State-owned electricity utility Eskom confirmed earlier this month that it would be taking the Energy Regulator’s most recent tariff determination on legal review and would also be applying for urgent interim relief to “avoid financial disaster”.
The review of the fourth multiyear price determination (MYPD4) was not unexpected, with the utility having already moved to review the 2018/19 determination, as well as three regulatory clearing account (RCA) decisions. Indeed, when the decision was made on March 7, Eskom immediately noted that it had left a R102-billion financial hole.
More surprising, though, is the utility’s decision to approach the courts for urgent relief in the form of a reversal of the regulator’s controversial decision to offset government support to Eskom of R23-billion a year for three years, as announced by Finance Minister Tito Mboweni in his February Budget.
Eskom argues that the decision to subtract the equity injection from its return on assets not only falls foul of the MYPD methodology but is also irrational, as it defeats the purpose of government’s support to stabilise Eskom’s finances. The move has resulted in Eskom’s return on assets being reduced to negative 1% for each of the financial years covered under the MYPD4.
In addition, Eskom argues that the relief is urgent, because its precarious financial position, which has been worsened by the regulator’s decision to offset the equity injection, poses a risk not only to its sustainability but also to South Africa’s fiscal balance. For this reason, it wants the High Court to make an immediate intervention rather than wait for the outcome of a review of the MYPD4, which will follow.
As with the other review applications, the MYPD4 review is unlikely to be resolved ahead of April 1, the date of Eskom’s next annual tariff adjustment. Should Eskom prevail in securing the relief it seeks, the full R69-billion injection would be recovered through the tariff over a three-year period, starting on April 1, 2020.
The utility is proposing that the recovery be phased in, with the first R15.5-billion recouped in 2020/21, followed by clawbacks of R43-billion and R10.5-billion in 2021/22 and 2022/23 respectively. The impact on the tariff would be material, as the equity clawback would arise at the same time as the tariff is adjusted to allow for the liquidation of RCA-related awards that have already been granted.
Already the RCA liquidation for 2019/20 has resulted in the tariff for the year being 4.41% higher than the 9.41% approved for the first year under MYPD4. Should the courts side with Eskom on its claim for urgent relief, the tariff could rise by 16.6% next year, as opposed to the 8.1% already sanctioned and by 16.72% in 2021 rather than the 5.22%.
After studying the MYPD4 reasons, which were published on October 9, the utility will also press ahead with a review of the determination, claiming that the regulator failed to adhere to the rules and principles of the Electricity Regulation Act, as well as the MYPD methodology, to arrive at its decision. In its reasons for the decision, the Energy Regulator said it had attempted to strike a balance between Eskom’s financial sustainability and the impact on the South African economy.
As with so much else in South Africa, however, it’s now going to be up to the courts to adjudicate a highly technical, but extremely important, dispute, the outcome of which will affect every citizen.