The National Energy Regulator (Nersa) on Tuesday confirmed receipt of Eskom’s application on March 3 for a tariff increase, aimed at compensating it for under-recovery of costs incurred in 2013/14.
This is on the back of Eskom asking for further tariff increases for electricity that South Africans will be using in the next three financial years.
In simple terms Eskom is saying it spent more to supply electricity in 2013/14 than anticipated and consumers have to pay up to cover the shortfall.
Paying for future electricity
Moneyweb reported last week that an application was on its way from Eskom to Nersa to “selectively re-open” the tariff determination for the last three years of the current tariff period, that is 2015/16, 2016/17 and 2017/18.
Eskom is currently in consultation with municipalities and the National Treasury before submitting the application to Nersa. From the submission to municipalities it is clear that Eskom wants a total increase of 25.3% for 2015/16.
Nersa did not disclose any further information about the application it received, aside from that it will be published “once all confidential issues have been cleared with Eskom”.
The amount Eskom wants to recover is, according to Nersa, “still in question” and it will determine whether the public will be consulted in considering the application.
The application is made in terms of the Regulatory Clearing Account (RCA) mechanism that is part of the methodology to determine electricity tariffs. It provides for the annual review of Eskom’s finances and operations.
Variance on different cost estimates and projected electricity sales used to calculate the revenue Eskom should get from electricity tariffs is tracked in the RCA.
If the net variance is less than 2%, it is transferred to the next financial year. If it is more than 2% but less than 10% tariffs are adjusted and when it is more than 10%, the tariff determination is re-opened with full public participation. A re-opener may take 12 to 18 months to finalise.
Done it once before
Eskom used this mechanism only once before and was granted R7.8 billion extra revenue for the recovery of costs incurred in 2010/11-2012/13. This translated into an extra 4.69 percentage points tariff increase that takes effect on April 1 for Eskom’s direct customers and July 1 for municipal customers.
This means Eskom tariffs will increase by 12.69% instead of the 8% annual increase granted earlier for the current five-year tariff period ending March 31 2018.
When and how much?
According to Eskom’s financial results for 2013/14 it over-spent on diesel to the tune of R8.1 billion. It also spent R815 million on buying electricity from independent power producers (in terms of the Short-Term Power Procurement Programme) not budgeted for, because it did not anticipate the delays in the completion of its new power stations, Medupi and Kusile.
If this spending is recognised as prudent by Nersa and not cancelled out by savings on other items, it may result in further tariff increases of several percentage points, probably to be implemented in 2015/16.
Economist Chris Hart said the high increases in electricity tariffs in 2008 were motivated by the need for capital investment in Medupi and Kusile. “That I grudgingly accepted, but now we are asked for higher tariffs to cover operating expenses. I am not sure the need really exists. Are we throwing good money after bad?” he asks.
Hart says the coal price has declined considerably, but Eskom is plagued by inefficiencies in operations and procurement, an inefficient capital structure and an inefficient regulatory environment. Added to this, sales are lower than expected and debts are just not being collected.
“There is an enormous amount of inefficiencies that have to be fixed at Eskom,” he says, adding that corporate governance at the utility seems to be “dodgy” at the moment.
Impact on consumers
He says consumers are subjected to tariff increases much higher than inflation and in addition they simply don’t know what the future cost of electricity will be. To add insult to injury, they also have little certainty about the supply of electricity.
Hart says households are already in deficit financially and are also subjected to rising tax and municipal bills. “Salaries don’t rise at the same rate and one cannot blame the unions if they ask for higher increases, but the economy is just too weak to place more money into their pockets,” he says.