Eskom seeks 20% tariff increase

Eskom wants its clients to pay on average 19.9% more for electricity from April 1 next year and proposes that municipalities pay 27.3% more for bulk electricity purchases from July 1 2018.

This comes against the background of controversy about an aborted irregular R30 million pension benefit for its former CEO Brian Molefe, after serving only about two years in the post.

The proposed increase was disclosed in a confidential draft tariff application for 2018/19 that Eskom submitted for comment to National Treasury and local government association Salga. Moneyweb has seen the document.

Eskom is expected to incorporate the comments from National Treasury and Salga before submitting its application to energy regulator Nersa in the coming week. Public consultations will be held before Nersa decides on the increase.

The application follows after the regulator allowed Eskom an increase of only 2.2% in the current financial year, which is in real terms a decrease. Nersa at the time invited Eskom to submit an application for a higher increase based on financial hardship, but Eskom preferred to proceed with its application for the next tariff period.

It did receive permission from Nersa to apply for a single year increase due to regulatory uncertainty around the Regulatory Clearing Account (RCA) mechanism that is currently the subject of a court appeal and pending the finalisation of the Integrated Resource Plan (IRP) and Integrated Energy Plan (IEP).

The draft application is for total revenue of R218.7 billion, an increase of 6.6% from the current year. The price impact is however much bigger because of the lower sales volumes.

The building blocks of the tariff allocation are operational cost, primary energy including the cost of buying energy from independent power producers (IPPs), return on assets and depreciation. This is then divided by the forecast sales volumes to arrive at an average tariff. Nersa prescribes the methodology for these processes.

In its draft application, Eskom states that electricity sales volumes were lower during the previous tariff period (MYPD3) that stretched from April 1 2013 to March 31 2018. Nersa never adjusted the sales forecast during the period and therefore the sales forecast has to be rebased. This alone accounts for 9.6 percentage points of the 19.9% increase Eskom applies for.

Eskom illustrates it in this graph:

Eskom states that 5.5 percentage points are for IPP cost and 7.4 percentage points for operating costs.

These are offset by lower returns and depreciation, which constitutes a drop of 9.4 percentage points compared with the current year, Eskom states.

Notably, Eskom includes renewable IPPs up to the Department of Energy’s bid round 4.5. That means it is claiming costs to buy from the very renewable projects that it currently refuses to sign power purchase agreements with.

Even if Eskom signs those agreements today, the 37 affected projects won’t be in production during 2018/19. Construction has not yet started and will take at least two years.

Eskom acknowledges that a 20% tariff increase could have a 0.76% impact on the consumer price index (CPI).

Eskom bases the higher increase proposed for its municipal bulk customers on the prescribed methodology and specifically, that the increase would only take effect three months into the tariff period, on July 1 2018. This is due to the provisions in the Municipal Finance Management Act (MFMA) that allow municipalities to increase its retail tariffs only once a year, at the start of the municipal financial year on July 1.

The draft application provides for a return on assets of R14.7 billion, which is only 2%, Eskom states. It is not enough to cover its interest payments of R36 billion and represents a sacrifice of R41.7 billion, according to Eskom.

The draft application does not include the detailed information required by Nersa. Moneyweb earlier this month reported that Eskom requested an open-ended exemption from the disclosure rules. The information it told Nersa it couldn’t supply includes segmented cash flow for the last reporting period, certain detail regarding assets, depreciation, capital expenditure, deferred debits and credits, coal purchases, coal handling costs and sales revenue and demand forecasts.

Nersa has put Eskom’s request to the public for comment and the Organisation Undoing Tax Abuse (Outa) and Business Unity South Africa (Busa), among others, called on Nersa not to allow Eskom to withhold information necessary to assess its tariff application.

Nersa has not yet ruled on the exemption and stated in its electricity committee meeting, that Moneyweb attended, that Eskom would have to comply with all the requirements pending the ruling.

Brought to you by Moneyweb

For more news your way, follow The Citizen on Facebook and Twitter.