Eskom’s giant clients to pay R1bn extra

It is not clear how Eskom will go about clawing back almost R1 billion from BHP Billiton and Eskom’s international clients.

Energy regulator Nersa on Tuesday ruled that Eskom could clawback R10.2 billion from its standard customers and R983 million from ‘local special pricing agreements’ and international customers.

Eskom currently has only one local special pricing agreement and that is with BHP Billiton for electricity for its aluminium smelters in Richards Bay.

Nersa’s decision was taken in terms of the Regulatory Clearing Account (RCA) mechanisms that allows tariff adjustments to compensate Eskom for lower than expected revenue or over-expenditure after the end of a financial year. The amounts relate to Eskom’s 2013/14 financials.

Customer groups

Nersa’s differentiation between Eskom’s customer groups follows after several presenters during Nersa’s public hearings on the Eskom application said it would be unfair to expect standard customers (general consumers of electricity) to compensate Eskom for losses incurred in sales in terms of special pricing agreements.

The regulator’s ruling provided for a 9.4% tariff increase in April for the recovery of the R10.2 billion from standard customers, but so far it has not provided any clarity on how Eskom should go about recovering the R983 million from BHP Billiton and its international customers.

Moneyweb asked Nersa’s regulator member for electricity Thembani Bukula whether the Nersa ruling supersedes the contractual arrangement between Eskom and BHP Billiton. He said it does not.

In terms of the contract, BHP Billiton pays for its electricity at a rate linked to the rand/dollar exchange rate and the dollar aluminium price on the London market.

It is also not clear whether Eskom’s contracts with international clients provide for any clawback.

Record of decision

Eskom spokesperson Khulu Phasiwe told Moneyweb it will wait for the formal record of decision on Nersa’s ruling and hopes it will give guidance on the implementation of this part of Nersa’s ruling.

If it cannot find a lawful way to recover the money from BHP Billiton and international clients, it may be in an even worse position, by a margin of R983 million.

The contract with BHP Billiton has been a bone of contention for a long time. It was concluded in 1990s and was set to run for 25 years until 2010. An amendment in 2001 has allegedly extended it by eight years, but the extension is being disputed.

A few years ago it became clear that BHP Billiton was paying much less for electricity than Eskom’s other customers and that other customers were in fact subsidising the company’s electricity purchases heavily.

Eskom’s efforts to renegotiate the contract were unsuccessful and the utility referred it to Nersa for review in October 2012. In June 2014 Nersa told Moneyweb the investigation was almost done. It was hoping to complete the process by the end of July that year, but first had to consult senior legal counsel.

Since then Nersa has been very quiet about the matter.

It is not clear whether Nersa’s ruling might indicate that the matter will be brought to finality in the near future.

Tariff application

Asked whether Eskom will be able to prepare a new multi-year tariff application within three months, as the regulator instructed, Phasiwe said the Eskom board would meet urgently to discuss the tight deadline.

Nersa indicated that the extent of the RCA tariff adjustments is so big, that they undermine the objective of price certainty that underpins the multi-year price determinations. It therefore said Eskom should prepare a new application “based on revised assumptions and forecasts that reflect the recent circumstances.”

In the past Eskom has taken up to a year to prepare such an application.

The current tariff period ends on March 31 2018 and in the normal course Eskom would submit the tariff application for the subsequent period some time next year.

Phasiwe said the Eskom executive and the board would consider whether it would be more feasible to continue with further RCA applications and prepare the next multi-year tariff application (MYPD4) in the normal course, or do what Nersa said and expedite MYPD4.

If need be, Eskom would go back to Nersa about this decision, he said.

Load shedding

Eskom applied for R8 billion to compensate it for diesel it burnt in running its open-cycle gas turbines (OCGTs) for up to 12 hours per day to avert load shedding. Nersa only allowed R1.2 billion, arguing that Eskom ran the OCGTs extensively only because its coal-fired fleet was unavailable due to bad maintenance.

In reaction Eskom CEO Brian Molefe said: “We note with concern the decision on open cycle gas turbines (OCGTs), which will guide Eskom’s operations in the future in terms of balancing the energy supply and demand in a bid to avoid load shedding.

He continued: “OCGTs are part of our emergency portfolio and have been used in the past to avoid or limit load shedding with the understanding that we can recover these costs within the RCA process. The recovery of diesel costs is now seriously in question with Nersa’s current decision. We will do our best to minimise the risk of load shedding, striking a balance with Eskom’s already depleted balance sheet.”

Phasiwe said Molefe’s statement does not amount to a threat to implement load shedding.

The reality is that Eskom will in future only run its OCGTs during peak hours – the purpose it was designed for, Phasiwe said. He added that if load shedding cannot be averted without running them for longer hours, Eskom would have to revert to load shedding as it had no guarantee of recovering the diesel cost.

Eskom’s main objective however is to improve the performance of its coal-fired power stations through better maintenance practices, Phasiwe said.

Moneyweb pointed out that Nersa’s ruling on the diesel cost followed exactly the same principle followed in the previous RCA determination last year. It could therefore not have been a surprise to Eskom. Phasiwe confirmed that Nersa was consistent in this regard.

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