The state of Nersa, according to Eskom

Energy regulator Nersa will announce on Thursday how much revenue Eskom will be allowed to recover through tariffs from its customers all over South Africa.

This will be in two parts – the annual revenue allocation for the next three years as well as the amount Eskom will be allowed to recover from its customers based on actual sales and expenditure in 2017/18 versus the amount projected when the revenue for that period was originally allocated about six years earlier.

In all recent tariff decisions, Nersa has granted Eskom far less than it thought it was entitled to in terms of the prescribed legislation and tariff methodology.

Eskom is however not taking this lying down.

It earlier challenged Nersa’s decision to allow Eskom only R190 billion for the current financial year instead of the R215 billion Eskom applied for. No date has yet been determined for the court to hear this matter.

Eskom has now also lodged a challenge to Nersa’s three decisions in terms of the Regulatory Clearing Account (RCA) methodology, which allowed Eskom to recover only about R32.69 billion in relation to actual sales and expenses in 2014/15, 2015/16 and 2016/17.

This is significantly less than the R66.6 billion Eskom applied for.

The R32 billion will be recovered by an addition to electricity tariffs in the next four years, which will add to the revenue allocation Nersa will announce on Thursday.

It is unclear when these challenges will be finalised, but court processes are slow and the uncertainty this brings about the future price path could continue for a long time.

Nersa’s abilities questioned

In an affidavit supporting the latest court challenge, Eskom CFO Calib Cassim makes allegations that cast serious doubt over Nersa’s ability to deal with the complex calculations and run a fair process.

Nersa has not yet filed a response.

Eskom accuses Nersa of, among other things, double counting.

Cassim alleges that Nersa disallowed R1.2 billion of Eskom’s claim for compensation because of lower than expected sales on the basis that Eskom lost those sales due to load shedding. Nersa argued that the load shedding was due to Eskom’s own failures, and that consumers should not be expected to pay for this.

According to Cassim Eskom had already subtracted the amount due to load shedding before submitting the claim, and informed Nersa it had done so. The R1.2 billion was therefore double-counted to the detriment of Eskom, he stated.

Nersa, he added, made the same mistake by deducting R12.7 billion of Eskom’s claim for coal cost, arguing that the lower sales should have meant a reduction in coal cost. In this instance Eskom had also made that adjustment before finalising its claim, and again Nersa double counted the amount, he said. That allegedly cost Eskom R12.7 billion.

Cassim stated that Nersa seemingly added R1.7 billion when it copied information from one document to another. There is no basis for this extra amount and it seems to be a clear mistake, he said.

Eskom provides proof

On the basis that Eskom failed to provide supporting documents for Nersa to assess the prudence of capital expenditure on transmission and distribution, Nersa disallowed almost R13 billion of Eskom’s claim. Cassim however attached copies of two emails containing the information, each sent to three different Nersa officials in time for it to be considered by Nersa.

Eskom argues that Nersa unlawfully delayed processing the applications and thereafter delayed further before providing the reasons for its decision.

It accuses Nersa of inconsistency in applying its own methodology for determining electricity tariffs. It said it based its application on Nersa’s reasons for its earlier decision about the RCA recovery for 2013/14, but Nersa completely changed its approach in assessing the three applications Eskom is now challenging.

Cassim stated that Nersa’s conduct caused incredible harm to Eskom.

It had to borrow money while waiting for Nersa to process and finalise the three RCA applications, with its debt rising to R426 billion in February.

He further stated that Eskom’s debt is expected to rise to R700 billion by 2023.

Eskom had used R337 billion of its R350 billion government guarantees by February and was negotiating for a further R13.6 billion, he said.

Eskom could find it difficult to raise further debt without government guarantees.

Cassim also said in his affidavit that Eskom would only have R9 billion in cash by the end of March, less than half of its earlier internal target of having a R20 billion liquidity buffer.

Eskom is asking for annual tariff increases of between 15% and 17% over the next three years.

If the utility gets this as well as the full amount claimed in its 2017/18 RCA application, and if it succeeds in its court challenges, economist Mike Schüssler calculates that electricity tariffs could rise by as much as 50% next year.

Nersa does have the option of implementing the RCA recoveries over more than one year though.

Whatever the decision on Thursday, the court challenges cast a shadow of uncertainty over the future electricity price path.

The country also needs clarity from the court about the quality of Nersa’s decision-making. The regulator plays a role that is crucial to the South African economy, and investors, business people and consumers need to know it is in safe hands.

Originally appeared on Moneyweb.