Eskom’s application to Nersa could mean 15% average tariff increase

Eskom has submitted a R5.4 billion supplementary tariff application to energy regulator Nersa, and for the first time it has also included interest – to the tune of R1.3 billion – in the application.

This follows a high court order made by Judge Jody Kollapen in March, that found Nersa’s determination of Eskom’s tariffs for 2018/19 was irrational and unlawful. Kollapen set the determination aside.

At that stage, Eskom’s R27 billion Regulatory Clearing Account (RCA) application was already before the regulator. The RCA is a risk-mitigating mechanism that provides for retrospective adjustments – in favour of either Eskom or consumers – for revenue variations if assumptions underlying the revenue determination play out differently in reality.

Kollapen ordered that Eskom would, after the finalisation of the RCA, be allowed to bring a supplementary tariff application, should it still be short of the revenue it was entitled to if Nersa had made the initial decision lawfully. He laid down certain principles to be followed in deciding this application.

Nersa slashed Eskom’s RCA application to R13 billion. In its new application, Eskom says certain amounts it was entitled to, such as the R511 million it wanted for demand side management, it did not actually spend and is therefore no longer included in the outstanding amounts.

No option but to borrow

Other amounts were disallowed, and Eskom had no option but to borrow. While the RCA makes no provision for the recovery of interest, Eskom argues that once the supplementary revenue has been determined, it should be compensated for the carrying cost incurred due to Nersa’s unlawful decision.

“Only the interest cost, at a rate of 10% per annum compounded annually, is considered. The effect of inflation is not included”, it states.

Also included in the application is R2.4 billion for employee cost. This comes after Nersa based its calculation of prudent employee cost on Eskom’s generation function only, without proper consideration of the business model that includes transmission and distribution as well.

In its application, Eskom proposes that the R5.4 billion be added to the R13 billion RCA balance and the total R18.4 billion liquidated through increased tariffs next year.

This, Moneyweb understands, will go a long way to ensuring that Eskom gets R23 billion additional revenue next year, which translates to a 15% average tariff increase. Nersa earlier approved a 5.22% average increase for next year.

Simple corrections

Nersa must still reconsider three RCA decisions for 2014/15, 2015/16 and 2016/17, and Eskom hopes that the balance to make up the R23 billion it wants can be found by simply correcting some obvious mistakes Nersa made when it first took these decisions.

During a meeting of Nersa’s electricity sub-committee last week, it was, however, clear that regulator members were concerned about the impact of a 15% tariff increase on consumers still trying to recover financially from the Covid-19 lockdown.

This article was republished from Moneyweb with permission