2018 EIUG Comment on Eskom s RCA s 2014/15, 2015/16, 2016/17
CONTENTS THE EIUG WHO WE ARE KEY MESSAGES PURPOSE SUMMARY OF THE RCA ANALYSIS REVENUE ANALYSIS COST OF COAL ANALYSIS LOCAL IPPs AND COGENERATION PRUDENTIALLY INCURRED COSTS PRICE PATH CERTAINTY CONCLUSION
WHOWEARE 2018 The Energy Intensive User Group of Southern Africa (EIUG) is dedic ated to the promotion of th e interests of energy in tensive users in South Afr ican Industry. KEYFOCUSAREAS: Affordable and Sustainable energypricing Security of Supply Quality of SUpply EstablishedIn 1999,the EIUGIs avoluntary, non-profit assodatlon of energy IntensiVe consumers whose members currently account for over 4096of the electrical energy consumed InSouth Africa.Our members collectively contribute about 22% to the GOP of South Africa. The EIUGhassignificant technical expertiseon energy matters. ItIsa respected and nonpartisan organisation dedicated to working towards a sustainable energy supply Industry. NoofCompanies NoofEmployeesWorldWide NoofEmployees InSouthAfrica SouthAfricanoperationsturnover %SouthAfriC4nGOP EnergyUsage(InSouthAfr1ca) 9bMemberswith EEProjects d 3 11038416 657984 R684724000000 22,0%GDP 146825121 Mwh 58% CURRENTMEMBERSCONTRIBUTETOTHEFOLLOWINGSECTORS: Agnrulttn, Hun1Jn9. for &Ashlng TherPtsnoS«tOf limstotjonlotitm! rship and.w try 9'f onasdvi!rseotrayasposs blr ElECTRICITYCOSTASO,i,OFANNUALEXPENDITURE Agrirulture,hunting, forestryandfishing Miningandquarrying ManuOOuring Be<tricity, gasandwatff supply Transport.storageandcommunication {)119' SO'- EIUG lneruv rnreasrv 3 G eu ser U a
KEY MESSAGES EIUG member companies cannot absorb any further price increases while remaining in business; The EIUG analysis established that only up to R40.5 billion cost-recovery could be allowed in terms of the RCA rules. However NERSA must determine whether these costs (i.e. covering the R40.5 billion) have been prudently and efficiently incurred because EIUG does not have adequate information to make this assessment; EIUG s view is that, in making the decision, NERSA should also consider the capital expenditure overspent by Eskom (R40.9 billion), to ensure that Eskom is not permitted to pass-through any costs outside the RCA rules; The capital expenditure overspend should also not be included in Eskom s RAB going forward, in line with the Electricity Pricing Policy. NERSA must exercise its regulatory discretion to ensure that the interests and needs of present and future electricity customers and end users are safeguarded and met and facilitate a fair balance between the interests of customers and end users, licensees, investors in the electricity industry and the public (Sections 2 (b) and (g) of the Electricity Regulation Act 4 of 2006 respectively). 4
PURPOSE The following questions were received from the NERSA panel. This presentation seeks to answer these questions. 1. Quantify prudently incurred costs vs inefficiently incurred costs. 2. Fixed costs vs operational costs must be clearly unpacked. Which costs must be allowed and provide reasons? 3. What is the level of participation of your members in the MTPPP and STPPP? 4. Instances where EIUG wanted to buy electricity and it was not available, Eskom had to go MTPPP and STPPP. Costs going up but the quantity produced declining, are your members willing to pay for these costs? Shouldn t NERSA look at the effect of MTPPP and STPPP? 5. In what way do you deem the costs of coal to be within Eskom s control? 6. Fixed costs portion of the revenue should be compensated to Eskom, why is this stance not maintained in the analysis of coal burn costs? 7. Do you believe that as the Energy Regulator we should conduct efficiency and prudency tests? Eskom believes that if costs are incurred and can be explained, those costs must be allowed even if it s in their control, without any consequences for them. What is your stance on that? 8. Capital expenditure, what if the 70% that you calculated is not prudently incurred? 9. MYPD3 decision gave a clear price path, if NERSA was to allow the increase of 30% how will it help your members in terms of certainty? 5
SUMMARY OF RCA ANALYSIS RCA (R m) 2014/15 RCA Recommended 2014/15 2015/16 RCA Recommended 2015/16 2016/17 RCA Recommended 2016/17 TOTAL RCA TOTAL Recommended Revenue 8 787 6 150 15 578 10 904 20 016 13 010 44 381 30 064 Coal 574-1 114 3 258-2 499-359 -2 312 3 473-5 925 OCGT s 1 944 1 944 689 689-1 259-1 539 1 374 1 094 Other PE 1 355 1 355 728 728 722 722 2 805 2 805 Local IPP s 4 346 4 217 620 584 2 452 1 973 7 418 6 774 Int. Purchases 3 299 3 299 3 567 3 567 2 282 2 282 9 148 9 148 Environ Levy -683-683 -1 180-1180 -1 404-1 404-3 267-3 267 Nuclear decom. 83 83 83 83 83 83 249 249 DMP -379-379 248 0 194 0 63-379 CECA 91 0 332 0 636 0 1 059 0 IDM -149-149 -368-139 0-229 -517-517 Opex -528-528 -134-528 0 394-662 -662 SQI 236 236 318 318 343 343 897 897 Inflation 209 209-152 -152 162 162 219 219 TOTAL 20 924 14 640 23 587 12 375 23 868 13 485 66 640 40 500 It must be noted that some of the amounts require verification from NERSA. 6
REVENUE ANALYSIS RCA (R m) 2014/15 Recon 2014/15 2015/16 Recon 2014/15 2016/17 Recon 2014/15 Total Total Recon Revenue 8 787 6 150 15 578 10 904 20 016 13 010 44 381 30 064 Eskom should only be compensated for the fixed costs portion of the revenue variance. NERSA should establish if the 70% fixed cost portion was prudent expenditure and do efficiency tests and benchmarking similar to the FY19 one year application. Eskom s fixed cost ratio of 70% is an enormous problem. Even if these costs were prudently incurred, the 70% fixed cost portion is at the root of the problem of unaffordable prices. Eskom should be given a benchmark based target in order to reduce the 70% fixed cost portion over time. NERSA should do benchmarking on this and Eskom needs to be given a time frame in which to reduce this. 7
