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Regulator grants Eskom 31,3% tariff increase

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Regulator grants Eskom 31,3% tariff increase

Nersa regulator member responsible for electricity generation Thembani Bukula discusses the regulator's decision in awarding Eskom an interim tariff increase. (Cameraperson: Nicholas Boyd; Editing: Darlene Creamer)

26th June 2009

By: Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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The National Energy Regulator of South Africa (Nersa) on Thursday granted electricity utility Eskom a 31,3% power tariff increase, which includes an environmental levy, and warned consumers that future tariff increases would occur.

State-owned Eskom, which submitted a delayed application in May, had asked for a 34% interim tariff hike.

The increase, which would take effect from July 1, 2009, to March 31, 2010, would move the average standard electricity tariff to 33,14c/kWh, up from the current 25,24c/kWh.

Nersa explained that it had arrived at the 31,3% target by taking the 25% real increases that it had initially projected and adding 6,3% for inflation. This was lower than the 9% inflation that Eskom had been using in its calculations.

The increase would result in estimated standard tariff revenues of R62-billion or R64,7-billion if special pricing agreements (SPAs) and international sales were included.

The sustainability of Eskom, the security of electricity supply and the affordability of electricity had remained the key considerations in Nersa’s decision, chairperson Collin Matjila said at a media briefing in Pretoria.

Nersa regulator member responsible for electricity generation Thembani Bukula said that the regulator had to ensure that Eskom had enough cash to be able to run its operations, adding that this was also why it had to fast-track its procedures.

The regulator has had to make a decision on the tariff increases in a few weeks, compared with three to six months that its deliberations usually take. However, Matjila emphasised that it had not sacrificed the quality of its assessments and that it was continuously engaging with Eskom on its cost-drivers.

During public hearings held into the matter earlier this month, Eskom CEO Jacob Maroga had said that the interim tariff increase would enable it to guarantee the security of electricity supply, while it finalised its funding model and second multiyear price determination (MYPD 2), which it was aiming to have completed by September.

Meanwhile, Eskom and municipalities’ poor customers would only be subject to a limited price hike of 15% in the interim, Matjila reported.

This would only be in place until the implementation of inclining block rate tariffs for the protection of the poor came into effect, most likely with the implementation of Eskom’s MYPD 2.

Further, the increase would not be applicable to customers with SPAs, said Matjila.

However, Bukula explained that this did not mean that these customers would not be impacted on by the increased tariffs at all, but he would not be drawn on the exact increase these customers would face.

Matjila added that Eskom would be required to extract efficiencies from primary energy and its operating expenditure and that the regulator would conduct a verification of all costs. If these were not efficiently incurred in line with the MYPD rules, there could be a clawback in costs.

Eskom spokesperson Fani Zulu said it was still reviewing the Nersa's decision and "crunching the numbers", but said that the utility acknowledged the work done by Nersa in fast-tracking the tariff application, while still giving stakeholders the opportunity to give their input.

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He highlighted that Nersa’s decision contributed towards ensuring the Eskom could cover its operational costs, while also providing it with an enabling environment for discussion regarding its funding model and to finalise its funding requirements.

The utility welcomed Nersa’s announcement of a lower tariff for the poor, saying this was an important move.

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Meanwhile, Nersa said that the country could expect further tariff increases, which would most likely be higher than inflation, in future, but could not give an exact projection.

Matjila and Bukula noted that the regulator would first have to see Eskom’s MYPD 2 application. The regulator would also conduct an economic conditions analysis in parallel with the application.

FUTURE SUBMISSIONS

Any price increase applications made by Eskom in future, would have to be submitted to Nersa six months prior to the required implementation date of the increase, Bukula stated.

Eskom had been heavily criticised over its late interim tariff application, with the South African Local Government Association infrastructure services executive director Mthobeli Kolisa telling the regulator that a “chaotic and incoherent” approach to tariff increase applications seemed to have become the norm for the electricity sector.

Various organisations had also been concerned over a lack of certain information in the application.

Matjila said on Thursday that it would issue Eskom with the minimum information requirements, as well as provide clarity on what information is needed, in future.

Further, there were also some outstanding policy issues that government was dealing with and which the regulator hoped would be resolved by the time the MYPD 2 application was made.

