Eskom cannot operate with the current tariff level - energy expert

Even an efficient, well-run electricity utility would not be able to operate on Eskom’s tariff levels, according to an international energy expert.

While most South Africans have strongly opposed Eskom’s tariff increase of just under 14% that kicked in on Monday, engineer and former head of the Council for Scientific and Industrial Research’s energy department Tobias Bischof-Niemz believes Eskom’s electricity tariffs before the increase were not cost-reflective.

"That means even a perfect utility that incurs all costs in both a prudent and efficient manner, would not be able to run with the current tariff level," he said.

The National Energy Regulator of SA (Nersa) is legally bound to allow tariff increases to cover Eskom’s costs, provided the costs incurred are from money spent prudently and efficiently.

Bischof-Niemz, a former Eskom chief engineer and now head of strategy in the international energy company Enertrag, said a problem Nersa faced every year when Eskom asked for tariff increases was the difficulty in trying to differentiate between Eskom’s costs that had been prudently and efficiently incurred and those that had not been.

That was why Nersa always took "a more cautious route", authorising lower tariffs than Eskom wanted, but usually higher than the consumer wanted.

Bischof-Niemz believes Nersa’s struggle to assess Eskom’s legitimate costs would continue with each tariff increase application  – unless the utility was "unbundled" into separate units.

"The fundamental reason why we need to unbundle Eskom is so that we have smaller pieces that individually are transparent enough to be properly regulated. Without unbundling, it is difficult to grant Eskom fully cost-reflective tariffs," Bischof-Niemz said.

The unbundling would entail separating Eskom’s generation, transmission and distribution functions into separate entities, which he believes would create transparency and accountability in the new, smaller entities. This would then allow cost-reflective tariff regulation.

"The ratepayer will pay for prudently and efficiently incurred costs only. That will mean the need for bailouts from the taxpayer falls away." 

Without unbundling, we would see the same vicious circle repeated again and again: non-transparent costs of Eskom presented to Nersa in one piece; followed by tariff hikes that were too low as a precautionary measure by Nersa; leading to liquidity problems on Eskom’s side; resulting in the taxpayer having to step in and bail the utility out.

Eskom’s debt is R420bn.

Government agreed in February to give Eskom a R23bn bailout every year for the next three years.

Eskom has said the just under 14% tariff increase Nersa approved for the next three financial years was far less than it needed to be financially stable.

Eskom’s view was echoed by the rating agency Moody’s that said in an updated credit opinion this week that capital transfers from government plus the tariff hikes, which were below what Eskom has asked for, "may prove insufficient to address the company’s long-standing financial troubles".

Moody’s warned that Eskom would remain the main source of contingent liability for the fiscus.

President Cyril Ramaphosa announced in his state of the nation address in February that Eskom would be split into three units of generation, transmission and distribution.

Bischof-Niemz said it was essential that the plan to unbundle Eskom did not get put on a back burner as a result of the bailout from government.

"We must ensure the taxpayer bail-out does not reduce pressure on Eskom and stakeholders to take the long overdue step and unbundle the organisation."

The manner in which the unbundling was implemented was critical to its success or failure, Bischof-Niemz said

"There are many parameters in the details, and they must all be adjusted properly, otherwise it will fail and that will mean the topic might get burned and it would not be possible to unbundle again for many decades to come."

The government’s plan to unbundle Eskom has been met with opposition from the SA Communist Party and Cosatu, who believe it will lead to privatisation of Eskom and job losses.

Ramaphosa has denied this.

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