Eskom is again taking the National Energy Regulator of SA (Nersa) to court, this time for “mistakes” and “financially impossible” conclusions that the regulator reached in determining Eskom’s tariff increase for 2022/23.
In February, Nersa awarded Eskom a 9.6% tariff increase, far below the 20.5% requested.
Nersa released the detailed reasons for its decision last month. On examining the document, Eskom CFO Calib Cassim said that he found Nersa’s reasoning deeply flawed and it could not be left unchallenged.
Eskom has taken Nersa’s decisions on review on numerous occasions over the last three years and won each time. Each time that Eskom overturns a tariff decision in its favour, it can add the increases it has foregone to tariffs for future years.
Nersa determines the electricity tariff based on a formula that takes account of costs that the company will incur in producing energy – such as primary energy costs and labour – as well as a reasonable return on its assets. The return on assets, which is based on the value of its power stations, less depreciation, is particularly key as it enables Eskom to charge tariffs that are more reflective of its operational costs and also takes account of the need for new investment.
In his affidavit, Cassim argues several glaring problems in the reasoning behind Nersa’s decision but focuses particularly on the way that the regulator has treated Eskom’s allowable return on assets. While Eskom valued its regulatory asset base (RAB) at R1.25 trillion in its application, Nersa’s valuation is less than half of this at R551 billion. It is also vastly different from the RAB in Eskom’s previous tariff application, only the year before, when the valuation was R885 billion.
The result of this is outlined in a table in the Nersa decision, which provides the valuations of all of Eskom’s power stations giving certain of them longer depreciation lives than remaining useful lives.
The affidavit states:
“This is financially not possible…This results in negative values for the three power stations as at 2020. This is a result of another incorrect implementation of basic financial principles. Assets are depreciated until the end of their useful lives. Their depreciation lives cannot be more than their useful lives”.
The consequence is that Koeberg is valued at -R42 billion; Ingula power station, which is only eight years old, is valued at -R7.3 billion; and Gariep at -R1.2 billion.
In an interview on Wednesday, Cassim said that Nersa “is so blatantly wrong that we have review it.” Not only could the valuation be used in future years but it has implications for how Eskom’s balance sheet is viewed by auditors and funders.
If Eskom succeeds in its review, the outcome will change the 9.6% tariff.
Cassim says it is impossible to compute the possible impact as it is difficult to determine what the effect would be had Nersa not made any mistakes.
