The 9.4% Eskom tariff increase that will take effect on Friday will add more than 1% to the inflation experienced by low-income households and cost the economy 5 172 jobs, energy regulator Nersa said in granting the increases.
In its record of decision, published on Tuesday, Nersa said it had to strike a balance between Eskom’s financial sustainability and the impact on the South African economy.
Nersa further states that indications are that Eskom will submit an even bigger application – for a further R25 billion – for lower-than-expected revenue and over-expenditure during 2014/15. This would be done in terms of the Regulatory Clearing Account (RCA) mechanism that forms part of the prescribed Multi-Year Price Determination (MYPD) methodology to determine Eskom’s tariffs.
The 9.4% increase was based on an additional R11.2 billion of revenue Nersa granted Eskom to compensate for revenue and expenditure variances in 2013/14. It is less than half the R22.7 billion Eskom applied for.
Nersa has instructed Eskom to prepare a new multi-year tariff application before June 1, arguing that the extent of Eskom’s RCA applications prove that assumptions for its earlier MYPD, which stretches until March 31 2018, are no longer valid and should be revisited.
Eskom spokesperson Khulu Phasiwe, told Moneyweb the Eskom board has not yet met to decide whether Eskom would follow that route. Moneyweb has learnt that Eskom officials are doubtful about the utility’s ability to prepare an RCA application before June 1 and might recommend to the board that it proceeds with the next RCA application, which Nersa stated could amount to R25 billion.
Phasiwe would not comment on the amount, but pointed out that Eskom used its costly open-cycle gas turbines (OCGTs) extensively during 2014/15 as it tried to limit load shedding. The country nevertheless suffered regular load shedding from December 2014 to mid-2015.
Nersa, in its record of decision, provided the following table illustrating the inflationary effect of the 9.4% Eskom increase:
Nersa further stated the 9.4% increase would result in a loss of R1.4 billion to the economy. “From a macroeconomic perspective, this is not major when compared to the total national GDP, but it cannot be ignored,” it said.
Nersa said the 9.4% increase would increase Eskom’s ability to honour its current and short-term interest obligations. After the implementation of the increase Eskom’s profitability and leverage would improve, Nersa stated. It illustrated Eskom’s improved financial situation with the following table:
Eskom and Nersa will, however, face a legal challenge to the implementation of the increase a day before it is to be implemented.
The Organisation Uniting against Tax Abuse (Outa) will ask the North Gauteng High Court to suspend the implementation for a month to give it time to study the reasons on which Nersa based its decision to grant the 9.4% increase. The reasons were only published on March 29. This could be the first salvo in legal battle aimed at having the decision reviewed and set aside.
Phasiwe said if the litigation results in a long delay before the increase can be implemented, Eskom will remain in its current (weak) financial state, which would be of grave concern to ratings agencies that want clarity on Eskom’s price path.
Economist Mike Schüssler of Economists.co.za, says above-inflation increases are unsustainable and in the current economic downturn it “just adds to the hurt”. “Eskom has cost us well above their value in economic losses either through higher prices or load shedding.”
He says South Africa has become less energy intensive, partly as a result of huge cost changes in electricity.
Eskom supplies about 5% less power today than in 2007, but instead of 2% of GDP the cost is closer to 4% – a near doubling, he says (see graph).
“This is crazy as we compete internationally as a country and the effect is that Eskom prices make it difficult. Electricity adds less than 2% of value to the economy but is about 5% of the cost. That is currently the bigger problem for South Africa.”
Schüssler says Eskom’s revenue from industrial customers has increased dramatically as a percentage of manufacturing GDP, which creates a huge challenge for South African manufacturers when competing on the international market.
Schüssler points out that Eskom’s revenues from the mining sector have more than doubled over the past decade or so, in spite of the fact that mining companies have reduced consumption through energy efficiency measures and the use of alternative energy sources.
As open pit mining, which relies on diesel and not electricity, grew, electricity consumption by the mining sector started decreasing in the 1990s. In spite of this trend, energy efficiency programmes and the increased use of alternative energy, Eskom’s revenue from the mining sector has since 2009 increased dramatically as a percentage of mining GDP.
Schüssler says the effect of rising electricity cost was most dramatic on the agricultural sector, which is currently also battling with a debilitating drought.
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