South Africa Faces Higher Power Fee as Eskom Claim Approved

Jul 30, 2014 11:06 am ET

(Updates with comment from Eskom in sixth paragraph.)

July 30 (Bloomberg) -- South Africa’s energy regulator said Eskom Holdings SOC Ltd.’s costs exceeded projections in the three years through 2013, possibly enabling bigger power-price increases in April.

The company that provides 95 percent of South Africa’s electricity didn’t recover 7.8 billion rand ($735 million) of spending incurred from 2010 to 2013, the Pretoria-based regulator said in an e-mailed statement today. Eskom in August asked that it be allowed to get back 18.4 billion rand. Nersa, which last year said the utility can raise fees by an average of 8 percent in each of the five years through March 2018, didn’t say by how much more tariffs will increase.

“There will definitely be a tariff adjustment next year,” Charles Hlebela, a spokesman for Nersa, said by phone. For Eskom to recover the 7.8 billion rand, prices would have to increase by a further 2 percentage points to 5 percentage points, he said. The final increase has yet to be determined, Hlebela said.

Eskom is struggling to supply sufficient power to Africa’s second-biggest economy and is building new plants after years of underinvestment in generation. Its primary energy costs, mostly coal, rose at rates of 23 percent to 31 percent in each of the three years to 2013 and were 60.7 billion rand in 2013, exceeding the regulator’s projections by 34 percent, according Bloomberg calculations.

Decision Welcomed

The utility uses coal for about 85 percent of electricity, and has been running more expensive, diesel-fueled open-cycle gas turbines to meet demand.

“Eskom welcomes the decision regarding a balance in its favor,” it said in an e-mailed statement. It isn’t yet able to determine the effect of the decision on specific customer categories because the regulator still has to decide how the company will liquidate the balance on the so-called regulatory clearing account.

Eskom, which last year got half the 16 percent price increase it requested for the five years through March 2018, is seeking to plug a 225 billion-rand cashflow shortfall for the period as it struggles to keep the lights on.

Standard & Poor’s cut the utility’s rating to one notch above junk on June 13, in line with a similar reduction for South Africa. A week later, it placed Eskom on negative CreditWatch, meaning it has a 50 percent chance of being lowered again within 90 days, citing concern about revenue stagnating and government backing. S&P will announce the outcome of its review by the end of August.

South Africa’s inflation rate was 6.6 percent in June, a more than four-year high.

“This is the first step before tariff increases are authorized by Nersa,” Peter Attard Montalto, an emerging- markets economist at Nomura International Plc, said in an e- mailed note to clients. “Assuming an extra 5 percentage-point increase would add an additional 0.2 percentage point onto headline inflation from July,” rising to as much as 0.4 percentage point over a year, he said.