Tariffs could rise materially in 2020 should Eskom prevail in court bid for urgent relief

17th October 2019 By: Terence Creamer - Creamer Media Editor

Tariffs could rise materially in 2020 should Eskom prevail in court bid for urgent relief

Photo by: Creamer Media's Dylan Slater

State-owned electricity utility Eskom’s decision to approach the courts for urgent relief in the form of a reversal of the Energy Regulator’s controversial March 7 decision to offset a government equity injection of R69-billion through a lowering of the utility’s return on assets could result in material increases in electricity tariffs in the coming two years.

Eskom announced on October 11 that it had applied for urgent interim relief against the Energy Regulator’s fourth multiyear price determination (MYPD4), which it would also take on legal review on a non-urgent basis.

The utility said the regulator’s decision to offset the equity investment, which Finance Minister Tito Mboweni announced in his February Budget would be disbursed at a rate of R23-billion a year for three years, “defeated the whole purpose of the government support”.

The decision, it added, was at odds with the MYPD methodology and the Electricity Regulation Act, which required the regulator to set revenues reflective of prudent and efficient costs, including a reasonable return on capital.

“Consequently, we have put in an application for urgent interim relief, which is necessary to avoid financial disaster for Eskom,” CFO Calib Cassim announced.

The review of the MYPD4 was not unexpected, with the utility having already moved to review the 2018/19 determination, as well as three regulatory clearing account (RCA) decisions for the 2014/15, 2015/16 and 2016/17 financial years.

When the MYPD4 decision was announced, Eskom also immediately highlighted that the determination had left it with a R102-billion financial hole, but that it would study the regulator’s reasons before taking it on review. Those decisions were eventually published on October 9, triggering not only the review, but more surprisingly, a decision to approach the courts for urgent relief.

GM for regulation Hasha Tlhotlhalemaje reports that the application for urgent relief has been submitted to the Gauteng North High Court and that Eskom expects the matter to be adjudicated by February 2020.

In its application, Eskom argues that the decision to subtract the equity injection from its return on assets not only falls foul of the MYPD methodology, but is also irrational as it has resulted in Eskom’s return on assets being reduced to negative 1% for each of the financial years covered under the MYPD4.

In addition, Eskom argues that the relief is urgent, because its precarious financial position, which has been worsened by the regulator’s decision to offset the equity injection, poses a risk not only to its sustainability but also to South Africa’s fiscal balance. For this reason, it wants the High Court to make an immediate intervention rather than wait for the outcome of a review of the MYPD4, which will follow.

As with the other review applications, the MYPD4 review is unlikely to be resolved ahead of April 1, the date of Eskom’s next annual tariff adjustment.

Should Eskom prevail in securing the relief it seeks, the full R69-billion injection would be recovered through the tariff over a three-year period, starting on April 1, 2020.

The utility is proposing that the recovery be phased-in, with the first R15.5-billion recouped in 2020/21, followed by claw-backs of R43-billion and R10.5-billion in 2021/22 and 2022/23 respectively.

The impact on the tariff would be material, as the equity claw-back would arise at the same time as the tariff is adjusted to allow for the liquidation of RCA-related awards, that have already been granted.

While Eskom is disputing the value of these awards through a separate review process, it stresses that the amounts already awarded should nevertheless be liquidated, as there is no threat of an over-recovery in light of the fact that it is seeking higher RCA awards.

Already, the RCA liquidation for 2019/20, resulted in the tariff for the year being 4.41% higher than the 9.41% approved for the first year under MYPD4.

Should the courts side with Eskom on its claim for urgent relief, the tariff could rise by 16.6% next year as opposed to the 8.1% already sanctioned and by 16.72% on April 1, 2021, rather than by the 5.22% approved in the MYPD4.

Tlhotlhalemaje acknowledges that Eskom is in “unchartered territory” in seeking such relief, but stresses that Eskom’s tariff remains below cost-reflective levels and will continue to do so for the full MYPD4 period. The utility’s standard tariff rose to 106c/kWh this year and would rise to 124c/kWh next year and 145c/kWh in 2021 should it prevail in its application to have the regulator’s treatment of the equity injection reversed.

The court application comes amid a resumption of load-shedding, precipitated by breakdowns at several of Eskom’s coal plants at a time when summer maintenance is picking up.