The Democratic Alliance (DA) will be meeting with the National Energy Regulator of South Africa (Nersa) over what appear to be significant problems in the adjudication of Eskom's tariff application. After reviewing the nature of the proposals put forward by the National Energy Regulator in detail, and consulting with industry insiders, we believe that three major flaws existed with the Nersa decision.
These problems suggest that the entire tariff increase might be flawed in overstating Eskom's expenses, in order to legitimise a larger tariff increase.
Firstly, in its application, Eskom's stated Primary Energy costs include a once off portion of some R7.5 billion to rebuild stockpiles. Nersa has included this as a basis to escalate the allowances for increases in the tariff. This, we believe, transgresses basic accounting rules and shows lack of basic understanding by all involved. Does this mean that new stockpiles will arise all over the show, or will this cash be ferreted away as well?
The R 7.5 billion involves past expenditure to rebuild stock to a specific level - that level of expenditure will not be needed since the stock will only need to be filled up at the margin as time goes by. If it costs R 2000 to fill a swimming pool with water initially, then one cannot claim that you spend that amount each year to keep it at its present level. This means that their cost estimate seems overstated.
Secondly, Eskom's stated operating costs include a sum of R9.5 billion, which is a once off provision for the aluminum hedge, and is included in Nersa's base calculations to escalate further tariff increases.
Once again, this does not make sense; does Eskom intend to keep on speculating in the aluminum market? The aluminum hedge was used in order to limit Eskom's risk at the time they needed to buy the aluminum for capital expansion. By including that expense for the next year, they will continue with the level of capital expansion. Once again, this apparent accounting misstep would appear to significantly overestimate their costs for the coming year.
Thirdly, the allegations of mismanagement, wastage and failure in critical areas, as highlighted in the Susan Olsen report have been totally ignored. If the recommendation and warnings of the report are not integrated into future Eskom changes to management, then it assumes that the coal-management unit will again face huge losses due to the dismal mismanagement which Susan Olson flagged over two years ago.
What all of this implies is that Eskom's costs have been overstated in its application before Nersa. This means that it is quite possible that the tariffs have been set too high, partly because of accounting errors, and partly because Eskom is telling us that they won't fix their management failings. If this is the case, then Nersa obviously has to urgently reconsider the application before its implementation.
The notion that the tariff hike would be overstated is concerning for two reasons: firstly, because of the massive burden it is imposing at its current rate on both ordinary South Africans and businesses. Secondly, the ANC clearly has a great deal to gain through Chancellor House from higher tariffs, so any sign that the costs are being artificially inflated must be scrutinised and explained.
In addition to meeting with Nersa to discuss these issues, we will pose questions to the Minister of Energy. If it is indeed the case that Nersa has not been rigorous and accountable in its decision, then it calls into question whether their adjudication carries any legal weight.
Statement issued by David Ross, MP, Democratic Alliance deputy shadow minister of energy, March 7 2010
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