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Eskom plans ten-year tariff submission while pushing ahead with two clawback bids

Eskom CFO Anoj Singh on the utility's approach to future tariff requests. Camera Work & Editing: Nicholas Boyd. Recorded: 24.11.2015

24th November 2015

By: Terence Creamer
Creamer Media Editor

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State-owned electricity producer Eskom plans to make an early fourth multiyear price determination (MYPD4) application to the National Energy Regulator of South Africa (Nersa) and also extend the tariff horizon in the submission to ten years, CFO Anoj Singh said on Tuesday. The current MYPD3 determination runs for five years and is scheduled to continue until March 31, 2018.

Speaking during the utility’s interim results presentation, Singh said the new application – which would follow on the back of a failed attempt for a partial reopening of the MYPD3 earlier in the year – would be pursued in “parallel” with two Regulatory Clearing Account (RCA) submissions to claw back unrecovered revenue for 2013/14 and 2014/15.

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The 2013/14 RCA application was submitted to the regulator on November 10 and Eskom was seeking to claw back R22.8-billion, which, if approved, could result in tariffs rising by nearly 17% from April 1, 2016, instead of the 8% already sanctioned. However, Nersa still had to adjudicate the application and had, in the past, not always granted Eskom its full request.

Singh gave no indication as to the timing or size of either the 2014/15 RCA application or the MYPD4 submission, saying only that the MYPD4 application would allow for an 18- to 24-month adjudication process.

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“We are certainly contemplating, and will, lodge an early MYPD4 application with Nersa to try and get tariff increases that are more in line with our cost increases,” Singh said, dismissing any suggestion that the group’s improved financial position during the first half of 2015/16 could result in it withdrawing requests for further upward tariff adjustments.

Eskom reported a 22% rise, to R11.3-billion, in net profit for the six months to the end of September on the back of an 8% increase in revenues to R87.9-billion. Earnings before interest, taxes, depreciation and amortisation rose 9% to R24.9-billion, while gearing fell from 66% to 60% and its debt-to-equity ratio improved to 1.50 from 1.90.

However, Eskom’s first half performance was always far stronger than its second half, when demand fell and maintenance costs rose.

In addition, the improvement in the financial ratios was largely underpinned by the first R10-billion tranch of a R23-billion capital injection from government, as well as the conversion of a R60-billion subordinated loan to equity. The R13-billion second tranch was anticipated before March 31, 2016.

Singh indicated that the decision to simultaneously press ahead with two RCA applications and the MYPD4 submission was part of a strategy to prove the operational effectiveness of the mechanism, which enabled Eskom to recover revenues in cases of under recovery, or pay back in instances of over recovery.

“The RCA process is a risk mitigation measure for both Nersa as well as Eskom. And for us to have two RCAs adjudicated gives us relative comfort that the risk-mitigation measure will actually be implemented, and implemented reasonably, over the long-term MYPD4 tariff path.”

Following a RCA application for the MYPD2 control period, Nersa granted Eskom a 4.69% upward adjustment to the tariff from April 1, 2015, which resulted in a hike of 12.69% in 2015.

There is likely to be considerable resistance to yet further tariff increases, which have surged over the past decade, with Eskom currently charging 82.6c/kWh, up from 74c/kWh in 2014/15. However, Eskom consistently argues that tariffs are still not cost reflective.

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