PRUDENCE. This was the crucial word from mouths and on screens throughout the recent two-day National Energy Regulator of SA (Nersa) hearings in Cape Town.

Does the R22.8bn that Eskom is trying to claw back originate from an operation managed in a wise, careful and reasonable manner?

While the primary aim of the hearings is to aid Nersa in deciding on this important question, there is growing sentiment that parts of Eskom’s approach may be flawed.

In the multiyear price determination (MYPD), Nersa decides on "allowable" costs and revenues for the production and distribution of electricity by Eskom. In theory, this sets electricity prices for a five-year period. However, a complementary mechanism, the regulatory clearing account (RCA), allows Eskom retrospectively to compare its actual costs and revenue against what was allowed.

Where there is a difference, the RCA balance could be recouped by Eskom (if positive) or given back to the customers (if negative). At this point, Nersa must determine what parts of the RCA balance are deemed prudent. In practice, this happens through tariff adjustments. The current RCA application from Eskom is for the period 2013/14.

While the process sounds good on paper, there are some inherent practical problems, as highlighted by presenters at the first hearings.

Let’s start with the revenue shortfall. The amount in the application was R11.7bn but, as indicated by Project 90, by 2030, this may already be overstated.

Effectively, this state-owned monopoly is allowed to make a profit (as it did in 2013/14), but when it falls short of its expected revenue, is still allowed to ask that the future price be increased to cover this. In part, it is charging customers for saving electricity. The system also encourages Eskom to overestimate its future sales.

Furthermore, there were primary energy cost overruns of R14.4bn. Through the RCA, it is allowed to get future customers to pay for this, if the overspend is viewed as prudent. Essentially, Eskom is charging customers for bad planning and inefficiency — if it can get away with it.

The resultant price hikes are not going to make Eskom more financially stable or efficient. Increasing prices will inevitably result in even lower sales. For example, as Cape Town electricity services director Leslie Rencontre pointed out, the City sold 22% less electricity in 2014/15 than the projected baseline.

Given the historical optimism and inaccuracy of Eskom’s demand predictions and demonstrated operational inefficiency, it will be back every year asking for more money to cover its perceived revenue shortfall and overspending, and so the cycle will continue.

Something needs to change, and the energy landscape is already doing so. Whole communities are going off grid. Individuals and businesses are using photovoltaics to reduce their electricity bills.

Eskom is clearly in desperate need of cash, but increasing tariffs will do little more than anger the public and push the alternative energy market, which is great for the environment and job creation.

However, most South Africans have poor access to this technology and will suffer. Surely, there are better ways to promote residential green energy than by rewarding Eskom for poor planning?

These unintended consequences of the RCA system were pointed out in various ways by almost all the presenters at the hearings.

While the MYPD gives a basis for further increases, the uncertainty around increases coming out of the RCA means that we really have no idea of how the price will change over time.

As pointed out by Nhlanhla Ngidi from the South African Local Government Association, this makes it very difficult for municipalities to plan. The overriding message was that, with the current economic situation, we cannot afford the increases — not without serious ramifications.

One should have sympathy for Eskom. It has to deal with an extensive maintenance backlog, an ageing generation fleet, low public opinion and a constantly changing management team, to name but a few of its problems. But, if it had direct competitors, it would surely have gone out of business by now. In what other situation could a service provider have lower output for increased costs and then ask customers to pay more?

In the absence of this competition, Nersa needs to ensure that the price of electricity remains predictable and affordable. Nersa has a tough job to do, determining if the Eskom overspend was indeed prudent. However, there is a larger question, whether the application of the RCA methodology is prudent in today’s electricity landscape.

• Halsey is part of the Project 90 by 2030’s policy and research team