In an attempt to address what are now seen as problems with the determination of electricity tariffs, energy regulator Nersa is determined to develop a new methodology, but experts say it will also come with significant risks.

After consulting on the principles behind the new methodology last year, Nersa published a consultation paper on June 30 detailing the new methodology.

Read: Nersa to consult on Eskom’s 32.66% tariff rate.

It invited interested parties to provide comments until July 29 and plans to publish the final methodology by September 22.

The current multi-year rate-setting methodology is a two-step process in which the allowable annual revenue to which a licensee is entitled is first determined over a period of three to five years.

This is based on the effective cost of delivery plus a reasonable margin.

This amount is then divided by the number of units the licensee predicts it will sell during the rate period to arrive at the unit price for an average standard customer.

Subsequently, tariffs are calculated for the relevant groups of customers – all of which must be approved by the regulator.

Risk reduction

The methodology has a risk mitigation mechanism that allows for retrospective adjustments in favor of the licensee or payer if any of the assumptions underlying the rate determination deviates significantly from what was expected. This is called a Regulatory Clearing Account (RCA).

If the required adjustment exceeds the preset parameter, the tariff definition must be reopened and recalculated from scratch.

This methodology applies to all licensees, although Nersa only applied it to Eskom.

Its approach to municipalities, consisting of the annual publication of rate hike recommendations and rate guidelines, has been widely criticized and challenged in court.

Eskom and Nersa have been arguing with each other for several years over the application of the methodology. Eskom has challenged several tariff determinations and RCAs in court and has consistently been successful.

Read: Nersa admits it did not implement electricity tariff methodology

While Nersa appears to blame the methodology for some of the problems, Eskom sources close to the process say Nersa failed to implement the methodology correctly – and the courts seem to agree.

Expected improvements

Some of the issues with the current methodology that Nersa hopes to address in developing its new methodology are:

  • Guaranteed Profit: If the licensee fails to achieve the projected sales figures, it will underperform. This then leads to large adjustments in the RCA, leading to unexpected price shocks. As prices rise, sales fall further, creating a vicious cycle known as the utility death spiral.
  • Cross-subsidy: Each group of consumers must pay the true cost of the supply to them.

Nersa offers cost sharing not only in terms of activities (generation, transmission and distribution), but also at the level of each power plant.

In addition, it wants to differentiate between electricity consumers based on the type of load they use – base load, which is the steady, constant demand day and night required by customers such as mines and industry; semi-permanent or average load that fluctuates during the day; a short but intense load known as a peak load; and special emergency load.

The idea is to then relate the load to the cost of the plant supplying that load.

In other words, peak-load customers have to pay the cost of open-cycle gas turbines that gobble up diesel, while base-load customers have to pay the cost of coal and nuclear power plants that operate much lower.

Nersa also offers monthly or quarterly adjustments for fluctuating costs that are outside the licensee’s control, such as fuel costs.

Read: CoJ plans to take over more electricity distribution from Eskom to hit business hard

Difficulty will increase “dramatically”

Ayal Rosenberg, MD of measurement specialist WeBill, warns that Nersa’s proposal will significantly complicate tariffs and accounting.

“If you have four tariffs in a tilted block tariff for residential customers at the moment, it will [now] to be 16,” he says.

Rosenberg says the large number of meters currently in use across the country will not be able to perform the necessary measurements.

They will need to be replaced first, and it is unclear who will bear the cost.

He notes that the tariff methodology underpins the finances of Eskom and all municipal distributors. In most cases, these licensees are already financially vulnerable, and if things go wrong, it can have devastating consequences for these institutions and the economy as a whole.

Deon Conradi, an independent consultant with a specialist in electricity pricing, agrees that meters – particularly in residential and large sections of the commercial sector – will need to be replaced to accommodate the proposed methodology.

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He says this is “too idealistic” given the current situation, such as the skills available in most local authorities, the availability of data, the “intense” requirements for information (as Nersa itself describes) and the huge costs of implementing accounting to meet all this. .

“My biggest concern is that implementing the proposed methodology with such a large load loss and uncertainty will put Eskom at even greater financial risk,” Conradie says.

He notes that monthly or quarterly price adjustments can lead to increased price uncertainty, and municipal law only allows for rate adjustments at the beginning of the fiscal year.

In addition, he questions the statement that the redetermination of tariffs will be at the discretion of the regulator.

Abolition of cross-subsidization

Konradi goes on to note that Nersa proposes to abandon cross-subsidization. Industrial users currently subsidize households, and Nersa anticipates that such subsidies will be provided by governments in the future.

“This is a matter of government policy, and despite the fact that it is the right principle, the money must now come out of the treasury and must be approved and budgeted by the government.

“How realistic is it in the current economic situation that this will happen? Where will the money come from?”

Conradi says the real risk lies in the way the methodology is implemented.

“It cannot happen suddenly and it will have to be introduced gradually. This will require the necessary skills and capacity in many areas, additional funds to set up the accounting and billing systems that need to be changed, and the political will to make this happen so close to an upcoming election, and in an extremely uncertain economic environment.

“I don’t think it’s realistic,” he says.

According to a recent court ruling, Eskom’s tariffs for 2023/24 will continue to be determined according to the current methodology.

However, for the next year, according to the resolution, they will be determined according to the methodology “which will exist at that time”.

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