National Energy Regulator of SA on its decision on Eskom’s Regulatory Clearing Account application for 1st year of 3rd Multi-Year Price Determination

Meeting report

Briefing by National Energy Regulator of South Africa (NERSA)

Mr Thembani Bukula, Regulator Member, NERSA began the presentation at a time when he was the only NERSA member present. The Chairperson, Mr Jacob Modise, arrived about a quarter of the way into the presentation.

The presentation lasted about 20 minutes and highlighted the important issues regarding NERSA’s decision on Eskom’s Regulatory Clearing Account (RCA) application for the 2013/2014 financial year, explaining the conditions of RCA applications and the reason for multi-year price determinations (MYPDs). MYPDs were put in place to ensure price certainty and stability and to facilitate consumer planning. They were based on projected/estimated scenarios and forecasted costs, taking into account the country’s gross domestic product (GDP), inflation, customer growth projections, plant performance and primary energy and manpower costs. This process allowed for correction and alignment of actuals with projections and forecasts in the RCA. When the variations were within 2%, no changes were required, but variations between 2% and 10% were at NERSA’s discretion and above 10% required re-opening of the MYPD.

Mr Bukula illustrated the MYPD process – Eskom’s applications and NERSA’s decisions – since 2006, before focusing on the 2013/14 to 2017/18 period. Each year, Eskom had applied for a 16% increase, and each year NERSA had decided on 8%. However, each year was linked to the next. In 2013/14, there had been an RCA balance of R22.8bn allowed as a percentage of revenue. This amount had been brought forward to Eskom’s 16% application for 2016/17, effectively increasing it to a 16.6% increase, and effectively increasing NERSA’s 8% decision to 9.4%. NERSA had allowed the R22.8bn to be brought forward following a comprehensive list of reasons submitted by Eskom, including the running of open cycle gas turbines (OCGT) to avoid load shedding, a revenue shortfall due to lower electricity sales and events like the platinum mining strike.

NERSA had approved a balance of R11.241bn in Eskom’s favour to be implemented on 1 April 2016, with R10.257bn coming from standard tariff customers and R983 million from special pricing agreements and international customers. The approval of this amount would translate into an average price increase of 9.4% for the 2016/17 financial year. NERSA would like a new application from Eskom, based on revised assumptions which took into consideration the current circumstances, to be submitted within 3 months.

Mr Bukula indicated the following deadlines for the establishment of structural and municipal tariffs:

• Eskom had applied for the structural tariffs to be tabled in Parliament by 15 March 2016;
• NERSA would consider the application and approve before 15 March;
• NERSA would publish the consultation paper for the municipal tariff guideline increases after approving the Eskom structural tariffs;
• The target date for conclusion of the municipal tariff guideline was 30 March;
• Municipalities would be required to apply to NERSA for their tariff increases before 1 July.

Discussion

The Chairperson of NERSA, Mr Modise, apologised for his late arrival, and explained that he was late because of the new system at the front of Parliament and the congestion it had caused.

The Committee Chairperson asked about the three-month deadline that NERSA had given Eskom to report back to NERSA, but added that NERSA could reply to that at a later stage after it had fielded questions from the Members of the Committee.

Mr P van Dalen (DA) asked how much Eskom had done to avoid the cost overruns shown in the presentation, and whether this would have happened if Eskom had brought Madupi and Kusile online on time, as the two plants were around three years behind schedule. What was the diesel price that Eskom had used in operating the OCGTs, and why was it so much more expensive, as it could not have been because someone was making money from selling this diesel to it.

Had Eskom been prudent in recovering the fines it enforced for lower than contracted quality coal? Optimum coal mine had received a fine of R2bn -- what had Eskom done to reclaim this amount?. Mr Van Dalen asserted that Eskom should surely have checked the quality of the coal, because if it had been lower than the contracted quality, it would not have been able to supply as much power as was intended. How many more coal mines owed Eskom for coal quality violations?

He raised the issue of BHP Billiton and the special price they were getting from Eskom --estimated at about 20c per unit when the average South African was paying around R2.20 a unit -- and asked how far Eskom was in renegotiating the contract.

