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Electricity hike announcement postponed

| Economic factors

The National Energy Regulator (Nersa) has postponed its announcement on the Eskom tariff hike decision until Tuesday, following Finance Minister Pravin Gordhan's swipe at the power utility.

Gordhan said at his press briefing ahead of his 2016 Budget Speech that tariff increases should only be approved if they are necessary, and not just to make things more comfortable.

His comments came a day before Nersa was scheduled to announce possible electricity price increases through a tariff hike to fund Eskom’s shortfalls.

“Regarding tariff increases, are they necessary or just comfortable in a particular environment?" Gordhan asked. “We need to improve governance, financial management and state-owned entities’ contribution to the developmental agenda.”

In the Budget Review, Treasury said “further efficiency improvements are necessary at Eskom to ensure moderation in future tariff increases”.

“SOEs are not sacrosanct,” Gordhan said. “We are willing to take a tougher look at them.”

On top of this, it was revealed in the Budget Review that Gordhan “delayed the transfer of R5bn until Eskom complies with several conditions attached to the equity allocation”.

“These conditions relate to implementing cost reductions, improving maintenance and executing the capital expenditure programme,” the review said.

Nersa said in a statement on Wednesday the postponement of the tariff hike announcement "is due to further verification that needs to be conducted on certain information".

Eskom submitted an application to Nersa in November last year to recover R22.8bn, which the utility said it used to avert load shedding.

Nersa will evaluate the “regulatory clearing account” (RCA) balance for the first year (2013/14 period) of the third multi-year price determination (MYPD3) amounting to R22.8bn.

Should Eskom be granted the R22.8bn adjustment for the 2013/14 financial year, all cities in South Africa will face an electricity tariff increase of at least 16% in July, Leslie Rencontre, director of electricity at the City of Cape Town, said at the Nersa public hearings into Eskom's tariff hike application.

Peter Attard Montalto, emerging markets economist at Nomura, said earlier this week he expects a figure of about 14% to be granted for the coming fiscal year (below the 16.6% applied for), but the risk may well be skewed to a lower award.  

Treasury on Wednesday warned about the effect the increase in food inflation and Eskom’s likely tariff hikes could have on consumers. “If these result in higher consumer price index inflation over the coming year, there will be upward pressure on inflation-linked expenditure, including compensation, social grants and free basic services,” it said.

“As a result of the 8% annual tariff increase approved by Nersa for the period up to 2017/18, the cost of providing free basic electricity is rising,” Treasury said. “Equitable share allocations compensate municipalities for this, but not for any additional increases in the bulk price of electricity approved after the budget is tabled.”

Treasury explained why government provides support in the form of guarantees to Eskom. “In the event that Eskom is unable to purchase power as stipulated, government must buy the power on Eskom’s behalf,” it said.

“The probability of default is low, since the regulator generally approves tariff increases that accommodate these agreements. However, significant deterioration in Eskom’s financial position may increase government’s risk exposure.”

Power-purchase agreements between Eskom and independent power producers providing renewable energy are now categorised as contingent liabilities, Treasury said in its budget.

“This change adds about R200bn to contingent liabilities in 2015/16. The agreements oblige Eskom to buy power from these producers over a 20-year period at a price agreed to by Nersa.”

* Visit our special issue on Pravin Gordhan's 2016 Budget Speech.

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