Nersa has starved Eskom of ‘papgeld’

Failure to grant higher tariff increases seen as more damaging than corruption

● There is a papgeld kind of feel to the relationship between Eskom and the National Energy Regulator of SA (Nersa).

The energy regulator decides how much the power producer receives — not in child maintenance (papgeld), but in the form of electricity tariff increases. And Eskom is usually unhappy with what it gets as it needs to pay the bills and run a massive household on what Nersa decides it should.

This happens every few years with a multi-year price determination and sporadically in between with regulatory clearing account (RCA) applications. These terms have become part of SA’s energy landscape vocabulary, much in the same way as “loadshedding” and “equity injection”.

The result is that Eskom has to make do with the revenue that cascades down after Nersa has had its say. And for more than a decade now, it has not been enough.

Nersa this week continued the tradition, granting Eskom a 9.4% tariff increase for the next financial year, instead of the 17.1% Eskom had asked for. And for the two years after that, Eskom will only be allowed to raise prices by 8.1% and 5.2%, instead of the 15.4% and 15.5% it wanted.

Though the difference might not seem that big, keep in mind that Eskom has revenue of R177bn and a single percentage point represents nearly R2bn a year. Also, that these multi-year schemes have a compound effect.

In 2007, when the romance of ample economic growth — domestic and global — was still in the air, Eskom flagged that it would ask for an 18% increase in 2009 and 17% the year thereafter.

At the time, it sounded greedy. Tariff increases were mostly lower than inflation and usually about 5%. Marketing material to investors proclaimed proudly that SA had the cheapest electricity in the world and that it was thanks to its generation beauty, Eskom.

Eskom warned that if true economic costs were not passed on to consumers, it would have to pursue alternative funding.

“The options are additional loan funding (which increases our gearing, thus making it more difficult to raise funds and increases the cost of borrowings) or an equity injection from government (funded by taxpayers),” the utility said in its 2007 annual report.

That year, Eskom asked for an 18% hike, but was granted only 14.2%.

Then disaster struck.

In the first quarter of 2008 the power utility brought the mining sector to a standstill by cutting power to prevent a nationwide blackout. This put the brakes on nearly a decade of economic growth above 4%. And SA has not seen growth of that sort since.

Soon the words Medupi, Kusile and Ingula entered the South African vocabulary — a big and expensive build programme was under way, new power stations were coming.

That year, Eskom asked for tariff increases of 60%. Nersa handed over 27.5%. The next year it wanted 35% a year for three years in a row, but got 24.8%, 25.8% and 25.9% instead. The 25.9% was later revised to 16%.

“I do believe with the benefit of hindsight that the tariff strategy which was proposed in the early 2000s by Eskom at the time would have made a difference,” said Steve Lennon, former Eskom group executive for sustainability.

“We proposed small and consistent above-inflation increases over an extended period until tariffs reached cost reflectivity. At the same time funds could be accumulated to finance new capacity.”

Instead, in the boom years of Thabo Mbeki’s presidency, the regulator mostly granted below-inflation increases — the effect of which was to make electricity cheaper in real terms.

And that sent the wrong signal to consumers.

Econometrix chief economist Azar Jammine sees the early part of this century as six or eight lost years.

“By the time the government woke up to the fact it was already too late in a way … They then tried to rush the process to build Medupi and Kusile [which] happened far too quickly to build it efficiently.”

The cost overruns on these projects added tens of billions to Eskom’s debt of more than R400bn.

And though that surely did not help, it is dwarfed by the so-called revenue shortfalls the power utility started talking about when Nersa denied its application for a 16%-ayear increase for the half decade from 2013. It was granted 8% a year instead, leading to a shortfall of R225bn for the five years to follow, according to Eskom.

Jammine puts the cumulative gap that developed between the price of electricity needed to finance capital expenditure and maintenance and the actual price awarded at R270bn.

Though alleged corruption, poor-quality coal and a bloated workforce all played a role in Eskom’s woes, “they pale into insignificance compared to that enormous gap”, he said.

The power utility’s appeals for interim relief in the form of RCA applications became an important lifeline, releasing a few billion here and another few billion there. Still not nearly enough to turn a tanker like Eskom around.

Though it is difficult to speculate about what would have happened had Eskom been granted the tariff hikes it requested, Lennon said there definitely would have been fewer surprises and shocks.

“The benefits of low electricity costs to the economy over this period have been more than offset by the negative impacts of power shortages and volatile price increases,” he said.

And Nersa has over the years fallen so far behind that it is now near impossible to adjust tariffs in such a way that Eskom becomes sustainable, while not shocking SA into a deep recession.

The latest adjustment — the hike of 9.4% this year — is not good news for the economy as it will put pressure on energy-intensive sectors such as manufacturing and mining, according to Isaah Mhlanga, chief economist at Alexander Forbes Investment.

And for Eskom — and ultimately the taxpayer — it is even worse.

Mhlanga said the National Treasury would have likely based its budget for the Eskom bailout on a much higher tariff.

Dondo Mogajane, National Treasury director-general, told Business Times recently that the R69bn injection into Eskom was modelled on a 10%-11% tariff hike.

The difference will be in the billions.

Papgeld Eskom desperately needs.

I do believe with the benefit of hindsight that the tariff strategy which was proposed in the early 2000s by Eskom at the time would have made a difference

Steve Lennon

Former Eskom group executive for sustainability