Picture: BUSINESS DAY
Picture: BUSINESS DAY

THROUGHOUT the National Energy Regulator of South Africa’s (Nersa’s) public hearings on Eskom’s proposed electricity tariff increases, protest at the extent of the hikes has been the order of the day.

Energy-intensive foundry and steel industries such as ArcelorMittal have warned that they would be forced to close down all or part of their businesses as a result of Eskom’s "big-bang" approach to the hikes. They are not the only groups protesting — electricity tariff hike proposals of 16% have raised a storm of criticism.

Critics such as Independent Democrats MP Lance Greyling and National Union of Metalworkers of South Africa deputy general secretary Karl Cloete note that the proposed return is far higher than that which electricity utilities elsewhere in the world earn, although Eskom CEO Brian Dames points out that R140bn of the return would be used to pay interest on loans. A further 17% (R185bn) of the revenue would cover depreciation costs, which would rise 10% a year.

However, in making its amendments to the electricity pricing policy, the government did not envisage that the asset revaluation would happen all at once but expected it to be phased in. It also expected the projected return to be adjusted downwards to take account of the revaluation. This phased approach has not happened as Eskom opted for the "big bang" approach.

Much of the opposition to Eskom’s proposed tariff hike has focused on its effects on business, the poor and the economy in general, and less on the robustness of the calculations the utility has relied on to support its claim.

The Cabinet decided in about March last year that Eskom should revalue its undervalued assets and change the method it used to provide for depreciation. In effect, this policy decision represented an amendment to the Department of Energy’s electricity pricing policy adopted in 2008, but the changes were not formally processed as such.

The import of the Cabinet decision was that the period for achieving tariffs that reflect all costs — which the pricing policy said must be five years — would be extended.

In addition, Eskom was required to revalue its assets fivefold from their 2008 level and to depreciate these assets on a replacement cost basis — that is on their revalued worth, rather than their actual cost.

This meant that Eskom would have to generate a much higher revenue, with a higher tariff, in order for it to cover the cost of its now bloated provision for depreciation. It projects that the proposed increase would generate about R1-trillion in revenue, 17% (R187bn) of which would provide a return on assets that would rise from 0.8% in 2013-14 to 7.8% in 2017-18.

Questions have now been raised — even within the government itself — about whether Eskom needs to "rush" towards achieving an investment grade rating now that the government is standing behind it as an implicit guarantor and has already provided it with a R60bn unsubordinated loan and a R350bn loan guarantee.

Nersa’s public hearings as well as the build-up to them highlighted that the annual 16% increase over the next five years will significantly increase the operating costs of private sector companies, diminish their profit and erode the competitiveness of their products.

The proposed increase would come after previous increases that the Energy Intensive Users Group estimates have raised tariffs more than 200% from 2007 to date, and will soar to 540% by 2017 should Eskom succeed with its application.

Labour and civil society organisations say these extra costs will inevitably have to be passed on to cash-strapped consumers, who will also face an escalation in domestic electricity prices.

Eskom has argued it requires the tariff increase to finance its R340bn build programme and to achieve an investment grade rating from credit ratings agencies, which it says is essential to limit its financing costs.

But what is not so well known is that it has interpreted government prescriptions in a particular way and the prescriptions have not been well publicised.

While Nersa is bound by the prescriptions of the electricity pricing policy, that its approved tariff must allow Eskom to achieve a reasonable rate of return and cover its operational costs (including provision for depreciation), it does have the discretion to extend the period in which the utility achieves cost reflectivity and the replacement cost of its assets.

It is likely that it will use this window to reduce Eskom’s tariff increase application.

Nersa’s regulator in charge of electricity, Thembani Bukula, who is chairing the hearings, rejects the suggestion that Nersa’s hands have been tied by government policy and that the public consultations are all rather pointless. He says the constraints simply mean Nersa has to be "creative", for example by setting time frames over which this policy must be implemented.