During public hearings being 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) has expressed concern that further electricity tariff hikes will disadvantage municipalities and communities.
Salga on Thursday stated that Eskom’s revenue requirements were causing uncertainty with regard to the future electricity pricing path in South Africa and, in turn, causing instability to 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.
Nersa’s public hearings are being held across South Africa, having started in Cape Town on April 16 and scheduled to end in Johannesburg on May 11.
Salga noted that municipalities’ electricity sales have shown a sustained downward trend over the last few years and, in some cases, have dropped significantly.
“This is also the case with Eskom; however, municipalities can not 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 supports Eskom’s financial sustainability, the prudency of some of the costs contained in the RCA applications was questionable.
Salga explained that the revenue variance boils down to inaccurate forecasting on Eskom’s behalf, but that it is now being claimed from the customer. Additionally, Salga questions whether Eskom’s more-than-allowed coal and diesel burn, owing to its internal inefficiencies and not meeting its own targets, is also a consequence of poor maintenance on its power generation fleet.
Salga added that independent power producer (IPP) costs had also accrued owing to Eskom not meeting 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 address its financial challenges through further tariff increases.
On Wednesday, Eskom continued to explain its applications at the Nersa public hearing, in Port Elizabeth, urging stakeholders to note that the RCA was a backward looking process claiming against actual audited costs and not a new application for revenue that is 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 have been 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 accepts that Nersa’s decision on the revenue application is based on the forecast supplied by Eskom. In turn, Eskom’s forecast is 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 can not 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 has been a contentious issue for most stakeholders, it is a significant aspect of what determines 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 when 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 under-recovery of fixed costs.”
Tlhotlhalemaje further stated that Eskom had taken an 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 also came to the fore.
Eskom finance and economic regulation corporate specialist Deon Joubert requested Nersa to evaluate the utility’s application based on prudency 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.