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Eskom seeks 20% tariff increase

Also expects municipalities to pay 27.3% more in 2018/19.

Eskom wants its clients to pay on average 19.9% more for electricity from April 1 next year and proposes that municipalities pay 27.3% more for bulk electricity purchases from July 1 2018.

This comes against the background of controversy about an aborted irregular R30 million pension benefit for its former CEO Brian Molefe, after serving only about two years in the post.

The proposed increase was disclosed in a confidential draft tariff application for 2018/19 that Eskom submitted for comment to National Treasury and local government association Salga. Moneyweb has seen the document.

Eskom is expected to incorporate the comments from National Treasury and Salga before submitting its application to energy regulator Nersa in the coming week. Public consultations will be held before Nersa decides on the increase.

The application follows after the regulator allowed Eskom an increase of only 2.2% in the current financial year, which is in real terms a decrease. Nersa at the time invited Eskom to submit an application for a higher increase based on financial hardship, but Eskom preferred to proceed with its application for the next tariff period.

It did receive permission from Nersa to apply for a single year increase due to regulatory uncertainty around the Regulatory Clearing Account (RCA) mechanism that is currently the subject of a court appeal and pending the finalisation of the Integrated Resource Plan (IRP) and Integrated Energy Plan (IEP).

The draft application is for total revenue of R218.7 billion, an increase of 6.6% from the current year. The price impact is however much bigger because of the lower sales volumes.

The building blocks of the tariff allocation are operational cost, primary energy including the cost of buying energy from independent power producers (IPPs), return on assets and depreciation. This is then divided by the forecast sales volumes to arrive at an average tariff. Nersa prescribes the methodology for these processes.

In its draft application, Eskom states that electricity sales volumes were lower during the previous tariff period (MYPD3) that stretched from April 1 2013 to March 31 2018. Nersa never adjusted the sales forecast during the period and therefore the sales forecast has to be rebased. This alone accounts for 9.6 percentage points of the 19.9% increase Eskom applies for.

Eskom illustrates it in this graph:

Eskom states that 5.5 percentage points are for IPP cost and 7.4 percentage points for operating costs.

These are offset by lower returns and depreciation, which constitutes a drop of 9.4 percentage points compared with the current year, Eskom states.

Notably, Eskom includes renewable IPPs up to the Department of Energy’s bid round 4.5. That means it is claiming costs to buy from the very renewable projects that it currently refuses to sign power purchase agreements with.

Even if Eskom signs those agreements today, the 37 affected projects won’t be in production during 2018/19. Construction has not yet started and will take at least two years.

Eskom acknowledges that a 20% tariff increase could have a 0.76% impact on the consumer price index (CPI).

Eskom bases the higher increase proposed for its municipal bulk customers on the prescribed methodology and specifically, that the increase would only take effect three months into the tariff period, on July 1 2018. This is due to the provisions in the Municipal Finance Management Act (MFMA) that allow municipalities to increase its retail tariffs only once a year, at the start of the municipal financial year on July 1.

The draft application provides for a return on assets of R14.7 billion, which is only 2%, Eskom states. It is not enough to cover its interest payments of R36 billion and represents a sacrifice of R41.7 billion, according to Eskom.

The draft application does not include the detailed information required by Nersa. Moneyweb earlier this month reported that Eskom requested an open-ended exemption from the disclosure rules. The information it told Nersa it couldn’t supply includes segmented cash flow for the last reporting period, certain detail regarding assets, depreciation, capital expenditure, deferred debits and credits, coal purchases, coal handling costs and sales revenue and demand forecasts.

Nersa has put Eskom’s request to the public for comment and the Organisation Undoing Tax Abuse (Outa) and Business Unity South Africa (Busa), among others, called on Nersa not to allow Eskom to withhold information necessary to assess its tariff application.

Nersa has not yet ruled on the exemption and stated in its electricity committee meeting, that Moneyweb attended, that Eskom would have to comply with all the requirements pending the ruling.

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How can supplying in bulk to municipalities (who must then distribute the electricity themselves of their own networks) be more expensive than supplying it to direct customers? In fact, municipalities should get a bulk discount.

I’m guessing because direct customers pay or are switched off. Municipalities have lots of people not paying so the increase is pushed onto the good payers and is proportionately more for the bad debt.

Eskom is a giant dinosaur from the carboniferous period and it’s tentacles reaches into every business and home in the country. It is sucking the life out of the economy, and the spending power from all citizens. After this engorged monopolistic parasite has killed the economy, it will move to hibernate in Dubai.

Nersa is part of the problem, supporting the Guptas, and not protecting South Africans from being abused by incompetent, corrupt and criminal cadres. Ben Ngubane is not our friend, he uses Nersa to steal the food from our tables every moment of every day.

Nersa should privatize Eskom and put the supply of electricity out on tender. South Africa cannot afford to support this incompetent, criminal monopoly any longer.

“The answer, my friend, is blowin’ in the wind
The answer is blowin’ in the wind” – Bob Dylan

“Notably, Eskom includes renewable IPPs up to the Department of Energy’s bid round 4.5. That means it is claiming costs to buy from the very renewable projects that it currently refuses to sign power purchase agreements with.” The IPP projects haven’t even been built yet. I’m not a financial expert but charging the public for something that will only come on stream in two or more years’ time seems deliriously stupid.

Only a SOE would try to make up for loss of volumes by increasing prices. Insanity.

actually Apple did this with the massive increase in the new Macbooks. Less people are replacing their machines as the status quo is good enough and volumes are down.

Agree, goes a bit against normal economic thinking. But they rewrote that book a few years ago by asking us to please not buy electricity, and then raising the price because of less units being bought.

Jip 5% increase for oporations and 15% increase to Gupta and co.

Eskom is a joke. Is this to pay baby Molefe and all the other corruption money? Or is this now to show the public ‘who has the power’ after voicing their concern against what is wrong.

We as public would be more willing to pay above inflation increases if Eskom can demonstrate that they are managing our money efficiently.

Eskom should be used as a case study of how a poorly run monopoly can destroy a country in 20 odd years and then ask the students to propose ways and means of fixing the problems, what competency levels would be required to put it on an even keel. It would be more than interesting for the students to determine also within the case study as to who was negligent and who actually made a difference – those who were negligent must get their just deserts – even if it means jail time

Yes this could be a good exam question for 1st year economist students (or maybe even for school students studying accounting). They should solve this easily. Amazing that our dear government can not solve this question.

Supersunbird must be living in la-la land.I get my electricity from Eskom and I am paying R6.00 A kW hour.While folks in town are paying R1.50.If I use no electricity I still have to pay R2000.00 a month due to various charges.Please note I live on a small farm and I am about 20 kilometers north of Krugersdorp. Eskoms grid has been in this area for more than 50 years.Needless to say a lot of folks are setting up solar systems.

What is your point? Of course it is going to cost more to provide you with electricity if you live out in the sticks.

Why not make it a 1000% increase?

Seems that the consumers must pay for very poor business decisions?

Seems that the consumers need to switch off from Eskom to other cheaper energy resources?

Where do we rank in pricing compared to the rest of the world?

There goes the Economy … still want to create new jobs?

Please get the outstanding monies from Soweto and Zimbabwe, adjust your business model to cater for renewables supplied by private sector and then we can have a look at this again.

Oh yes, and assure us Brian Molefe is not going to get a R30m payout on an 18 month contract at our cost.

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