Eskom does not deserve R33bn

The Organisation Undoing Tax Abuse (OUTA) is disappointed by NERSA’s approval today of R32.69 billion extra revenue for Eskom, even though it is only about half of what Eskom had wanted.

The decision leaves uncertainty over the future price of electricity, as NERSA will announce only by September how this recovery will be added to the price. Eskom's average price is already 93.79c/kWh, excluding VAT.

Eskom had brought three regulatory clearing account (RCA) applications since 2016 which asked for a total of R66.69 billion to cover reduced revenue and increased costs for 2014/15 to 2016/17.

OUTA had objected to the RCA applications at NERSA’s public hearings, and motivated for a zero recovery to Eskom due to evidence of high inefficiencies and growing irregular expenditure at the utility. NERSA reported more than 85 000 comments were received on the RCA applications, which OUTA welcomes as an increase in public involvement which may have helped cap the award to Eskom.

OUTA regards NERSA’s decision as rewarding the rampant corruption of recent years at Eskom, and believes that this cost should not be passed on to electricity users.

“The Electricity Regulation Act makes provision for NERSA to enable an efficient utility to earn a return on investment, however, Eskom is grossly inefficient and does not deserve this recovery which NERSA granted,” says Ronald Chauke, OUTA’s Energy Portfolio Manager.

“This approval makes electricity consumers pay for the gross mismanagement at Eskom.

“Eskom is in a cash flow crunch. The best remedy would be for the National Treasury to provide a bailout with stringent conditions attached, rather than passing on these costs to electricity users. Increasing the price of electricity will increase the cost of living and the cost of doing business, which imposes a further burden on our ailing economy which is failing to create the much-needed jobs.”

Eskom has not provided any update on its recovery programme to normalise its cashflow, implying that electricity prices will continue to increase unabated without proper accountability or any corrective action by the Eskom leadership.

OUTA believes that the huge spike in Eskom’s operational and capital expenditure costs in the last six to eight years coincides with the state capture phenomenon.

Eskom’s major drivers of operational costs are the wage bill for 47 600 employees and primary energy. OUTA is concerned by the excessive use of the diesel turbines (OCGT), while coal purchase costs escalate simultaneously.  This doesn’t make any economic sense, because increased levels of plant breakdown imply a decline in coal costs and an increase in diesel. Coal procurement remains a core source of irregularities.

On the capital expenditure side, the cost overruns for the new build are untenable. Medupi, Kusile and Ingula were supposed to together cost R159 billion, but escalated to at least R456 billion.

The pricing process

The RCA applications are in addition to the annual price increase which NERSA sets for Eskom. The annual price increase is for the year ahead, while the RCA applications are backward-looking requests, allowing Eskom to charge customers for extra costs or to make up reduced revenue.

NERSA set the annual price increase in December last year, approving a total allowable revenue for Eskom of R190.348 billion for 2018/19, resulting in an increase in the average price of electricity of 5.23% from April 2018. The average price of Eskom electricity is now 93.79c/kWh excluding VAT.

As part of the annual price increase, Eskom’s price to municipalities for bulk purchases increases by 7.32%. In turn, the municipalities may increase prices by an average of 6.84%, from July 2018.

Some municipalities want to charge a higher increase and they have applied to NERSA for this permission; the public hearing for these applications is on 15 June.