There was widespread relief last week when the National Energy Regulator of South Africa (Nersa) bared its teeth and announced that Eskom would only be allowed to increase electricity tariffs at an average yearly rate of 8% between 2013 and 2018 – an increase that was half the 16% sought by the utility in its application for the third multiyear price determination (MYPD3) period.

The State-owned utility had requested an allowable revenue allocation of nearly R1.1-trillion, which would have increased its average selling price from 61c/kWh currently to a nominal 128c/kWh by 2017/18, or a real price of 96c/kWh.

The approved tariff increases were premised on cumulative revenues of R906.6-billion over the period, which would result in the electricity price increasing to 89.13c/kWh by the end of the MYPD3. An indication was also given that the price path should transition back towards inflation-type levels during the MYPD4 period.

Nersa considered about 200 written and 162 oral representations before arriving at its decision, which is said was based on reason, facts and evidence.

On just about every component of the revenue application, Nersa deviated from Eskom’s requests – in some instances materially.

Eskom requested R355-billion to cover its primary energy costs over the period, but was granted R293-billion. It sought R270-billion for operating costs and was granted R265-billion – a determination based partly on salary and wage increases of inflation plus 1.4%. The utility requested R78-billion for purchases from independent power producers and received R64-billion, suggesting that Nersa expected even lower renewable-energy prices in further procurement rounds. Another R13-billion was sought for integrated demand management costs, but Eskom secured R5-billion. Nersa also extended no revenue for further power buy-backs, for which Eskom had requested R8-billion. On the highly contested issues of depre- ciation, Eskom sought R185-billion, but secured R139.9-billion. While on the equally fraught area of Eskom’s return on assets, the utility requested R187-billion, but received R137-billion over the period.

At the end of the period, Eskom would be left with retained earnings of R10-billion rather than the R46-billion that had been requested. But the composition of the returns had been front-end loaded to ensure that Eskom could service its debt.

In noting the decision, Eskom said the determination would “present some challenges” in enabling it to meet its mandate of “keeping the lights on”.

But Nersa argued that the 8% would not “run Eskom into the ground”, but rather ensure that the utility was “efficient, effective and sustainable”.

Just how sustainable this seemingly favourable decision is over the full five years is yet to be determined, though.

For now, it sends a strong signal to Eskom that the regulator is going to demand greater efficiencies from the utility – whether or not it is in a position to deliver these is up for debate.

Hopefully, we won’t see Eskom officials driving north up the N1 motorway in a couple of years requesting a reopener.