Had NERSA exempted Eskom from complying with the transmission development plan for 2016-2025 and the N2 grid code? If NERSA had done so, this would increase the chances of a transmission system failure and if this were the case, NERSA would have transgressed the Public Finance Management Act (PFMA) section 50 1 A. NERSA was asked why, in this instance, they would have lowered the standards. Mr van Delan submitted that if NERSA had done so, it was actually quite reckless when considering Eskom’s transmission systems’ needs, as the failure rate would be higher than it was before and therefore NERSA would be partly responsible for the proposed price increase. He also asked what progress NERSA had main concerning the implementation of the marginal cost-based electricity tariff in South Africa.

Mr J Esterhuizen (IFP) asserted that NERSA’s purpose should be to act and make decisions in the greater public’s interest. NERSA should have allowed expenditure only that had passed the efficiency test, and this would have seen NERSA approve only R1.3bn of the just more than R8bn that Eskom had requested. He maintained that the already cash-strapped customer and taxpayers would have to pay for Eskom’s inefficiency. Medupi was an example of this inefficiency as R10 trillion worth of coal had been delivered to it and it had never been used. This exhibited very bad management on the part of Eskom, and it had been alleged that the ‘poor directors’ had given themselves only R100m in bonuses. Why was it that Eskom’s inefficiency should be shouldered by the average citizen? Eskom had contributed to the unstable economic situation and now NERSA had implemented a 9,4% increase in the unit price of electricity. In the current unstable economic conditions, the taxpayer and consumer could not be expected to pay the 9.4% increase.

He asserted that electricity tariffs in SA had reached a point where, with every increase in price, the demand for electricity decreased. It was his opinion that this was leading to the de-industrialization of the economy, which was obviously negative. He accused NERSA of not listening to the public regarding this 9.4% increase, as there had been a public outcry and in some instances people had disrupted the hearings, as they had claimed that it was unfair for the public to pay for Eskom’s incompetence. Why then was the 9.4% price increase still on the cards for NERSA in light of this?

Mr Esterhuizen then went back to 2007 and asserted that since then, if he was not mistaken, NERSA had already granted Eskom increases amounting to 700%, which he described as “mind boggling.” Eskom was potentially applying for another R80bn over the next 24 months, including another R22bn next year, which would mean another 13% increase in the next two years, which he maintained the taxpayers and customers could just not afford.

The issue of BHP Billiton was then brought up, and he asked NERSA how they allowed contracts that were made with BHP Billiton as long ago as 1992, to still stand.

Mr G Mackay (DA) congratulated NERSA on withstanding considerable strong-arming from Eskom. He wanted to address the issue of what NERSA had estimated Eskom would ask for in the next two years, as it had been indicated that Eskom would ask for an additional R50bn. This was a considerable amount, so if clarity could be given about NERSA’s estimates it would make sense. He said that this was linked to the management issues at Eskom, which ran quite deeply, and the fact that they were not being dealt with, despite Mr Molefe’s stance. This additional R50bn was evidence that Eskom was not efficient and would not be for the foreseeable future. He wanted to know how NERSA had come to the R50bn estimate, as they had obviously looked at the specific operational issues at Eskom, and he wanted to know what these specific operational issues were.

Mr Mackay asked what NERSA was doing about the fact that it appeared that Eskom was ignoring the multi-price determination system. This was an important issue, because if Eskom was misbehaving the Members of Parliament (MPs) needed to know so they could lay the blame at the correct door.

He also wanted to know whether NERSA had assessed the coal and diesel contracts of Eskom, as MPs had been refused access to these contracts after more than two years of asking. He wanted to know if the public were getting the best and cheapest deals they could.

He asked NERSA whether they had done an assessment of how the proposed nuclear power proposals would affect the pricing of the average unit of electricity should SA add 9.6 giga watts of nuclear power in the next ten years. Eskom liked to quote how well Koeberg worked, but that did not mean that nuclear power was the best option for SA.

Ms T Mahambehlala (ANC) apologized for being late. She then congratulated NERSA on being as efficient as they were and commented on how the Department of Energy could learn one or two things from them. She was excited to see that NERSA was taking on the Committee’s recommendation not to allow municipalities to decide electricity tariffs that had not been guided by the regulator, because from this year, NERSA would guide the process of deciding what a municipality’s electricity tariffs would be.

She referred to the presentation slide which depicted the balance approved in favour of Eskom, and which would be implemented on 1 April. She asked for more information to be given about how NERSA decided on this figure. She then asserted that the 9.4% increase was questionable and wanted to know how NERSA had approved this price increase and whether this was the result of the consultations they had had with the public throughout the country. She was skeptical that this was what the people had decided, because it was a hefty increase and the people that were unemployed were no longer getting the free 50 units per month as a result of this increase. She therefore wanted to know if NERSA had deviated from what the public had expressed, and why they had done that.

