Nersa: Holes in Eskom's argument

The National Energy Regulator of South Africa (NERSA) has denied Eskom’s application of a 25.3% tariff increase for 2015/2016 today. The regulator slammed Eskom for it's lack of transparency, while one commentator said Eskom was confused and unprepared. 
 
NERSA stated: “Based on the available information and analysis performed, the Energy Regulator has decided as follows: Not to approve Eskom’s application for the selective reopener of the MYPD3 application for OCGTs and short term power purchase programmes (STPPP), and the impact of the increase in the environmental levy received o 30 April 2015. And that Eskom should submit: an application for the adjustment in the allowed revenue in accordance with the MYPD methodology, [or] alternatively, a new application for the period 1 April 2016 to 31 March 2019 with indicative predictions for the period 1 April 2019 to 31 March 2021.

While consumers can breath a sigh of relief for now, one commentator from Nomura, Peter Attard Montalto, believes that we won't be in the clear for long.
 
Montalto explained: “Eskom can now only reclaim this year's cost overruns through an RCA claim (a regulatory clearing account claim – which put simply is where certain cost overruns 'go' to be clawed back through larger tariff increases in the following year). This means Eskom may well end up with a high tariff increase next year in the order of 20-25% anyway.”
 
According to NERSA, the document which Eskom submitted to the regulator presented some changes in Eskom’s selective reopening of the third multi-year price determination (MYPD). These included commissioning dates, which could not be examined in isolation of other factors.
 
NERSA highlighted that some of the commissioning dates in its MYPD3 application had lapsed, and Eskom had not provided new commissioning dates in its application. Other holes in Eskom’s application included a lack of information pertaining to:
·         Savings associated with the operations and/or the delay in the commissioning of Medupi, Kusile and Ingula;
·         Savings associated with a low load factor of the existing generating plant;
·         The impact of the change in the maintenance regime and the resultant poor plant performance; the effectiveness of the plant maintenance with respective plant availability;
·         The impact of the R23 billion equity injection and R60 billion loan conversion to equity by the state;
·         The change in the demand for electricity;
·         The availability and costs of alternatives to the use of OCGTs, for example, demand site management, power buy-backs, demand market participation;
·         Changes in other MYPD3 assumptions;
·         The economic impact of the proposed price increase, and other sources of funding.
 
“The Energy Regulator did not consider the proposed increase to the environmental levy as it was not gazetted, and Eskom withdrew the application of the environmental levy during the public hearings,” said NERSA.
 
In addition, NERSA noted that if Eskom does submit a new application, it must be in accordance with the MYPD methodology, which means that the application must include all possible cost savings, the impact of the government bail-out, as well as changes in the demand for electricity and possible alternatives to the use of OCGTs.
 
Furthermore, a new application must also be submitted six months before the proposed date of implementation.
 
Parliament passes Eskom’s Bills
 
Parliament has passed two bills which will allow Eskom to receive R23 billion, as well as to convert “a R60 billion subordinated loan to the company into equity.” These bills are: the Eskom Special Appropriation Bill and the Eskom Subordinated Loan Special Appropriation Amendment Bill, which have been “transmitted to the President for promulgation.”
 
The statement released by National Treasury, it said: “Government has indicated that in order to ensure that there is no impact on the budget deficit, the appropriation to Eskom would be funded through the sale of non-strategic assets and that the funds would be transferred once the proceeds have been realised into the National Revenue Fund.
 
“The process for the disposal of assets to fund the allocation to Eskom is well-advanced and government will make further announcements in this regard in due course.”
 
When asked what non-strategic assets will be sold to provide these funds to Eskom, Treasury reiterated that the process is “well-advanced” and that further announcements will follow.
 
In addition to the R23 billion cash injection that Eskom will be receiving from government, and the conversion of a R60 billion loan into equity, Eskom will be taking other measures. These include Eskom saving R60 billion in costs up to March 2018, and an adjustment of the electricity tariffs in order to reach cost-reflective levels.
 
The NERSA public hearings
 
Chris Yelland, an energy expert and managing director at EE Publishers, was one of the people to present at the NERSA public hearings last week, opposing Eskom’s application for a tariff increase.
 
Yelland said: “I thought the hearings were very interesting. On the one hand Eskom made its presentation for the extra [tariff increase], this was followed by, I think virtually all the presentations, very strongly opposing it on the reasons largely to do with affordability and damage to the economy that an increase would do.”
 
According to Yelland, acting Eskom CEO Brian Molefe and the Energy Regulator had at least two clashes during the presentation. He believed that Eskom arrived at the NERSA public hearings in a confused and unprepared state. “I think the way it was handled, and the confrontational way that Eskom handled it with the regulator didn’t present Eskom in its best light.”
 
The first clash between the Energy Regulator and Eskom was due to information which stated that 50% of the utilities power plants produce less just days after maintenance. The Energy Regulator pointed this out, and Molefe reportedly disputed the point, until it was noted by the Energy Regulator that this information had been provided by the power utility itself.
 
Yelland believes that during this dispute, the Energy Regultor was trying to highlight that it provides Eskom with the money necessary to do maintenance on the power plants, yet the maintenance is not effective. “The maintenance is not being done properly, and that is half the problem that Eskom’s generation capacity performance is declining even though they are supposed to be doing this maintenance.”
 
Secondly, if NERSA had approved the tariff increase, it would have only been implemented from 1 July 2016, a point which seemed to shock Molefe, despite the fact the document from National Treasury explaining the reasoning behind this, was provided to NERSA by Eskom.
 
“The circular has been issued by the Treasury to all municipalities, and it seemed from the interaction between the Regulator and the CEO (Molefe), that Eskom were claiming that they had not seen this directive or were unaware of it. And when the Regulator pointed out that in fact it had received this directive via Eskom, there was this rather surprising interaction between the Regulator and Molefe, who was claiming ignorance of it. It was a very surprising interaction that took place in public.”
 
Damage to the economy “Eskom gave out that message that if they didn’t get this price increase there was going to be increased load shedding and that that would be even more damaging to the economy than what they are asking the regulator for.”
 
With regards to the new bills which have been passed by Parliament, Yelland noted: “There are some very mixed messages coming from Eskom. On the one hand they are saying that if they don’t get this price increase there is going to be increased levels of load shedding, which is going to be very damaging to the economy. On the other hand, Eskom has been indicating that its financial positon is not nearly as bad as financial journalists are making out. I must say that with the passing of this Bill in which Eskom is now to receive a R23 billion equity injection and the conversion of a R60 billion subordinated loan to equity, this considerably strengthens Eskom’s balance sheet, enabling it to borrow more money more easily, and more cheaply.”
 
He added: “Eskom is going to receive R10 billion from the Treasury at the end of this month in terms of the R23 billion equity injection, and I think it is financially in a reasonable position to get by without the tariff increase.”