Consumers bear the brunt of Eskom hikes but remain quiet

South Africans have been unfairly treated ever since the National Energy Regulator of South Africa (Nersa) started the trend of increasing Eskom tariffs whenever the power utility and the Regulator deemed it fit.

Very few people understand the intricacy of how Nersa arrives at a tariff to determine how much consumers will pay for a kWh unit of electricity. It is a highly complex process to arrive at a fair and reasonable cost of electricity per unit.

For many years South Africans have been enjoying relatively cheap electricity. However, the rise in electricity tariffs started just after 2011.

Before then, Eskom was debt free and profitable, enjoying surplus revenues and so the tariff was cheap. Whatever additional income or losses Eskom makes is either declared surplus or losses.

Eskom's mandate by law is to build, operate and maintain its power generation fleet, transmission network and distribution network until recently when the Electricity Regulation Amendment Bill passed in Parliament.

The crisis of high tariffs started when Eskom took on the mammoth task of expanding its generation capacity by building Medupi and Kusile as well as Ingula hydro power stations - the first ever huge mega build projects since the dawn of democracy. So we are now paying exorbitant tariffs due to the huge debt of R480 billion created by Medupi and Kusile cost overruns.

Secondly, the problem of skyrocketing tariffs got worse when Eskom was forced to buy electricity from the Independent power producers (IPPs) program at high cost and sell it at a loss. This as a result led to more debt, losses, capital erosion and long-term obligation on Eskom’s balance sheet.

By procuring IPPs bid windows (1-6) this will cost Eskom more than R1.4 trillion over a period of 20 years with little change to recover this expenditure.

These factors and the current emergency diesel costs Eskom frequently incurs, running into billions of rands, are the primary reasons why South Africans are having to pay so much for electricity.

Tariff hikes battle:

Every year Eskom applies to Nersa for a tariff to be used on a multi-year basis. Eskom presents its revenue plans for the upcoming year and then Nersa determines if the revenue requested satisfies its legislation basis to either grant or refuse to support the required tariff application by the power utility as a licensee.

Last week Eskom confirmed that it would implement electricity price increases, as approved by the Nersa from April 1. Eskom said the average increase applied to the key industrial and urban tariffs would be 13.29%, owing to the increase in the affordability subsidy charge.

The irony is that most political parties have never objected nor contested any tariff hikes. There is only one political party, the Democratic Alliance, I can recall that is forever fighting against Nersa tariff hikes. All others seem to be in agreements and in support of Eskom tariff hikes. They never bother to even study how these hikes occur and why? This is the irony.

Ted Blom:

Ted Blom, who passed away last year, a dear friend and a fellow energy activist, was one of the few energy experts who mastered the art of understanding Nersa’s complex regulated tariff structures.

Nersa MYPD Methodology

The Multi-Year Price Determination (MYPD) methodology forms the basis on which Nersa evaluates the price adjustment applications received from Eskom.

The MYPD is a cost-of-service-based methodology with incentives for cost savings and efficient and prudent procurement by Eskom. The methodology also provides for Services Quality Incentives (SQI). On an annual basis, the MYPD runs concurrently with Eskom’s financial year(s).

In developing the MYPD Methodology, the following objectives were adopted:

1. to ensure Eskom’s sustainability as a business and limit the risk of excess or inadequate returns; while providing incentives for new investment;

2. to ensure reasonable tariff stability and smoothed changes over time consistent with socio-economic objectives of the government;

3. to appropriately allocate commercial risk between Eskom and its customers;

4. to provide efficiency incentives without leading to unintended consequences of regulation on performance;

5. to provide a systematic basis for revenue/tariff setting; and

6. to ensure consistency between price control periods.

The development of the methodology does not preclude the energy regulator from applying reasonable judgement on Eskom’s revenue after due consideration of what may be in the best interest of the overall South African economy and the public.

MYPD legal basis:

The legal basis for the MYPD Methodology lies in the Electricity Regulation Act, 2006 (Act No. 4 of 2006). Section 4 (a)(ii) of the Act states that “the Regulator must regulate prices and tariffs”. Further, section 15 (1) and (2) of the Act prescribes the following tariff principles:

1. A license condition determined under section 14 relating to setting or approval of prices, charges and tariffs and the regulation of revenues:

a) Must enable an efficient licensee to recover the full cost of its licensed activities, including a reasonable margin or return;

b) Must provide for or prescribe incentives for the continued improvement of the technical and economic efficiency with which the services are to be provided;

c) Must give end-users proper information regarding the costs that their consumption imposes on the licensee’s business;

d) Must avoid undue discrimination between customer categories; and may permit the cross subsidy of tariffs to certain classes of customers.

(2) A licensee may not charge a customer any other tariff and make use of provisions in agreements other than that determined or approved by the Regulator as part of its licensing conditions.

Apart from the Act, the Electricity Pricing Policy (Electricity Pricing Policy GN 1398 of 19 December 2008) (EPP) gives broad guidelines to the Energy Regulator in approving prices and tariffs for the electricity supply industry.

Nersa Tariff:

Allowable Revenue: The Allowable Revenue (AR) for Eskom for the MYPD period must be determined by applying the AR formula.

The following formula must be used to determine the AR:

AR = (RAB x WACC) + E +PE + D + TNC + R&D + IDM + SQI + L&T +/- RCA Where:

AR = Allowable Revenue

RAB = Regulatory Asset Base

WACC = Weighted Average Cost of Capital

E = Expenses (operating and maintenance costs)

PE = Primary Energy costs (inclusive of non-Eskom generation)

D = Depreciation

TNC = Transmission and Network Costs

R&D = Costs related to research and development programmes/projects

IDM = Integrated Demand Management costs (EEDSM, PCP, DMP, etc.)

SQI = Service Quality Incentives related costs

L&T = Government imposed levies or taxes (not direct income taxes)

RCA = The balance in the Regulatory Clearing Account (risk management devices of the MYPD)

Each division’s revenue will be calculated separately with the overall price/revenue determined at distribution level and communicated as such to customers.

The formula above must be applied to the three Eskom divisions (generation, transmission and distribution) by allocating the relevant costs to the division that incurred such costs.

– Common costs will be allocated to the divisions according to an appropriate formula which will be subject to approval by the Energy Regulator.

– Transmission revenues will be treated as pass-through costs at generation and distribution level to avoid double-regulation.

– Generation revenues will be treated as pass-through costs at distribution level to avoid double-regulation.

So in short this is how Eskom gets its annual tariff price increases. All Eskom costs are passed through to consumers via tariff.

So if we, the consumers, are the owners and funders of Eskom as we fund the power utility on a pass through tariff why don't we as the citizens have a majority say on how Eskom is run and operated. Since all Eskom costs are paid by the consumers. South Africans on the whole remain quiet, but need to find their voice and have more of a say.