The National Energy Regulator of South Africa (Nersa) has granted Eskom a partial clawback of revenue and cost variations recorded during the first year of the third multiyear price determination (MYPD3), which runs for five years until March 31, 2018.

Nersa made the determination on Tuesday, having received Eskom’s Regulatory Clearing Account (RCA) application on November 10 and having held public hearings on the matter in six of the country’s nine provinces between January 18 and February 5.

Through its RCA submission, Eskom sought to recoup R22.8-billion in revenue and cost variances for the 2013/14 financial year; the first year of the MYPD3 control period.

Following its analysis and consultation, Nersa granted Eskom R11.2-billion in cost and revenue variances, representing about half of what it had been seeking.

Chairperson Jacob Modise said R10.3-billion was recoverable from standard tariff customers during the 2016/17 financial year only, with R983-million recoverable from Eskom’s special pricing agreement and international customers.

The effect on the tariff from April 1, 2016, would be a rise of 9.4%, marginally above the five yearly 8% increases sanctioned under MYPD3.

However, it was above the 3.5% increase that would have actually been instituted, owing to the MYPD2 RCA adjustment, implemented in 2015/16, which resulted in a tariff increase for the year of 12.69%, and changed Eskom's revenue base for the subsequent years of the MYPD3.

In terms of the Municipal Finance Management Act, the Public Enterprises Minister Lynne Brown would table the municipal increases in Parliament on or before March 15, 2016, with municipal tariff adjustments implemented from July 1. These would be above the 9.4% Eskom tariff, as municipal distributors would recoup higher payments made to Eskom from April, with increases passed on to consumers from July.

MYPD4 APPLICATION

Nersa also instructed Eskom not to make further RCA applications under the MYPD3, but to rather prepare a MYPD4 application, which took account of material changes to the demand outlook and delays to Eskom's build programme.

In the absence of an entirely new application, Eskom would likely have returned with further RCA submissions for revenue variances of above the 10% level that triggered public consultation.

Nersa full-time regulatory member for electricity Thembani Bukula said that, while the RCA mechanism would be sustained, having further applications in the current context of vastly altered assumptions would run counter to the stated intention of offering price-path certainty.

The State-owned utility would need to submit such an application within the coming three months, which was a tight timeframe given the obligation on Eskom to first consult with the National Treasury and the South African Local Government Association.

ESKOM UNHAPPY

Eskom reacted negatively to the determination, with CEO Brian Molefe arguing that the decision did not “address the question of Eskom’s continued financial sustainability”. In addition, it would have “operational consequences”.

“We note with concern the decision on open cycle gas turbines (OCGTs), which will guide Eskom’s operations in the future in terms of balancing the energy supply and demand in a bid to avoid load-shedding,” Molefe said, referring to Nersa’s decision to allow the utility to recover only R1.25-billion for diesel used in 2013/14, against an applied fore amount of over R8-billion.

Nersa argued that Eskom’s high diesel consumption related directly to the unavailability of the coal fleet and it had, thus, only allowed a recovery of OCGT costs at a rate equivalent to the coal price, rather than the actual operating cost.

Molefe said that, although Eskom had reduced diesel usage in recent months and had made maintenance strides, it continued “to run a constrained grid”.

“OCGTs are part of our emergency portfolio and have been used in the past to avoid or limit load-shedding with the understanding that we can recover these costs within the RCA process. The recovery of diesel costs is now seriously in question with Nersa’s current decision. We will do our best to minimise the risk of load-shedding, striking a balance with Eskom’s already depleted balance sheet,” Molefe said.

Minister Brown said she would study the reasons for decision document and discuss with Eskom "the implications of this lower-than-expected increase".

"I have requested Eskom to provide me with a report on the impact this increase will have on their programmes. I appeal to all municipalities to consider the economic conditions of their citizens and businesses when considering electricity payment increases. They must implement their respective indigent policies to cushion the most vulnerable against this increase," Brown said.

REACTION

Meanwhile, Chamber of Mines CEO Roger Baxter said that, while the increase was significantly higher than inflation, it was more palatable than the 16%-plus increase that Eskom applied for in both the MYPD and RCA processes.

“However, for the struggling mining sector this increase will have a major impact on increasing the industry’s cost base,” Baxter added, noting that electricity costs had been the fastest growing component of the mining sector’s cost base, having increased by over 300% over the past seven years.

The Steel and Engineering Industries Federation of Southern Africa described the determination as an "unfortunate setback" for the metals and engineering sector. Chief economist Henk Langenhoven said the increase would have a "crippling effect not only
on the embattled metals and engineering sector, but also on the South African economy".

"Production in the metals and engineering sector has not recovered since the 2008/9 financial crisis and has deteriorated further since June 2015. Production is currently 30% below the peak of 2007," Langenhoven said, warning that the tariff increase would postpone the sector’s recovery even further.

The Congress of South African Trade Unions (Cosatu) said it was “utterly opposed” to the increase, arguing that consumers were being forced to carry the burden of Eskom’s inefficiencies.

“Electricity is a very central part of the running costs of nearly all companies and at the rate that Nersa is awarding Eskom tariff increases, many businesses will start to retrench workers and very few businesses will get started. This will slow down economic growth even further and have a catastrophic impact on an already limping economy with high levels of unemployment, at more than 34%, and more than 50% of South Africans living in poverty according to Stats SA. We warn employers though not to use this electricity tariff hike increase as an excuse to retrench workers,” Cosatu said in a statement.

“Something drastic needs to be done to sort out the Eskom issues and the consumers cannot afford to pay for the sins of others,” the union added.

Likewise, the National Union of Metalworkers of South Africa (Numsa) said it was “outraged” by the decision.

“This hike of almost 10% will hit working-class consumers hard, as they are already struggling with rises in school fees, transport costs and food prices, as a result of the drought and falling rand," Numsa said. “Also at risk are workers in companies struggling to survive in a harsh economic climate. Jobs are already in the firing line and the tariff increase could be used as the excuse to start retrenching. The Chamber of Mines has already warned that, if Eskom’s application was approved, 40 000 jobs could be lost.”

Cape Chamber of Commerce and Industry president Janine Myburgh argued that the increase would not solve Eskom’s problem and could even make them worse.

“What it means is that more businesses and domestic consumers will turn to alternative energy sources to escape the high and seemingly ever-increasing tariffs,” Myburgh argued.

However, AfriBusiness welcomed Nersa’s announcement in light of Eskom’s efforts to receive a 16.6% tariff increase.

“After attending the public hearing on 4 February 2016 we were confident with the rest of the roll players who were present that Eskom would not succeed in their endeavour for a 16.6% increase in the tariff of electricity. Nersa’s announcement today speaks volumes of the impact that South Africans can have on their own future, and we are very pleased with the announcement. This is indeed a victory for all,” AfriBusiness law and policy analyst Armand Greyling said.

By contrast, Organisation Undoing Tax Abuse (Outa) described the determination as unacceptable and indicated that it would request the full written reasons for the decision.

“The organisation believes this increase is too lenient towards Eskom and allows the bill for various inefficiencies within Eskom to be passed on to consumers. The decision will be studied in detail and energy analysts, economists and lawyers will be consulted to determine whether the increase is justifiable and lawful,” Outa said.