Tariff increases loom as Eskom flounders

ELECTRICITY users should brace themselves for further tariff increases as
Eskom tries to address cash flow constraints brought by rising operational and
funding costs.

The utility has asked government for a bailout of at least R50 billion and will need
higher electricity tariffs to keep the lights on, finance director Tsholofelo Molefe told
Business Day in an interview.

Government already provides a R350-billion debt guarantee to Eskom, which was
required to enable the utility to fund its build programme.

Shaun Nel, director of the Energy Intensive User Group (EIUG), said the 8% annual
increase awarded by regulator Nersa to Eskom for the multi-year price
determination (MYPD) period of five years to 2018 was insufficient to leave the
utility in a financially sustainable position. Eskom asked for annual increases of
16%.

“Our modelling showed that Eskom would need 10% a year to get to a healthy
credit position just after the five-year MYPD period, but that didn’t include issues
such as the massive increases in the use of open-cycle gas turbines, which are
hugely expensive, and the power station failures we’ve seen,” Nel said.

The lower tariff implemented last year left Eskom with a forecasted revenue
shortfall of R225-billion over the five-year period. According to the latest available
financial statements, Eskom reported a total comprehensive income of R14.3 billion
for the six months ended September, and held cash reserves of R30 billion.
Outstanding liabilities totalled R358 billion, while assets were valued at R482 billion.

“There will have to be some kind of injection, whether it’s from Treasury or through
tariffs. Eskom is not a nice-to-have; it can bring the economy to its knees,” Nel
said.

Any assistance to Eskom will have to come with strict requirements that plant
performance is stable, problems with short-term coal purchase contracts are
addressed and costs are cut wherever possible, he said.

While Eskom has not yet applied to Nersa to review its tariff, the regulator is
currently analysing the regulatory clearing account (RCA) for the 2010-2013 period.

The RCA is a depository for qualifying differences between the revenue and
expenditure approved for Eskom in the period, and the actual revenue and
expenditure over that time.

According to the rules, Nersa can do a reconciliation of these variances from time
to time to quantify the over/under collection of revenue and over/under-expenditure
on Eskom’s part. These assessments can lead to either Eskom refunding customers
where it is found that the utility has been overcharging for electricity, or increases
in tariffs to make up for shortfalls, Nersa said.

The current review will be finalised by the end of May, said Nersa spokesman
Charles Hlebela.

Economist Mike Schussler said a bailout of R50 billion will require government to
increase tax revenue by 5%, or Nersa to raise tariffs by roughly 30%. “There is
only one person who can pay for this: me, through tax revenue, or me, through
higher tariffs.”

Eskom and Treasury did not respond to queries on Thursday.