Eskom faces grilling about efficiency of its operations

Eskom’s efforts on Monday to justify its claim for the recognition of an additional R27.2bn by the country's energy regulator was met with scepticism on Monday.

If Eskom is successful, this will result in higher electricity tariff increases in future. It wants to be able to claw back this amount over the next two years.

Key to whether Eskom will be granted the amount, claimed under the regulatory clearing account, is whether or not it operated its assets and its coal supplies efficiently. It appeared from the questions asked by National Energy Regulator of SA (Nersa) regulators at a public hearing in Cape Town that they had doubts about that.

If Eskom was found to be inefficient, Nersa would have to reject all or part of its claim.

The regulatory clearing account is a backward-looking reconciliation. It is a monitoring and tracking mechanism that compares certain uncontrollable costs and revenues assumed in the multiyear price determination for Eskom, with actual costs and revenues incurred by the power producer.

The Electricity Regulation Act stipulates that an efficient licensee must be able to recover the full cost of its licensed activities including a reasonable margin or return. Nersa has to determine whether Eskom’s costs in the 2018/2019 financial year were efficiently and prudently incurred. The regulator has indicated that it will have to take account of the governance and mismanagement failures arising out of state capture.

Eskom, which supplies virtually all SA’s power, is hamstrung by maintenance issues, a R450bn debt and design flaws at the Medupi and Kusile power stations. Ratings agencies have identified the state power utility as the single largest risk to the economy. It is currently implementing stage two load-shedding, scheduled until Thursday.

Monday was the first of a series of nationwide public hearings that Nersa is holding on Eskom’s application for Nersa to include R27.2bn as costs and under-recoveries in the 2018/2019 financial year in terms of the regulatory clearing account.

Eskom GM for regulation Hasha Tlhothlalemaje told the hearing that power utility Eskom claimed R5.4bn as an adjusted revenue amount because its actual revenue of R179.9bn for 2018/2019 was less than the amount of R190.3bn used by Nersa for its calculation of the tariff for the year; the adjusted primary energy costs were R16.8bn more, including R12.4bn more for coal, R3.4bn more for open cycle gas turbines and R1.7bn more for primary energy; and other costs were R4.8bn more than the provision made by Nersa.

Nersa recognised primary energy costs of R86bn when Eskom’s actual cost was R99.5bn.

Tlhothlalemaje explained that the variance in sales volume was due to lower international sales as well as poor economic conditions for local sales. She argued that Nersa had not considered Eskom’s existing obligations under its coal contracts. Open-cycle gas turbines had had to be used more than assumed by Nersa to secure electricity supply and minimise load-shedding, she said.

Nersa regulators pointed out that Eskom had consistently over-forecast its revenue to the detriment of consumers as it attempted to recover the shortfall through the regulatory clearing account. They also questioned whether Eskom had conducted its maintenance effectively, especially considering that shortly after maintenance, power stations tripped and broke down again. The quality of its maintenance was questionable, they said. They also raised questions about Eskom’s management of coal supplies given that during 2018/2019 it had had to replenish its coal stockpiles on an urgent basis.

Asked about the costs of governance failures and mismanagement, Tlhothlalemaje said these were under investigation by external agencies and still had to be quantified.

Chair of Nersa’s electricity subcommittee Nomfundo Maseti objected to the lack of detailed, factual and specific information provided by Tlhothlalemaje but she said this would be provided at the other public hearings in other cities.

According to energy expert Ted Blom, were Nersa to approve the full R27.2bn, this would result in an electricity tariff increase of over 10%. In his presentation, Blom objected to consumers having to pay for corruption and mismanagement at Eskom.

Eskom has taken Nersa to court to contest its revenue clearing account decisions for 2014/2015, 2015/2016 and 2016/2017, claiming an additional R103bn, which Blom said would result in a 53% tariff increase if granted. Eskom is also contesting Nersa’s decision to treat as income the R23bn paid to Eskom by the government in 2019 to strengthen its balance sheet. Eskom argues that this should be seen as part of capital in the balance sheet.

ensorl@businesslive.co.za