The Chairperson then reminded the NERSA Chairperson about the question regarding the feasibility of Eskom coming up with a new RCA application in three months.

Mr Modise said that NERSA might not be able to answer questions that were directly related to Eskom, such as the contract between BHP Billiton and Eskom, but that it would do its best where it could regarding the questions asked. He then deferred to Mr Bakula.

Mr Bukula said that the decision of NERSA to implement the three month deadline for an application from Eskom was based on the fact that if NERSA did not receive an application from Eskom in this period, it would put its RCA application in anyway in the next three months. Therefore, the reason that NERSA had imposed the deadline was because it did not want Eskom to submit an RCA application that was dislocated from the actual situation, such as the fact that Medupi was three years behind schedule and that Eskom had miscalculated the amount of revenue that it would generate from sales. He clarified that the reason this was being done by NERSA was because they did not want to approve an RCA that was based on optimistic forecasts, and would rather prefer that Eskom gave them realistic forecasts.

Mr Modise said that Mr Bukula would answer the question about cost overruns and whether they would have been different if the Medupi and Kusile power stations had come on line.

Mr Bukula said that the reason that NERSA had not approved the amount asked for by Eskom was because NERSA had told Eskom that it should have used coal (Medupi), as it would have then saved R1.2 bn, and it had penalised Eskom for cost overruns at Medupi. Cost overruns had also been incurred because the cost of diesel had initially been the retail price, but as Eskom had moved on and increased the usage of the OCGT power stations, it had then bought the diesel at wholesale prices. The overruns were linked to Medupi and Kusile not coming on line, and NERSA’s presentation had shown that, in that it had told Eskom it should have been using the coal plants by then.

Regarding the fines for the period under consideration, NERSA had not looked at whether Eskom had reclaimed them, although the process that Eskom underwent when trying to collect the fines was always complicated as businesses always gave the usual runaround of a business trying to avoid a fine.

When the BHP Billiton contract started, there had been one smelter. Today there were three smelters, and when the last smelter came on line in 2009, the contracts were revised and BHP Billiton were currently getting the same price as any other user who used as much electricity as they did. The negotiation between Eskom and BHP Billiton was still on going and NERSA had been trying for two years to publish certain clauses in the contract between Eskom and BHP Billiton, as they assessed whether this contract was still in the public’s interest. It had to be stated that NERSA could not revoke the contract between Eskom and BHP Billiton because it was between Eskom and BHP Billiton, not NERSA and BHP Billiton. What had to be remembered was that when these contracts were negotiated there were access control conditions, and these conditions still existed today, so it would be very hard to end these contracts.

He said that NERSA was not aware of the lowering of the standards regarding the transmission development plan (TDP), but the TDP was a ten-year plan that had been approved by NERSA and had been was based on what NERSA allowed in the MYPD for Eskom. The TDP took into account that there would be independent power producers who would be uploading power on to the grid/system and this very fact would mean that the system would need to be strong in order to handle this uploading, so he was unaware of any lowering of standards regarding the TDP. There was specific funding allocated to maintaining the standard of transmission. In fact, Eskom’s transmission system had been stable and the system minutes lost were less than one minute -- and that was world class performance.

Regarding when NERSA were going to move towards marginal price-based tariffs, Mr Bukula said that the electricity pricing policy commission had not directed NERSA to go in that direction. However, when NERSA looked at the costing for Eskom it would like to get to a place where, in the same way that it expected the IPPs to have marginal price-based tariffs, Eskom would also have marginal price-based tariffs. However, NERSA had not yet reached this stage, as there were more calculations to be done regarding whether de-centralisation would actually be beneficial. NERSA was in the process of simulating what it would be like if it there was a marginal price-based tariff.

Mr Bukula agreed with Mr Esterhuizen that NERSA decisions had to be made in the public’s interests, but that in the same breath NERSA was required to take into account all stakeholders -- the customer, ESKOM and the government. NERSA had looked at all of these. It was true that if Medupi had come online two years ago, Eskom would not have had to use the OCGTs, but it was not as simple as it seemed. If Eskom was shown to be inefficient, it was not NERSA’s mandate to just refuse it funding, because that would also not be in the public’s best interest. Therefore it was important that NERSA took all stakeholders into account, not just the public.

