NERSA Submissions ESKOM RCA

Transcription

1 NERSA Submissions ESKOM RCA 4 February 2016 Presented by: Stefan Pieterse Armand Greyling

2 Content 1. Who is AfriBusiness 2. RCA Methodology 3. Municipal Budget Process 4. Eskom Revenue Variance 5. OCGT USAGE 6. Affordability 7. Closing Remarks

3 1. Who is AfriBusiness AfriBusiness is a non-profit business rights watchdog; Our members are business people who increasingly play a role as entrepreneurs, financiers and job creators;

4 2. MYPD3 RCA Methodology Introduction: Eskom bases it s submission on RCA as risk mitigation measure in MYPD methodology; But it seemingly only quotes the sections which suit it; Following objectives are of specific importance:

5 2. MYPD3 RCA Methodology Objectives: 1. Ensure Eskom s sustainability and limit risk of excess or inadequate returns; 2. Ensure reasonable tariff stability; 3. Appropriately allocate commercial risk between Eksom and its customers; 4. Provide efficiency incentives; 5. Provide a systematic basis for revenue/tariff setting; and 6. Ensure consistency between price control periods.

6 2. MYPD3 RCA Methodology How should RCA be implemented: 1. RCA will be created at beginning of the year and continuously monitored; 2. RCA to be updated quarterly so as to use it for regular alerts to customers of any possible adjustment in the coming year; 3. Eskom will, on a quarterly basis, present NERSA with possible adjustments based on the mechanism, the costs to date and the projections to year-end; 4. NERSA will review Eskom s submission and have it published; 5. A further review will be performed upon receipt of audited statements from Eskom upon year-end.

7 2. MYPD3 RCA Methodology continued... Its clear that RCA review is to take place towards Eskom s year-end and confirmed on receipt of the audited financial statements; RCA should be updated quarterly and consumers updated accordingly to prevent price shocks. That would serve the MYPD objectives of: Tariff stability; Smooth tariff changes; Appropriate risk allocation; and Consistency between price control periods. This was not the method followed by Eskom.

8 2. MYPD3 RCA Methodology continued... According to Eskom s 2014/2015 Annual Report an RCA application for R38 billion was submitted to NERSA in March 2015, but this was withdrawn and replaced with the current application in November This defeated the whole purpose of the RCA account. The initial RCA was never published publicly, and quarterly updates were not given as required. Instead Eskom waited about a year before submitting its initial application, then withdrew it and resubmitted this application several months later. Eskom expects taxpayer to pay for it s gross negligence to comply with proper procedure determined by NERSA

9 2. MYPD3 RCA Methodology continued... Financial statements published every six months are not the same as to RCA reporting not adequate price signalling to customers. Consumers have to turn back the clock to prevailing conditions more than two years ago to assess current application. Consumers in position where they did not have any indication or notion of future price increases relating to 2013/14 operations. Contrary to MYPD methodology, there is no clear price path and no predictability. NERSA needs to seriously consider the failure by Eskom to comply with the methodology.

10 2. MYPD3 RCA Methodology NERSA to consider the following: a. Rejecting the application due to procedural failure; b. Alternatively see how it can penalise Eskom as a result; c. Ensure Eskom s failure, which is continuing relating to subsequent years, is rectified and consumers are kept well-informed on a continuous basis.

11 3. Municipal Budget Process Introduction: Municipalities buy bulk electricity and sell same to a variety of consumers. Electricity revenue is one of the major sources of income for municipalities and has traditionally been used to subsidise other services. The rapid rise in Eksom tariffs have seen the municipal margin shrinking, which places a lot of pressure on municipal finances and the ability to deliver services. Municipalities are highly vulnerable to price shocks from Eksom.

12 3. Municipal Budget Process continued... The municipal financial year stretches from 1 July - 30 June and is not synchronised with that of Eskom (1 April - 31 March). Municipalities are only permitted to increase tariffs once at the beginning of the financial year. It is imperative that Eskom increases are properly reflected and integrated into municipal budgets for the following year. The municipal elections are also a complicating factor. Municipal councils are advised by the Treasury to ensure budget approval by the outgoing council before the newly elected council takes its place.

13 3. Municipal Budget Process continued... Municipalities will experience extreme time pressure from the date of NERSA s decision, to tabling a budget for approval. This could ve been avoided if Eskom complied with the timeframe envisaged in the MYPD methodology. Eskom has not made an RCA submission for 2014/15 why? Is it withheld to avoid an even larger tariff increase right before the municipal elections? Eskom must not be allowed to place political considerations before its own interests.

14 3. Municipal Budget Process continued... Municipalities will experience extreme time pressure from the date of NERSA s decision, to tabling a budget for approval. This could ve been avoided if Eskom complied with the timeframe envisaged in the MYPD methodology. Eskom has not made an RCA submission for 2014/15 why? Is it withheld to avoid an even larger tariff increase right before the municipal elections? Eskom must not be allowed to place political considerations before its own interests.

