Eskom fights tooth and nail for massive price increases in the years ahead

Through the courts, and through an application to South Africa’s energy regulator, Nersa, Eskom is seeking to claw back massive additional revenue from electricity customers via the tariffs, over and above that from its normal annual electricity price increases.

Customers of electricity and the general public may be justifiably confused about the details, timing, outcomes and implications of three court actions by Eskom challenging a number of previous Nersa determinations.

Customers also need to understand the implications of the latest regulatory clearing account (RCA) application by Eskom for its 2018/19 financial year, which is not yet the subject of any legal challenge.

Eskom insists that its electricity prices are far from being cost reflective, and that they need to rise by some 30% in order to become cost reflective. Thereafter, Eskom says electricity prices in South Africa would stabilise, with only inflationary increases in subsequent years.

Eskom’s court actions

Nersa’s fourth multi-year price determination for the 2019/20, 2020/21 and 2021/22 financial years

In late 2019, Eskom applied for urgent interim relief pending a full judicial review of Nersa’s fourth multi-year price determination (MYPD 4) for the 2019/20, 2020/21 and 2021/22 financial years.

For this period, Eskom wanted revenue of R219 billion, R252 billion and R291 billion respectively for each year (i.e. 16% increase for each year), but was only allowed R206.4 billion, R221.8 billion and R233.1 billion (i.e. 9.41%, 8.10% and 5.22% increase). This resulted in a R102 billion shortfall for Eskom.

The significant portion of this shortfall (R69 billion) was caused by Nersa effectively considering a government bailout of 3 x R23 billion = R69 billion in this period as revenue. Therefore Nersa effectively reduced Eskom’s allowed revenue by this amount. Eskom is now seeking to recover this R69 billion through a review of Nersa’s MYPD 4 determination. It is not clear how Eskom is seeking to meet the remaining shortfall of R102 billion – R69 billion = R33 billion.

Eskom’s urgent interim application to recover R58.5 billion of the R69 billion shortfall through a 16.6% and 16.7% price increase for 2020/21 and 2021/22 respectively, instead of the 9.41% and 8.10% increase granted by Nersa for these years, was rejected by the court on the basis that the matter was not urgent, and should be heard following the normal court review process.

The full judicial review of MYPD 4 is now expected to be heard in court sometime in 2020. In its papers, Eskom argues that Nersa’s MYPD 4 determination was irrational and made in bad faith, and asks the court to order that the determination be sent back to Nersa for rework and adjustment.

Nersa’s RCA determination for the 2014/15, 2015/16 and 2016/17 financial years

In addition, Eskom is seeking a full judicial review of Nersa’s RCA determination for the 2014/15, 2015/16 and 2016/17 financial years.

For this period, Eskom applied to claw back R67 billion from electricity customers via the tariffs. However, only R32 billion was permitted by Nersa, which the regulator allowed Eskom to recover via a once-off 4.4% increase in the Eskom tariff applied over four years (2019/20, 2020/21, 2021/22 and 2022/23).

This results in a shortfall of R35 billion for Eskom, and the utility is seeking a court order instructing Nersa to rework and adjust its RCA determination for the 2014/15, 2015/16 and 2016/17 financial years to address alleged shortcomings of the determination.

This review application by Eskom has not yet been heard in court, and is being opposed by Nersa. It is not clear exactly how much of the R35 billion shortfall that Eskom expects to recover through this review.

Nersa’s single-year revenue and price determination for the 2018/19 financial year

Finally, Eskom has sought a review of Nersa’s revenue and price determination for the 2018/19 financial year.

For this period Eskom wanted revenue of R219.5 billion (i.e. a 19,9% increase) but was only allowed R190.3 billion (i.e. a 5.23% increase). This resulted in a shortfall of R29.2 billion  for Eskom, and the utility is seeking a court order instructing Nersa to rework and adjust its revenue and price determination for the 2018/19 financial year to address alleged shortcomings of the determination.

This application by Eskom was heard in court, and in March 2020 the judge ruled in favour of Eskom. The judgement declared Nersa’s revenue and price determination for the 2018/19 financial year as irrational and unprocedural, sent the determination back to Nersa for rework, and ordered Nersa to bear the costs of Eskom’s application.

It is not clear yet whether Nersa intends to appeal this judgement, nor exactly how much of this R29,2bn shortfall Eskom expects to recover as a result of this judgement.

Eskom’s RCA application to Nersa for the 2018/19 financial year

In August 2019, Eskom applied for an RCA determination by Nersa for its 2018/19 financial year to claw back an amount of R27.3 billion from electricity customers via the tariffs.

Public hearings have been held throughout South Africa by Nersa in February and March 2020 in respect of this application, and the Eskom and the country are still awaiting the outcome in order to understand its impact on the electricity price going forward.

Summary

Through three court actions, Eskom is challenging Nersa determinations dating as far back as 2014 that resulted in revenue shortfalls totalling R102 billion + R35 billion + R29 billion = R166 billion, and the associated electricity price increases that were well below that which Eskom wanted.

In addition, in an RCA application to Nersa for the 2018/19 financial year, Eskom is currently seeking to claw back an additional R27.3 billion from electricity customers though electricity price increases over and above Eskom’s normal annual price increases.

With Eskom’s electricity sales revenue for the 2018/19 financial year at R180 billion, it is clear that the revenue shortfalls of R166 billion challenged in court actions by Eskom, plus the current RCA application to claw back R27.3 billion from electricity customers via the tariffs, would result in additional price increases very significantly higher than those currently awarded by Nersa for the next few years.

While Eskom is unlikely to be able to recover the full alleged revenue shortfalls in its applications, nor will it be allowed to recover these in a single year, the above figures do indicate the scale of what Eskom is trying to achieve through its various court actions and its latest RCA application.