Regarding the issue of public hearings and the public not being listened to by NERSA Mr Bukula said that NERSA had listened to the public and that NERSA had found out some things they did not know in the process.

He said that the increase from 16c per unit in 2007 to 79c per unit now was explained by the price increases incurred when one went through a building phase. If one looked at any other country that went through a building phase, one would also see an upward pressure on price increases. The 9.4% price increase had been agreed upon by all the energy intensive users that had been consulted in the public hearings, and they had said that they would be happy with anything under 10%.

As far as Eskom’s improvement was concerned, he said that in 2015/16 there had in fact been a decrease in the usage of gas turbines, and this was when Mr Moelefe had taken over. There had also improvements in maintenance and less load shedding. From NERSA’s preliminary findings, Eskom had actually increased its efficiency in 2015/16.

Mr Bukula said that he would agree with Mr Mackay that Eskom had not adhered to the MYPD, but that there had been years when Eskom had stuck to the MYPD. When Eskom had not adhered to its targets, then NERSA had not given Eskom what it asked for in terms of funding, because of reasons such as inefficiency.

NERSA had looked at the coal contracts, but Eskom had three types of coal contracts: price plus contracts, where Eskom had a level of ownership in the mines themselves; fixed cost contracts; and the other contracts where they buy coal on the spot market. NERSA had assessed these contracts to a large extent when there had been the coal ban. Eskom was claiming R2bn for the coal ban. NERSA had observed that Eskom’s prices had stayed at what NERSA had suggested, but NERSA should now assess the proportion of coal coming from the three different types of contracts or sources.

With regard to Koeberg, Mr Bukula said that it was true it was still the cheapest plant to operate in SA, and that NERSA had not done any modeling regarding what the price would be per unit if 9.6 giga watts of nuclear energy came on to the market.

 

Finally, Mr Bukula asserted that NERSA had arrived at the 9.4% increase by listening to the public and the figures and facts that the public had presented to NERSA. He wanted to clarify that 9.4% was an average price increase, and that Eskom would make a statement and say that for those of the public who consumed less then 350Kw/h a month, the price increase would be only 1% higher than the consumer price increase (cpi).

 

Mr Modise said that NERSA thought that it had answered all the questions posed by the Committee.

 

Mr Van Dalen asked if the problems with the contract between BHP Billiton and Eskom could be solved by political intervention. Were the increases that the average consumer was incurring during Eskom’s building phase also driving BHP Billiton’s prices up proportionately? How could it be that the contract between BHP Billiton and Eskom had no escape clause, because if the country started to run out of electricity, surely it should be able to get out of this contract and supply the people of SA with power?

 

The Chairperson asked what the effect of the 9.4% increase would be on the R50bn RCA. He asked NERSA if it was correct that NERSA was happy with the way Eskom was progressing, and that they were in fact saying that Eskom was improving compared to previous years. After listening to NERSA, the Committee should call Eskom to answer questions, especially those that had come up in the NERSA meeting, but which only Eskom could answer.

 

Mr R Mavunda (ANC) asked about the issue of public hearings, saying that public hearings would not tell NERSA why the municipalities were failing to pay Eskom, even if NERSA consulted the SA Local Government Association (SALGA). He pointed out that NERSA might go to a municipality in the Western Cape, but would the municipality be able to convey what the people of Gugulethu wanted regarding electricity tariffs? He asked if it was an issue of whether the provinces were not willing to talk about this with NERSA, and that changes should be made so that the people on the ground could have a way of having a say over the electricity price increases.

Mr Esterhuizen maintained that Eskom was being ‘cheeky’ and misbehaving, and that NERSA should be more strong-handed with them and bring them into line. He agreed with Mr Mavunda that NERSA had not really listened to the public because its hearings had been interrupted. He also asserted that the problem of municipalities not paying was just evidence that Eskom’s debt collection was also inefficient. A greater concern for him was not the special price that BHP Billiton was receiving from Eskom, but the fact that BHP Billiton was currently negotiating with Eskom in connection with its new plant in Mozambique. How could this be acceptable if South Africa, our own country, did not have enough electricity?

Mr Modise said that regarding the contracts that Eskom had with BHP Billiton, they could not really comment as those contracts were binding and they were not an issue that NERSA was in a position to answer questions about.

