Eskom’s planned electricity price hikes grossly flawed

Today Moneyweb reports that Eskom wants an average tariff increase of 15% a year for the next three years. This is in addition to the recently approved backpayment of R33 billion, through the Regulatory Clearing Account (RCA), which goes onto our bills from next year; the two increases could add 20% a year to the tariffs.

This is what Eskom intends asking the National Energy Regulator (NERSA) to approve, says Moneyweb, which says it has seen the soon-to-be- submitted application for the next three-year cycle of the fourth multi-year price determination (MYPD4).

While this is a frightening prospect for consumers, the Organisation Undoing Tax Abuse (OUTA) believes that even those tariff increases won’t cover Eskom’s debt repayment obligations.

Asset base revalued

Eskom bases the 15% hike on its revalued asset base, up from R702bn in the last price application to a starting point of R1 288bn.

“OUTA is extremely perturbed by the grossly over-valued asset base used as the basis to calculate the 15% tariff increase. We ask NERSA to reconsider its decision to permit Eskom to do asset rebasing, by ensuring that Eskom adheres to international financial reporting standards (IFRS),” says Ronald Chauke, OUTA’s Portfolio Manager for Energy.

Economists have told OUTA that, if best practice was applied along with stringent oversight over Eskom, the real asset valuation should not exceed R400bn given the age and book value of most of Eskom’s coal fleet and other assets.

Eskom also assumes it will sell more electricity over the next three years, despite its ongoing sales slump.

OUTA believes that a steep increase in the price of electricity is hardly going to encourage sales and this is a way of padding the application to allow another RCA backpayment in the future.

“OUTA rejects the high electricity price hikes proposed by Eskom based on run-away personnel and primary energy costs and will continue to oppose the offloading of these uncontrolled costs onto already over-burdened consumers,” says Chauke.

Eskom’s debt by March was R387bn and is expected to be R600bn within four years, leading to the utility considering options for managing this to avoid defaults.

“Taking shortcuts like the asset revaluation to resolve deep-rooted structural problems is not ideal, as it could lead to a Steinhoff-type situation,” says Chauke.