Some progress has been made in identifying the trade-offs required for Eskom to deal with the R225-billion financial shortfall that has emerged as a result of it being granted a lower-than-requested tariff increase for the five-year period to 2018. But outgoing CEO Brian Dames says he cannot discount the possibility that it could request a reopening of the third multiyear price determination (MYPD3).

The utility has already confirmed that it is planning to raise an additional R50-billion in debt over-and-above its existing R300-billion funding plan for the period from April 1, 2010 to March 31, 2017, as a direct response to the determination. However, speaking during an interim results presentation overshadowed by the surprise announcement that he would be leaving Eskom at the end of March, Dames said that MYDP3 would require a material change to the utility’s business model, as well as more trade-offs.

The shake-up has been precipitated by the National Energy Regulator of South Africa’s (Nersa’s) February 28 announcement that it would granted Eskom yearly increases of 8% for the MYPD3 period, instead of the 16% requested. This translated into allowable revenue for the period of R862-billion, rather than the nearly R1.1-trillion sought.

The full impact, however, was postponed to the latter three years of the determination period during which R191-billion of the shortfall would arise.

In response, the utility initiated a far-reaching review designed to find strategies to deal with the shortfall in the breathing space provided by Nersa in the first two years, while still implementing a R30-billion cost-savings plan to which it had committed in its MYPD3 application.

Dames reported that, besides taking on additional debt, Eskom was in discussions with its shareholder on a range of other remedies, including changes to the equity structure. “It is very clear to us when you look at the balance sheet that you would have to look at some of those [equity] choices as well.”

However, such a discussion was arising at a time when the National Treasury was working to reduce its fiscal deficit. In fact, during his Medium-Term Budget Policy Statement speech in October, Finance Minister Pravin Gordhan reaffirmed government’s commitment to meeting its fiscal-deficit target for the year, which was revised lower to 4.2% of gross domestic product (GDP), from 4.6% in February - a revision aided by a technical adjustment to the reporting format, which boosted receipts and payments. The deficit was then projected to decline to 4.1% of GDP in 2014/15, with expenditure of R1.14-trillion anticipated during the period, before falling to 3.8% in 2015/16 and 3% in 2016/17.

Acting Eskom finance director Caroline Henry, who is to be replaced by Tsholofelo Molefe, who has been appointed to replace Paul O'Flaherty, stressed “nothing is sacred” in the review process. She said that besides interrogating operational and capital-expenditure efficiencies existing contracts were also being reviewed to assess whether further savings could be secured.

Eskom was also planning to exploit the regulatory clearing account (RCA) to “claw back” some of the revenue disallowed through the determination – the RCA is a risk management device used to reconcile differences between actual and approved revenue during the MYPD period.

Corporate Counsel Mohamed Adam reported that the utility had been in ongoing dialogue with Nersa regarding the use of the RCA, as well as other changes to the environment since the determination. The key change, he said, related to the revenue impact as a result of the lower power sales.

The utility reported a 0.1% decline in sales during the interim period, having reported a 3.7% decline in electricity sales to 216 561 GWh in 2012/13 – the last time sales were at current levels was in 2006.

“So all of these things taken together will have to be reviewed and, if necessary, we will have to go back to Nersa to see what is possible to deal with this challenge,” Adam said.