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Eskom's next tariff application in doubt - expert

May 21 2017 13:09
Stephen Labson*

Johannesburg - South Africa's National Energy Regulator (Nersa) will soon decide if Eskom is to be exempt from a long list of reporting requirements when it submits a new tariff application next month.
 
While a decision on regulatory reporting requirements is not usually the stuff of great expectations, the circumstances surrounding this matter are anything but usual, and the consequences of Nersa's decision may reverberate for years to come.

Judicial review of regulatory decisions
 
In years past, a request to waive Eskom's reporting requirements would have gone largely unnoticed. For better or worse, these types of exemptions are often granted to public enterprises.  

But with legal challenges to regulatory decisions growing in frequency in South Africa, regulators understand gradually that their decisions may be subject to judicial review.
 
As a case in point, only last year, the Gauteng High Court found Nersa to have acted in an irrational and unlawful manner in deciding on Eskom's allowed tariffs. Without elaborating on the details of that case, the court's ruling was in part based on the fact that Eskom had not complied with certain reporting requirements of the multi-year price determination (MYPD) methodology.

Based upon this, the court adjudicated that Nersa had improperly deviated from the MYPD methodology in making its tariff decision.

The matter is now before South Africa's Supreme Court of Appeal, and is to be heard on May 23 - only a few days before Nersa is to decide on Eskom's application to waive certain reporting requirements. The timing might not be entirely coincidental.

READ: How Eskom bent the rules

Crossing point

If the high court ruling is overturned on appeal, regulatory matters might comfortably return to the privacy of the board room. Eskom's request to forgo reporting requirements may become a moot point.
 
But if the high court's judgment is upheld by the Court of Appeal, Nersa, and other South African regulators will have to pay greater attention to the administrative processes employed in setting tariffs. This would be a positive step forward in raising the standards of regulatory decision making. It would, however, place Nersa in a difficult position in deciding whether to condone Eskom's current application.
 
On the one hand, for Nersa to waive existing reporting requirements is to admit that the requirements are not practical to administer, or were not needed in the first place. That might be difficult for the regulator to swallow, given that the regulatory reporting requirements are the outcome of years of developmental work.
       
Added to this, in waiving the reporting requirements Nersa must consider the impact on Eskom's business sustainability, tariff stability, regulatory efficiency incentives, and the basis for setting tariffs. Nersa must also have regard to the prejudice that may be suffered by Eskom, the public, and the economy.

For Nersa to have prescribed such a far-reaching assessment criterion is perhaps admirable, but not highly practical.
 
In times past it may have been sufficient for the regulator to note its consideration of a number of assessment criteria and move on. But this too was a point highlighted by the high court last August, in which Nersa was found to have given insufficient attention to similar criteria called for in the MYPD methodology when making its tariff decision.
 
And while Eskom's application to waive reporting requirements covers slightly less than five pages, it cites relevant documents dating back to 2008, covering hundreds of pages of technical content. Presumably, that content would need to be considered as part of the application.

By any standard, this suggests a considerable amount of time and effort would need to be employed to properly support a determination in Eskom's favour. Anything less would seem destined for the courts.

On the other hand, if Nersa stands by its reporting requirements, Eskom will have to run the gauntlet in submitting its next tariff application, at this stage planned for June 1 of this year.

In this case, conditions of Nersa's reporting manuals would presumably come into play. More specifically, tariff applications that do not meet prescribed minimum information requirements are to be referred back to the applicant. This would be problematic, with Eskom having now highlighted some 17 reporting areas with which it is unable to comply with.
 
In hindsight, perhaps Eskom should have challenged Nersa's reporting requirements in the courts when first promulgated. But it may now be too late to lodge that challenge, and as things stand, Eskom's MYPD 4 tariff application will almost certainly be dead on arrival.

READ: Eskom signs R6bn French deal

Financial implications for Eskom  
 
The financial implications of this will be more easily unpacked once Eskom's financial reports for 2016/17 become available. But if history is any indication, things don't look good.

Electricity sales are flat, IPP costs are increasing, and with the commissioning of major generation facilities increasing in pace, large chunks of capitalised interest costs will start hitting Eskom's bottom line.

Against this context, Minister of Public Enterprises Lynne Brown may have been overly optimistic when commenting on upcoming credit rating reviews, stating that "credit rating agencies will not be able to fault them" (Eskom) in terms of its financial stability.

With no tariff increase in sight, Eskom's financial stability will rest on its ability to reduce costs. While this is no doubt a hopeful outcome, whether it is to be achieved is still to be seen.

And this leads to a second surprising insight offered by Brown, in that Eskom has assured her that "it will reduce its reliance on state guarantees by R100bn within the next five years".

Time will tell, but Eskom may require additional financial support in the next couple of years if it is to last long enough for us to find out.

* Stephen Labson is a director at Trans African Energy.

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