Eskom looking to take R67-billion out of your pocket

The objections to Eskom’s efforts to claw back almost R67-billion in revenue began in earnest this week as the first round of public hearings into the matter got underway.

But this is not the end of attempts by the power utility to recover money it believes it is owed.

Eskom is planning to submit another application for a further estimated R20-billion later this year, through the regulatory clearing account process (RCA).

The RCA is a mechanism under South Africa’s tariff setting framework, or the multi-year price determination (MYPD) process. It allows Eskom to claim the difference between revenues granted to it by the National Energy Regulator of South Africa (Nersa) based on a set of forecasts, and what actually materialises.

The current R67-billion Eskom is asking for, covers the claw backs for three years in the MYPD3 tariff cycle, the 2014/15, 2015/16 and 2016/17 years.

The additional application, which could be filed as soon as the end of July, will be for the 2017/18 financial year – or the final year in the MYPD3 cycle.

The utility is also contemplating taking Nersa’s most recent tariff decision of 5.23%, made late last year, on review.

Eskom is however seeking a “phased approach” to the RCA application whereby it would get a 2% tariff increase in the coming years.

But public submissions to Nersa on the RCA applications has revealed a host of criticism against Eskom’s, underscored by continued mistrust of the utility due to corruption scandals that have plagued it.

The bulk of the clawback, or what amounts to R44.3-billion, is due to the variance in electricity sales.
Eskom sold significantly less electricity than forecast in the MYPD3, which it attributes to the downturn in the economy and a decreased reliance on Eskom amongst other reasons.

The methodology that Nersa uses to inform its decisions does allow for this, according to Eskom, to ensure that it can recover the fixed and some of the variable costs it incurs to provide electricity as a regulated entity.

Fixed costs typically account for 65 % to 70% in any revenue decision for a coal based utility, according to Hasha Tlhotlhalemaje, Eskom’s general manager for regulation. These costs are also influenced by decisions about electricity planning taken at a policy level – such as what investments Eskom must make – so it needs to be able to recover them over a particular volume of sales.

This is standard practise globally, said Eskom specialist in corporate finance Deon Joubert, and also provides a mechanism to adjust for “uncontrollable elements” such as changes in economic growth, and fuel prices which can be difficult to forecast. This approach also ensures that a utility is not perversely incentivised to make very conservative forecasts that would ensure it is awarded windfall profits.

Eskom works on the basis that its costs are prudently incurred added Tlhotlhalemaje.

But the efficiency and prudency of Eskom’s costs have been the subject of intense debate.

In its submission to Nersa, the Organisation Undoing Tax Abuse (Outa) said that in terms of the methodology Eskom is able to recover fixed costs (such as operating costs) and variable costs (mainly primary energy ie coal).

But the process allows Eskom to continue to incur these costs, regardless of whether its sales volumes increases or decreases. The organisation said that the rule in the methodology relating to qualifying expenses is “grossly flawed, as it doesn’t curb or minimise expenses which could be ill-conceived or related to maladministration [and] corruption.”

“It allows for prior year inefficiencies and undue expenses to be perpetuated into the future,” it said.

Along with a 0% adjustment in tariffs, Outa want to see the methodology reviewed to ensure Eskom cannot get excessive revenue recoveries through the RCA process and to address shortcomings relating to the use and updating of assumptions.s

Eskom however believes its application is solid, and is soundly informed by Nersa’s previous decision on an RCA application for the first year of the MYPD3 cycle.

Eskom is not contemplating a scenario where the RCA is not awarded said Tlhotlhalemaje.

Nersa did not respond to a request for comment.

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