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Hefty 8% Eskom tariff hike still possible - economist

Aug 17 2016 20:15
Carin Smith

Cape Town - A hefty 8% electricity tariff increase for the next fiscal year is still possible, though risks now look a little more balanced, emerging markets economist Peter Attard Montalto of Nomura said on Wednesday.

In his view, it seems highly unlikely - logistically and legally near impossible - to adjust Eskom's electricity tariffs for this current fiscal year and next year’s tariff will likely be a complex mix.

He reacted to a court order instructing energy regulator Nersa to review its decision to allow Eskom to recoup unforeseen expenses through higher electricity tariffs. This will put Eskom under even more tariff stress, according to Montalto.

On Tuesday the North Gauteng High Court set aside Nersa’s decision on Eskom's 2016 tariff uplift from its regulatory clearing account (RCA) application that was submitted at the end of last year. The case was brought by a group of Eastern Cape businesses against Eskom, Nersa and others.

The court said judging price applications isn’t part of its competency and sent the decision back to the regulator.

The court ruling setting aside a portion of the 9.4% electricity tariff increase is a big win for businesses and consumers, according to the Nelson Mandela Bay Business Chamber, which was one of the applicants.

In a statement issued on Wednesday evening, Eskom said it awaits a decision by Nersa on the way forward regarding the court judgment.

"It is important to note that the court has ruled that the revenue allowed for the 2016/2017 tariff will remain in force as well as the direct tariff to the customers and the tariff to municipalities,” Eskom pointed out.

Eskom said it is still studying the court judgment and its implications on its business. Nersa has indicated that it would announce its position on the matter in due course.

READ: Eskom tariff ruling a massive win - chamber

Montalto thinks, in reality, a reassessment by Nersa is unlikely to remove the whole award, but could lower it slightly.

"What stands out in the judgment is its use of terms like 'irrational' and 'unlawful' to describe the behaviour of both Nersa and Eskom. The case ultimately centred on technicalities in the RCA application process and calculation formula for IPP costs," explained Montalto.

"The nub of the issue, however, was that it was 'unfair and unjust' for Eskom’s inefficiencies - which caused income levels to drop as they had to buy back energy from heavy industrial users - to lead to high tariffs."

Eskom was also criticised for filing incorrect paperwork and not filing the accounts needed by law.

"Some question mark, therefore, must hang over Eskom's ability to get the tariff increases it needs and legally can get, especially as it now moves towards submission of its multi-year price determination (MYPD-IV) tariff framework structure along with two more years of RCA applications," said Montalto.

"Nersa has now been asked to re-examine this RCA tariff increase. In the meantime, there are likely to be numerous appeals by both Eskom and Nersa."

READ: Eskom yields jump as court seeks SA power-price review

As for next year’s tariff, Montalto thinks it will likely be a complex mix of new regulatory clearing account (RCA) applications, a base MYPD-III income level and then an adjustment (payback) for too large a tariff increase in the financial year 2016/2017.

"Next year’s tariff would have to account for the uplift of the 2016/2017 tariff to 9.4% when the underlying 3.5% MYPD-III tariff increased. This would mean, if the total RCA were rejected by Nersa, there could end up being a 5.4% odd tariff cut next year," said Montalto.

"Eskom’s balance sheet is now slightly more healthy given such weak domestic demand (on non-cost-reflective tariffs) allowing bigger exports on cost-reflective tariffs. However, last year it still made only a R4.6bn profit and would have to slow the investment and new build programmes as well as issue more debt in the domestic market."

Montalto still sees no major risk to credit in the short term.

"However, greater issuance on a lower tariff increase for next fiscal year will accelerate the issue of guarantees around Eskom’s domestic MTN programme as well as unresolved issues like the inability to get an FX guarantee for a Eurobond issuance," he said.

On Wednesday the Organisation Undoing Tax Abuse (Outa) congratulated the Nelson Mandela Bay Business Chambers and others with their successful court application.

Outa indicated that it will be engaging with various experts to assess the viability of launching a class action against Eskom on behalf of the public to recoup the amounts unlawfully charged.

ALSO READ: Eskom can cut off your power, but must be fair - Madonsela

Read Fin24's top stories trending on Twitter:

nersa  |  eskom  |  energy  |  electricity tariffs
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