Regulatory processes key to Eskom's future

Tuesday, February 5, 2019

With Eskom projected to make losses in the coming years, regulatory processes are crucial to restoring the operational and financial position of the utility.

The power utility made these comments on the second day of the three-day public hearings held in Gauteng by the National Energy Regulator of South Africa (Nersa).

At the hearings held on Monday, the utility appealed to the regulator that its operational requirements that pass the regulator’s prudency test need to be compensated through the regulatory process to enable it to recover technically and financially.

“Our stakeholders who include debt providers, rating agencies, auditors are awaiting this crucial decision from our MYPD 4 [Multi-Year Price Determination] and RCA [Regulatory Clearing Account] applications as an important part of the solution to return Eskom to financial and operational sustainability,” said the power utility’s Chief Financial Officer Calib Cassim.

Projected losses

“As disclosed in our interim financial statement for the period ending September 2018, Eskom’s going concern status is highlighted as emphasis of matter showing the level of financial distress,” he said.

He added that the utility is projecting a net loss of close to R20 billion at financial year end.

“This loss situation will continue for the next few years even with the applied-for increases,” said Cassim.

The utility said it cannot solve financial and operational sustainability challenges that it faces alone.

Eskom stressed that the regulatory process and shareholder support is crucial, adding that the shortfall in tariffs cannot be solved through cost reductions alone, with further indebtedness adding to the problem.

The utility said it was encouraged by the regulator’s presentation in Parliament where they showed that Eskom had not recovered revenue allowed by the Regulator over the MYPD 3 period.

Changes in RCA applications

Eskom confirmed that it would continue to apply the MYPD methodology and the precedent set by the 2013/14 RCA decision.

“We note the impact on electricity users and have made two changes in our RCA application following questions from the Nersa panel on the fees recovered from McKinsey and the period over which to recover the RCA.

“The first one is using the money recovered from McKinsey to reduce our application of R21 billion to R20 623 billion and secondly, to recover the 207/18 RCA over a period of three years from 2020 to 2023. Delaying recovery of the RCAs puts more pressure on Eskom’s finances,” said Cassim. 

In July last year, the utility announced that McKinsey, the management consulting firm will pay back the R1 billion paid to it by Eskom under the Turnaround Programme.


Meanwhile, senior manager for Sales Forecasting, Mpumelelo Mnyani, explained that there were a myriad of factors that impact Eskom’s sales forecasting process.

Sales volume adjustment is one of the factors that led to the adjustment in Eskom’s application.

Mnyani said while the utility is confident of its sales forecasting process, which it revised the market is volatile.

“We therefore appreciate the fact that the Nersa MYPD methodology is cognisant of this fact and allows Eskom to review its sales forecast closer to the decision date. We have revised our sales forecast down and we welcome Nersa to run a verification process on the new numbers,” he said.

The utility also requested the regulator to consider allowing the revision of these numbers annually based on the latest available projections in order to avoid increasing divergence.

Ensuring a reliable electricity supply

The utility also spoke of the importance of ensuring a reliable electricity supply which is crucial for the economy.

“Customers require reliable electricity. If Eskom cannot meet its commitments to produce electricity, it affects the customers as well as the country. An inadequate security of supply has more negative repercussions to economic growth and social welfare than a tariff increase required for Eskom’s sustainability,” said Cassim.

Nersa in previous public hearings held around the country had requested Eskom to provide changes that reflect the latest environment and condition.

The last day of the countrywide public hearings into the applications will be held at Gallagher Estate in Midrand on Tuesday. -