NERSA's reasons for decision on Eskom's revenue application raise more questions than answers

11 October 2019

The National Energy Regulator of South Africa (NERSA) has published the reasons for decisions for its MYPD4 revenue decision and the Regulatory Clearing Account (RCA) balance decision for the 2018 financial year.  NERSA’s MYPD4 decision that was made on 7 March 2019 in terms of which  tariff increases of 9.41%, 8.1% and 5.22% were allowed for the next three years to 2022 left Eskom with a shortfall of approximately R102 billion compared to what was applied for.

The key reason for this shortfall was NERSA’s decision to offset the envisaged Government support or R23 billion per year (that was referred to in the Minister of Finance’s budget speech) against the return on assets. This resulted in the return on assets in the decision being approximately negative 1% for each of the financial years. This is very far below a reasonable return and worsens Eskom’s financial sustainability.  The Electricity Regulation Act requires NERSA to set revenues such that it would be reflective of prudent and efficient costs, including a reasonable return on capital.  Government’s Electricity Pricing Policy allowed NERSA until 2013 to ensure that Eskom’s revenues and tariffs reached that level.  This was however not yet achieved six years later by the end of the 2019 financial year and NERSA’s MYPD4 revenue decision is worsening the lack of achievement of this Policy requirement.

Calib Cassim, Eskom’s Chief Financial Officer says, “Following analysis of the reasons for decision, the Eskom Board decided on taking the matter to court. Consequently, we have put in an application for urgent interim relief, which is necessary to avoid financial disaster for Eskom. We are seeking an order to address this shortfall in a phased manner. In addition, we are seeking the court to review and set aside NERSA’s MYPD4 revenue decision and remit that decision to NERSA for reconsideration in the light of the Court’s judgment.”

Cassim explains, “It is our understanding from NERSA’s reasons for decision that the rules and principles of the Electricity Regulation Act as well as the MYPD methodology have not been duly considered by NERSA in arriving at the decision made in terms of our revenue application. The MYPD methodology does not allow for equity investment by government to be included as a return on assets. NERSA’s deduction of the financial support announced by the shareholder therefore defeats the whole purpose of government support. In addition, the reasons as provided for the latest revenue decision are not aligned with the regulator’s own guidelines on prudency and its previous MYPD and RCA decisions.  This is further evidenced by NERSA not including the previous Government support of 2015 in its revenue decision”. 

“Eskom provided sufficient details during public hearings on the impact of the continuous shortfall between allowed revenue and efficient and prudent costs for many years and especially since the beginning of the MYPD3 period. The MYPD4 decision has exacerbated the situation further and raises questions about NERSA’s commitment to implementing its mandate that requires considering the balance between the impact on consumers with Eskom’s sustainability when making revenue decisions,” added Cassim.

Issued by Eskom Media Desk, 11 October 2019