The National Energy Regulator of SA (Nersa), which determines the tariff that Eskom can charge for electricity, has effectively wiped out the R69bn cash injection that the Treasury allocated to Eskom in the budget in February and neutralised the government’s support package.
In March, when Nersa announced its decision on Eskom’s three-year tariff application, it calculated the return on assets in rand terms for each of three years. It then deducted the Treasury’s R23bn a year from the total.
For example, instead of allowing Eskom a return on assets of R14.28bn in year 2020, Nersa deducted R23bn and calculated a negative return of minus R8.75bn. Overall, instead of a R41bn return on assets over the three years it would have received without the bailout, Eskom was allowed a negative return on assets of minus R27.98bn.
While Nersa has not yet given its reasons for the R69bn deduction, Eskom chairman Jabu Mabuza said Eskom’s reading of what had happened was that Nersa viewed the R69bn bailout as revenue in Eskom’s hands.
Following a news briefing on Wednesday, at which Eskom’s operational performance was under scrutiny, Mabuza said in an interview that the decision by Nersa was "strange".
"Nersa took the R69bn from our allowable revenue. They adjusted our revenue as a result of the support we got from the shareholder. We will have to wait until we receive their written reasons to find out why. But the effect has been to leave us worse off than we were before we got the R69bn."
Nersa determines the electricity tariff through a formula that allows Eskom to recover the costs of producing electricity, as long as these are incurred prudently. In recent years it has granted Eskom tariffs far short of what it has requested on the grounds that its costs were not efficiently managed. A range of elements are part of the formula, among them the cost of primary energy such as coal; a return on Eskom’s cost of capital; its expenditure and purchases from independent power producers and neighbouring countries; and depreciation, levies and taxes as well as Eskom’s return on assets.
Eskom is allowed a 1.5% return on the value of its assets.
Nersa is expected to send its reasons for the decision to Eskom "in due course", according to its website. The Treasury said on Friday that it had noted Nersa’s decisions on Eskom’s revenue application and is awaiting the release of the reasons for decisions to gain a better understanding of what informed the decision.
"At this stage it will be premature for the National Treasury to articulate a particular view without understanding the reasons that informed the Nersa decision," the Treasury said.
Nersa said on Friday, "the details will be in Nersa’s reasons for decision", but that "the document still needs to go to Eskom first for issues of confidentiality".
Mabuza said a previous government bailout in 2015 had not been treated in the same way.
Eskom also said last week that its financial position was worse than previously thought and that in order to meet its obligations and supply electricity over the next three years it needed an additional R250bn.
This was due to higher than anticipated costs for diesel and maintenance and the lower than anticipated revenue allowed for by Nersa in its decisions on the tariff and on Eskom’s regulatory clearing account, which is a mechanism through which Eskom can retrospectively claw back certain costs from consumers.
Eskom has been prohibited by the government from retrenching staff, which it had expected would enable significant cost savings. It had also hoped that government would immediately take over R100bn of its R419bn of debt. But due to possible legal complications — as all lenders must be treated the same — rather than take over some of the debt the Treasury chose instead to provide equity injections of R69bn over a three-year period.
These shortfalls, rising costs and accumulating municipal debt have sent both Eskom and the Treasury back to the drawing board to consider bailout number two even before the first bailout has flowed into Eskom’s coffers.
Eskom’s growing financial troubles will have a negative bearing on attempts by the Treasury to consolidate the fiscal framework, by bringing the budget deficit before borrowing down and arresting the growing debt to GDP ratio.
In a report on SA’s sovereign credit rating issued last week, Moody’s Investors Service said it expected the country’s credit metrics to deteriorate further than the Treasury’s budget projections made in February.
While the Treasury forecast a 4,5% budget deficit for 2019/ 2020, Moody’s said it expected the deficit to be 4.9%. The Treasury also projected the debt to GDP ratio at 60% in 2023.
Moody’s said it expected this ratio to be far higher at 65%.
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