Eskom defended its proposed 20.5% tariff increase for 2022/23 on Monday, arguing that most of the cost increase was driven by two factors outside of its control: the requirement to increase purchases of energy from independent power producers and the increase in carbon taxes.
Together, these two factors accounted for 13.8% of the proposed price increase, while increases in operating expenditure accounted for only 7.5% and cost escalations in primary energy for 6.5%. SA introduced a carbon tax in 2019, which is to be increased gradually. IPP costs for Eskom are set to rise as more producers come on stream.
Due to large increases in these and other areas, in its application Eskom requested a negative return on assets of 6.38%, to prevent the overall increase rising too high.
CFO Calib Cassim presented Eskom’s revenue application to the National Energy Regulator of SA (Nersa) on which the utility’s annual tariff increase is based. Nersa decides the tariff on a legislated methodology, which determines how much Eskom can justifiably earn from consumers, assuming Eskom operates efficiently.
The regulator has seldom granted Eskom its full request, as its scrutiny of Eskom costs has almost always found that a large a portion of costs be ruled out due to inefficiency. Eskom, has in turn, regularly succeeded in clawing back some of the costs retrospectively through a mechanism called the regulatory clearing account. Retrospectively allowed costs are then added to future tariffs, making for a complicated and constantly changing price determination mechanism.
While the determination of Eskom tariffs is extraordinarily complicated at the best of times, this year’s application – which will put in place new tariffs on 1 April for non-municipal customers and 1 July for municipal customers – is even more complicated. This is because the application was drawn up a year ago but had not been deliberated on by Nersa.
In September, well after the application had been completed, Nersa informed Eskom that it intended to change the methodology for determining allowable revenue, requiring a new application. In December, Eskom approached a court and secured an order that Nersa consider the 2022/23 application immediately to put new tariffs in place by 1 April.
On Monday, Cassim presented Eskom’s tariff application which was compiled a year ago. However, much has changed in both Eskom and wider energy supply industry over the past year and Cassim will be given another opportunity on Tuesday to revisit the assumptions in the application.
While the balance between the various factors contributing to the price application will change, the global amount of 20.5% is expected to remain the same.
But while Eskom tried to justify its application, stakeholders and interested parties at the Nersa public hearings appealed to Nersa to ignore its methodology and refuse to award the increase on the basis that consumers could not afford them.
Among them was mayor of the City of Cape Town Geordin Hill-Lewis who said the proposal was “unaffordable, unfair and unjust”.
“The point of departure should not be what Eskom’s maximum return on assets should be, but what people can afford. It would in line with inflation at around 5.5%,” he said.
The Nersa methodology should be set aside on the grounds that it is not rational to award high tariff increases in the prevailing economic environment, he said.
Other groups, including community, faith-based organisations and business organisations made similar appeals arguing that it was immoral to force consumers to pay for Eskom’s and government’s mistakes and excesses of the past.
Members of the Nersa electricity panel told presenters that while they sympathised with their plight, their hands were tied by legislation methodology.