State-owned electricity group Eskom has expressed confidence that its three applications to recoup nearly R67-billion through the Regulatory Clearing Account (RCA) mechanism will succeed, stressing that its submissions are fully aligned to the most recent RCA decision made in 2016 for the 2013/14 financial year.
However, regulation GM Hasha Tlhotlhalemaje stresses that the utility does not anticipate that, even if approved, the full amount will be reflected in the 2019/20 increase, but will, instead, be liquidated over several years, possibly at a rate of an additional 2% a year on approved tariff increases. She also stresses that there will be no further increase before April 1, 2019.
The applications relate to three years of the third multiyear price determination (MYPD3) period, which operated for a five-year period between April 1, 2013 and March 31, 2018.
To recoup the R11.2-billion arising from its 2013/14 RCA application, the tariff for 2016/17 was increased to 9.4% instead of the 8% approved for the financial year.
However, the RCA mechanism then became the subject of a protracted legal contestation, with the High Court deeming the adjudication process carried out by the National Energy Regulator of South Africa (Nersa) in 2016 to be illegal.
However, subsequent rulings by the Supreme Court of Appeal and, again in August last year, by the Constitutional Court, opened the way for Nersa to begin processing RCA applications once more.
RCA applications are backward-looking and are designed to reconcile revenue related to cost recovery and revenue adjustments based on actual variances, as reflected in Eskom’s audited financial statements.
As a result of legal delays, Nersa will now adjudicate all three RCA applications for 2014/15 (R19.2-billion), 2015/16 (R23.6-billion) and 2016/17 (R23.9-billion) together.
The deadline for written submissions has passed, but public hearings will run nationally from April 16 to May 11. Nersa expects to make a determination on the RCA balance on June 21.
ANOTHER RCA ON THE WAY
Eskom will make a further R20-billion RCA submission in July for the final year, 2017/18, of the MYPD3 period, before submitting its MYPD4 application for the financial year beginning on April 1, 2019.
In December last year, Eskom was granted a 5.23% tariff increase following a single-year revenue application for 2018/19, in which it requested a 19.9% hike. The utility’s board has since indicated that it would take Nersa’s 2018/19 determination on review.
In the event of the full R67-billion claw-back sought being both granted and liquidated in a single year, the electricity tariff would surge by 30% from April 1 next year – this before any adjustment potentially arising from Eskom’s first-ever review of a Nersa determination.
Such an outcome, Tlhotlhalemaje says, is not only undesirable, but also unlikely, owing to the fact that the regulator has the authority to spread the RCA claw backs over a number of years.
“There is currently an uproar about a possible 30% tariff increase . . . but this is not something that Eskom is anticipating, as we expect that there will be a phased approach for recovering the R67-billion over three, four, or five years. However, that is a Nersa decision,” she stresses.
SALES VARIANCE
An aspect of the applications that is likely to receive a significant amount of attention is a request for a revenue clawback of R44.4-billion, representing 67% of the combined applications, arising from the variation arising as a result of lower actual sales when compared to those assumed in Nersa’s MYPD3 determination, which was made in 2013.
The RCA methodology allows for revenue adjustments arising from volume variations, which over the period were far lower, Eskom says, owing to the slowdown in the economy, a decreased reliance on Eskom, commodity prices changes and elements of price elasticity. The utility claims, too, that it has stripped out the 2015 load-shedding from the decline in sales volumes and its revenue-variance calculations.
Nersa, Eskom stresses, made the final decision on sales volumes for the MYPD3 period and decided to sustain them at the levels initially outlined by Eskom (premised on yearly growth of 1.9%) in its 2012 application, notwithstanding a later letter sent by Eskom to the regulator in early 2013 indicating that sales were moderating and that Eskom was forecasting growth of 0.9% a year. Even the second projection proved optimistic, with sales having actually fallen during the period.
The higher sales assumption, which is the denomination when translating allowed revenue into a tariff, helps moderate the yearly tariff increase for the MYPD3 period to 8%, as opposed to the 16% sought.
Eskom corporate specialist finance Deon Joubert highlights that, if the lower sales volumes had been incorporated into Nersa’s MYPD3 decision, there would have been a higher tariff increase for each one of the five years covered by the determination period.
“This is not a cost that the consumer is now having to pay because of inefficiency by Eskom, or Nersa, or because of some error of forecasting. The higher sales forecast delayed the cost to the economy. The economy would have paid a higher price in 2014, 2015, 2016 and so on, because the fixed costs would have been the same, but we would have absorbed them into a lower volume,” Joubert explains.
He adds that allowing for retrospective adjustments for “uncontrollable” components is not only sound regulation, but also international best practice. In the absence of such a re-measurement mechanism, utility’s would be incentivised to make “overly conservative” assumptions on everything from fuel costs to exchanges rates and volumes to mitigate the risks associated with setting prices based on forecasts and assumptions.
“To avoid such perverse incentives, it is standard regulatory practice worldwide to incorporate mechanisms that adjust for non-controllable elements.”
OTHER COMPONENTS
The other components included in the three RCA applications include: higher independent power producer costs (R7.4-billion); international purchases (R9.1-billion); coal (R3.5-billion), open cycle gas turbines (R1.4-billion); and other primary energy (R2.8-billion). Also included is an over-recovery of R3.3-billion through the environmental levy.
Overexpenditure on operating costs during the three years, which amounted to R10-billion, have been absorbed by Eskom, Tlhotlhalemaje says.
Despite Eskom’s confidence that the application is fully in line with the most recent RCA determination, opposition to the applications will be high.
Already some written submissions have urged Nersa to reject any recovery against lower sales volumes on the basis that it is the consequence of inefficient forecasting by Eskom. In addition, there is strong opposition to Eskom recovering more revenue related to coal, owing to perceptions of corruption in procurement.
These arguments will be ventilated during the hearings, which start in Cape Town on April 16 and will conclude in Soweto on May 11.