NERSA allowed R85bn a year in Eskom runaway costs – OUTA
6 March 2018
OUTA’s assessment of NERSA’s detailed reasons for decision on curbing Eskom’s 2018 tariff hike to 5.23%, following Eskom’s application for 19.9%, shows that NERSA is only now beginning to realise the role it needs to play in bringing Eskom’s electricity tariffs in line with reasonable generation costs.
“We have studied Eskom’s performance indicators over the past decade and believe that NERSA has been remiss in discharging its mandate to challenge Eskom’s runaway costs, which they keep factoring into their tariff framework,” says Ronald Chauke, OUTA’s Energy Portfolio Manager.
While the NERSA reasons for decision document is critical of Eskom’s inefficiencies and inability to forecast sales properly, OUTA believes that the regulator is now having to step in and curb Eskom’s costs at a late stage, which, if conducted according to OUTA’s calculations, will be a shock to the system and too big to address in the short term.
NERSA allowed the utility too high an increase, with a knock-on effect on the economy that NERSA notes is likely to cost about 4255 jobs and a combined loss of household income of about R1.7 billion.
OUTA believes that Eskom’s high costs of operation over the past decade are due largely to its capture and political meddling by people connected to the Guptas and the previous state president. However, more worrying is NERSA’s lack of action as the regulator in challenging the gross developments of rising primary energy costs, runaway capital expenditure projects, staff headcount and other operational inefficiencies.
According to OUTA’s assessment of Eskom’s financial statements over the past decade, the Medupi, Kusile and Ingula projects have incurred a combined excessive cost overrun of no less than R280 billion, and two of these major projects remain far from completion. This factor alone has added an estimated R28 billion in unnecessary interest costs to Eskom’s operation.
In addition, the high asset valuations, partially due to the “never ending” power plant projects and partially due to their dubious revaluation of existing assets, has enabled to Eskom to increase its “allowable revenue” based on the inflated Regulated Asset Base (RAB) by a further by R8 billion a year, used in its price application at 2,96% of asset value.
Runaway primary energy costs have not been scrutinised sufficiently by NERSA, allowing this element to escalate from R14 billion a year in 2007 to R82 billion in 2017, translating into an estimated R47 billion a year overspend – after allowing for CPI-related increases. OUTA believes the primary energy overspend is linked to rampant corruption and favourable coal contracts to a selected few suppliers, which NERSA has allowed to go unchallenged.
Adding to the inflated RAB, the borrowing costs and runaway primary energy costs, a further R10 billion a year overspend is attributed to excessive staff costs, due to the 52% higher than required headcount, giving rise to a 32% drop in manpower productivity over the past decade.
Had the above factors been challenged more rigorously by NERSA over the past decade, we estimate that that Eskom should be operating at costs of R85 billion lower than it does today.
Eskom announced the price decision on 15 December but delayed provided the detailed reasons. Eskom had asked for a 19.9% price increase to achieve an annual revenue of about R220 billion, but NERSA granted it a 5.23% increase in the average price for allowable revenue of about R190 billion for 2018/19.
Accordingly, the average price of electricity for Eskom direct customers thus increases on 1 April from 89.13c/kWh to 93.79c/kWh, excluding VAT.
On 28 February, NERSA approved Eskom’s new tariffs arising from this increase.
The new tariffs include a 7.32% increase in the Eskom charge to municipalities for bulk electricity, which will ultimately be passed on to the municipal customers.
The consultation period with the municipalities and other interested parties over the average price increase that municipalities may charge their customers is currently running.
On 18 April, NERSA will decide on the municipal price increase; NERSA has acknowledged that this is late and thus in contravention of the Municipal Finance Management Act. Municipalities that want to charge more must apply to NERSA and those decisions will be made by 18 June. The municipal prices for their customers start on 1 July.
OUTA’s opposition to electricity price hikes
OUTA had opposed any price increase for Eskom, citing an ongoing decline in efficiencies, maladministration, corruption and lack of leadership accountability over the past decade.
OUTA provided NERSA with a written submission in October (see OUTA’s submission and OUTA’s media statement) and a further presentation at the public hearings in November (see OUTA’s presentation and OUTA’s media statement).
In December, when NERSA announced the 5.23% decision, OUTA thanked all those who sent in the thousands of comments, in what is believed to be the biggest public participation process on an electricity price decision.
Issued by Ronald Chauke, OUTA Portfolio Manager for Energy, 6 March 2018