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I met on Monday with the National Energy Regulator of South Africa (NERSA) to discuss alternative pricing options to the model currently employed by Eskom. At issue is the Modern Equivalent Asset (MEA) method that Eskom employs to evaluate its costs.

The Democratic Alliance (DA) has appealed to the regulator, Mr Tembani Bukula, to ease the rate of price hikes currently contained in the Multi-Year-Price-Determination (MYPD 2).

NERSA has made a disastrous move for consumers by approving burdensome tariff price hikes (25% per annum) on the basis of book-keeping theatrics.

The MEA is often used by public enterprises to justify inflated ‘cost recovery’ from consumers who can barely afford it. Yet, ‘return on assets’ in NERSA’s ‘summary of allowed revenue’ has been inflated by more than 1000%.

This makes Eskom’s balance sheet look better than it really is, and then falsely justifies consumer price-hikes.

We further proposed that the MYPD 3 pricing regulations be linked to inflation, currently targeted at the 3 to 6% range. We have the backing of reserve bank governor, Gill Marcus, on this proposal.

We also strongly recommended that the money for the R90 billion shortfall on the Medupi station be recovered over a longer time period to ease the burden on consumers.

In addition, we proposed that the remainder of the cost recovery should be sourced through alternative financing mechanisms, such as energy and/or infrastructure bonds. This way, we can harness the dynamism of the market through state-guaranteed bonds.

The Medupi station is due to come online in 2013 and Eskom plans currently rely heavily on payments from consumers to meet the shortfall.

The DA also informed NERSA that it would be making submissions to the Portfolio Committee meeting on Energy to call for further regulatory reform.

The price hikes that NERSA is permitted to allow are governed by the National Energy Regulator and Electricity Regulator Acts, respectively.

The regulator has also agreed with the DA that proposed amendments to the National Energy Regulator and Electricity Regulator Act fail to address damaging clauses in the Act, in particular paragraph 15 (a), which reads that:

“The Regulator, in setting and approving tariffs as contemplated in sections 14 or 14A “must enable an efficient licensee to recover the full cost of its licensed activities”.

The failure to address this clause is concerning, given that Eskom’s ‘full cost’ is predicated on a questionable pricing technique. Furthermore, the word ‘must’ should, at worst, be replaced by the word ‘may’.

I have been requested by the Director-General of Energy to present a submission in this respect to the Department and to table it before Parliament.

Redrafting this legislation is a critical prerequisite to correct pricing. I will be making this submission shortly.