Energy regulator Nersa on Friday announced that it granted Eskom little more than a quarter of the 19.9% tariff increase it applied for, for 2018/2019, and in fact slashed its revenue to considerably less than it was entitled to in the current year.

Electricity tariffs will increase by an average 5.23% on 31 March next year for Eskom’s direct clients. The average percentage increase for municipalities will be determined in January and will be implemented on 1 June.

Nersa will publish the detailed reasons for its decision later. Chairman Jacob Modise however made it clear that the regulator is of the view that Eskom is overspending and should be able to make do with R30bn less than it applied for, without compromising its sustainability.

That is, if Eskom “makes the right decisions”, Modise said.

Eskom applied for R219.5bn, compared to the current year’s R205.3bn. Taking into account the continuous drop in electricity sales, Nersa however only allowed Eskom R190.3bn in revenue.

Modise criticised Eskom for overspending and said the regulator specifically focused on the utility’s huge staff costs and generous bonuses paid to executives and staff earlier this year.

Nersa has made extensive recommendations to Eskom in this regard, which will be published along with the reasons for the decision once Eskom and Nersa have agreed on aspects that should remain confidential.

These recommendations are aimed at changing the way Eskom does business, but it is still up to the utility to implement them. “If Eskom cuts costs as we recommended, it will be able to get its cash flow back on track,” Modise said.

Not budgeted for

He pointed out that Eskom only reduced the use of its diesel-hungry open-cycle gas turbines after Nersa earlier disallowed the multi-billion-rand expenses that were not budgeted for. Similarly, he said Nersa hopes to use the tariff decision to force Eskom to “take the decisions they should be taking”.

Nersa accused Eskom of abusing the regulatory clearing account to get huge interim tariff increases. To prevent a recurrence of this, it carefully interrogated Eskom’s electricity sales forecast to prevent Eskom from submitting over-optimistic forecasts, only to later claim compensation when the sales are lower.

Modise added that in the current environment where Eskom has surplus capacity, customers wouldn’t pay for such capacity.

Modise said Nersa received 23 000 written comments and 96 oral presentations in response to Eskom’s application. With the previous multi-year tariff determination in 2013 it received 200 written submissions.

He said in taking its decision, Nersa had to balance the interest of Eskom’s customers and end users with those of its licensee (Eskom) and investors in the electricity industry. Nersa may, however, apply reasonable judgment and took the decision in the interest of the South African economy and the public.

Eskom expressed its disappointment with the small increase in a statement, saying it will await the reasons for the decision to determine the impact on its business.

Eskom spokesman Khulu Phasiwe said in a radio interview that about four percentage points of the 5.23% increase will not benefit Eskom, as it will be used to pay for its purchases of renewable energy from independent power producers (IPPs).

Nersa has allowed Eskom R26.5bn for IPPs compared with R23bn in the current year. The IPP cost will be almost 14% of the total revenue, up from 11.2% in the current year.

Phasiwe gave the assurance that Eskom will be in a position to pay salaries — for now.

Eskom in November confirmed that it had liquidity problems, which it blamed on the low 2.2% tariff increase Nersa approved for the current financial year.

Credit ratings agencies Moody’s and Standard & Poor downgraded Eskom later last month and Fitch put it on a negative credit watch. Nersa’s decision to limit the tariff increase is expected to raise further concern with the agencies, as Eskom will have to try and dig itself out of a hole with almost R20bn less than in the current year, taking the increased IPP cost into account.

According to reports, Eskom’s own assessment was that it would have only R1.2bn of cash at the beginning of this month and will run into a negative liquidity position of R5bn by the end of January. This has raised questions about its ability to pay salaries.

Paying salaries

According to Phasiwe, Eskom will use the proceeds of a recent R3bn loan for “basics” like paying salaries. He admitted that it is not ideal to pay salaries with borrowed money.

Eskom last month also confirmed that it had only secured 56% of its funding requirement for the current year. This might become even more difficult and, if it succeeds in negotiating funding, increase the cost in light of the recent downgrades and reduced allowed revenue.

Eskom does have the option to take the Nersa decision on review in the high court, but that might delay the implementation of the increase, which would further exacerbate Eskom’s financial problems.