Much at stake in court battle between Eskom and Nersa

Eskom and the National Energy Regulator of South Africa (Nersa) will see each other in court on Wednesday.

It is an unprecedented case, in which the embattled power utility is asking for the court’s assistance against what it sees as an irrational regulator.

Eskom wants that part of the current tariff determination that disallowed a total of R69 billion from tariff revenue – in light of the same amount of government assistance being promised to Eskom – reviewed and set aside.

It is asking the court to allow it to add the amount to its tariffs for the next two years.

And that’s just the first round …

Less than two weeks from now the same court will hear another of Eskom’s applications, this time to have three different Nersa decisions (to claw back about R32.7 billion from consumers) reviewed and set aside. These relate to costs Eskom incurred in the 2014/15 to 2016/17 period due to actual conditions turning out differently from what had been assumed when the tariffs, which fell far below the R66.6 billion Eskom applied for, were determined.

About a month later the two parties expect to be back in court to debate the merits of Nersa’s tariff decision for 2018/19. Eskom also wants this reviewed, set aside and remitted back to Nersa. In this case Nersa allowed Eskom little more than R190 billion, over R30 billion less than it applied for.

This will be the first time that Eskom challenges Nersa’s determinations formally and publicly. It is convinced and spells out in court papers that Nersa’s inadequate tariff determinations are at the root of its financial ruin and it’s putting the whole economy at risk.

‘Not fair’

The utility believes it has been done in by R135 billion in relation to the three court applications.

Eskom must be terrified that any future government bailouts could in effect disappear if Nersa consistently adjusts its allowable revenue accordingly.

It is however not only for Eskom that the stakes are high.

Nersa is convinced that it acted strictly in accordance with the Electricity Regulation Act, the Electricity Pricing Policy and its own methodology, and believes the court should respect its technical expertise and experience. It sees itself as a fair regulator having considered Eskom’s sustainability while also protecting the consumer against undue risk.

It is frustrated with the failure of Eskom as the licensee to follow its decisions by cutting costs. Instead, it argues, Eskom takes poor decisions and operates inefficiently.

For Nersa, its credibility as a regulator is at stake.

If Eskom is successful on Wednesday, the consumer will have to cough up R69 billion more in the next two years, and if the two subsequent applications succeed, Nersa will have to reconsider its limited tariff allowances.

The already cash-strapped consumer is seriously at risk.

Further to this is another application from Eskom to claw back a further R27-odd billion in relation to 2018/19, which is already with the regulator.

The fact is that Eskom and its regulator are currently miles apart.

According to Eskom, Nersa has made stupid mistakes and acted completely irrationally, while Nersa sees Eskom as a delinquent licensee. It promises to be a titanic, perhaps dirty fight.

It will also be costly, fought with money generated from consumers, licensees and taxpayers, and could take a long time to adjudicate.

While it might bring greater clarity on Nersa’s powers in the long run, it has resulted in complete uncertainty about the future electricity price path in South Africa, which is something investors hate.

Roadmap

In the Eskom Roadmap to Recovery, published by Public Enterprises Minister Pravin Gordhan in October, he calls for the speedy finalisation of amendments to the Nersa Act to provide for a mechanism for a licensee like Eskom, or its customers, to appeal a regulator decision.

That would presumably fast-track the journey to price certainty and save costs.

According to Democratic Alliance Shadow Minister of Energy Kevin Mileham, the Nersa Amendment Bill has not yet been tabled to Parliament’s energy portfolio committee.

He is also wary of any move that might put Nersa’s independence in jeopardy.

Shareholder influence

While the roadmap has been adopted by cabinet, it is in the first place a Public Enterprises document; changes to the Nersa Act would have to be driven by the Department of Energy.

The latter department referred questions about the proposed amendment to Nersa, and Nersa reportedly failed to respond.

If there is a lack of alignment between the departments about this, it would not be the first time.

Remember the power purchase agreements the Department of Energy negotiated with 27 independent power producers that Eskom, residing under Public Enterprises, refused to sign?

There are currently calls for Eskom to be removed from Public Enterprises as its shareholder to the Department of Energy.

On the face of it, that might eliminate this kind of misalignment.

On the other hand, government has on more than one occasion voiced its intention to “engage Nersa” about being more lenient with Eskom on the tariff front.

What would be easier for a minister who gets saddled with the Eskom headache than to solve it by leaning on Nersa, should the two both reside under him or her?

Whether Eskom remains within Public Enterprises or not, there is a lot at stake for consumers. The wording and architecture of an amendment to the Nersa Act will have to be carefully studied and considered.

Until then, the matter is with the courts.

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