During public hearings held to enable the National Energy Regulator of South Africa (Nersa) to determine whether to allow power utility Eskom to recoup R66.6-billion under the Regulatory Clearing Account (RCA) mechanism, the South African Local Government Association (Salga) expressed concern that further electricity tariff hikes would disadvantage municipalities and communities.

Salga said in a statement that Eskom’s revenue requirements were causing uncertainty with regard to the future electricity pricing path in South Africa and, in turn, causing instability in the economy.

Salga and its members have assessed the RCA applications submitted by Eskom for the 2014 to 2017 financial years and have raised a series of concerns with Nersa.

Salga noted that municipalities’ electricity sales had shown a sustained downward trend over the last few years and, in some cases, had dropped significantly.

“This is also the case with Eskom; however, municipalities cannot penalise its customers for the low demand or reduction in sales. It is concerning to Salga and its member municipalities to receive yet another application from Eskom to increase tariffs,” the organisation added.

The association stated that, while it supported Eskom’s financial sustainability, the prudency of some of the costs contained in the RCA applications was questionable.

Salga explained that the revenue variance boiled down to inaccurate forecasting by Eskom, but that it was now being claimed from the customer. Additionally, Salga questioned whether Eskom’s more-than-allowed coal and diesel burn, owing to its internal inefficiencies and failure to meet its own targets, was also a consequence of poor maintenance at its power generation fleet.

Salga added that independent power producer (IPP) costs had also accrued because Eskom had not met its own targets. “Why did Eskom have to use expensive short-term power in excess of what was allocated by Nersa?” it asked.

Salga suggested that Eskom thoroughly assess its underlying problems and focus on re-engineering its operations rather than addressing its financial challenges through further tariff increases.

Eskom Holds Firm
However, Eskom has continued to defend its applications at the Nersa public hearings, urging stakeholders to note that the RCA was a backward-looking process claiming against actual audited costs and not a new application for revenue based on estimation.

“We note stakeholder concerns around the impact of our projections on the RCA application, but we want to assure them that we have done our application in terms of the RCA process.

“We adhered to the approach in the multiyear price determination (MYPD) methodology. In addition, while we have taken into account that some circumstances have changed, the three applications were aligned to the Nersa decision on our first RCA application for 2013/14 because the principles remain the same,” said Eskom regulation GM Hasha Tlhotlhalemaje.

Eskom said it accepted that Nersa’s decision on the revenue application was based on the forecast supplied by Eskom. In turn, Eskom’s forecast was derived from a bottom-up process in consultation with various stakeholders, including customer groupings.

Once Nersa takes the decision, the methodology allows Eskom to do an RCA application, comparing what was allowed with what panned out, because projections cannot be adjusted during the year, but only after the year.

This is why Eskom’s RCA application lists all the elements that have led to the unforeseen drop in volumes, including a downturn in the economy, lower investor confidence, a decrease in reliance on Eskom, commodity price changes and elements of price elasticity.

Further, the revenue accounts for 67%, or R44-billion, of the total amount (R66-billion) that Eskom is applying for. The MYPD methodology allows for revenue adjustment attributable to volume and mix changes.

Tlhotlhalemaje explained that, while this had been a contentious issue for most stakeholders, it was a significant aspect of what determined the price of electricity and the revenue allowed by Nersa in MYPD decisions.

“This is completely in line with standard regulatory practice worldwide. Nersa had, in its MYPD 3 decision, assumed a higher volume for sales based on our forecast, which did not materialise.

“When volumes are higher, the price of electricity becomes lower, compared with lower sales volumes, which leads to a higher price. We, therefore, worked with a lower tariff based on higher volumes in the years we are applying for when, in reality, our sales volumes were lower, requiring a higher tariff. This resulted in the underrecovery of fixed costs.”

Tlhotlhalemaje further stated that Eskom had taken the opportunity to revise its sales forecast and had submitted it to Nersa at the MYPD 3 public hearings in 2013. However, Nersa decided to use the original forecast in its final decision.

Meanwhile, the issue of the technical performance of Eskom’s generating plant was also raised.

Eskom finance and economic regulation corporate specialist Deon Joubert requested Nersa to evaluate the utility’s application based on prudence assessed “within the circumstance of the time when Eskom made the five-year application under MYPD 3”.

“The application was submitted at a time when Eskom’s plant availability was at 80%. While we were aware of the risk associated with the then ‘Keep the lights on’ stance of our country, after the IPP capacity investments envisaged by the Energy White Paper of 1998 failed to materialise, Eskom was left as the supplier of last resort,” he notes.

“The capacity shortage was mitigated by Eskom running its existing plants above design parameters – this was not sustainable in the long term and extra wear and tear on plant would eventually manifest in unreliability; no one knew when this would manifest.

“We, therefore, submitted a figure that was closer to our performance at the time of the application. As luck would have it, deterioration of our plant hit and our energy availability factor plummeted during the following three years,” concluded Joubert.