The manner in which some strategic natural resources, particularly coal, was procured and managed had to be reviewed in the public interest, said Matjila.

The possibility of free basic electricity doubling to 100 kWh/m, Eskom’s funding model and the specific role of government in supporting the build programme also had to be resolved, he added.

GOVERNMENT NOT SPLIT

South Africa's Department of Public Enterprises and the Department of Energy, meanwhile, welcomed the regulator's decision on the tariffs, announcing in a joint statement that this would assist the utility in funding its operational costs.

It also highlighted that the need to cushion the poor against price increases remained a priority for government, and that the 15% tariff limitation for these people supported the resolution made at last year's Energy Summit to avoid adding to the burden of the vulnerable in the country.

It emphasised that, contrary to news reports in recent days, there was no difference of opinion between these two government departments on the tariff increases.

"There is no difference of opinion in Cabinet over this issue, and the Budget Vote speeches tabled in Parliament this week by both Ministers were clear on the matter," it added.

Revenues from tariffs should reflect the full cost, including a reasonable risk-adjusted margin or return, of supplying electricity, and ensure that the industry is economically viable, stable and fundable in the short, medium and long term, the departments commented.

SHOCK FOR CONSUMERS, BUSINESS

Frost & Sullivan energy industry manager Cornelis van der Waal commented that the increase was in line with what it had expected.

“The increase will be hard on consumers in the medium term, but we maintain that a long-term view needs to be taken on this issue. These decisions must be taken in the interests of the country’s economic development, the sustainability of industry and ensuring a reliable supply of electricity. Hiking tariffs now, is the best way to support these long-term goals,” he said.

However, various associations had voiced their concern over the high tariff increase, following the announcement, saying that it would impact negatively on business and consumers.

South African Chamber of Commerce and Industry (Sacci) CEO Neren Rau said in a statement that it was concerned about the magnitude of the increase, adding that this would heighten the burden being experienced by business and domestic electricity consumers who were facing cash constraints on a daily basis.

“This increase in input costs for business will generate a ‘ripple’ effect that will be reflected in the final price of goods and services. Consequently, it will have a negative impact on inflation, and could contribute to a further slowing down or even a reversal of the current downward path of inflation,” he asserted.

The Cape Chamber of Commerce director Albert Schuitmaker added that it was shocked by the decision to increase electricity by this much, as this could be the “last straw” for some companies that were already battling to survive as a result of the recession.

“I’m afraid we are being asked to pay for years of poor management, poor planning and underinvestment by Eskom and the government,” he said.

Further, Sacci appealed to municipalities to keep any additional costs it might pass on to consumers to a minimum, with Rau explaining that the tariffs applied by local government was sometimes “substantially more” than the Eskom tariff.

Business Unity South Africa (Busa) also expressed its concern over the “inevitable negative impact” that the increase would have on the country’s economy, which was already in recession.

“Busa has always advocated an optimal mix between tariffs, loans and government finance to fund Eskom. The unintended consequences of this decision may well swamp the intended ones,” the organisation stated, saying that it was concerned about the serious cost implications that this would have on consumers and business at a time when the Reserve Bank was reluctant to cut interest rates more rapidly.

South Africa’s Monetary Policy Committee (MPC), lead by central bank governor Tito Mboweni on Thursday decided to leave the repo rate unchanged at 7,5%, in contrast to the further 0,5% or 1% cut many analysts were expecting.

Meanwhile, trade unions slammed Nersa’s decision to grant Eskom a tariff increase, saying that it was a blow to consumers and industries.

“Consumers are losing hope, they simply won’t be able to carry the extra burden. Industries struggling to keep [their] head[s] above water will be hit hard and I suspect many businesses will find it hard, if not impossible, to recover from this,” UASA spokesperson André Venter commented.

The Congress of South African Trade Unions asserted that the increase, which was almost four times the current inflation level, could not be justified as a response to Eskom’s rising running costs.

“It is clearly another attempt to shift the burden of Eskom’s capital costs for restructuring from the government on to the consumers. The consequences will be catastrophic,” the federation stated.

Meanwhile, the South African Human Rights Commission said that while it accepted that it was essential for Eskom to remain a viable entity, this would, nevertheless, add more pressure on consumers and the poor in South Africa.

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