National energy regulator (Nersa) has removed the provisions that landed it in hot water in the North Gauteng High Court from its draft of the methodology it uses to set Eskom’s tariffs.
The court ruled in August to set aside Nersa’s decision to grant Eskom an additional R11.2 billion revenue, that translated into a 9.4% tariff increase implemented on April 1 this year. This was granted in terms of the Regulatory Clearing Account (RCA) mechanism, which is a tool in the Eskom Multi-Year Price Determination (MYPD) methodology to mitigate the risk of over-expenditure or under-recovery by Eskom.
Significant variances result in tariff adjustments.
The public and interested parties will on Friday have a final opportunity to present their comments on the draft revised MYPD methodology published on September 8. The regulator plans to publish the final methodology on October 30.
David Mertens, who was closely involved in the recent successful court challenge by the Nelson Mandela Bay Business Chamber and several large power users in that metro (and is a member of the chamber’s electricity task team) says Nersa is changing the document to fit its actual behaviour, instead of complying with the methodology.
The business chamber is opposing that particular amendment. It represents approximately 700 businesses who collectively employ approximately 60 000 people.
The court based its ruling on Eskom’s failure to open the RCA at the beginning of the financial year to keep track of variances and its failure to give quarterly updates to Nersa – which Nersa should have reviewed before making its finding public, as an early price signal to Eskom’s customers.
The regulator has expressed its intention to appeal the court ruling that might also affect two subsequent RCA applications currently before Nersa.
Nersa now proposes the removal of those very requirements that it failed to comply with.
The chamber says in its written submission to Nersa, the RCA must be a quick-response warning system for Eskom, Nersa and Eskom’s customers for intervention and decision making in case positive or negative variances are being reported.
“From that perspective, Eskom has to create an RCA at the beginning of the year and report quarterly to Nersa. The request from Nersa to remove the quarterly reporting requirement in relation to the RCA is, as such, not a logical request and its motives have not been explained properly by Nersa in the methodology consultation paper.”
The chamber opposes the removal and says Nersa’s motivation that it would be done for practical reasons “are also difficult to understand as Eskom’s financial reporting is advanced and sophisticated.”
The chamber argues that the revision of the methodology should be seen against the background, where Eskom’s tariffs have increased by 367% between FY 2007/8 and FY 2016/17 and its revenue by almost as much.
This, together with the presence of independent power producers (IPPs), has resulted in lower Eskom sales volumes – contrary to forecasts of medium growth. It criticised Eskom’s increased operational and primary energy expenditure and considers it proof of the utility’s inefficiency. The chamber points out Eskom’s bad maintenance practices and load shedding, despite reduced demand and increased margin, as well as its mismanagement of the new build programme.
The chamber says: “The facts listed above have strongly influenced the well-being of South Africa and have led to electricity prices spiralling out of control. The ‘state of electricity’ in South Africa is in a severe crisis, as consumers have to pay more and more to an electricity utility which is achieving less and less.”
The chamber questions how a new set of rules would stem Eskom’s decline. “One of the specific reasons for past RCAs has been the declining sales of electricity. Given the current and proposed MYPD methodology, these declining sales cause reduced recovery of overheads and increased R/kWh (rand per kilowatt hour) cost. Reduced sales are then simply recovered through the RCA mechanism,” it says.
The chamber says Eskom should fundamentally restructure its overheads as sales decline, and should have a long-term strategy to deal with declining sales.
“It is moreover clear that the proposed methodology still stems from outdated thinking where South Africa has a lack of generation capacity, while Nersa’s official statistics show the opposite,” the chamber argues.
Eskom is expected to address the 5% annual cap Nersa proposes on its sales variances, during its presentation on Friday, “regardless of whether it is caused by external economic factors or reasons within Eskom management’s control.”
For a three-year tariff period, the utility has to make sales estimates up to five years in advance, taking into account the two-year application process, and the limit on variances might be seen as onerous in such circumstances.
It might also repeat earlier calls on Nersa to allow it to claim prudent over-expenditure on operational cost. Currently that is disallowed, but customers do benefit, should Eskom under-spend on operational cost.