State-owned electricity utility Eskom will submit an application to the National Energy Regulator of South Africa (Nersa) this week to review the “prudency” and “appropriateness” of its controversial legacy contracts with BHP Billiton’s aluminium smelters, in KwaZulu-Natal.

The aluminium-price-linked contracts, which were signed in the 1990s and are known to be highly favourable to the world’s largest mining company, have come in for ongoing criticism since the load-shedding crisis of 2008.

Hitherto, Eskom has indicated that it would seek a negotiated settlement with the Melbourne-domiciled company, as was the case with regard to the future supply of power to BHP Billiton’s aluminium smelter in Maputo, Mozambique.

In fact, CEO Brian Dames insists the group remains open to continuing negotiations with BHP Billiton in order to reach a settlement, but says the approach to Nersa followed on from several investigations and engagements and is currently regarded as the “most prudent way to deal with this matter”. He also highlights that all of its other large customers, including 184 municipalities, mines and factories, were now paying the regulated tariff.

BHP Billiton communications and external affairs VP Lulu Letlape said the group had been informed by Eskom of its intention to approach Nersa.

However, the company did not have a firm view on whether Nersa was the appropriate forum for a review of the Hillside and Bayside contracts, saying only that it would not "preempt the regulator’s decision on the terms of the review".

Letlape confirmed that the two companies had been unable to reach agreement on the KwaZulu-Natal smelter contracts, despite the successful Mozal negotiations of 2010.

Eskom’s head of regulatory and legal Mohamed Adam reports that the application is premised on the Electricity Regulation Act, which obliges both Eskom and Nersa to act in the best interests of the economy and the country.

Therefore, Eskom believes Nersa has the authority to intervene in  the interests of a sustainable electricity industry and to ensure that the interests of all stakeholders are “balanced”.

The submission would be made in line with the general powers granted to Nersa in the legislation, as well as Nersa’s specific authority to adjudicate “discriminatory access or pricing”.

“Our view is that circumstances have changed and that [Eskom] as well as Nersa have an obligation to look into these contracts, given these changed circumstances.

“So, they do have the power to look into them and based on their conclusions will have the power, then, to take whatever action necessary to deal with their findings,” Adam said.

Nersa was likely to pursue an adjudication process that was transparent and consultative.

However, Adam refused to offer insight into the current losses associated with the contracts, noting that the current legal contest involving Media24 and BHP Billiton in relation to disclosure of contract details prevented him from offering further details.

But CFO Paul O’Flaherty indicates that the current negative value associated with the embedded derivatives recorded in its financial statements, listed at around R5-billion, is “the difference between a Megaflex price and what we are actually charging” the smelters.