Eskom has made a case for its Regulatory Clearing Account (RCA) application totalling R27 billion at the first session of the National Energy Regulator of South Africa (NERSA’s) public hearings.
The application is to recover prudently-incurred costs for the year 2018/19 according to the Multi-Year Price Determination (MYPD) methodology guided by the Electricity Regulation Act (ERA), the Electricity Pricing Policy (EPP) and NERSA’s reasons for the decision on the 2014 RCA application.
Eskom’s general manager for regulation, Hasha Tlhotlhalemaje, gave a presentation providing an overview of the entire RCA application. She explained that the shortfall needed management intervention and a re-prioritisation of cost between the different licensees and cost categories.
“This application deals with variances between what was assumed when NERSA made its decision on Eskom’s revenue application in the 2018/19 financial year and what eventually materialised as per Eskom’s audited financial statements as Eskom spent money in order to fulfil its mandate to provide electricity to South Africans,” said Tlhotlhalemaje.
When a regulator makes a revenue determination for a future period it does so based on assumptions, estimates and forecasts regarding that future period, stated Eskom in a statement.
The utility added that backward-looking mechanisms such as RCA are internationally-accepted in regulated environments to allow the utility to retrospectively adjust for any over or under-recovery due to actual events differing from the initial assumptions, estimates and forecasts upon which the revenue determinations were based.
This ensures fairness for both the utility and electricity consumers. The under- or over-recovery is then catered for through adjustment to future electricity tariffs.
This mechanism also applies to Eskom, said the power utility.
Any revenue adjustments due to RCA are implemented within a period that is sustainable for Eskom and consumers. The period for recovery of adjustments pertaining to FY 2018/19 (the subject of the current application) needs to consider the impact of approved RCA adjustments that Eskom has not yet recovered dating back to 2015.
McKinsey, the wage bill, and corruption
Addressing the hearing, Tlhotlhalemaje said: “The context within which the Eskom Board has approved the RCA application is based on the NERSA prudency guidelines. We are therefore asking the regulator to review the application based on the efficiency and prudency of expenditures, some of which were already committed prior to the regulatory revenue determination.
“We are also mindful and committed to complying with the approach decided by NERSA with regards to amounts associated with governance failures. The recovery of moneys from McKinsey, for example, has already been included in the RCA balance determination related to this application.
“In addition, we continue to work with law enforcement agencies to recover moneys that were lost to Eskom under corrupt circumstances and our future revenue applications will be adjusted based on the outcomes of current investigations,” she said.
The main variances in favour of Eskom relate to primary energy costs, usage of open-cycle gas turbines, employee benefits and lower sales volumes.
“Achieving the amount that was assumed by NERSA would have meant Eskom decreasing coal costs by approximately 17% and ignoring its existing contractual obligations to coal suppliers. Regarding the assumed cost of employee benefits, it was based on an assumption that Eskom would lose about 6,000 employees at a go, which did not materialise, irrespective of whether the assumption had any merit in the first place,” she explained.
“While Eskom implemented measures such as an embargo on external appointments in order to work within financial constraints, this did not lead to the savings assumed for purposes of the revenue determination.
“OCGTs were used in accordance to NERSA’s scheduling and dispatch rules to ensure security of supply. Reduced usage would have increased incidents, duration and severity of loadshedding,” added Tlhotlhalemaje.
Eskom RCA: Favouring the consumer
It is worth noting that Eskom’s application also includes variances that are in favour of the electricity consumer where initial revenue determination assumed higher costs for the year under review).
These include maintenance, independent power producers (IPPs), environmental levy, return on assets, research and development, demand response programmes and other primary energy(due to a misalignment in NERSA decision).
Tlhotlhalemaje emphasised that due to the complexity of the various aspects of the application, and specialist staff required to deal with each aspect, Eskom had scheduled to deal with these in more detail at each of the public hearings to be held over the next three weeks in various provinces.
Appropriate subject matter experts will be attending the respective public hearings – as opposed to Eskom’s presentation the first hearing, which was a high-level overview of the full application. Eskom has implemented this approach over a number of years in order to provide a rationale behind its application and deal with stakeholder concerns adequately.