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.
ENDS