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Electricity costs will rocket way beyond 13.8%.

| Economic factors

On Thursday (07/03/2019), an audible sigh of relief went up across the land – Eskom was granted only a 13.8% increase for 2019/20 by the regulator instead of the 15% it had applied for.

With a previously approved 4.4%, the additional 9.41% approved for 2019/20 will amount to a total of 13.81%.

Don’t sigh with relief too quickly. You will pay much more than that for the landed cost of electricity to your home or business. And 13.8% is already significantly higher than CPI. Residential customers make up an estimated 20% of total electricity sales. 

For one thing, the allowable tariff increase announced by the National Electricity Regulator of SA (Nersa) on Thursday does not include VAT. So that needs to be added. If you get your electricity from your local municipality rather than directly from Eskom, then you will pay an additional surcharge. 58% of all consumers buy directly from the electricity utility while 42% buy from municipalities.

If you buy from a municipality, hold onto your seat, as your power costs may go up significantly higher than 13.8% plus VAT – although this is only likely to kick in from July 1. 

'We are in trouble'

"If you are an Eskom customer, you will pay (the announced tariff) plus VAT. If you are a municipal customer, you are paying the NERSA tariff, plus VAT plus a surcharge. 

"If you have a vendor (that is, if you are a prepaid customer), they also add an admin fee of 5% to 10%. We are in trouble," says Ronald Chauke, OUTA’s portfolio manager on energy.   

On Thursday, Nersa announced only the top-line tariff adjustments.

By April 1, Nersa will announce its retail tariff adjustment and then municipalities must apply to the regulator with their requests for the allowable surcharge. If you are a customer, you have to look at what the surcharge is that your municipality adds on.  

Eskom spokesperson Khulu Phasiwe says these surcharges can vary, but that it is also a regulated and not a free-for-all market. He says that municipalities, like Johannesburg, which have their own power stations, may not pass on the full increase. 

A Deloitte study on electricity pricing done for Eskom two years ago shows that you can be fleeced at this point.

"A comparison of the standard electricity tariffs charged by 7 of the 187 municipalities was sufficient to show that there are large discrepancies in the tariff charged by municipalities," the authors found. 

Ekurhuleni, on Johannesburg’s East Rand, for example, added surcharges so high, it took costs to among the highest in the world. At the time of writing, Ekurhuleni’s tariffs were 85% higher than Johannesburg’s, the 2017 Deloitte study on electricity consumption found.  

The municipalities have a constitutional right to set tariffs, which means they can override Nersa, according to the Deloitte study.

"Roughly 42% of Eskom's total sales of electricity are distributed to end-consumers via 187 municipalities who as re-distributors. Nersa's authority to regulate the tariffs charged by municipal distributors however is not clear - while the Electricity Regulation Act of 2006 gives Nersa the responsibility to regulate electricity prices and tariffs, the Constitution gives local government exclusive jurisdiction over electricity reticulation.

"The Municipal Systems Act of 2000 requires that municipalities determine their own tariff policies for municipal services."

From cheap to dear

For the longest time, the cost of electricity in South Africa, in fact, fell year on year. "Between 1978 and 2004 the real average price of electricity fell by more than 40%,” Deloitte found. 

After the first countrywide blackouts of 2008, the price of electricity more than doubled in real terms, as Eskom and the government began to budget for maintenance and for the construction of more power stations after ignoring these needs for a long time.

From this time, Nersa began granting increases that outstripped consumer price inflation even though these have been historically lower than Eskom’s requests for increases, set at well over 10 percentage points above inflation. 

In a statement at hearings Nersa held around the country on Eskom’s requested increases, OUTA said that electricity tariffs have shot up by 500% over the past 11 years. "This is largely due to poor leadership, political meddling and corruption which has permeated the largest state-owned entity and caused a rapid rise in operating costs," the anti-tax abuse organisation said.   

Paying the costs of state capture

The rapidly rising electricity tariff is the clearest way in which the consumer bears the costs of state capture.  The regulator said as much on Thursday. "The energy regulator also considered that Eskom conceded that certain governance failures occurred in Eskom… however, at the time the (tariff) adjustments were affected, the extent of the governance failures or amounts associated therewith had not been fully quantified.

"The Energy Regulator may initiate its own investigation into the governance failures in Eskom and may effect adjustments to Eskom’s revenue based on the relevant outcomes of its investigation or those by…Eskom, the National Treasury, the Special Investigating Unit, the Hawks, Parliament or any Commission of Inquiry…"  

Nersa said when a costs sheet (of the governance failures) had been drawn up, this may have an implication on future tariff decisions. OUTA reads this to mean that if monies are recovered, it will be returned to consumers.  The only state-owned enterprise which has recovered costs unlawfully incurred is Transnet. 

High tariffs are here to say

The Nersa allowable tariff pares down from next year and over the medium-term, but Eskom is allowed adjustments to the tariff to account for unforeseeable expenses or lower than expected electricity sales. 

These amounts are allocated to Eskom’s Regulatory Clearing Account (RCA) and for this year (2019/20), the additional costs put an effective 20% surcharge on the tariff that Nersa allowed Eskom.  

If you consider, for example, that Eskom is currently using the diesel-fuelled open-cycle gas turbines to keep the lights on, it’s clear that the RCA is going to keep ensuring that tariffs increases are high over the medium term.  And if South Africa does not break the low-growth pattern, then Eskom’s predicted sales to the industry are likely to be over-stated which also means the costs are passed back to consumers through the RCA. It’s a cruel bind. 

The Deloitte long-range study of electricity prices recommends that Eskom must begin to price electricity according to its true cost and that it should make more clear the value of subsidies in how it bills and how it reports its accounts. 

"Branko Terzic, a former commissioner at the US federal energy regulatory commission, recommends that during South Africa’s transition to cost-reflective tariffs, all implicit subsidies should be exposed. 

"This might require that the regulator identify the portion of disallowed revenue that will need to be recovered via an implicit subsidy rather than the tariff and to inform the public about the level of the subsidy via the billing system."

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