Eskom's need for tariff hike explained

The first day of the public hearings for Eskom’s application to the National Energy Regulator of South Africa (NERSA) for a tariff increase had many warning about the impact that a tariff hike could have on consumers and businesses.

In a statement released by Eskom, it was noted that “Eskom’s 2013/14 RCA (regulatory clearing account) Submission of R22.8 billion is driven substantially by revenue under recoveries, higher expenditure on coal burn, Independent Power Producers, Open Cycle Gas Turbines and other primary energy costs.”

During the first day of public hearings, NERSA heard arguments from a range of people, including Anoj Singh from Eskom, Leslie Rencontre from the City of Cape Town, Jaco Wiese from Virgin Active, Longchamp Roger Pitot from NAACAM (the Authority of the SA Automotive Components Industry), Nhlanhla Ngidi from SALGA (South African Local Government Association), and Monika Hermann from Cape Town City.

According to reports, the general consensus of Rencontre, Wiese, Pitot and Ngidi was that the RCA application by Eskom to recover an additional R22.8 billion is unaffordable, not only for consumers, but businesses as well. If this application is approved by NERSA, it will mean that there will be an electricity tariff hike by July this year.

What is the application about?
The public hearings are being held to look into “Eskom’s application for the evaluation and approval of the regulatory clearing account (RCA) balance for the first year (2013/14 period) of the third multi-year price determination (MYPD3).”

In other words, the RCA application by Eskom is a bid to make up a loss between the allowed revenue the NERSA awarded to Eskom based on a forecast (the MYPD), and what revenue Eskom actually achieving. “The RCA balance could either be in favour of Eskom or the consumer which will impact on the price of electricity,” explained Eskom.

Through forecasts, NERSA awards Eskom with an ‘allowed revenue’, which intends to enable Eskom to cover operating costs and earn a reasonable return. The RCA submission, in comparison, looks at the performance over the period the forecast was made, and aims to reconcile the difference between the two amounts. In other words, Eskom is applying to NERSA for the difference between what its forecasted revenue was, compared to what it actually received.

The application by Eskom to NERSA is part of Eskom’s attempts to stabilise the power utility. Eskom noted: “Investors are seeking certainty and stability from the regulatory process. Eskom has recently been downgraded by Rating Agencies and they note inadequate tariff increases as part of the reason for the downgrade.

“A favourable RCA process will improve investor confidence, which impacts our credit rating and funding security. Funding security ensures that the build programme remains on course for completion. Sufficient revenue allows Eskom to continue with the generation performance improvement programme to the benefit of all customers. A financially sustainable Eskom will support our country’s broader economic objectives,” added Eskom.