Regulatory process crucial in restoring Eskom’s operational and financial position

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Monday, 4 February 2019: Eskom has made an appeal that its operational requirements that pass the regulator’s prudency test need to be compensated through the regulatory process to enable it to recover technically and financially. This message was shared at the National Energy Regulator of South Africa (NERSA) public hearings in Midrand where Eskom also confirmed the revenue requirement remained unchanged, recovered over the lower sales resulting in the percentage increase to 17.1%, 15.4% and 15.5% over the three years.

Mr Calib Cassim, Eskom’s Chief Financial Officer said, “Our stakeholders who include debt providers, rating agencies, auditors are awaiting this crucial decision from our MYPD 4 and RCA applications as an important part of the solution to return Eskom to financial and operational sustainability. As disclosed in our interim financial statement for the period ending September 2018, Eskom’s going concern status is highlighted as emphasis of matter showing the level of financial distress. We are projecting a net loss of close to R20 billion at financial year end and it is clear that while we have maintained operating costs escalations around inflation levels, Eskom cannot solve financial and operational sustainability challenges that it faces alone. This loss situation will continue for the next few years even with the applied-for increases.”

The analysis shared by Mr Deon Joubert, Corporate Specialist, illustrated that Eskom has been providing a subsidy to customers over many years. Eskom had to fund this subsidy through increased borrowings. However, Mr Cassim clarified that this “credit card phenomenon” is not sustainable any longer. The regulator would need to make a decision on whether the electricity consumer or the taxpayer is accountable for efficient costs. “The regulatory process as well as shareholder support is crucial. The shortfall in tariff cannot be solved through cost reductions alone, and further indebtedness adds to the problem. We were encouraged by NERSA’s own presentation in parliament where they showed that Eskom had not recovered revenue allowed by the Regulator over the MYPD 3 period,” said Cassim.

Eskom confirmed that it would continue to apply the MYPD methodology and the precedent set by the 2013/14 RCA decision. “We note the impact on electricity users and have made two changes in our RCA application following questions from the NERSA panel on the fees recovered from McKinsey and the period over which to recover the RCA. The first one is using the money recovered from McKinsey to reduce our application of R21 billion to R20 623 billion and secondly, to recover the 207/18 RCA over a period of three years from 2020 to 2023. Delaying recovery of the RCAs puts more pressure on Eskom’s finances,” said Cassim.

Mr Mpumelelo Mnyani Senior Manager for Sales Forecasting explained that there were a myriad of factors that impact Eskom’s sales forecasting process. Sales volume adjustment is one of the factors that led to the adjustment in Eskom’s application. “We are confident that Eskom’s sales forecasting process is robust but it must be noted that the market is quite volatile. We therefore appreciate the fact that the NERSA MYPD methodology is cognisant of this fact and allows Eskom to review its sales forecast closer to the decision date. We have revised our sales forecast down and we welcome NERSA to run a verification process on the new numbers. We further request NERSA to consider allowing Eskom to revise these numbers annually based on the latest available projections in order to avoid increasing divergence.”

Responding to a comment alleging that Eskom denies the impact of price on its sales, Mnyani reiterated that Eskom accepted that price has an impact but that it wasn’t the only factor. He made an example of investors who quote the price of transportation from the harbour to inland as being prohibitive compared to importing from international suppliers.

Talking on the impact of electricity price increases, Eskom Treasury Consultant Mr Kabelo Masike showed that the National Treasury’s study estimated price elasticity of demand to be less than -0.5 with 15% price increases. “Price of electricity is relatively inelastic even though it has increased somewhat over time. NERSA’s own analysis showed that there would be 1.8% growth in sales with 5.23% electricity price increases, however, this projected increase by NERSA did not materialise as anticipated. This is a demonstration that projections for a single year depending on whatever factors you put may not materialise simply because there are various factors that impact your projections. We are mindful of sectors that will feel the adverse effects of price increases like gold mining and low consumption residential customers but we submit that there must be programmes to assist distressed customers instead of keeping the price of electricity artificially down, which would deny Eskom the ability to fund investments and maintenance required to sustain adequate security of supply for all customers.”

In addition, Masike indicated that Eskom has such a high concentration in the market that doing a Small but significant non-transitory increase in prices (SSNIP) study of the impact of our prices on demand as requested by NERSA would be a fallacy. “There is no idle capacity waiting to fill the gap when Eskom is not available. While alternative sources make a case for change for some of our customers, the high load customers, for instance, would not be wholly dependent on renewable energy coupled with battery storage as the technology is not yet commercially viable or technically proven.”

“Customers require reliable electricity. If Eskom cannot meet its commitments to produce electricity, it affects the customers as well as the country. An inadequate security of supply has more negative repercussions to economic growth and social welfare than a tariff increase required for Eskom’s sustainability. If Eskom’s financial situation does not turn for the better it will have dire consequences. Lenders will recall their loans as Eskom will be in breach of the loan covenants and Government will be liable to pay for the loan agreements that are guaranteed causing a run on a third of Government debt and Eskom will also have to prepare the Audited Financial Statements on a liquidation basis,” ended Cassim.

In response to the Energy Regulator alluding to Eskom’s application being defective, it was clarified that this is not the case. Eskom under oath provided facts and evidence to motivate its application for efficient and prudent revenue.