Court sets aside Eskom tariff increase

It will be up to the national energy regulator (Nersa) to decide how to “unscramble the egg” after the North Gauteng High Court on Tuesday set aside the interim tariff increase it granted to Eskom in March.

The result of the decision is that customers should have been subjected to a 3.51% increase instead of the 9.4% that was implemented to Eskom’s direct customers on April 1 and passed on to municipal customers on July 1.

Judge Cynthia Pretorius said the decision is of such a technical nature that it is best for the court to refrain from making it and to refer it back to Nersa.

Pretorius found that Nersa’s decision to grant Eskom an additional R11.2 billion in revenue for higher-than-expected energy costs and lower sales in 2013/14, was irrational, unfair and unlawful and set the decision aside.

The Nelson Mandela Bay Business Chamber, which brought the court application together with several local intensive-energy users called the ruling a “massive win for electricity users in South Africa”.

Pretorius accepted the arguments of the applicants that the Nersa decision did not comply with the prescribed methodology.

According to the methodology, the Regulatory Clearing Account (RCA) – which keeps track of Eskom’s over- and under-recovery – should be opened at the beginning of a financial year. Eskom should then submit quarterly reports to Nersa, indicating possible variances from approved budgets that might necessitate an interim tariff adjustment and make projections for the rest of the financial year. The quarterly reports should be reviewed and the assessment should be finalised upon receipt of Eskom’s audited financial statements, for implementation in the following year.

The RCA account was however not opened at the beginning of the year. Eskom only submitted bi-annual reports and, while its audited financial statements were available by July 2014, it only submitted its RCA application 27 months later in November 2015.

Pretorius found that the purpose of the quarterly reports is to give regular pricing signals to customers. This purpose was not fulfilled.

She ruled: “I find it was irregular for Nersa not to have the quarterly financial reports for the 2013/14 year; not to alert customers and the public that it intended to deviate from the MYPD methodology; and not to allow customers and the public to deal with the deviation in the public hearings and submissions to Nersa. (MYPD refers to the Multi-Year Price Determination).

“I further find that it was irrational, unfair and unlawful not to deal with the deviation in 2014, which was the subsequent year, but to wait 27 months before launching the RCA application.”

Nersa further did not properly assess the efficiency “in an adequate manner or at all”, Pretorius found. Nersa’s decision to allow Eskom an additional R580 million – with regard to its agreement with Mozambican independent power producer (IPP) Aggreko – without properly assessing the efficiency of it, was specifically criticised.

Pretorius found that Nersa relied on its approval of the power purchase agreement (PPA) between Eskom and Nersa in 2011, without assessing the prudency of its application within the MYPD context. She said such an assessment should not result in a breach of the validity of the agreement.

“Although the rules provide that, once the regulator has authorised power purchase cost recovery ‘costs incurred will be allowed as a pass-through for the duration of the PPA’, this will not exempt the regulator to ensure that the efficiency assessment of the use of the IPPs is consistent with the methodology,” she said.

She further found there was some double counting. “In the present instance Nersa allowed a variance for decreased revenue, but this could only be done if the lower sales had not been due to Eskom’s own inefficiencies. Nersa ignored the fact that Eskom actively encouraged its customers to use less electricity and provided monetary incentives to customers in this regard. According to the applicants, this conduct by Eskom is irrational and the decision by Nersa to compensate Eskom for the lesser income, is therefore irrational, unfair and thus unlawful.

“I must agree that this results in some double counting. Eskom receives money from consumers; pays money to other consumers to use less electricity, which results in a decreased income for Eskom; and then Nersa decides to grant a RCA increase to compensate for the decreased income.”

Pretorius disagreed with an earlier finding in an application brought by the Organisation for Undoing Tax Abuse (Outa) that there won’t be any tariff to fall back on if the RCA decision is set aside. She said it is only the RCA decision that is set aside, therefore the original tariff determination stands.

She ordered that future RCA applications should comply with the prescribed methodology and ordered Eskom and Nersa to pay the applicants’ costs, for which they are responsible jointly and severally.

Both Eskom and Nersa are still studying the ruling. Eskom spokesperson Khulu Phasiwe said the utility would take its cue on the way forward from Nersa.

The ruling is attached. Borbet others v NERSA and others – Judgment – 16 August 2016

Source: MoneyWeb