State-owned electricity utility Eskom will apply for urgent interim relief against the National Energy Regulator of South Africa’s (Nersa’s) most recent tariff determination, which it is taking on legal review, arguing that such relief is required to “avoid financial disaster”.

The legal action follows the publication of Nersa’s long-awaited reasons for decision relating to the fourth multiyear price determination (MYPD4), covering the three years from 2019/20 to 2021/22, as well as the Regulatory Clearing Account (RCA) balance for the 2018 financial year.

Eskom has already approached the courts for a judicial review of the regulator’s price determination for the 2018/19 financial year, as well as three previous RCA determinations for the 2014/15, 2015/16 and 2016/17 financial years.

The utility is claiming that the regulator failed to adhere to the rules and principles of the Electricity Regulation Act, as well as the MYPD methodology, when arriving at its MYPD4 and RCA2018 decisions.

Nersa granted Eskom allowable revenue of R206.38-billion for 2019/20, which translated into a tariff increase of 9.41% from April 1, exclusive of the 4.41% hike sanctioned following an adjudication, in 2018, of three Eskom RCA applications. The regulator also granted further increases of 8.1% and 5.22% for 2020/21 and 2021/22 respectively, equating to allowable revenue of R221.843-billion and R233.078-billion in 2020/21 and 2021/22 respectively.

Eskom applied for R219-billion for financial year 2019/20, R252-billion for financial year 2020/21 and R291-billion for financial year 2021/22.

Following the March 7 announcement of the Energy Regulator, Eskom immediately highlighted that the regulator had disallowed R102-billion of revenue applied for over the MYPD4 period and hinted that its board would considered its legal options once the reasons for decision were published.

Nersa eventually published its reasons on October 9, more than 200 days after the determination was made and well in excess of the 180 days prescribed in the Promotion of Administrative Justice Act and the National Energy Regulator Act.

In a statement, Eskom CFO Calib Cassim said that, following analysis of the reasons for decision, the Eskom board had decided to take the matter to court.

“Consequently, we have put in an application for urgent interim relief, which is necessary to avoid financial disaster for Eskom. We are seeking an order to address this shortfall in a phased manner. In addition, we are seeking the court to review and set aside Nersa’s MYPD4 revenue decision and remit that decision to Nersa for reconsideration in the light of the court’s judgment.”

Eskom stated that the key reason for the shortfall related to Nersa’s decision to offset envisaged government support of R23-billion a year, referred to by Finance Minister Tito Mboweni in his Budget speech, against its return on assets.

“This resulted in the return on assets in the decision being approximately negative 1% for each of the financial years. This is very far below a reasonable return and worsens Eskom’s financial sustainability.”

The utility argued that the MYPD methodology did not allow for an equity investment by government to be included as a return on assets and that the deduction of the financial support defeated the purpose of the support received by the shareholder.

Mboweni has subsequently introduced a Special Appropriations Bill to transfer a further R59-billion to Eskom over the coming two years over-and-above the R69-billion announced in the Budget for three years from 2019/20 to 2021/22. Discussions are also under way within government about restructuring Eskom’s R450-billion in debt, with an announcement anticipated in the coming weeks.

The determinations, Eskom argued further, were at odds with the Electricity Regulation Act, which required Nersa to set revenues that were reflective of prudent and efficient costs, including a reasonable return on capital.

Government’s Electricity Pricing Policy, the utility noted, allowed Nersa until 2013 to ensure that Eskom’s revenues and tariffs reached that level.  This was however not yet achieved six years later by the end of the 2019 financial year and Nersa’s MYPD4 revenue decision was worsening the lack of achievement of this policy requirement.

“Eskom provided sufficient details during public hearings on the impact of the continuous shortfall between allowed revenue and efficient and prudent costs for many years and especially since the beginning of the MYPD3 period. The MYPD4 decision has exacerbated the situation further and raises questions about Nersa’s commitment to implementing its mandate that requires considering the balance between the impact on consumers with Eskom’s sustainability when making revenue decisions,” Cassim stated.

In its reasons for decision, the Energy Regulator said it had attempted to strike a balance between Eskom’s financial sustainability and the impact on the South African economy. “The MYPD4 tariff increase granted to Eskom places Eskom in a favourable financial position, considers the consumers and mitigates the negative effect of the tariff increase on the economy as discussed above.”

In a statement, Nersa noted Eskom intention to take the Energy Regulator’s MYPD4 decision on judicial review. It also highlighted that the National Energy Regulator Act, 2004 empowered any person to institute proceedings in the High Court for the judicial review of any decision of the Energy Regulator in accordance with the Promotion of Administrative Justice Act, 2000.