PRETORIA (miningweekly.com) - The National Energy Regulator of South Africa (Nersa) has approved an Eskom power tariff increase of 24,8% as from April, 1, 2010, and subsequent increase of 25,8% and 25,9% for 2011/12 and 2012/13 respectively, chairperson Cecilia Khuzwayo announced on Wednesday.

In November last year, South Africa's State-owned power utility Eskom applied for increases of 35% a year over the three-year MYPD2 timeframe, having initially requested yearly increases of 45%, which it said were necessary to help it cover rising operational and capital costs.

The electricity price will rise to 41,5 c/kWh this year, to 52 c/kWh in 2011/12 and to over 65 c/kwh in 2012/13.

The increase, which will be wildly unpopular, will add to inflationary pressures and could limit economic growth and job creation.

Nersa has calculated the impact on inflation as being less than 1,5% a year over the three-year period, regulatory member for electricity Thembani Bukula said.

The regulator based its determination on a revenue requirement formula, against which Eskom is allowed to recover prudently incurred operational and capital costs, while making a "reasonable" rate of return.

Eskom is allowed to recover revenue of R85-billion in 2010/11, R105-billion in 2011/12 and R141-billion in the final financial year.

Nersa has also included a revenue allocation to cover demand side management costs, which should partly enable Eskom to roll-out a number of its demand dampening projects, such as solar water heaters, Bukula confirmed.

The rate of return that should be allowed and the basis for its calculation emerged as a key theme during the recent public hearings into Eskom's application, which was unable to draw support from any sector of society, including the ruling African National Congress.

In its application, the utility has interpreted the stipulation (contained within the electricity pricing policy) for a revaluation of its assets to mean that it should use the modern equivalent asset (MEA) revaluation model. By contrast, many presenters have argued that the "less subjective" index historic cost (IHC) methodology would be the best regulatory practice.

The regulator decided to base the revaluation of assets using the MEA method, but phased in over five years not three. It also based its determination on a weighted average cost of capital, or WACC, of 8,16%.

Analysis by Genesis Analytics showed that the MEA model could inflate Eskom's revenue requirement and, in turn, its tariff request by as much as 10c/kWh and that it could even lead to a revenue windfall for Eskom.

Eskom then proposed that its return be based on a WACC of 10,3%, arguing that this had been benchmarked.

But other, including the Chamber of Mines, argued that the utility's real pretax WACC should be equivalent to the risk-free rate plus a small premium, owing to the fact that Eskom is considered to be a low-risk, long-term business owned and supported by the State.

This means that the WACC calculation should be as much as three percentage points lower than that proposed by Eskom. The chamber also warned that every 1% rise in the WACC represented a five- percentage-point increase in the electricity price.

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