State-owned electricity utility Eskom has stressed that the regulator’s “prudence” review of its R22.8-billion clawback application could well result in it receiving a lower determination. But CFO Anoj Singh warns that a marked deviation from the claim could pose a serious risk to the way investors price Eskom debt and perceive the tariff-setting methodology.

On November 10, Eskom submitted a Regulatory Clearing Account (RCA) application for the first year, or 2013/14, of the five-year third multiyear price determination (MYPD3).

The National Energy Regulator of South Africa (Nersa) subsequently initiated its adjudication processes, with written comments due by December 14. It will also host hearings between January 19 and February 4, before making its determination by the end of February.

If approved, the R22.8-billion clawback could result in tariffs rising by nearly 17% from April 1, 2016, instead of the 8% already sanctioned, but Nersa typically has not granted Eskom its full tariff requests. The main components of the RCA relate to a revenue variance of R11.7-billion and diesel expenses of R8-billion.

In its communication with bondholders and investors, Singh says, Eskom has been careful to emphasise that the submission offers no “estimation of prudence, which is the domain of Nersa”. In other words, while Eskom argues that the submission is based on fact-based calculations verified by Deloitte, it has been cautioning the market to expect a lower figure.

But the size of the differential will be closely monitored, with Singh suggesting that the RCA determination will have a major bearing on the future pricing of Eskom bonds and debt.

He even indicates that the utility may wait for the determination before making any fresh approaches to the domestic and international bond markets – the utility is said to be con- sidering a $1-billion global bond issuance before the end of its financial year.

“I think all the investors are basically looking at this process to understand how they price our debt going forward, given the unsuccessful selective reopener,” Singh says, referring to Eskom’s April 30 approach to Nersa for an additional 9.58% to cover surging diesel-related costs and to pay for the extension of short-term power purchase contracts with private generators. Nersa rejected the application on June 29.

The importance of the clawback arises from the fact that it could go part of the way in alleviating some of the financial pressure on Eskom, without being sufficient by itself to ensure the utility’s recovery to an investment grade credit rating.

Nevertheless, it will improve Eskom’s ability to meet its financial commitments and support a recovery in the group’s financial ratios, which, in turn, would be supportive of Eskom’s borrowing programme.

As importantly, Singh suggests that a successful RCA application would offer greater certainty for investors in South Africa’s regulatory process and would guide a follow-up RCA claim for the 2014/15 financial year, which is likely to be submitted soon after the 2013/14 RCA determination.

However, a material gap between the claim and the determination does present a “major downside risk”.

“In our communication we have been [having] with the investor community, it has been on the basis that, while we think we have a claim of R22.8-billion, it is still subject to prudence and it may be a lower number,” Singh explains, adding that it has even been articulating a range. “But, certainly, if we come out with number of say R8-billion, then I think that would undermine the messaging.”

Meanwhile, Eskom is also considering an early MYPD4 application to Nersa and has confirmed that it is likely to begin working on the submission once its corporate plan is finalised at the end of February.

The utility will assess the possibility of applying for a ten-year tariff path, but may still make two more RCA applications in parallel, in light of an expectation that the MYPD4 could involve an 18- to 24-month adjudication process.