Consumers lose when electricity regulator is weak

Eskom wins, but NERSA, electricity users and taxpayers lose.

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03/07/2020 13:32:48

                                                                                                                                                                                                                      Consumers lose when electricity regulator is weak  

                                                                                                                                                                                                                      South Africa needs an electricity regulator who can defend the public from rising electricity prices. This week the high court again found the National Energy Regulator (NERSA) wanting.

                                                                                                                                                                                                                      NERSA is supposed to be the independent energy regulator with the skills and capacity to assess whether Eskom’s applications for tariff increases are rational and reasonable, and set a fair price for electricity. Although Eskom is allowed a reasonable profit, it is not allowed to claim for over-expenditure that could have been reasonably predicted and was not prudently incurred.

                                                                                                                                                                                                                      State-owned entity Eskom has been mismanaged for years, resulting in higher prices and social hardship for consumers, substantial bailouts with taxpayers’ funds which should have been available for alternative spending, and a devastating effect on the economy. OUTA has participated in the consultation processes that NERSA has held over the years on Eskom’s prices, and has pushed for NERSA to overcome its apparent reluctance to hold Eskom accountable for what we see as mismanagement.

                                                                                                                                                                                                                      On 29 June 2020, the high court found that NERSA had not applied its own methodology properly in its decisions on three Eskom applications, and had erred in refusing to allow Eskom to pass on to consumers certain additional primary energy costs. It is somewhat disappointing that the court was unable to hear NERSA’s side of the story, as NERSA chose not to defend its decisions.

                                                                                                                                                                                                                      The judgment means NERSA must redo those decisions. These are Eskom’s regulatory clearing account (RCA) applications for 2014/15, 2015/16 and 2016/17. Eskom had applied for R66.6bn in total, but NERSA had allowed only R32.69bn. Whatever amount is ultimately decided will be added to electricity consumers’ bills in the future.

                                                                                                                                                                                                                      Eskom has welcomed the judgment, saying it paves the way towards cost-reflective tariffs.

                                                                                                                                                                                                                      This case is one of several legal challenges which Eskom has brought against NERSA over electricity pricing decisions. In March, in another case, the high court overturned NERSA’s decision on the 2018/19 price. This does not affect the amount that consumers have already paid, but allows Eskom to return to NERSA to apply for a supplementary tariff.

                                                                                                                                                                                                                      These decisions show that the courts have found that NERSA operational procedures are wanting, and this raises serious concerns about energy regulation.

                                                                                                                                                                                                                      Cost-reflective tariffs should apply to prudently incurred expenditure.  OUTA cannot accept that Eskom’s tariffs be increased when based on poor operational choices, for which consumers must simply pay no matter how such expenses are incurred.  

                                                                                                                                                                                                                      In its response to the judgment, NERSA said the issue at stake is procedural fairness.  NERSA claims that it acted in the interests of ensuring regulatory independence, minimising the risk of perceived regulatory capture.

                                                                                                                                                                                                                      OUTA wholeheartedly supports a regulator that can act without fear or favour, but the court also found that NERSA had “delayed unconscionably” in taking its decisions. This is an ongoing problem in NERSA. When OUTA commented to NERSA on Eskom’s latest RCA application, we raised concerns about how NERSA had published a decision on electricity tariff increases in 2020 without providing reasons for the decision.

                                                                                                                                                                                                                      At the core of the issue of rising electricity costs is the cost of coal, some contracts which have been acknowledged by Eskom as overpriced. OUTA has argued that Eskom’s overpriced coal costs due to unreliable coal supplies and various corrupt practices should not be passed on to consumers.

                                                                                                                                                                                                                      OUTA calls on Energy Minister Gwede Mantashe to call NERSA to account and ensure that NERSA’s capacity is strengthened. For South African society to prosper, the economy needs pricing certainty, but we cannot cope with ever-increasing electricity prices as this will not aid economic recovery.  OUTA welcomes the Department of Mineral Resources and Energy 2020 plan to review energy pricing policy and hopes that this will be initiated sooner rather than later.
                                                                                                                                                                                                                      OUTA will be interested to see how NERSA applies the court decision without failing in its obligation to protect electricity consumers from hardship due to increasing electricity prices.
                                                                                                                                                                                                                      OUTA continues to argue that the RCA mechanism is outdated and should be scrapped. The RCA process should be reviewed as it has outlived its usefulness. This process effectively allows Eskom to overstate its sales predictions and understate its operating costs, then go back to NERSA every year to get the extra funds. NERSA is a critical institution and OUTA calls on NERSA to take this opportunity to reconsider its tariff methodology to suit to a modern electricity system. This would ensure increased certainty and consistency in future prices, which can only be positive for South Africa.

                                                                                                                                                                                                                      Picture: Pxhere

                                                                                                                                                                                                                      OUTA is a proudly South African civil action organisation, that is purely crowd funded. Our work is supported by ordinary citizens who are passionate about holding government accountable and ensuring our taxes are used to the benefit of all South Africans.