‘Wrongly placed’ ideas in Nersa plan will result in much higher tariffs: Eskom

Energy regulator Nersa’s proposed new method for determining electricity tariffs will result in much higher electricity tariffs, and the hardest hit will be households – especially poor ones.

This warning comes from Eskom in a 76-page response to the consultation paper Nersa published on 30 June.

The consultation paper invited written comments by end of July, but Nersa extended the deadline to 12 August after appeals by several stakeholders, including the Energy Intensive User Group.

Read: Stakeholders want more time to study new electricity tariff methodology

Three virtual public hearings on the paper are planned for 10, 11 and 12 August, and Nersa hopes to publish the finalised methodology by 30 September.

In a statement announcing the extension, Nersa emphasised that the methodology will apply not just to Eskom, but to the whole electricity industry.

This means the methodology will also have to be implemented by municipalities, many of which are dysfunctional and lack skilled staff.

The Nersa statement further clarified its intention that the new methodology will be implemented in a phased manner, as opposed to a “big-bang approach” that Eskom has warned against.

“It is envisaged that once the methodology has been approved, an appropriate transition period will be allowed, as has happened in the past, to enable the industry to adapt to the new EPDM [electricity price determination methodology] over time,” Nersa stated.

New methodology?

Although politely worded, Eskom’s comment on the Nersa document is scathing.

The utility stops short of telling the regulator that it has no clue what it is doing and doesn’t understand how electricity works.

Eskom does not even recognise that the consultation is aimed at a new tariff determination methodology – instead describing it as “the first step towards the process to develop” one.

Read:

Eskom further points out that many concepts have not been properly defined and certain terms that Nersa uses interchangeably in fact have different meanings.

Principles

The regulator’s proposal is based on three principles that it approved in November last year.

Nersa lists them as follows:

a) Unbundling of activities across the value chain activities (vertical) and across activities [sic] (horizontal) to set cost-reflective tariffs;

b) Understanding consumer demand (load types) and, demand over time (load profiles); and

c) Discovery of cost-reflective consumer prices through merit order dispatch and build-up from the tariffs along the value chain.

According to Eskom these principles are “not appropriate to meet the Nersa mandate of ensuring that licensees recover efficient costs and a fair return”.

“These are not regulatory approaches at all,” says Eskom.

The power utility points out that its current tariffs are not yet reflective of its prudent cost of supply. If the new methodology fails to provide for a path from the current tariff levels to cost reflectivity, it will result in a sharp increase in tariffs – a big-bang approach, it states.

Other problems …

Eskom further points out that the removal of cross-subsidisation, which seems to be part of the proposal, will benefit industrial customers to the detriment of households.

It warns against plans by Nersa to place the full risk of lower-than-forecast sales volumes on the utility, and says in that case it will have to ensure that the recovery of fixed charges is no longer linked to the sales volumes. This, it says, will impact small users most.

“The likely outcome would be a substantial increase in prices.”

Eskom also raises the possibility of passing the risk on to, especially, larger customers, who will have to “take accountability for the forecasts they provide”.

Confusion

Eskom seemingly battled to get to grips with what exactly the regulator wants, saying: “For the purpose of understanding the apparent objectives of this consultation paper, the impossible, the inappropriate and the violation of policy, legislation, regulatory rules and codes are excused.”

It repeatedly states that what Nersa has in mind has not been implemented anywhere else in the world and is non-compliant with existing legislation and regulatory instruments.

It states: “This Consultation Paper is in contradiction with the existing Distribution Tariff Code. These [contradictions] include concepts introduced in this Consultation Paper that have never been encountered previously, anywhere in the world, such as type of use tariffs.”

Follow the electron?

In response to a question Nersa put to stakeholders about its plans to collect data from end users to analyse their demand, Eskom says: “A request is being made by Nersa to ‘follow the electron’. It is unclear why an impossible request is being made. A thorough understanding of the manner in which […] electricity works needs to be appreciated.”

Eskom is critical of Nersa’s plan to link specific load or demand types to the cost of specific generating units.

“As demand for electricity increases, more expensive generation must be dispatched to meet this demand. The last generator dispatched does not exclusively supply the last consumer requiring power but both now participate, simultaneously, with all other generators and consumers at that moment in time. From the above, it is clear that no consumer or group of consumers can be mapped or be deemed to be supplied from any generator or group of generators.”

Eskom explains to Nersa that transmission and distribution costs are not driven by the volume of energy transmitted, but by capacity created and maintained to enable a safe and reliable network operation to service all participants.

It proposes that the current methodology “that has been applied for many years” be used “as the basis for any further review as far as determining efficient costs and a fair return are concerned”.

It adds: “It is submitted that many of the ideas and concepts that this consultation wishes to implement are wrongly placed. This results in impossible requirements for the whole industry.

“It is proposed that the existing framework, appropriately applied could provide the envisaged outcomes.”

Eskom’s criticism of the Nersa proposal comes against the background of a long list of Nersa tariff decisions successfully challenged by Eskom in court.

Indications are that should Nersa persist in implementing its current proposals, Eskom will once again see its regulator in court.