The push back against Eskom’s request for five yearly tariff increases of 16% between 2013 and 2018 began in earnest on Tuesday when the National Energy Regulator of South Africa (Nersa) kicked off its public hearings into the application in Cape Town.
In its third multiyear price determination (MYPD3) application, the utility applied for allowable cumulative revenue of nearly R1.1-trillion over the five-year period, which it said was necessary to cover its costs of operations, as well as its multibillion-rand build programme to the completion of the Kusile coal-fired power station.
CEO Brian Dames indicated that 13% of the proposed increase would cater for its own needs, while the remaining 3% would be required over the period to support the introduction of independent power producers (IPPs), including renewable-energy IPPs.
Should the tariff increase be approved, Eskom’s average selling price would rise from 61c/kWh currently to a nominal 128c/kWh by 2017/18, or a real price of 96c/kWh.
A good portion of the revenue requirement applied for in the application related to anticipated primary energy costs of R355-billion over the period, the bulk of which related to the purchase of coal.
The balance was attributed to IPPs (R78-billion), operating costs (R270-billion), integrated demand management (R13-billion), depreciation (R185-billion) and a return on assets request of R187-billion.
As could be anticipated, there was significant opposition to Eskom’s MYPD3 application at the hearings, particularly given that these would be additional to several above-inflation tariff increases since 2007 that had already resulted in the price rising from around 20c/kWh to 61c/kWh currently.
A number of questions were posed by the Nersa panel, chaired by Thembani Bukula, about the depreciation and return-on-assets components of the MYPD3 application.
CFO Paul O'Flaherty said the depreciation charge was based on yearly increases of 10% over the period, while the return on assets was premised on a transition from a return of 0.9% in 2013/14 to 7.8% in 2017/18. He stressed that the return would remain below the 8.16% target set by the regulator, as well as the utility's weighted average cost of capital of 8.31%.
However, the City of Cape Town’s Dr Leslie Rencontre said the revaluation of assets, which accounted for 17% of the revenue requirement, was a “negative” aspect of the application with which the city did not agree.
Rencontre urged Nersa to reject the proposed revaluation during the five-year period.
Similarly, the Institute of Municipal Finance Officers’ Louise Muller said the revaluation of assets incorporated in MYPD3 was not the “right principle” to be allowed by Nersa. She called for “full disclosure” on the asset valuation model, while Nersa should give guidance on what should be allowed in the tariff calculations.
Independent Democrats Member of Parliament Lance Greyling, who is the Democratic Alliance’s shadow energy minister, argued that Eskom was requesting a far-too-generous rate of return and that this should be pared down from 7.8% to closer to 4%. As a State-owned company, the tariff increases being sought, coupled with the return proposed, amounted to a “double taxation”.
He also argued that Eskom’s revaluation model “radically inflated” Eskom’s expenses and was not justifiable, as Eskom would never replace its full fleet all at once.
Greyling called for a greater interrogation of the utility’s cost base, particularly in the area of coal, which was a key component of the tariff increases being sought.
The Congress of South African Trade Unions' (Cosatu’s) Western Cape organiser Mike Louw added that Eskom’s plan to transition its returns from 0.9% to 7.8% would undermine its developmental role as a State-owned company and turn it into a “profit-thirsty monster”.
The proposed increases were, therefore, “totally unacceptable” and would exacerbate an already gloomy economic outlook, while undermining employment. They would also push up costs for citizens and businesses, especially small businesses.
Cosatu instead called for inflation-linked increases over the period, warning that further steep price rises were at odds with government’s growth ambition in the areas of manufacturing and minerals beneficiation and in conflict with the New Growth Path and the Industrial Policy Action Plan.
In his presentation, National Union of Metalworkers of South Africa (Numsa) deputy general-secretary Karl Cloete also insisted that Eskom be granted only “inflation-matching” increases.
Consumers should not be “punished” for policy “sins of the past” and Eskom “inefficiencies”, which had resulted in “needless costs” being added to the MYPD3 application. For instance, he questioned whether a R46-billion shareholder return was justifiable for a State company.
Cloete argued that the increases being sought would have serious cost consequences for many companies and could lead to further job losses in some sectors, such as the foundries sector.
A recent Numsa survey found that 37.5% of energy-intensive responding firms anticipated that “they would have to close down” should the price increases be approved.
Cloete also pointed to a recent National Foundry Technology Network study, which found that seven foundries had already closed and that further increases could threaten the livelihoods of 15 000 foundry workers.
Numsa also insisted that the MYPD3 period should be limited to three years, which would offer enough time to allow for a “thorough review of the country’s electricity pricing policy” ahead of the introduction of a 20-year electricity price path and model.
During such a review, Numsa would advocate that the country's energy system be “brought under democratic control with a strong social and public mandate” and that the corporatisation of the utility be reversed.
“We are also of the view that the refusal of the State to capitalise Eskom is tantamount to privatisation of the utility, as the mandate of the utility becomes less about electrifying the country and ensuring economic development but more about maximising profit,” the union argued in its submission.
However, the union concurred with Eskom that coal be declared a “strategic resource” to help mitigate future price increases – a view not shared by many of the presenters, which called for a greater role for IPPs.
The hearings moved to Port Elizabeth on Wednesday and would culminate in a two-day session in Midrand on January 30 and 31.