The National Energy Regulator of South Africa (Nersa) announced on Thursday that Eskom would be allowed to increase electricity tariffs at an average yearly rate of 8% between 2013 and 2018 – an increase that was half the 16% sought by the utility in its application for the third multiyear price determination (MYPD3) period.
In fact, the State-owned utility had requested an allowable revenue allocation of nearly R1.1-trillion, which would have increased its average selling price from 61c/kWh currently to a nominal 128c/kWh by 2017/18, or a real price of 96c/kWh.
The approved tariff increases, which were premised on an allowable revenue of R906.6-billion, would result in the electricity price increasing to 89.13c/kWh by the end of the MYPD3.
From April 1, 2013, Eskom would be allowed to raise its average selling price to 65.51c/kWh. The prices would then rise to 70.75c/kWh in 2014/15, 76.41c/kWh in 2015/16 and 82.53c/kWh in 2016/17. An indication was also given that the price path should transition back towards inflation-type levels during the MYPD4 period.
Eskom’s application came in for strong criticism during public hearings, which took place in all nine provinces during January and February.
Nersa chairperson Cecilia Khuzwayo indicated that it considered about 200 written and 162 oral representations, covering issues such as Eskom’s weighted average cost of capital, its regulatory asset base, primary energy costs, purchases from independent power producers (IPPs), integrated demand management, economic impacts, operating expenditure and tariff restructuring.
There had been particular unhappiness from stakeholders with the fact that the latest round of increases would compound the pain already inflicted on business and residential consumers by the fact that the utility’s prices had already trebled between 2007 and 2012.
Business cautioned of a “tipping point” and appeals were made for the shareholder to inject additional equity or extend more guarantees beyond the R60-billion subordinated loan already absorbed and the R350-billion in government guarantees already offered.
For its part labour said additional above-inflation increases would not only threaten job security, but would also sow the seeds of social discord as workers and the poor struggled to keep pace with rising costs across a range of essential product and service categories.
Many in civil society also questioned Eskom’s costs base and the utility’s over-reliance on coal, which made up the lion’s share of its application for R355-billion to cover its primary energy expenses.
Full-time member responsible for electricity Thembani Bukula said Nersa has based its determination on reason, facts and evidence and argued that the 8% would not “run Eskom into the ground”. Instead, it would ensure that the utility was “efficient, effective and sustainable”.
On just about every component of the revenue application, Nersa deviated from Eskom’s requests – in some instances materially.
Eskom requested R355-billion to cover its primary energy costs over the period, but was granted R293-billion.
It sought R270-billion for operating costs and was granted R265-billion – a determination based partly on salary and wage increases of inflation plus 1.4%.
The utility requested R78-billion for purchases from IPPs and received R64-billion, suggesting that Nersa anticipated even lower renewable-energy prices in futher procurement rounds.
Another R13-billion was sought for integrated demand management costs, but Eskom secured R5-billion. Nersa also extended no revenue for further power buy-backs, for which Eskom had requested R8-billion.
On the highly contested issues of depreciation, Eskom sought R185-billion, but secured R139.9-billion.
While on the equally fraught area of Eskom’s return on assets, the utility requested R187-billion, but received R137-billion over the period.
At the end of the period, Eskom would be left with retained earnings of R10-billion rather than the R46-billion that had been requested. But the composition of the returns had been front-end loaded to ensure that Eskom could service its debt.
Eskom spokesperson Hilary Joffe said the utility had noted Nersa’s decision, which she indicated would “present some challenges” in meeting its mandate of “keeping the lights on”.
“We will now study the determination in-depth and assess its consequences and its impact on Eskom,” she said.
Joffe added that Eskom was resolved to keep the lights on in partnership with all South Africans, and that it would now have to look at how it could deliver on that objective in light of the determination. “But it will be a challenge, there is no doubt about it”.
In reaction to the announcment, Business Unity South Africa said it endorsed the decision, while adding that the excessively steep rises in electricity tariffs in recent years had been damaging to growth and employment.
Special policy advisor Raymond Parsons said Nersa had taken account the various submissions made to it during the course of its consultative process, which had “clearly played an important role in the regulator’s final decision”.
“The fact that the increase of 8% per annum is projected over a five-year period also makes the trajectory of electricity costs more predictable for business planning,” Parsons added.
Meanwhile the South African Chamber of Commerce and Industry (Sacci) said that, in the current economic circumstances, the “right decision has been made as the capacity of businesses to absorb costs has diminished”.
Sacci members had indicated that an increase in the range of 5% to 10% would be in the interest of sustainable electricity supply.
But CEO Neren Rau stressed that a paradigm shift in municipal electricity pricing was still necessary, as vastly different pricing and cross-subsidisation models were employed and were imposing substantial cost challenges to business at a local level.
Similarly, Manufacturing Circle executive director Coenraad Bezuidenhout said the decision came as a “tremendous relief to manufacturers”. But the lobby group was still gravely concerned about the significant mark-ups charged by municipalities for electricity they sell to industrial customers.
Writing on Twitter, Congress of South African Trade Unions general-secretary Zwelinzima Vavi said that, while 8% was far better than 16%, he remained concerned that the increases came on the back of high previous increases. He was also worried about further mark-ups of between “14% to 100%” at the municipal level.
Bukula said when the municipal tariffs were approved, before the end of May, Nersa would insist that the guideline limitations outlined for Eskom on customers, particularly poor customers, be passed through to municipal consumers.
“At the time we [consider municipal tariffs], we will impose similar conditions,” Bukula said.
While the new tariffs would take effect for Eskom customers from April 1, municipal customers would see the increases from July 1.
The Cape Chamber of Commerce and Industry also described the determination as better than it had feared, while the Western Cape government welcomed the moderation, noting that the proposed increases were widely opposed by members of the public, civil society and trade unions.
The Steel and Engineering Industries Federation of South Africa said its members, which were confronted with the price sensitivity of international markets and had to be ultra-sensitive to maintain their competitiveness, also welcomed the decision.
However, economist Henk Langenhoven called on Nersa to make “absolutely certain that these increases are not nullified by the local authorities and metro’s actions in their price setting practices”.
Eskom had a right to take the decision on legal review and could also request a reopener should it be in a position to argue that certian cost, or revenue factors had changed materially. However, Bukula said he hoped that would not be the case during the coming five years.
By: Terence Creamer
28th February 2013