South African electricity tariffs are set to increase on average by 12.69% on 1 April 2015 for consumers who purchase directly from the state-owned power utility, Eskom. Municipal consumers will pay the increased tariff from 1 July 2015 after the bulk purchase price increase has been factored into the retail tariffs.

The increase was announced by the electricity regulator, Nersa, this week to implement its earlier decision to grant Eskom additional R7.8 billion revenue from electricity tariffs, over only one year.

The additional revenue and subsequent further tariff increase was earlier granted after Nersa did a reconciliation of the Eskom Regulatory Clearing Account (RCA) and determined Eskom under recovered R7.8 billion in the tariff period 2010/11 – 2012/13.

The RCA is a mechanism that tracks Eskom’s actual income against projections. If it deviates due to factors outside of Eskom’s control, tariffs may be adjusted to either compensate Eskom or consumers for over- or under-recovery.

The implementation of the RCA decision over one year rather than two or three is aimed at improving Eskom’s sustainability by improving its debt cover to 1.9 from an unsustainable 0.65 in 2013/14. The debt cover benchmark is 2.

Responses to the announcement varied

Dr Rod Crompton, full-time regulator member for petroleum, expressed concern and proposed that it be recovered over three years as this would be more equitable. ‘If Nersa received further RCA applications from Eskom as is expected, further tariff increases in later years that may result from it could be added “on top like layers in a sandwich”’, he said.

Initially Nersa deputy chairperson Maleho Nkomo, agreed with Crompton, but said she could see compelling reasons why the further increase could not be spread over more than one year. Part-time regulator member Fungai Sibanda also agreed, saying the overriding motivation to further increase tariffs over one year is based on Eskom’s needs and not enough weight had been attached to the needs of consumers.

The tariff is one of the instruments government mentioned in its recent announcement of an aid package to Eskom. The argument was that the R50 billion increase in government’s guarantee to Eskom is not enough if the utility’s funding shortfall, stated at R225 billion, is correct.

A further argument was that Nersa is legislatively obliged to also consider Eskom’s sustainability. The EBITDA to debt ratio achieved in the earlier tariff determination was not sustainable and should be corrected to avert a further downgrading of Eskom by ratings agencies.

Shaun Nel, spokesperson of the Intensive Energy Users’ Group (IEUG) said the group was always of the view that the 8% increase was not enough and with a 10% increase annually over the five-year period (MYPD3) Eskom would be able to achieve a stand-alone credit rating in seven years, if not sooner. The need for an extra adjustment is therefore not a surprise to the IEUG. He said the group supports the drive towards cost-reflective tariffs, but does not agree with the level of return on equity Eskom wants to be included.

Nomfundo Maseti, full-time regulator member for piped gas, strongly supported the officials and said the issue was debated at length during the previous meeting of the electricity sub-committee. That meeting recommended implementation over one year.

Naren Rau, Chief Executive Officer, South African Chamber of Commerce & Industry (Sacci), said the business sector does not have the capacity to absorb higher electricity tariffs and they will either have to pass it on to customers or business activity will be inhibited.

Rau said Sacci is engaging with the Department of Cooperative Governance and Traditional Affairs (Cogta), on behalf of especially small businesses that are battling extremely high electricity bills from municipal suppliers. Traditionally, municipalities have used electricity revenue to subsidise other services and business tariffs were further increased to subsidise residential customers. Rau said Sacci is looking at alternatives for the municipal funding model.

He said South Africa is only at the 99th position out of 140 countries on the World Economic Forum’s competitively report, regarding electricity provision. Electricity supply in South Africa is in crisis and policy constraints should be removed urgently in order to look for solutions beyond Eskom.

No decision has been taken with regard to revenue and tariffs in 2016/17 and 2017/18, which are the last two years of the current tariff period (MYPD3). This indicates that the revenue Nersa approved for Eskom from electricity tariffs will remain as foreseen in the MYPD3 determination, unless further RCA decisions lead to further increases.

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