What is prudent?

29th January 2016 By: Terence Creamer - Creamer Media Editor

What is prudent?

The National Energy Regulator of South Africa (Nersa) has the unenviable task of assessing the ‘prudence’ of Eskom’s application to recoup what it has calculated to be a R22.8-billion cost and revenue variance between its actual performance in 2013/14 and that allowed for in the first year of the third multiyear price determination, or MYPD3.

Eskom is claiming the amount under the Regulatory Clearing Account (RCA), which forms part of the current regulatory methodology and is designed to reconcile differences between what was awarded by Nersa in 2013 and what actually materialised on both the cost and sales fronts.

In other words, the methodology allows for costs that are incurred prudently to be recovered, as well as for the utility to recoup any revenue underrecovery. In the current application, revenue underrecoveries have been calculated by Eskom to be R11.7-billion, while extra diesel costs of R8-billion make up the lion’s share of the cost increases.

It is up to Nersa to determine whether these additional costs – which also relate to other primary-energy inputs, as well as purchases from independent power producers and the net import/export position –were prudent.

The regulator also needs to assess whether the lower sales, which resulted in lower revenue to Eskom, have been fairly calculated and were not in fact caused by the utility’s inability to supply, owing to the poor availability of its power station fleet or efforts to suppress demand.

Eskom insists that its application is mathematically correct and that it has been calculated with strict adherence to the MYPD rules. In an effort to bolster the credibility of this claim, it subjected its calculations to review by Deloitte, which determined the RCA submission to be “robust in terms of the underlying data used as well as the interpretation and application of the MYPD methodology”.

Both Eskom and Deloitte are at pains to stress, though, that they have not subjected the application to any form of prudence review, as this is the “domain of the regulator”. Indeed, Deloitte’s Daryl Elliott acknowledged that, in a number of areas, the RCA rules are open to interpretation, including on the way cross-border positions are handled, and what could be considered prudent in the areas of revenue, diesel and coal burn variances.

In other words, the ball sits firmly in Nersa’s court as to what is a legitimate and justifiable claim and what should be excluded.

For its part, Eskom has stressed that prudence is not a test of perfection, but rather a test of whether its actions – without the benefit of hindsight – were reasonable in the circumstances.

In other words, it is well known that the diesel-fuelled turbines are extremely expensive to operate. But was it prudent, or reasonable, for Eskom to use them as extensively as it did so as to avoid even higher incidents of load-shedding, the economic cost of which is considered to be significantly higher?

Was the way in which Eskom managed its maintenance regime during the period prudent, particularly in light of subsequent developments that have shown a different regime to be less load- shedding and diesel intensive?

Did Eskom willfully overestimate its volumes for the year and, if so, why were its sales estimates approved by the regulator in the first place?

All eyes will be on Nersa on February 26 to see how it answers these and a number of other questions.