Nhlanhla Gumede, head of electricity regulation at the National Energy Regulator of South Africa (Nersa), says a mistaken interpretation of the law by the regulator has led to way above inflation electricity tariff increases and an affordability crisis for consumers.
“We have been using an inappropriate pricing methodology which is not founded in the Electricity Regulation Act (ERA),” he says.
Between 2007 and 2022 Nersa-approved Eskom tariffs went up by 653% while inflation went up by 129%.Nersa is due to consider Eskom’s latest proposal for a 36% tariff increase in the next financial year, in addition to a 12.7% increase this year.“To determine Eskom tariffs we’ve been regulating Eskom revenue as if we’re still in the era of the 1987 Eskom Act,” Gumede says.
This act was repealed by the 2001 Eskom Conversion Act and the 2006 ERA.
“The objective of the ERA is to balance the interests of Eskom, consumers and the supply industry. I don’t think we have done this,” says Gumede, a metallurgical engineer and MBA from Wits University who was an adviser to international oil companies on regulatory frameworks, energy policy and strategy before being recruited by Nersa four years ago to improve its performance.
“Our law is very clear. It says we’re supposed to be regulating certain activities such as generation, transmission, distribution and trading. We have no mandate to regulate Eskom revenue; our mandate is to regulate the tariffs of those four things. We have not been doing that.
“We’ve brought on to ourselves all these things that may have been happening at Eskom that frankly have nothing to do with those regulated activities. That’s all come into the fold.” He says the question Nersa asks is whether Eskom is unprofitable, because then it needs to increase its tariffs.
The issue of affordability arises because we are regulating revenue, which is not within our mandate
“But the real question is whether the tariffs that are related to generation are cost-reflective, are the tariffs related to transmission cost-reflective, are the tariffs related to distribution and trading cost-reflective? That is where our answer lies, and we have not provided an answer to that.”
Nor, as the high court in Pretoria ruled on Monday, did Nersa ask any cost-of-supply questions before allowing dysfunctional and corrupt municipalities to impose exorbitant and unlawful electricity tariff hikes on ratepayers.
“This doesn’t just apply to municipalities, it applies to Eskom as well. It’s something we have been trying to correct.”
Meanwhile, electricity & energy minister Kgosientsho Ramokgopa has said he doesn’t think Nersa has the capacity to deal with tariff-related issues that are becoming increasingly complex as the electricity market is liberalised.
Will Nersa be out of its depth in the new era confirmed by the recent signing into law of amendments to the ERA?
“Not if it accepts the fact that it needs to change direction,” says Gumede. “This is overdue, but this bill now forces us to change. It’s not that we cannot transition; but to want to transition is the biggest hurdle at the moment.”
The electricity minister says the methodology used by Nersa to set electricity tariffs needs to be urgently reviewed in order to address affordability concerns.
“We tried to introduce an electricity price determination rule which recognises that the era of regulating an Eskom passed in 2001 with the Eskom Convergence Act.”
From that point already the national energy regulator should have been regulating generation separately, transmission separately, distribution separately and trading separately, he says.
“If we do that and do it efficiently we can move at least 20% faster to address affordability and efficiency and a lot of things.
“You need to ring-fence the costs that are about buying and selling electricity. Just that ring-fencing on its own will remove a lot of fat that has come into those costs. So the unbundling of the tariffs will liberate a lot of costs and translate into better affordability.”
The minister says that to address affordability a clear pricing policy needs to be set for the industry. Gumede says pricing policy has always required Nersa to unbundle tariffs, as has the ERA. They’ve just never done it, which is why there’s an electricity affordability crisis.“The issue of affordability arises because we are regulating revenue, which is not within our mandate.”
Why they are regulating Eskom revenue when it’s not in their mandate he has no idea, he says. But what it means is that “if Eskom makes a boo-boo, such as paying 10 times more than they should to build a power plant such as Kusile, that cost gets filtered completely into the system”.
“If we were regulating tariffs for generation it would not have arisen. Our tariffs should be cost-reflective so that when they come to apply and say, ‘we’re going to build Kusile for R500bn’, the cost should be carried by the shareholder, never filtered into the tariff and borne by consumers.”
If they’d done what they should have done, which was to regulate Kusile’s tariffs, not regulate Eskom’s revenue, consumers wouldn’t be facing an electricity affordability crisis, he says. “Because unfortunately when we regulate Eskom’s revenue we’re obliged to recognise the whole R500bn.”
Unbundled tariffs are in the existing pricing policy, so the pricing policy is not the cause of the problem, he says. The implementation of that policy by Nersa has been the problem, just as its implementation of the ERA has been the problem. The law has been “very clear”. The amendments have clarified it even further by including the word “unbundled”.
To the extent that implementation has been the problem Nersa must shoulder much of the blame for the affordability crisis, “because you are regulating revenue instead of regulating tariffs of those activities”.
How Nersa responds to Eskom’s 36% tariff proposal will depend on “do we continue to implement a methodology that is not based in the law, or do we accept that we should be regulating tariffs of unbundled services? If we implement the law and regulate tariffs of the licensed activity the 36% does not apply.”
Though he is primarily responsible for electricity regulation, Gumede is one of nine members of the Nersa board whose decision it will be.
The omens are not good.
“A decision was made in December 2023 to demand that Eskom tariff applications be made on an unbundled tariff applications basis, but this decision was rescinded by the majority of the nine members in June 2024.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.