Business warned on Friday that South Africa risked entering a “vicious cycle” of ever-increasing yearly electricity hikes, beyond those already approved, owing to the nature of the current tariff-setting formula, which allows Eskom to recover variances in revenue arising when power sales are below that approved in a given multiyear price determination (MYPD) period.

In its Regulatory Clearing Account (RCA) submission, Eskom is seeking to recoup R11.7-billion in revenue variances for the 2013/14 financial year alone, making it the largest single component of the R22.8-billion claw-back application. The second-largest claim relates to its use of R8-billion more in diesel than the R2.5-billion sanctioned for the year.

The revenue variance claim arises, Eskom asserts, as a result of R7.3-billion in lower sales to standard tariff customers in the year, which saw Eskom sell 194 778 GWh under its standard tariff instead of the 208 442 GWh outlined in the current determination, or MYPD3. The utility has also made a further R3.8-billion claim, arising from Eskom’s interpretation of how its controversial negotiated pricing agreement with the aluminium smelters should be treated.

Speaking on the final day of National Energy Regulator of South Africa (Nersa) public hearings in Gauteng, Business Unity of South Africa (Busa) standing committee chairperson on economic and trade policy Martin Kingston said it was unlikely that economic growth and electricity demand would recover for the remaining duration of the MYPD3 to March 31, 2018. Therefore, Eskom would have further claims to recoup revenue over the duration of the prevailing five-year determination period, which would result in hikes well beyond the 8% already sanctioned.

Should Eskom’s RCA application be approved as is, the Eskom tariff could increase by around 16.6% from April 1.

Such as scenario, Kingston argued, would compromise the viability of Eskom’s customers, which, in turn, would lower demand to the point where the viability of Eskom itself could be imperilled. Demand had already fallen to 2007/8 levels, while tariffs had risen sharply, with Busa estimating a 348% over the ten-year period from 2007/8 to 2017/8.

The consequence would be a “vicious cycle, whereby customer unit costs would rise to the point where some domestic enterprises would be forced to either downsize, or close.

“I think this is a self-fulfilling prophecy and we need to think very carefully about how we arrest this particular trend before its damage on the economy becomes irreparable,” Kingston argued.

He was not alone in calling for some reflection as to whether the regulatory methodology was “fit for purpose”, with Ted Blom, representing the newly rechristened Organisation Undoing Tax Abuse, better know as Outa, arguing vociferously for a complete overhaul of the methodology.

PRICE CERTAINTY NEEDED

Business was equally concerned about the uncertainty caused by continual upward adjustments to the tariff in the middle of a determination period, with Eskom having already succeeding in an earlier RCA application, which resulted in the 2015/16 tariff rising by 12.69% instead of 8%.

Sibanye Gold’s Peter Turner said mine planning was affected by “surprise” RCA adjustments within the agreed period and added that the sustainability of, and unlocking value from, South African gold resources required stable and reliable supply and affordable input costs.

The Aluminium Federation of South Africa’s Mark Krieg, added that price predictability and certainty were required to encourage investment in a period of very low or no economic growth.

Krieg warned that a further drop in demand and cost increases would lead to further tariff increases – a “vicious circle that needs to broken” to restore confidence, certainty and growth.

Eskom CFO Anoj Singh concluded by again defending the R22.8-billion claim, arguing that the additional costs had been incurred in the provision of electricity “as efficient and effectively as possible within the context it operated”.

The additional costs were “legitimately claimable, subject to prudency, under the MYPD methodology”, he added.

However, business and civil society presenters expressed serious misgivings about the prudency of both Eskom’s revenue variance claim and its claim for additional costs.

Busa argued that Eskom’s greater used of the diesel-fuelled open cycle gas turbines was the result of operational inefficiencies and should be disallowed, while many presenters argued that Eskom was itself a major cause of the lower sales outcome and that consumers should not be penalised for its failure to complete key new-build projects and maintain its existing plant.

Nersa hearings chairperson Thembani Bukula closed proceedings in Johannesburg with an announcement that the regulator intended announcing its RCA determination on February 25.