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South Africa’s High Court on Monday set aside NERSA’s regulatory clearing account (RCA) decisions for the 2014/15, 2015/16 and 2016/17 financial years in favour of state-owned power utility Eskom.

Eskom applied to the court to dispute the regulator’s decision to only award it RCA balances of R32.69 billion ($1.9 billion) for those three financial years, compared to the R66.6 billion it had sought.

NERSA will now have to come up with new decisions, which could lead to higher power tariffs, as the court said it appeared the regulator had disallowed Eskom money for lower-than-forecast revenue based on a “fundamental factual error”. The court judgement said disallowing some coal costs was not rational.

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High Court ruling welcomed

“Eskom welcomes the judgement of the high court delivered on 29 June 2020, which reviewed and set aside the National Energy Regulator of South Africa’s (NERSA’s) decisions on the regulatory clearing account (RCA) submissions for the financial years 2015 to 2017,” read an Eskom statement.

The utility added: “The RCA is a reconciliation of prudently incurred costs that are motivated in the submission. Eskom had requested that the decision be remitted to NERSA to reconsider in accordance with the Court Judgement. This judgement means that Eskom will now be in a position to recover prudent and efficient costs that were incurred in these financial years.”

The RCA mechanism allows Eskom the opportunity to achieve the initial revenue that was allowed during the revenue decision and to adjust the allowed revenue due to changes in costs that are subject to re-measurement as outlined in the Multi Year Price Determination (MYPD) Methodology published by NERSA.

The changes in costs are generally due to two key reasons:

  • A significant change in the environment
  • The nature of the original revenue decision

The review applications are premised on the fact that the applicable legislative framework i.e. the MYPD methodology has not been correctly implemented by NERSA.

In addition, the principles applied to certain items in previous decisions were not maintained, and no valid reasons were provided for the departures made from these previous precedents.

This was the instance where Eskom had made an application for R67 billion for the three RCA balances. NERSA had determined the balance to be R32 billion. NERSA had originally opposed the review application, but has in fact just recently withdrew its opposition to the review application.

The judgement sets aside the NERSA decision and found the failure to process the decisions within a reasonable time was inconsistent with the Constitution. In addition, it found that there were fundamental factual errors as well as that the decisions made were not rational.

The Judgement accepts that Eskom had put forward a proper case for relief in those key areas where NERSA did not implement its methodology and precedents. The areas specifically dealt with are the treatment of revenue variances, coal costs, IPP costs, and the capital expenditure clearing account.

Next steps for Eskom

Eskom awaits the judgement of the misappropriation of the equity injections of R69 billion in the NERSA revenue decisions for the FY 2020 to 2022.

In this matter, NERSA again acknowledged that it incorrectly deducted the equity injections provided by the Government. Thus the merits of the case were not argued, only the remedy was considered at the hearing held on 24 June 2020.

With regards to the prior judgement made on 10 March 2020 for the revenue decision for the financial year 2019 that was also reviewed by the Eskom Board, a supplementary tariff application will need to be made.

“It is hoped that NERSA will undertake its mandate by ensuring that Eskom is allowed to recover its prudent and efficient costs. The outcomes of the judgements will aid in ensuring that NERSA corrects the current poor decisions and in future applies and abides by the rules when making determinations on Eskom’s Revenue Applications (MYPD and RCA),” said the utility.

“This would go a long way towards restoring credibility of the regulatory environment and will also aid in ensuring the consistency and predictability of regulatory decisions that is sought by many stakeholders, e.g. consumers, investors, rating agencies etc.

“More importantly, the correction of the unlawful and poor decisions made by NERSA will assist Eskom in paving the way forward towards financial sustainability and in ensuring the migration towards cost-reflective tariffs,” the Eskom statement concluded.