Eskom’s review of Nersa rulings draws direct link between debt surge and ‘inadequate tariff’

26th July 2019

By: Terence Creamer

Creamer Media Editor

     

Font size: - +

State-owned electricity utility Eskom’s court papers challenging two recent price determinations by the National Energy Regulator of South Africa (Nersa) include a detailed financial analysis showing a direct correlation between its surging debt levels and what it describes as years of “chronic under pricing”.

The utility’s debt burden has increased to about R450-billion and could rise to over R600-billion by the early 2020s.

In an unprecedented move, Eskom has approached the courts for a judicial review of the regulator’s price determination for the 2018/19 financial year, as well as three Regulatory Clearing Account (RCA) determinations for the 2014/15, 2015/16 and 2016/17 financial years. The utility sought a 19.9% tariff hike for 2018/19, but was granted only 5.23%, while it moved to recoup R67-billion through the RCA applications, but received only R33-billion.

Eskom is asking the High Court to set aside the determinations on the basis that they are “unconstitutional and invalid”. It will argue, too, that Nersa’s actions were “irrational and unjustifiable” on the basis that the determinations included arithmetic errors, incorrect reasoning and ignored relevant information submitted to it by Eskom.

In its evidence, Eskom will highlight the damage caused to its liquidity by the delays in processing of its RCA applications, as well as what it deems to have been procedural and substantive irregularities in the regulator’s eventual decisions on the three applications.

It will also draw, however, on a financial analysis that seeks to prove that the assumption that its tariffs are “comparatively high” is incorrect. Instead, it will argue that the tariffs are among the lowest in sub-Saharan Africa and are also below cost-reflective levels outlined in models developed not only by Eskom itself, but also Nersa and several other organisations.

The analysis was shared during the recent hearings into Eskom fourth multiyear price determination (MYPD4) submission. It seeks to demonstrate how inadequate tariffs account for about 80% of Eskom’s current debt burden, which is popularly ascribed to over expenditure on Medupi, Kusile and Ingula, as well as surging primary energy costs, over-staffing, mismanagement, fraud and corruption.

Eskom’s analysis shows that, under the prevailing Nersa-sanctioned price path, it will report yearly funding shortfalls of over R40-billion – shortfalls that will be only partially offset through promised fiscal transfers of R23-billion a year for the coming ten years.

PRICE-PATH COMPARISONS

The financial analysis compares Eskom’s actual and projected electricity tariffs from 2010 to 2024 against various external price-path references, including one produced by Nersa in 2009.

Comparisons are also made with the price paths outlined for several scenarios in the draft 2018 Integrated Resource Plan (IRP), as well as with those provided in submissions made by Business Unity South Africa (Busa) and the Energy Intensive User Group of Southern Africa (EIUG) during previous Nersa hearings.

The Nersa analysis, which was published as part of the reasons for decision delivered by the regulator in 2009, comprises a five-year future price-path cone for the period 2009/10 to 2013/14. It includes an upper- and a lower band for transitioning Eskom’s tariff to a level reflective of the utility’s prudent and efficient costs.

The upper cone assumes that, to reach cost-reflective levels, the 30% increase approved for 2009/10 should be followed by two yearly nominal increases of 60%, before falling to 30% and then below 10%. Under the scenario, Eskom tariffs, reported in constant 2009 rands, surge from 30c/kWh in 2009/10 to 80c/kWh in 2013/14, after which they plateau to increase at the rate of inflation. In constant 2018 rands, Eskom says the increase to reach Nersa’s ‘upper boundary of pricing cone’ is from 50c/kWh to 135c/kWh.

For the lower cone, which assumes major cost cutting by Eskom over the period as well as R100-billion equity injection, four yearly hikes of 30%, followed by a low double-digit increase result in tariffs rising steadily to nearly 70c/kWh in constant 2009 rands by 2014/15, or a plateau level of about 114c/kWh in constant 2018 rands.

In other words, Nersa’s 2009 ‘Future Price Path’ suggests that the cost-reflective-tariff band lies between 70c/kWh and 80c/kWh in 2009 constant rands and between 114c/kWh and 135c/kWh in 2018 constant rands.

Eskom claims that this band is corroborated not only by the draft 2018 IRP scenarios, but also by the price-path models outlined in the Busa and the EIUG submissions for the MYPD3 public consultation during January 2013, as well as a World Bank report of 2016.

