Eskom says regulator ‘artificially’ deducted billions in revenue from tariff

Nersa will respond on Tuesday.
Eskom says Nersa did not consider the impact of its 'irrational' tariff decisions. Image: Moneyweb

The unprecedented face-off between Eskom and the energy regulator continued at the Pretoria High Court on Monday – this time over the regulator’s 2018/2019 tariff decision.

This is the second matter against the National Energy Regulator of South Africa (Nersa) that has been heard by Judge Jody Kollapen this month. Eskom is trying to challenge some of Nersa’s historical determinations, which it argues have not been cost-reflective, to a point of not only being devastating to Eskom’s finances but those of the country.

In a separate case two weeks ago, Eskom representative senior advocate Matthew Chaskalson argued that Nersa’s decision to disallow the equivalent of the government bailout of R69 million for the three financial years from 2019 to 2022 – and turn that into an “electricity tariff subsidy” in order to keep tariff increases low – was unjustifiable and irrational. 

Read: Much at stake in court battle between Eskom and Nersa

On Monday Chaskalson continued his assault on the regulator, saying the single-year tariff determination for 2018/2019 – which ended with Eskom receiving a 5.23% increase as opposed to the 19.9% increase it had applied for – was “invalid”. 

This resulted in Eskom receiving allowable revenue of R190 billion, which is R29 billion less than the R219 billion the utility wanted. 

Reverse engineering 

Chaskalson challenged the process Nersa used to determine the tariff, saying it did not comply with the Electricity Regulation Act, the Electricity Pricing Policy and Nersa’s own regulatory methodology used to determine electricity tariffs. 

He said instead of considering what “allowable revenue for a reasonable licensee in the position of Eskom” would be and then working that price down through a process of deduction as the methodology dictates, Nersa conducted the process backwards. 

“It seems clear that Nersa decided on the low tariff and then attempted to reverse engineer a justification for that tariff increase by finding artificial ways to disallow billions of rands in Eskom costs that ought to have served as the basis for the correctly-determined tariff increase,” said Chaskalson. 

Read: Eskom vs Nersa: An imminent national crisis or fear-mongering?

He outlined how in the reasons for determination provided by Nersa there was evidence that deductions across multiple areas such as Eskom’s coal spend, operational costs, asset base, transmission and independent power producer costs were made through subjective considerations, without justification and had a “series of patent arithmetical and double counting errors”. 

Not only that, but Eskom states in court papers that “substantial” parts of the regulator’s reasoning show no link to the decision that was finally taken, which suggests to Eskom that these are “either remnant of a reasoning process in relation to a decision which was previously intended to be taken, or evidence of a decision that was not properly reasoned”.

Employee costs

In one instance when determining employee costs, Chaskalson said Nersa applied an “arbitrary” approach that stripped Eskom of R3.8 billion in revenue for employees by using a ratio of how many gigawatt hours (GWh) Eskom produces per employee compared with 2007/2008 as a base year. 

The result shows that Eskom was able to produce 239 109 GWh with 32 954 employees in 2007/2008, compared with 216 771 GWh and 39 186 employees in 2018/2019 – a drop from 7.26 GWh to 5.3 GWh per employee over the 11 years – with Nersa reasoning that Eskom is overstaffed and should not be compensated for the full costs.

Chaskalson said Nersa’s reasoning was not only “wholly inappropriate” but was “reverse engineering of a desperate nature, designed to reduce allowable revenue”. 

Chaskaslon said selecting 2007/2008 as the base year was inappropriate because that was the year that sales peaked prior to the global financial crisis and demand outstripped supply, therefore power stations were used well beyond their capacity to the extent that load shedding became necessary for the first time. 

“If you choose the year in which your system is operating beyond ordinary industry parameters and you say this is the output that you want per GWh ratio to employees, then you are going to find that you get a higher ratio per employee; but it is not a sustainable basis [on which] to run an electricity generation business,” argued Chaskalson.

He accused Nersa of not considering what Eskom would require for its operational costs and instead “looking for some pretext to slash Eskom’s allowable revenue”.

Nersa will respond to Eskom’s arguments on Tuesday.

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At the beginning of this month Eskom were pursuing R1.8bn in order to pay for their 13th cheques. Is it just a mere coincidence that R1.8bn x 13(salary payments) = R23.4bn…?
Notably, this amount is just a bit more than the R23bn the state has devoted to the SOE for the next 3 years or as the fin minister said “or 10 years”.
Which we can probably interpret, actually means that this amount (R23bn) is due to be increased in 3 years time. I.E. 2022 budget speech.

Who is in charge of Eskom? Do they at this late stage not understand that they control the the well being or the demise of never mind the utility but the country. Please start running the business properly and begin to cut costs. If they ran this in any other country they would be out of a job and in China in jail where the whole lot belong. This is an act of treason.

Damn right bailouts are funded by taxes so we are already paying for it, cannot expect consumers to pay for a service and then take taxes to fund poor management of such a service.

Want to cover you costs with bailouts and 20% increases are you insane.

Everyday that I read an article on Eskom’s finances the incredulous becomes even more incredible. Eskom, through their management stole, yes lets not mince words, it was not ‘badly” spent, they stole hundreds of BILLIONS from the taxpayers of this country. The amount they stole cannot even to this day be determined as each day more and more is uncovered.

Eskom now want to blame Nersa for their predicament, I am sorry but I cannot comprehend Eskom’s logic of lack thereof.

Our government needs to put just one crook in jail to even start to gain peoples trust before they ask us to fund this mess. Show us you mean business. The more than 1 trillion taken during the previous administration would of gone a long way in assisting to alleviate poverty in this country.

South Africa is a shining example of how a ruling party slowly commits suicide and destroys the geese that lay the golden eggs.The militant opposition only exists because the ruling party creates the environment for them to flourish. When the war comes it will not be racially motivated, it will be those that have vs those that have not.

To add to your point that Eskom blames Nersa for its woes:
what Eskom does not seem to understand is that ANY increase in production costs in excess of the PPI raises red flags on its performance. When it contains the production cost increases, it does not need these exorbitant selling prices.
Nersa is not to blame (regardless of the fact that it is another useless SOE), Eskom (and, of course the ANC, as de facto Board) should get sole blame.

Very well said. I too feel intensely irritated when commentators act as though SA’s economic calamity was like an act of God, not linked to the venal self interest of 25 years of the dishonest ANC elite. Talk about apartheid deniers and holocaust deniers; what about ANC crooked deniers?

Allowing Eskom’s 19.9% rise would further punish the paying users while allowing those non-paying (those that steal or just don’t pay) get away with murder.

The faster Eskom increases tariffs the faster people that can will make their own arrangements. At 247c/kWh my factory’s energy cost is already 60% higher than the average US industrial tariff. It is also getting near to the point where solar plus batteries plus diesel is cheaper and more reliable.

Three cheers to NERSA for showing some backbone!!!!

I have just received a communication from a friend in England which depicts a photo of Jabu Mabuza’s niece, taking delivery of a Lamborghini Aventador, price tag R9 to R9.6 million. Jabu Mabuza is the former Eskom chairperson. His niece was allocated an irregular tender worth R600 million.
I have no means of checking this as I am just an ordinary member of the public, but it should not be too difficult to check and if this is so I suggest Eskom demands the money back from Mr. Jabu Mabuza.
This is all over the English internet.

End of comments.

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