a possible increase of more than 17%.
Eskom did earlier submit a similar application, but withdrew it in favour of an application to re-open certain aspects of the current tariff determination. If approved, this application would have seen consumers pay 25% more for electricity. Nersa however rejected it, saying the methodology did not provide for a “selective re-opener”.
In the recent past a pattern has developed of Nersa approving significantly lower increases than what Eskom applied for.
In terms of the methodology Eskom is entitled to recover prudently incurred costs and a reasonable return. The prudency requirement has often been a hurdle for Eskom.
Eskom could also now have applied for an adjustment with regard to 2014/15, but has not done so. It is not clear whether the coming municipal elections played a role in the decision to defer that application.
It is possible that Eskom may submit an application for further adjustments for 2014/15 and 2016/17 after year-end on March 31 next year, together with a submission for the next tariff period (MYPD4).
This may result in an even bigger increase sought in the following year (2017/18).