‘SCA ruling may prompt 50% Eskom increases next year’

The Nelson Mandela Bay Business Chamber, which was recently defeated on appeal in its challenge to the interim tariff increase the National Energy Regulator (Nersa) granted Eskom last year, has warned that the ruling may result in increases of up to 50% in Nelson Mandela Bay tariffs next year.

This is in line with information Moneyweb published earlier about Eskom’s draft application for an average tariff increase of 20% and 27.3% for municipalities next year, in addition to two applications for further interim increases. Moneyweb last year reported that those two applications could add R43 billion to Eskom’s revenue if granted. Evidently this is the kind of amount Eskom aims to recover through the tariff.

The chamber’s argument would therefore probably hold for all municipal tariffs in the country.

The court challenge was largely based on the failure of Eskom to comply fully with the methodology Nersa prescribed for determining Eskom’s tariffs for multi-year periods (MYPD) and specifically the Regulatory Clearing Account (RCA).

The RCA is a risk-mitigating mechanism. It entails an annual reconciliation of Eskom’s actual revenues and costs with the forecasts upon which the multi-year tariff determination were based – and provides for interim tariff adjustments to compensate for variances.

The chamber says the Supreme Court of Appeal (SCA) ruling means the court is unable to support the public in instances where Nersa fails to do its job, and that Eskom abuses the process.

“This is unsustainable and will create even more hardship for hard-pressed consumers and the business sector struggling to survive in the recessionary environment created in part by irresponsible decisions by government which, among other consequences, has led to South Africa being downgraded to junk status,” said newly-elected chamber President Thomas Schaefer.

He pointed out that electricity tariffs in South Africa have almost quadrupled since 2007 and are currently among the highest in the world.

Schaefer said the chamber will review the judgment in detail and in consultation with the other applicants, and will in all likelihood appeal the decision. “This would mean that the Constitutional Court, being the highest court in the land, will have to make a final decision, which will hopefully be in favour of the people of this country.”

The SCA ruling overturned an earlier ruling in favour of the chamber and some intensive energy users in the Nelson Mandela Bay area. The earlier ruling would have seen Eskom repaying a portion of the 9.6% tariff increase it implemented countrywide last year. It would also have restricted Eskom’s tariff increase in the current year to an average of 2.2%.

In the meantime, economist Mike Schüssler says the electricity sales volumes forecast by Eskom for 2018/19 are the lowest in 22 years. This was disclosed in a confidential draft tariff application Eskom submitted to National Treasury and the South Africa Local Government Association (SALGA) recently.

Moneyweb earlier reported that it has seen the application, which proposes an average tariff increase of 20% for 2018/19 and 27.3% for bulk sales to municipalities.

Schüssler, who has studied the draft application, says Eskom forecasts industrial sales lower than in 1997. “They will sell less to Transnet than most years since 2001.”

He says Eskom also expects to sell less to municipalities than in 2011. “So despite about a million extra households in metros and towns estimated between 2011 and 2019 (both government built and private sector) as well as informal settlements and new malls, people have been saving so much electricity that Eskom expects to sell less.”

The lower sales volume is a big factor in Eskom’s calculation of the proposed increase.

Schüssler says the portion of GDP spent on electricity costs has doubled from about 2% in 1996 to almost 4% in 2015. “This has cost the economy jobs and of course growth. It has also cost Eskom, which then comes back to ask the economy for more money – and people must cut back on electricity consumption even more,” he says.

He says consumers switch to alternatives such as solar and gas, and that the search for alternatives is gaining momentum as Eskom tariffs rise and the costs of alternatives come down. “Battery technology is slowly advancing as well and that will change the game,” Schüssler says.

He adds that local governments can no longer afford electricity from Eskom and are likely to build their own plants if this trend continues. “We expect even more industry to switch to gas and other resources.”

Schüssler says Eskom today sells about 5% to 8% less than in 2007. “Another 5% drop, and it will no longer be able to pay for its big expensive new plants.” He points out that Eskom’s credit rating is already lower than that of the country and says Eskom is likely to be downgraded even further. “Their weighted cost of capital is about to increase, making further electricity increases more likely. That again leads to more alternatives being used.”

Schüssler points out that Eskom has increased staff numbers despite producing less electricity, which points to its inefficiency. He says it will have to reduce overheads by retrenching staff and will have to look for cheaper coal.

“The unnecessary costs that Eskom has undertaken will cost it ever more dearly.”

Schüssler says there is a good chance that Eskom won’t be able to survive a decade. “If they do (without radical adjustments) there is a good chance that economic growth will be even lower than projected currently!”

The Eskom effect is there for all to see, he says.

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