Picture: THINKSTOCK
Picture: THINKSTOCK

ESKOM’s bid to secure a tariff increase of 16.6% for 2016/17 begins on Monday with two weeks of public hearings by the National Energy Regulator of SA (Nersa), the first of which is in Cape Town.

As things stand, electricity tariffs will rise 8% this year. However, using a mechanism called the regulatory clearing account, Eskom can appeal to Nersa to allow it to claw back some of its cost overruns retrospectively by increasing levies on consumers in the year ahead.

In its application to Nersa, Eskom claims overruns or revenue shortfalls of R22.8bn for the 2013/14 financial year. If Nersa determines that Eskom is entitled to recover the full amount from consumers, then tariffs for 2016/17 will rise 16.6%.

This would be a heavy blow to an already struggling economy and add to inflationary pressures that will intensify due to the recent dramatic depreciation of the rand. Such a hefty tariff increase will hurt consumers, who will also be faced with rising food prices in the coming months due to the drought.

Nersa allows cost overruns considered essential to be recovered, while those that were due to wasteful operations or broke the efficiency rules may not be.

In the recent past, the regulator has played hardball with Eskom and in last year’s regulatory clearing account application, allowed it to recover less than half the amount it had claimed. Last June, it turned down a "selective tariff reopener" by Eskom entirely.

Eskom says cost overruns during 2013/14 arose primarily from two sources: an extra R8bn was spent on running diesel-fired, open-cycle gas turbines that were needed to avoid load shedding; and the price of coal was R3.3bn more than expected. As less coal was purchased — due to poor performance of its plants and lower demand — the net overrun for coal costs was R2bn.

A major issue that Nersa must deliberate on is whether Eskom’s use of the diesel turbines, which guidelines say should be used only as "a last resort" to avoid load shedding, was prudent. In its application, Eskom argues that the cost to the economy of load shedding would have been greater than the cost of using the turbines.

The public hearings allow stakeholders including business, labour and municipalities, to make representations on the anticipated effects of higher tariffs.