Eskom wants tariff hike

NERSA: IN PAST, REGULATOR AWARDED UTILITY LESS THAN IT ASKED FOR

Power utility is applying for R219bn in 2019-20. Moneyweb

Eskom is expected to submit an application to energy regulator Nersa for an average tariff increase of 15% per year for the next three years. The application has already been sent to National Treasury and the SA Local Government Association (Salga) for comment, as the law prescribes.

The increase would be over and above the increases required to liquidate the R32.7 billion Nersa earlier awarded to the power utility to compensate it for lower than expected sales and higher than expected costs in previous years. This was done in terms of the regulatory clearing account (RCA) methodology.

If the RCA award is recovered over the same three years that the tariff application covers, and if Eskom’s application is successful, consumers could pay about 20% more for electricity in 201920, and not much less in the two subsequent years, says economist Mike Schussler.

He adds that this would add almost one percentage point to inflation and further decrease the spending power of struggling South African consumers. The SA Reserve Bank would not lower interest rates due to the inflationary effect, and any economic recovery would be unlikely.

Nersa has in the past consistently awarded Eskom substantially less than it has applied for. The tariff application is essentially for the recovery of its prudently incurred cost, plus a reasonable return from tariffs, and the basic decision is for allowable revenue.

In a second phase, Nersa approves the specific tariffs that will apply to every customer group through which Eskom would recover the revenue.

For 2018-19, Nersa reduced Eskom’s allowable revenue to R190 billion from the previous year’s R205 billion. Eskom is taking this decision on review in the high court. No court date has been set.

The power utility is now applying for R219 billion in 2019-20; R252 billion in 2020-21; and R291 billion in 2021-22.

Eskom says its application provides for the phasing in of return on assets “to ensure that a significant portion of the interest cost and repayment costs are covered over the three-year period”.

Eskom states that the main factors contributing to the sharp increase in the revenue requirement over the three years are outside of its control. “The two key elements that contribute to this are the increase in debt service costs and IPP [independent power producers] costs …”

The period will see Eskom’s debt repayments almost double from R53 billion in this financial year to R101 billion in 2021-22, growing at annual compound growth rate (CAGR) of 24.1%.

The cost of buying electricity from IPPs grows at a CAGR of 16.4% from R27 billion in 2018-19 to R42 billion in 2021-22.

Operational cost grows by a CAGR of 7% over the same period, and primary energy by 12.6%.

Despite the fact that it is on the verge of concluding a wage agreement that provides for an increase to bargaining unit staff of 7.5% in the current year, plus a R10 000 signing bonus, and 7% in the next two years, Eskom states that its employee cost will increase by less than the inflation rate (currently 5.1%). This will be achieved by reducing staff numbers, it says.

Asset base revalued

The regulatory asset base (asset register) has been revalued at R1.3 billion as of April 1, 2016. This forms the basis for the calculation of the return on assets and depreciation costs in the application.

The 2018-19 tariff determination was based on a regulatory asset base value of R702 billion (R586 million less).

And despite the fact that it has failed to grow its sales volumes, which are currently at 2007 levels, Eskom in its application provides for an increase of 1.31% in sales volumes in 2019-20; 0.32% in 2020-21; and 0.97% in 2021-22.

Eskom says these numbers could be revised according to the latest available data before Nersa makes its final decision about the application. Its application is, among other things, based on assumed gross domestic product growth of 1.5% this year; 2.1% next year; 2.4% in 2020; 2.8% in 2021; and 3.3% in 2022.

Eskom is expected to submit the application, together with the comments from Treasury and Salga, within days. Nersa will invite written submissions and hold public hearings, and is expected to make a decision in December.

The new tariffs will take effect on April 1, 2019 for Eskom’s direct customers and on July 1 for consumers supplied by municipalities.

Eskom says these numbers could be revised according to the latest available data before Nersa makes its final decision about the application.