Another hike. What next?

11th March 2016 By: Terence Creamer - Creamer Media Editor

Another hike. What next?

Besides the National Energy Regulator of South Africa (Nersa’s) decision to grant Eskom a partial clawback of revenue and cost variations arising during the first year of the third multiyear price determination (MYPD3), its decision to insist on an entirely new application is arguably just as significant.

Nersa made the determination, having received Eskom’s Regulatory Clearing Account (RCA) application on November 10 and having held public hearings on the matter in six of the country’s nine provinces between January 18 and February 5.

Through its RCA submission, Eskom sought to recoup R22.8-billion in revenue and cost variances for the 2013/14 financial year; the first year of the MYPD3 control period.

Following its analysis and consultations, Nersa granted Eskom R11.2-billion in cost and revenue variances, representing about half of what the utility had been seeking. Over R10-billion is to be recovered from standard-tariff customers during 2016/17, with R983-million recoverable from Eskom’s special pricing agreement and international customers.

As a result, the tariff will rise by 9.4% on April 1 for direct Eskom customers – nearly 6% above the 3.5% increase that would have been instituted, owing to the MYPD2 RCA adjustment, implemented in 2015/16. That adjustment resulted in a tariff increase for 2015 of 12.69%, which changed Eskom's revenue base and the 8%-a-year tariff path sanctioned for the five-year MYPD3 period.

However, less prominence has been given to Nersa’s instruction that Eskom make no further RCA applications under the MYPD3, but rather prepare a MYPD4 application. Such application needs to take account of material changes to the demand outlook and delays to Eskom's build programme.

This is significant, because in the absence of an entirely new application, Eskom would likely have returned with further RCA submissions for the remaining years of the MYPD3. In addition, the revenue and cost variances would most likely have been above the 10% level needed to triggers public consultation. In other words, there would have been a series of RCA hearings, which could have led to significant changes to the original 8% price trajectory sanctioned in 2013.

Nersa full-time regulatory member for electricity Thembani Bukula says that, while the RCA tool will be maintained as part of the methodology, having further RCA applications in the context of vastly altered assumptions would run counter to the stated intention of offering price-path certainty.

The State-owned utility would need to submit such an application within the coming three months – a tight timeframe given the requirement that the application first be canvassed with the National Treasury and the South African Local Government Association.

The utility has indicated previously that it will assess the possibility of making a ten-year tariff path application.