Eskom rejects Nersa’s decisions regarding MYPD4 – heads to court; Nersa responds

October 11th, 2019, Published in Articles: EE Publishers, Articles: Energize, Featured: EE Publishers

According to Eskom, the reasons given by the National Energy Regulator of South Africa (Nersa), regarding allowed electricity tariff increases for the next three years, undermine the power utility’s ability to achieve financial sustainability. The utility says the reasons given do not align with the regulator’s own guidelines and will seek urgent financial relief. 

Calib Cassim

Nersa regulates the tariff Eskom may charge for electricity through its Multi-Year Price Determination (MYPD) and Regulatory Clearing Account (RCA). The regulator examines the application submitted by Eskom and makes a determination based on what it believes is reflective of prudent and efficient costs. On March 2019, Nersa authorised an increase in electricity tariffs of 9,41%, 8,1% and 5,22% for the period 2020 to 2022. 

Eskom says Nersa’s decision will result in the utility having a shortfall of approximately R102-billion. The utility says the key reason for this shortfall iNersa’s decision to offset the envisaged Government support of R23billion per year (which was referred to in the minister of finance’s budget speech) against the return on assets. This, Eskom says, will result in the return on assets being about –1% for each of the financial years – far below a reasonable return and will worsen Eskom’s financial sustainability. The Electricity Regulation Act requires Nersa to set tariffs which would be reflective of prudent and efficient costs and allow a reasonable return on capital.  

The power utility says that although the government’s electricity pricing policy allowed Nersa, until 2013, to ensure that Eskom’s revenues and tariffs cover prudent and efficient costs, this is yet to happen. Nersa’s MYPD4 revenue decision worsens the situation, Eskom says. 

Calib Cassim, Eskom’s chief financial officer says that after analysing the reasons given by Nersa for its decision,  Eskom’s board decided to take the matter to court. Consequently, it has applied for urgent interim relief, which is necessary to avoid financial disaster for Eskom. The utility is seeking an order to address this shortfall in a phased manner. In addition, it is seeking the court to review and set aside Nersa’s MYPD4 revenue decision and remit that decision to Nersa for reconsideration in the light of the court’s judgement. 

According to CassimEskom’s understanding from Nersa’s reasons for decision is that the rules and principles of the Electricity Regulation Act as well as the MYPD methodology have not been duly considered by Nersa in arriving at the decision made in terms of the utility’s revenue application.  

The MYPD methodology does not allow for equity investment by government to be included as a return on assets. Nersa’s deduction of the financial support announced by the shareholder therefore defeats the whole purpose of government support. In addition, the reasons given are inconguent with the regulator’s own guidelines on prudency and its previous MYPD and RCA decisions. This is further evidenced by the fact that Nersa did not include the support received from the government in 2015 in its revenue decision at that time. 

Commenting on Twitter, Anton Eberhard, a Professor Emeritus and Senior Scholar at the University of Cape Town, agreed with Cassim, and said that Nersa’s decision effectively sabotages Cabinet’s intention and provides a subsidy to consumers instead. 

Energy analyst Chris Yelland says that Nersa told him that the R23-billion a year bailout for three years effectively reduced Eskom’s net costs during MYPD4 period, as relevant ministers and Eskom executives had indicated that the bailout would be used to meet operational expenditure such as maintenance, etc., and would not be used not for debt repayment. The bailout would therefore reduce net operating costs, so Eskom’s average selling price should be lower in order to recover the reduced net operating costs. Eskom’s disputes this, saying Nersa’s decision wipes out the purpose of the bailout. 

Cassim says that Eskom provided sufficient details during public hearings on the impact of the continuous shortfall between allowed revenue and efficient and prudent costs for many years and especially since the beginning of the MYPD3 period. The MYPD4 decision has exacerbated the situation further and raises questions about Nersa’s commitment to implementing its mandate that requires considering the balance between the impact on consumers with Eskom’s sustainability when making revenue decisions. 

If Eskom’s court action is successful, electricity customers can expect a very significant electricity price increase of about 25%, over and above the current electricity price increase trajectory, phased in over several years, Yelland says. 

UPDATE: Nersa has subsequently responded to Eskom’s announcement saying it “remains confident that its determination is consistent with the governing legislative and regulatory requirements” and that Eskom is within its rights to institute proceedings in the High Court for judicial review of Nersa’s decision.

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