LOCAL IPPs AND COGENERATION The additional amount that was contracted by Eskom (including the ancillary service adjustments) to meet the demand from these contracts should be allowed, subject to verifications by NERSA that the payments were in accordance with the agreed contractual amounts. The MTPPP and STPPP pass through should be allowed since the programs followed due process with NERSA support. The PPAs were signed with NERSA s consent and Schedule 2 amendments of the relevant generation licences were approved by NERSA. Contractual agreements were concluded between Eskom and individual suppliers with NERSA support. The EIUG does not collect this type of confidential information, however NERSA itself will have record of these contracts. Ifthe reasons for these programmes were due to Eskom s inefficiencies, then costs under the programme(s) should only be recoverable at coal costs, such as the treatment of excess usage of OCGTs. The contracting of the additional generation supply to meet the demand was created by Eskom s inability to correctly project commercial operation dates for the new generation capacity as well as its inability to manage the existing fleet. The demand for electricity during this period was well below Eskom s installed capacity and could have been easily met had there been no delays in the commercial operation dates or deficient performance in maintaining the existing plant. 8
COST OF COAL ANALYSIS NERSA approved coal burn volumes compared to Eskom actuals shows that in all the 3 years under consideration the coal burn volumes were less than the amounts assumed in the MYPD3 decision, which is consistent with the lower sales volumes. However, the average costs were higher than Benchmark costs indicating that Eskom used more expensive coal than the Benchmark average. The coal price increases in 2015/16 from the approved R311,2/ton to R378,8/ton (i.e. more than 20% increase) have not been explained by Eskom. The reasons for purchasing expensive coal isattributed to the delay in the commissioning of Medupi and more expensive coal being sourced from other collieries. Both these reasons are within Eskom s control and the increase should be limited to the maximum increase of 10% Proper long term planning, strategies, and governance, forms part of the procurement process long before any contracts gets signed. With these in place the requirement for expensive short term contracts would disappear. The control of coal costs is within Eskom s mandate and the methodology should limit the opportunities for Eskom to purchase coal at higher prices than those approved. The EIUG has limited insight into how Eskom s coal contracts are written. These would directly inform the fixed costs portion that Eskom should be compensated for. 9
PRUDENTIALLY INCURRED COSTS The EIUG believes that NERSA should conduct efficiency and prudency tests on all material expenditure where practical. Eskom must be held accountable for poor decisions and inefficiencies. According to the MYPD Methodology the RCA process involves NERSA s review of the RCA items for prudency. Prudency applies to incurred expenditure that is: efficiently incurred; appropriate; useful; necessary; reasonable; which allows Eskom to provide an adequate level of service to its customers. The EIUG s stance is that the Regulator should allow Eskom to recover only prudently incurred costs. If the costs differences are deemed to be imprudent, those costs will not be taken into account when calculating the RCA as per the RCA rules applicable to a MYPD decision and informed by the approved regulatory framework applicable to the MYPD decision period. If Eskom were a company supplying power in a competitive environment, they would not have been able to pass on excessive costs and inefficiencies to their customers and still remain competitive. Industry should not be forced to absorb such costs merely as a result of Eskom s monopoly. 10
PRICE PATH CERTAINTY The MYPD3 decision was for 5 x 8% increases of which only 1 year was actually an increase of 8%. This unfortunately does not provide certainty. Price path certainty is critical to our members, many of whom cannot absorb any further price increases now. The RCA process unfortunately does not provide this certainty. We accept we are engaged in a rules-based process. The EIUG analysis establishes that only R40.5 billion cost-recovery could be allowed (not the full R66 billion) in terms of the RCA rules. However, NERSA must determine whether these costs have been prudently incurred because EIUG does not have adequate information to make this assessment. While we accept the RCA Rules do not allow for the set-off of cost under-recovery against capital cost-overruns, NERSA has a discretion to limit any further increases in electricity tariffs (other than those already granted) to balance the interests of electricity customers and Eskom. 11
CONCLUSION NERSA must exercise its regulatory discretion to balance the interests of customers and Eskom. NERSA must determine whether costs submitted by Eskom have been prudently and efficiently incurred. DOE, NERSA and Eskom have not provided any form of price path certainty to enable economic growth, development and job creation. This price certainty is critical to our members to plan for growth. 12
Re a leboha Ro livhula Siyabonga Ha khensa Enkosi Siyathokoza Dankie Thank you 13