Fresh look at bigger price increase puts Nersa in dilemma
March 10, 2008
By SAMANTHA ENSLIN-PAYNE
Durban - Eskom's hopes of squeezing more cash from electricity consumers might be in vain after the National Energy Regulator of SA (Nersa), which regulates the utility's prices, expressed doubts at the weekend on reopening negotiations for more increases.
But some consider Eskom's push for prices even higher than the 14.2 percent hike it has already been granted to be sensible, considering the dire straits it is in.
The price hike granted was lower than the 18.7 percent the utility wanted, but substantially higher than the 6.2 percent that was previously approved.
Eskom said recently it would need to buy 45 million tons of additional coal over two years to boost its supplies. This is expected to cost between R150 and R250 a ton, compared with the R85 a ton it pays on long-term contracts. In light of this, Eskom wants Nersa to push up prices beyond the approved 14.2 percent.
Thembani Bukula, who oversees electricity regulation at Nersa, said last week that reopening the multi-year price determination (MYPD) would make a mockery of the three-year pricing plan.
"There are risks that Eskom has to take," Bukula said. "Having said that, Nersa would need to consider a formal request to reopen the MYPD."
The MYPD was introduced to create consistency, predictability and transparency in electricity prices.
The first MYPD, effective from April 1 2006 to March 31 next year, approved price increases of CPIX plus 1 percent after Eskom asked for CPIX plus 4 percent.
But last year, mostly due to rising primary energy costs and Eskom's capital expenditure plans, Nersa reopened the process and approved a 14.2 percent hike.
"Even reopening last year was a hard-fought battle," Bukula said.
But when Eskom argued for higher electricity tariffs at Nersa's hearings late in November, there was no mention of the need for substantial amounts of additional coal.
Bukula said: "We have to decode the 45 million tons …
"Is this insurance or an operational issue?"
Some think the 14.2 percent tariff hike is too low.
Cornelis van der Waal, an industry manager of the energy and power systems group at Frost & Sullivan, said: "I would advise that electricity prices should double in one go." He conceded that this would have a major effect on inflation.
But if Eskom was forced to borrow too much, its credit rating would weaken, pushing up borrowing costs. In this scenario, consumers would have to pay more for longer.
Bukula said regulators worldwide had different rules for price increases.
"But whoever builds [electricity infrastructure] has to get a return on their investment," he said. "You can either pay now or later."
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