State-owned electricity producer Eskom has offered some fresh insight into the new approach it plans to adopt in its relentless efforts to migrate South Africa’s already steeply rising electricity tariffs towards what it calls cost reflectivity.
The utility made a failed attempt for a partial reopening of the third multiyear price determination (MYPD3) earlier in the year and now its CFO has reported that it will make an early fourth multiyear price determination (MYPD4) application to the National Energy Regulator of South Africa (Nersa). The MYPD3 determination runs for five years and is scheduled to continue until March 31, 2018.
Speaking during the utility’s interim results presentation, Anoj Singh also reported that the new application would include an extended tariff horizon of ten years, and would be pursued in “parallel” with two Regulatory Clearing Account (RCA) submissions to claw back unrecovered revenue for 2013/14 and 2014/15.
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 has to adjudicate the application and has, 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.
“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.
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.”
There is likely to be resistance to yet further tariff increases, with South African power prices having more than trebled since 2007. Eskom is currently charging 82.6c/kWh, and municipal customers are charged even higher rates.