Business Unity South Africa (Busa) has urged the National Energy Regulator of South Africa (Nersa) to suspend its methodology for setting power tariffs and to grant Eskom only inflation-linked increases until the electricity supply industry has been restructured.
In a presentation during the Gauteng leg of a nationwide public hearings process, Busa’s Martin Kingston said that, while the principles of the methodology were sound, “it may be appropriate to suspend it until such time as the electricity supply industry is restructured, especially as tariff setting is open to manipulation until return on the regulatory asset base (RAB) is fully recognised”.
Eskom’s operating model, the business body argued, was not fit for purpose and the utility should be restructured. “This cannot be done in isolation of a restructuring of the whole electricity industry,” Kingston argued.
Busa envisaged a “comprehensive” reconfiguration of the sector in the longer term. Nevertheless, it saw a functional, rather than legal, separation of Eskom’s generation, transmission and distribution units as a possible short-term remedy and a precursor to full legal separation.
President Cyril Ramaphosa established a task team in December to assess ways of addressing Eskom sustainability problems.
The task team presented a plan for splitting the utility into its component parts to the African National Congress’s January lekgotla and Ramaphosa is expected to make a pronouncement on the utility’s restructuring imminently, possibly during his State of the Nation address on Thursday night.
In a fully restructured energy supply industry Busa said independent power producers (IPPs) should no longer supply power to Eskom, but rather compete with the utility. In addition, small-scale embedded generation projects would be encouraged.
Busa also express discomfort with “last minute changes” introduced by Eskom to its submission. The adjustments increased the size of the hikes being sought by the utility during the three-year horizon of the fourth multiyear price determination (MYPD4) period, which would run from April 1, 2019, to March 31, 2022.
Initially Eskom requested three yearly hikes of 15%, but has since revised its request to 17.1%, 15.4% and 15.5%, primarily as a result of a downward revision to its sales forecast for the period.
The utility also made adjustments to its production plan for the period, including: the shutting of 12 additional units at the Hendrina, Grootvlei and Komati coal power stations; a further lowering of the expected energy availability factor (EAF) from its coal fleet for the MYPD4 period; and revisions to the scheduled introduction from new capacity from the Medupi and Kusile projects.
“We are concerned that consumers have been given insufficient opportunity to interrogate fundamental last minute changes,” Kingston said.
Busa was equally concerned with Eskom’s treatment of the RAB-related recoveries, suggesting that tariff setting was “open to manipulation”.
The organisation noted that Eskom’s RAB had been revalued from about R700-billion previously to R1.25-billion and the remaining life of the assets have reduced, with a significant impact on return on RAB and depreciation.
“We urge Nersa to perform an independent review of the revaluation. In the interim, a revaluation should be disallowed.”
Eskom warned of losses of about R20-billion for 2018/19 and 2019/20 even in the event of receiving the hikes it was currently seeking and cautioned that its going-concerned status would be imperilled without substantial increases.
CFO Calib Cassim also described calls for an inflation-linked hike as unrealistic.
He noted that Nersa had already approve a 4.41% hike for 2019/20, following its adjudication of Eskom’s Regulatory Clearing Account applications in 2018. In addition, full cost recovery against current and future IPP contracts would add a further two percentage points to the 2019/20 increase.
“Therefore, in reality, we are already at the top of the inflation target, without giving Eskom a single increase for its own cost of operations.”