Variances at heart of Eskom’s clawback claims

VARIANCES in respect of, among other things, revenue, primary energy and capital expenditure have prompted Eskom to apply for a R66.6billion clawback for the 2014/15, 2015/16 and 2016/17 financial years.

The multi-year price determination (MYPD) methodology, which the National Energy Regulator of SA (Nersa) uses to evaluate the stateowned power utility’s tariff applications, allows Eskom to claw back prudently incurred expenses and lower-than-anticipated revenue.

The regulatory clearing account (RCA), which is part of the MYPD methodology, is a backward-looking mechanism that seeks to reconcile what Nersa awarded Eskom on the basis of what was forecast in the MYPD and what materialised, as reflected in the utility’s financial statements. According to Nersa, it is intended to mitigate and manage the risk of excess or inadequate returns. If successful, the applications would result in higher electricity tariffs. But the clawback of the expenses would have to pass Nersa’s prudency test.

When it granted Eskom a less-thanexpected tariff increase of 5.23 percent for the 2018/19 financial year, Nersa in December expressed displeasure at Eskom’s poor forecasts.

The utility’s gross domestic product (GDP) growth forecasts during the MYPD3 period were off the mark.

“The actual GDP growth rates were approximately half the forecast assumptions as received from various economic forecasts at the time for the first part of MYPD3, declining to about 20 percent of the forecast in the last two years,” Eskom said.

In November 2015, Eskom submitted an RCA application for the 2013/14 financial year in which it sought to recover R22.8bn. Nersa approved the recovery of R11.2bn, which resulted in a 9.4percent tariff increase in the 2016/17 financial year.

In its 2014/15 application, published by Nersa this week, Eskom said there was a revenue variance of R8.8bn because of lower electricity sales volumes. In the application, the

utility also included R10.5bn for primary energy costs.

In its justification of the primary energy costs, Eskom said, due to the constrained electricity system, unplanned outages and delays in new build projects, it had operated a more expensive mix of plant compared with the assumptions in the MYPD3 decision to avoid or minimise load shedding. Primary energy costs relate to coal, nuclear, water, gas, oil, diesel and water usage. Eskom also wanted to clawback R9.3bn for capital expenditure variance.

“The variance is attributable to higher costs incurred for new build projects, outage capital costs and partially reduced by lower expenditures incurred for the transmission and distribution networks following Eskom’s capital expenditure reprioritisation process,” said the power utility.

For the 2015/16 application, Eskom has applied to clawback R15.6bn for revenue due to lower-than-expected electricity sales. The variance for primary energy was R8bn.

The IPP variance for 2015/16 was R620m. Eskom is the designated buyer of electricity from IPPs. It claimed R689m for open-cycle gas turbines. It could not claim the over-expenditure of almost R14bn relating to operating costs, because such costs did not qualify for the RCA.

The power utility also applied to clawback almost R23.7bn in the 2016/17 financial year.

At R20bn, the revenue variance accounted for the largest portion of the RCA balance for the 2016/17 financial year. As in previous years, Eskom has attributed the revenue variance to lower than expected electricity sales. The R20bn represents the biggest clawback in the MYPD3 period.