Massive blow to Eskom in planned price hike overhaul

The National Energy Regulator of South Africa (Nersa) has published its consultation paper for the proposed overhaul of electricity price hikes in the country – which is already drawing criticism from the biggest stakeholder, Eskom.

According to Nersa, the key change being proposed is doing away with the Multi-Year Price Determination (MYPD) methodology currently being used to determine annual electricity price hikes and replacing it with a new methodology.

A massive change in the proposed methodology, however, is dropping the revenue guarantees that have been hugely beneficial to Eskom.

Under the MYPD, the regulator allows Eskom to apply for tariff hikes based on the costs of its operations as well as projected revenues from sales. Controversially, the methodology also includes a ‘clawback’ clause, which allows the utility to recover ‘lost’ revenues in future tariff hikes.

These clawbacks and recoveries have led to Eskom applying for increasingly higher tariff hikes each year – and with each dismissal and cap by Nersa (to the benefit of energy users), Eskom’s financial woes and debt burden grew.

This reached an inevitable crescendo in the latest round of applications, where, amid record levels of load shedding and Eskom being in its deepest financial crisis in history, Nersa was forced to begrudgingly allow the embattled utility to hike tariffs by over 18% in 2023/24.

Eskom and Nersa have been at odds over the methodology for years, which has led to several high-profile court battles – which the regulator lost – and ultimately forced the whole affair back to the drawing board for review.

On 20 October 2022, the High Court of South Africa declared the Guideline and Benchmarking Method used by Nersa when approving municipal electricity tariffs unlawful, invalid and of no force and effect.

The High Court prohibited Nersa from applying the Guideline and Benchmarking Method when considering and approving municipal electricity tariffs with effect from the 2024/25 municipal financial year.

This is in addition to an earlier court judgment which ruled that the guideline and benchmark methodology was unlawful with immediate effect.

“Based on this judgement, Nersa has to review the existing methodology to address the gaps identified in the court papers and address the deficiencies emanating from the guideline and benchmarks methodology,” it said.

The regulator is now proposing a new tariff structure – called the Electricity Price Determination Methodology (EPDM) rules – that effectively does away with the clawback aspect of the applications, instead opting for a more granular structure.

It replaces the current methodology with a five-step price-setting structure:

The proposed structure also takes into account changes in the regulatory landscape, including the unbundling of Eskom into three different entities as well as the growing number of independent electricity producers in the country.

“The unbundling of the electricity supply industry, changes in legislation and the introduction of independent power market participants have imposed a need to review and change the existing pricing methodology,” Nersa said.

“The reviewers remain cognisant that a new price approach must enable greater transparency, efficiency and cost reflectivity. They also recognise that services might be provided by different service providers who must have clear unbundled, cost-reflective tariffs to compensate them for their costs.”

“Reviewing the cost of supply framework is considered the most practical path to complying with the court judgement. Nersa has put much effort into ensuring that licensees submit compliant cost of supply studies, and licensees have also invested resources to ensure that they comply.”

Eskom not happy

However, based on stakeholder consultations over the proposals, it is clear that Eskom is not a fan of the planned structure.

As part of the consultations, Eskom submitted that methodologies such as the MYPD methodology are not defective, but rather it is the application of these methodologies in the recent past that has resulted in poor outcomes.

“Significant progress could have been made if the methodologies were correctly implemented,” it said.

However, Nersa has pushed back against this view, saying that the problems with the MYPD methodology have become apparent over the past few years.

“The fundamental challenge with the current MYPD methodology is the regulation of the licensee’s revenue that is largely depended on projected sales,” it said. “Regulating revenue is not applied anywhere else in the world.”

Nersa said that while it does not intend to deviate from the principle that a licensee should be allowed a reasonable return, it will seek to abandon the revenue guarantee inherent in the current approach applied to the MYPD methodology.

It added that the recovery (clawback) mechanism had been misused to recover lost revenue due to lost sales – something which should be a risk management mechanism by Eskom for exogenous shocks that it has no control over.

Nersa added that due to the complexity of sales forecasting, it is proposing the setting of prices, not promising licencees allowable revenue. Thus it wants a new “revenue requirement”, based on measurables and investment that yields useful outcomes to be included.

“No business under conventional economic principles should be guaranteed a revenue. The revenue requirement approach does not protect a regulated company from normal business risk,” the regulator said.

“The proposed methodology determines the allowable revenue based using the nominal capacity instead of sales and the true costs to serve – as is applied in any conventional business environment where standard economic and finance fundamentals are observed.”

• The discussion document for the new pricing structure can be read here.
• The proposed rule structure for the EPDM can be read here.
• Nersa’s engagement with Eskom can be read here.

Written comments for EPDM rules must be sent to [email protected] by 14 September 2023. Public hearings on the proposals will take place on 15 September 2023, online.

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