The misfortune of Eskom’s tariff change

Sighs of relief all round after the announcement that consumers won’t be hit with a 25% electricity hike come July 1, but only with on average a 16% hike, conceals the true emotion that should be experienced by the public.

According to economist Mike Schüssler, the public should be furious with the regulator for not preventing this situation in the first place.

The National Energy Regulator of South Africa’s (Nersa) job is to conduct the economic regulation of the electricity supply industry. This includes the setting of tariff guidelines and structures and evaluating tariff applications from licensees.

In essence the regulator has to ensure that the people of the country were provided with electricity at the best cost possible.

If this is Nersa’s mandate, then the situation where Eskom now suddenly has the wiggle room financially to settle for a lower tariff increase points to the possibility that Nersa did not effectively regulate when Eskom applied for tariff increases of 45% per year in the second multi-year price determination in 2009, Schüssler says.

Eskom originally applied for a tariff hike of 45% for three years in a row, later lowering the application to 35% for the three years.

Nersa approved 24.8% for 2010/2011, 25.8% for 2011/2012 and 25.9% for 2012/2013.

If Eskom was granted its original request of 45% for three years, the effective increase after the three years would have been 204%. If the 35% was approved it would be 146%.

The Nersa-approved increases would’ve amounted to 97.6%.

With the lower rate hike now for the last year of the second multi-year price determination of only 16%, it would mean that were Eskom originally calculated that they needed 204% in increases to secure the finances for infrastructure expansion and for running costs, they are eventually satisfied with a total increase of only 81.8%.

In fact, they are comfortable enough with the 81.8% to give their employees above inflation increases (according to the integrated annual report) and still pay out bonuses to management in 2011.

Mike Schussler
Mike Schussler

Schüssler told Moneyweb that Eskom could make profit in these years despite the lower than applied for increases.

“I don’t believe Nersa did its job. At the time of the announcement of the high increases expected people and investors faith was destroyed and in my opinion it did cost jobs and economic growth,” he said.

Eskom said that one of the reasons it can settle for a lower tariff increase is the fact that the shareholder, the government, is willing to defer R8.1bn in equity returns from Eskom’s revenue for a year.

“Why couldn’t government defer these returns earlier already, to ensure lower hikes,” asks Schüssler.

In its decision on the revision of the tariff for 2012/2013 Nersa said that the municipal tariff guidelines increase for the financial year 2012/13 is 11.03%.

Consumers who expect to save on other costs with the lower tariff, will probably also be disappointed.

According to Gavin Came, chairman of the financial planning committee for the Financial Intermediaries Association of Southern Africa, most goods and services have already incorporated the expected 25.9% electricity price increase into the price and they are unlikely to be reduced now.

Source: Moneyweb

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The misfortune of Eskom’s tariff change