15 3. Municipal Budget Process NERSA to consider the following: a. The impact of Eskom s delay on municipalities in submitting this application; b. Rejecting the application on the ground of non-compliance with the prescribed methodology in this regard; c. How Eskom can be penalised in this regard; and d. Ensuring that Eskom in future submits RCA applications timeously.

16 4. Eskom Revenue Variance Introduction: In its application, Eskom ascribes lower than expected revenue to lower sales volumes to standard customers, treatment of negotiated price agreements and the impact of load shedding. With regards to negotiated price agreements, Eskom does not disclose at what tariff it sold electricity to certain consumers, nor the reason for lower its lower selling price. It claims R4.4 billion in compensation for under-recovery against approved revenue from negotiated price agreements. It is unfair to expect other consumers to compensate Eskom for unfavourable contracts without full disclosure thereof.

17 4. Eskom Revenue Variance continued... In its application, Eskom ascribes lower than expected revenue to lower sales volumes to standard customers, treatment of negotiated price agreements and the impact of load shedding. With regards to negotiated price agreements, Eskom does not disclose at what tariff it sold electricity to certain consumers, nor the reason for lower its lower selling price. It claims R4.4 billion in compensation for under-recovery against approved revenue from negotiated price agreements. It is unfair to expect other consumers to compensate Eskom for unfavourable contracts without full disclosure thereof.

18 4. Eskom Revenue Variance continued... Eskom had the option the appeal the original MYPD decision, but failed to do so. The RCA is not an instrument to revisit that determination. Nothing has changed regarding these agreements since the MYPD3 determination was made cannot be addressed through RCA process. Eskom claims R7.2 billion for lower than expected sales to standard customers. The largest drop in sales volumes measured against assumed sales, was with regard to redistributors (municipalities), industrial customers and mines.

19 4. Eskom Revenue Variance continued... It is submitted that the defection from the grid is the result of high tariff increases and unreliable service. To what extent is low economic growth the driver for lower than expected demand, and to what extent is it a result of Eskom s failure to provide reliable energy and the ever increasing cost thereof? Is it fair to expect consumers to bear the full cost of Eskom s failures? Consumers are called on to use less electricity through DSM, yet are penalised to compensate Eskom for revenue loss.

20 4. Eskom Revenue Variance NERSA to consider the following: a. Disregard Eskom s claim for all consumers to compensate it for low selling prices in terms of negotiated price agreements; b. Determine the direct and indirect impact of load shedding on electricity sales; c. Make a reasonable determination of Eskom s liability in this regard and subtract it from the compensation Eskom is reasonably entitled to regarding lower electricity sales; d. Find sustainable solution for the downward spiral, which sees fewer consumers paying more for a deteriorating service, which leads to further grid defection.

21 5. OCGT usage Introduction: Eskom claims compensation for R8 billion over-expenditure on diesel for OCGT s. MYPD3 tariff determination is based on the 80:10:10 principle 80% online, 10% offline due to planned maintenance and 10% offline due to unplanned outages. Eskom only achieved 75.13% plant availability, which led to its increased reliance on OCGT s. Eskom argues that its coal-fired fleet is getting old and less reliable, however, this was known when its MYPD3 application was made.

22 5. OCGT usage continued... This is not an assumption that has changed and therefore does not justify a basis for compensation. The maintenance schedule is under Eskom s control, it spent its maintenance budget but the benefit thereof seems questionable? Eskom has only itself to blame for poor maintenance practises. None of the new build projects for 2013/14 came into operation. Why do consumers have to pay for overly optimistic projections by Eskom and poor execution on its sites under its watch?

23 5. OCGT usage NERSA to consider the following: a. Investigate the reasons for Eskom s poor plant performance and time overruns on its new build programs; b. Strip out inefficiently-incurred costs; and c. Only allow OCGT costs incurred prudently.

24 6. Affordibility Introduction: In the current economic climate, Eskom s clients are extremely limited in their ability to pass on electricity price increases to consumers. General economic weakness is exacerbated by historic draught, low commodity prices and credit downgrades that may lead to increased inflation and increased interest rates (already the case). NERSA is obligated to take affordability of electricity into account in determining the RCA balance and implementation.

25 6. Affordibility NERSA to consider the following: a. Take the ability or inability of consumers to afford increased electricity tariffs into consideration.

26 7. Closing Remarks In Summary: Eskom acknowledges that variance in operating cost and interest on the RCA recovery is not provided for in the RCA methodology. It nevertheless puts forward an argument to have the rules changed to provide for such recovery. Operational expenses are within Eskom s control and should not be included as recoverable expenses in the RCA process. Eskom s delay in the RCA application illustrates that it does not act swiftly to mitigate the risk associated with the time delay of RCA recovery. To make provision for interest recovery would only encourage and already unacceptable practice the public should be consulted.

27 Thank You!