NERSA Public Hearings

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NERSA Public Hearings 8 June 2009

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• CONTENTS

• Non-compliance by Eskom with peremptory
  legislation
• Consequences and risk to municipalities
• Backdating of increase
• Impact on municipalities and consumers
• Content of Eskoms application
• Conclusion

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Non-compliance by ESKOM with legislation

• S 42 MFMA is peremptory
• NERSA understanding of S 42 is incorrect
• ESKOMs application did not follow the prescribed
  procedure and stipulated requirements as to
  content
• Did not follow timeframes in S 42(2)
• Accordingly did not contain requirements stated
  in S 42(3)
• NERSA does not have the power to sanction or
  overlook non-compliance in considering the
  application
• NERSA must reject application

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ESKOM non-compliance (cont.)

• S 42 is part of a carefully constructed scheme
  to regulate the municipal budgetary process
• Creates an incentive to ESKOM to finalise its
  application before 15 March to enable tariffs
  budget content to follow the constitutionally
  mandated public participation process
• Minister may authorize an extension to the
  timeframe, but not so as to make consultation
  impossible-this would be unconstitutional ultra
  vires the Ministers powers
• ESKOMs blatant disregard of the Act undermines
  it the Minister-it should not be allowed to
  merely assume that the Minister NERSA will
  rescue it from the mire caused by its inertia
• NERSAs timeframe for a decision accordingly
  fails to take into account that municipalities
  are obliged to table budgets for adoption prior
  to the end of May-councils are forced to consider
  budgets containing tariffs not based on NERSAs
  ruling on this application

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Consequences risk to municipalities

• ESKOMs non-compliance coupled with pressure on
  Minister to act unlawfully to rescue it the
  possible consideration by NERSA of an application
  which does not comply with the MFMA holds major
  risks for municipalities
• Municipalities which adopt budgets tariffs
  based on these unlawful procedures are at risk of
  having have budgets and/or tariffs set aside by
  the courts (NERSA the Minister would be joined
  in such action be at similar risk)
• A ruling by NERSA cannot be enforced against
  municipalities in any event if the Minister does
  not purport to approve otherwise

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Backdating of increase

• ESKOM once more anticipates that NERSA will
  grant an increase for municipalities above that
  applicable to other consumers to account for the
  three month difference in financial years
• This remains contrary to the MFMA amounts to
  introduction of a retrospective tariff
  implementation from 1 April notwithstanding the
  clear wording of the MFMA to the contrary
• NERSA has acceded to this request in the past
  ESKOM now assumes that it may adjust its tariffs
  each year during the MYPD period
• Even if authorised by the Act, such an
  additional increase should be a once-off and not
  repeated annually
• NERSA should not accede to such request should
  now determine a tariff applicable to all
  customers

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Impact on municipalities and customers

• For NMBM 34 bulk increase will result in
  average 25 increase in tariffs
• cost of purchase of power will increase by
  R76.3m
• Cost of internal consumption increase by R3m
• Cost of supplying FBE increases by R4.7m
• commission on pre-paid sales increases by R440
  000
• ESKOM makes no proposals to deal with impact on
  the poor
• If NERSA limits the impact of the increase to
  the poor (to say 14.2) the tariff payable by
  other customers will need to increase by
  26.5-this emphasises need for NERSA to consider
  an affordability framework (addressing this thru
  tariffs introduces danger of unsustainable
  subsidisation)

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Impact (cont.)

• ESKOMs application addresses only its own
  capital investment programme does not consider
  the need for a balance between that other
  impacts on the economy
• Economy declined overall 6.4 in 1st quarter but
  manufacturing sector declined 22 in that period!
  (this sector is 80 of NMBM economy, NMBM IS 50
  of EC economy)
• ESKOMs dilatoriness has left industry unable to
  budget or plan
• If ESKOM destroys the manufacturing sector, it
  will not need to plan for growth in consumption

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ESKOMs application

• ESKOM has filed an interim application (now
  states it will not apply for further increase for
  09/10 in MYPD application)
• Assumes as a result that it need not comply with
  regulatory framework and its application is
  essentially devoid of motivation
• Does not address revenue requirement, nor
  peremptory requirements in S 42(3) nor does it
  disclose its financial circumstances
• Broad assumptions as to the need for additional
  generation capacity formed during a period of
  sustained growth do not detract from the need for
  customers to be given the opportunity to assess
  comment on the scale timing of ESKOMs
  investment programme in context of changed macro
  economy
• Application precludes interested parties from
  doing so
• NERSA should not attempt to glean ESKOMs
  intentions- application should be rejected as
  inadequate non-compliant

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ESKOMS Application (cont.)

• ESKOMs only motivation for the amount applied
  for (i.e. a non-binding opinion by NERSA in
  considering the 2008 MYPD amendment, plus an
  unmotivated inflation figure) is inadequate
• ESKOM advances no reason why it could not have
  submitted an interim application early enough
  to comply with MFMA, subject to discussions on
  funding model
• Unsupported argument that a properly motivated
  application would have produced a higher outcome
  is spurious-cannot be tested
• Consideration of this application by NERSA will
  allow an unmotivated increase to stand as the
  base figure for MYPD- NERSA should make any
  approval conditional on full motivation in MYPD
  of grounds for interim increase

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ESKOMs Application (cont.)

• ESKOM proceeds on basis of assumptions developed
  in response to generation crisis of 18 mths ago
• Ignores factors such as the shrinking of the
  economy, massive drop in interest rates, lowering
  of fuel prices, drop in international demand for
  coal effect on local prices etc
• Does not address potential rate of recovery of
  economy time to return to nett growth position
• Eskom ignores the role of its shareholder-
  different responsibilities to those it holds as
  national government
• Shareholder has for extended period reaped
  benefit of dividends built into revenue
  requirement (paid for by consumers)- response for
  need to inject further capital is to expect
  customers to fund this

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ESKOMs Application (cont.)

• Inadequacy of ESKOMs application is highlighted
  by its abrogation from a discussion of the impact
  of the external factors it refers to by merely
  stating that NERSA will have to implement a cost
  recovery mechanism
• Implementation of the environmental levy as part
  of the tariff will add another 8-
  municipalities have not taken this into account
  in budgets and have not been able to consult (NT
  recommended a total increase of 34)
• All the other cost drivers referred to will
  result in impact on tariffs-not sufficient for
  NERSA to merely rule that ESKOM will be entitled
  to increase its tariffs to account for actual
  costs incurred (under NERSA supervision or at
  all)-municipalities unable to provide for
  additional costs in financial year

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Conclusion

• ESKOM has made no attempt to properly structure
  or motivate its application or to comply with
  peremptory process has assumed an ability to
  force NERSA the Minister of Finance to sanction
  its failure
• NT has concluded that ESKOM has undermined
  the MFMA- it is intent on similarly undermining
  NERSA
• Unmotivated and untested conventional wisdom
  that a capital expansion programme is necessary
  should not allow ESKOMs blind assumption that
  its interests override all others to stand
  unchallenged
• NMBM accepts that ESKOMs failure to plan
  properly for the future will result in a need to
  develop more capacity-however this does not
  excuse its contemptuous failure to address the
  interests of municipalities their customers as
  well as the macro economic issues the Act
  prescribes
• ESKOM should be held to account-NERSA should
  refuse to consider its application
• Should it proceed to consider it make a
  ruling, it should be conscious that in doing so
  it is compounding ESKOMs failure to comply with
  the law risks its ruling being set aside

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ADV J G RICHARDS Nelson Mandela Bay Metropolitan
Municipality grichards_at_mandelametro.gov.za 041
5063208