Eskom going concern status at risk (again)

Unless the National Energy Regulator of South Africa (Nersa) grants Eskom R66.7 billion additional revenue through increased electricity tariffs on June 21, it might not be able to continue as a going concern.

As a result, its annual results could be qualified unless government provides Eskom with additional support, as it did in January before the release of its interim results. Eskom postponed the release of its interim report in December and was only able to release it at the end of January after the going concern status was resolved.

Eskom acting CFO Calib Cassim divulged just how precarious Eskom’s financial situation is in an affidavit in which he sets out the devastating effect of consecutive disappointing and delayed Nersa tariff determinations on the utility.

The affidavit, which Moneyweb has seen, was deposed in support of Eskom’s application to the High Court to have Nersa’s decision to award Eskom a mere 5.23% tariff increase for 2018/19 reviewed and set aside. Eskom at the time applied for an increase of 19.9%.

Eskom is asking the court to refer the matter back to Nersa to re-determine the tariff increase. This comes despite that fact that the increase took effect on April 1 for Eskom’s direct clients and will do so on July 1 for municipalities.

Eskom is also asking the court to declare Nersa’s delay in processing its three applications for interim tariff increases in terms of the Regulatory Clearing Account methodology (RCA) unconstitutional. It is these applications that are to be decided in less than two weeks (by June 21). They are based on under-recovery in 2014/15, 2015/16 and 2016/17 totalling R66.7 billion, and could add 2-3 percentage points to the annual Eskom tariff increase over the next few years.

The statement about Eskom’s dire financial situation comes as labour unions threaten strike action due to Eskom’s announcement that it won’t increases salaries or award its staff bonuses this year. Some unions are demanding a 15% salary increase.

In his affidavit Cassim tries to dispel the popular belief that Eskom’s problems are of its own making through mismanagement and corruption.

He quotes statements from ratings agencies that have repeatedly referred to low tariffs that are not cost-reflective and regulatory uncertainty as weighing on Eskom’s credit rating, even after the new board was appointed and set about cleaning up Eskom.

Cassim also refers to a 2016 report by the World Bank about the financial viability of electricity sectors in Sub-Saharan Africa.

Cassim explains: “Chapter 6 of the study analyses on a country by country basis the ‘hidden costs’ – i.e. costs that are hidden from the view of consumers by not being recovered through tariffs, thus preventing the relevant electricity utility from achieving full cost-recovery on the basis of benchmark performance.”

He quoted the study’s conclusion that in the case of Eskom:

• 15% of the hidden costs were due to overstaffing;
• 4% of the hidden costs were due to inadequate debt recovery;
• none of the hidden costs were due to transmission and distribution losses; and
• 81% of the hidden costs were attributable to inadequate tariffs.

He says the contested 5.23% tariff increase came on the back of several years of small increases. In the previous multi-year-price-determination tariff period (MYPD3) – covering 2013/14 to 2017/18 – Nersa gave Eskom an 8% annual increase instead of the 16% it applied for. This left Eskom with a shortfall of R225 billion, Cassim says.

In 2017/18 Eskom was granted only 2.2% more, and despite desperate appeals by Eskom, Nersa failed to finalise the outstanding RCA applications in time for implementation this year. (Eskom has agreed that it be spread over several years.)

As a result, Eskom had to fund the R66.7 billion from other sources, which has resulted in unbearable pressure on its liquidity.

Eskom’s court application is not brought on an urgent basis and we understand that it could take up to a year. Moneyweb has been told that if finalised in time, and if Eskom is successful, it – together with positive RCA outcomes – could result in an average 20% electricity tariff increase next year.

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