State power utility Eskom says it is challenging energy regulator Nersa’s latest tariff decision in court to avoid financial disaster.

Eskom said that a decision by Nersa on tariffs taken in March has left the group with a massive shortfall.

“Nersa’s MYPD4 decision that was made on 7 March 2019 in terms of which tariff increases of 9.41%, 8.1% and 5.22% were allowed for the next three years to 2022 left Eskom with a shortfall of approximately R102 billion compared to what was applied for,” it said.

Eskom said that a key reason for this shortfall was Nersa’s decision to offset the envisaged government support of R23 billion per year – that was referred to in the minister of finance’s budget speech – against the return on assets.

“This resulted in the return on assets in the decision being approximately negative 1% for each of the financial years. This is very far below a reasonable return and worsens Eskom’s financial sustainability,” it said.

Eskom is currently surviving on government bailouts and sits with debt exceeding R450 billion, which puts the country’s entire economy at risk.

Finance minister Tito Mboweni tabled a bill before the National Assembly in July to allocate R59 billion to Eskom over the next two years. That Special Appropriation Bill remains before Parliament.

Calib Cassim, Eskom’s chief financial officer, said: “Following analysis of the reasons for the decision, the Eskom board decided on taking the matter to court. Consequently, we have put in an application for urgent interim relief, which is necessary to avoid financial disaster for Eskom.”

Eskom said it is seeking an order to address this shortfall in a phased manner. It also wants the court to review and set aside Nersa’s decision.

“It is our understanding from Nersa’s reasons for the decision that the rules and principles of the Electricity Regulation Act, as well as the MYPD methodology, have not been duly considered by Nersa in arriving at the decision made in terms of our revenue application.

“The MYPD methodology does not allow for equity investment by government to be included as a return on assets,” said Cassim.

Debt and privatisation

On Friday, President Cyril Ramaphosa said that the government has no plans to privatise Eskom, following reports that it may sell some of its assets to settle its debts.

Minister Mboweni suggested that the sale of Eskom’s generating facilities could raise R450 billion.

“South Africa is not inherently in the business of selling power stations,” Ramaphosa said. Eskom’s new plants were its “crown jewels” and should be retained, while the old ones were unlikely to find buyers, he said.

Instead, when the process of unbundling the power utility begins, smart partnerships will be sought to manage the coal-powered entity in a sustainable manner while the state retains full control over transmission and parts of generation, the president said.

“What I would like to be made clear is that we are not privatising Eskom. We are going to be looking at smart partnerships that can be struck. It is possible that we can have a smart partnership with other entities on certain aspects of Eskom.

“A smart partnership is what we will promote whilst the state continues to have full control over transmission and on parts of generation. With distribution, the state will continue to play a role in distribution,” he said.

The power utility’s acting group chief executive officer Jabu Mabuza told members of the Portfolio Committee on Public Enterprises that while the R59 billion government guarantee was important in addressing short-term challenges, there was a need to develop a long-term energy plan for the state-owned entity in a changing energy landscape.

Ramaphosa said it is broadly accepted that Eskom’s current structure is outdated and unresponsive to changes in the energy market.

Eskom’s financial challenges are mainly due to unsustainable operating costs caused by expensive coal contracts, high headcount, overall operating inefficiencies, high debt service costs, corruption in procurement and the excessive cost of the construction of Medupi and Kusile, he said.

Eskom is in the process of being restructured into three separate subsidiaries for generation, transmission and distribution.

The restructuring of Eskom will be detailed in the Special Paper on Eskom which is planned for release before the Medium Term Budget Policy Statement at the end of the month.

Over and above the financial recovery, the newly-appointed chief restructuring officer is developing potential solutions for Eskom’s debt, the president said.

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