It also notes that actual tariffs have deviated materially from that band. In constant 2009 rands, tariffs rose from 30c/kWh to 54c/kWh over the 2009/10 to 2018/19 period, or from 50c/kWh to 89c/kWh in constant 2018 rands.

When the analysis was first aired during Nersa’s Rustenburg and Midrand hearings into the MYPD4 application, the regulator told Eskom it was unfair for Eskom to hold it to a price path analysis published in 2009 and ahead of revelations of widespread corruption and maladministration at Eskom. Meanwhile, Busa and the EIUG called on the regulator not to grant Eskom any increase above inflation until the scale of the corruption and inefficiencies had been established.

WHAT ABOUT CORRUPTION?

In its court papers, Eskom will outline the actions it is taking to clean-up governance, recoup money lost to corruption and improve operational efficiencies. However, it will also argue that its financial sustainability, as well as the sustainability of an electricity supply industry that is set to include more independent power producers in future, will not be achieved in the absence of a transition to cost-reflective tariffs.

To amplify its case, Eskom will also draw on the findings of a controversial 2016 World Bank report, which is often cited as evidence of massive overstaffing at the South Africa utility.

Using global benchmarking, the report argues that, instead of its current headcount of above 42 000, the South African utility should be employing less than 15 000 people.

Eskom argues that the headcount benchmark is inaccurate, primarily because it has been calculated using an assumed transmission and distribution network of only 77 811 km, whereas Eskom’s actual network comprised 368 331 km in 2015.

Where Eskom does agree with the report, however, is in its conclusion that

Eskom’s electricity prices are at “unsustainably low levels”.  The World Bank report further states that “at benchmark performance” Eskom’s price should be around $0.10/kWh (around 135c/kWh for 2018/19), compared to the around $0.06/kWh that prevailed up to 2018/19.  

Eskom will acknowledge in its papers that further price increases would be detrimental to poor communities and vulnerable industries. Nevertheless, it will argue that it needs to receive enough revenues to be sustainable and that poor citizens and vulnerable industries could rather be protected through government-funded production or consumption subsidies.

Eskom has submitted its founding and supplementary affidavits to the Pretoria division of the High Court, but Nersa has yet to file its responding affidavit. A judge has not been appointed and a court date has not yet been set.

Should Eskom prevail in its applications, it will ask the court to order that Nersa make a fresh 2018/19 ruling and allow the utility to recover the difference between the new decision and the previous one in first annual tariff adjustment following the redeterminations. As for the three RCA decisions, Eskom will seek relief for having been “irregularly under compensated”.

Eskom has not yet applied to review Nersa’s most recent MYPD4 decision, which will govern the utility’s tariffs for the 2019/20, 2020/21 and 2021/22 financial years. Nersa is yet to release its reasons for decision.

The utility has, however, already signalled its unhappiness with the sanctioned increases of 9.41% for 2019/20, as well as the 8.1% and 5.22% for 2020/21 and 2021/22 respectively, having requested three yearly increases of above 15%.

Edited by Creamer Media Reporter

Comments

The content you are trying to access is only available to subscribers.

If you are already a subscriber, you can Login Here.

If you are not a subscriber, you can subscribe now, by selecting one of the below options.

For more information or assistance, please contact us at subscriptions@creamermedia.co.za.

Option 1 (equivalent of R125 a month):

Receive a weekly copy of Creamer Media's Engineering News & Mining Weekly magazine
(print copy for those in South Africa and e-magazine for those outside of South Africa)
Receive daily email newsletters
Access to full search results
Access archive of magazine back copies
Access to Projects in Progress
Access to ONE Research Report of your choice in PDF format

Option 2 (equivalent of R375 a month):

All benefits from Option 1
PLUS
Access to Creamer Media's Research Channel Africa for ALL Research Reports, in PDF format, on various industrial and mining sectors including Electricity; Water; Energy Transition; Hydrogen; Roads, Rail and Ports; Coal; Gold; Platinum; Battery Metals; etc.

Already a subscriber?

Forgotten your password?

MAGAZINE & ONLINE

SUBSCRIBE

RESEARCH CHANNEL AFRICA

SUBSCRIBE

CORPORATE PACKAGES

CLICK FOR A QUOTATION