Ms Thembisile Majola, Deputy Minister of the Department of Energy, said that the political intervention mentioned by Mr Van Dalen to review the Billiton contract did not fall within NERSA’s mandate. She then went on to give some background to the deal. It had been agreed upon in the 1990’s when the country was under the democractic government, and there had been a number of political concerns at the time, one of which was Mozambique. The contract was erroneous to an extent, as it assumed that there would be a massive surplus of electricity in the future. At the political level, the consideration was that there was a neighbour who had just come out of civil war and if Eskom supplied electricity to Mozambique, it would result in its development – such as the BHP Billiton smelter -- and then one could also deal with the problem of numerous economic migrants from Mozambique. The second reason she gave for Eskom’s involvement in Mozambique was that part of it was South African investment -- it was not only external. Another reason she gave was that if South Africa, a known world peace maker, invested in Mozambique -- a country which was just known for war and poverty -- then this would attract other investors such as Japan, who at the point had taken a more than 33% stake in the investment. The reason that BHP Billiton had this special price – at below cost price -- was because there was just too much energy for the demand at the time. Regarding a political intervention in the relationship between Eskom and BHP Billiton, she said that the contracts between the two were binding, so it was unlikely that political intervention would do much. She referred to how a new government had to pay the debts of the previous government as an example of just how binding contracts could be. She pointed out that SA had seen the benefit of this involvement in Mozambique, as it was growing very quickly and that SA benefited from this because almost 60% of investment in Mozambique was South African.

Mr Bukula said that the BHP Billiton contracts were linked to the London Metal Exchange (LME) and the price of aluminum, although there was also an inflationary link to the price that BHP Billiton paid. When the aluminum prices were low it worked in their favour, but when the aluminum prices were hig,h it worked in Eskom’s favour. This could be shown if one looked at the entire cycle. For example, in 2003 BHP Billiton had wanted to get out of the contract with Eskom, but Eskom had maintained that it could not do so because it was a binding contract. He said that when it came to electricity, the lower the consumption was the higher the price was, so if Eskom dropped BHP Billiton it would actually result in a price per unit increase of close to 10%.

The next report due in three months would not affect the 9.4% price increase, which would stay in place until March 2017.The new application was a report that would be realistic about the price because of the delays with Medupi and Kusile, but it would not affect the price increase for 2016/17 in any way. The new application would apply only to prices for 2017/18 and it would have taken into account the delays with Medipe and Kusile. The impact of the RCA on the R50bn would be controlled by NERSA. What NERSA was trying to avoid was talking about what might have been, and it hoped to get Eskom to do the same by asking for this new application.

Mr Kubula said that NERSA received a report about the efficiency of Eskom every morning and evening. When it came to the utilization levels of OCGT’s, levels had significantly decreased under the new management, and the availability of electricity had also been moving up from the low 70%s to the 81% target since the new management had taken over. There were still areas that needed to be improved, but there had been improvement since new management took over.

NERSA had heard the complaints of Mr Mavunda regarding how public hearings were carried out, and agreed that NERSA should do more to allow the people on the ground to voice their opinions as to what the increase should or should not be. Written suggestions and inputs were also important and should be encouraged more, as then even if NERSA did not go somewhere it could still receive input from any place, wherever it may be. He added that he had been at each public hearing and none of them had been disrupted, so he was not aware of the meeting to which Mr Esterhuizen had referred.

Mr Esterhuisen maintained that the public hearings of NERSA had been disrupted in KZN. He added that the Deputy Minister’s comments where all good and well, but asked when Eskom would start to run efficiently. He drew her attention to the fact that at the end of the last financial year, the outstanding debt of Eskom was R260 bn.

Mr Modise said that for the record, he would like to concur with Mr Kubula that the public hearing in KZN had not been interrupted or disrupted, as he had also been there.

The Deputy Minister agreed with Mr Esterhuizen that more should be done about public hearings and encouraging the public to attend these hearings, and NERSA should do as much as it could to improve the public hearings. She highlighted that NERSA had no easy task, as government had previously acted on the advice of Eskom because of the history of Eskom, and not the other way around. She suggested that Members of the Committee should help NERSA to implement this power shift over what Eskom got to decide and not decide, and how its relationship with government could be managed and improved. NERSA was not the entity that should be held accountable for some of the issues raised by the Committee.

The Chairperson thanked NERSA for the presentation and the Deputy Minister for her attendance, and adjourned the meeting.