Nersa’s very expensive electricity tariff mistake and the president getting angry with civil servants dragging their feet, were good news for Mavuso.
Eskom needs more competition in how its tariffs are set as there is surely no greater sign of the urgent need for reform of the electricity sector than the way Eskom’s electricity tariffs are set, says Busisiwe Mavuso, CEO of Business Leadership South Africa (BLSA)
In her weekly newsletter she writes that the whole electrical system is far from the way prices should be set, through a competitive market where companies aim to sell to consumers by offering them better value.
She says that the current approach was made clear last week with the news that regulator Nersa agreed to a court order that Eskom can collect an extra R54 billion in tariffs over the next few years due to a mistake Nersa made back in January when setting Eskom’s tariffs.
“Eskom was already going to increase prices by almost 13% this year and now it will be able to increase them by several percentage points more,” says Mavuso.
She says that the calculations are based on the multi-year price determination (MYPD) method which includes several elements in setting tariffs over three years.
“One of those is the ‘regulatory clearing account’ mechanism that effectively enables backwards-looking adjustments to tariffs if costs turn out to be higher than Nersa expected they would be when the original tariffs were determined (or, in theory, if revenue is higher than expected).
“This has the farcical effect of allowing Eskom to charge tomorrow’s customers for yesterday’s costs.”
ALSO READ: Nersa blunder on Eskom’s electricity tariffs triggers public backlash
What if other companies worked like Nersa and Eskom?
Imagine of other companies worked like this, she said.
“We are in the midst of results season as large companies report on their financial performance for the first half of the year. Many of those reporting show how hard it is to grow revenue in this difficult economy.
“Companies really struggled to increase sales, simply because everyone is under pressure, from consumers to businesses. But despite those gloomy top lines, many companies can tell a positive story about how they have been able to control costs by finding more efficient ways to do things and thereby ensure their businesses are sustainable.”
Mavuso says if instead of this strong pressure to maintain cost discipline, these companies could simply pass last year’s costs onto next year’s customers by upping the prices they pay.
“Would we be seeing any cost discipline at all? Would companies make difficult decisions about what divisions to close or to cut back on bonuses, or drive more efficient production mechanisms? Of course not.”
She points out that Nersa tries to lean against this risk by determining whether costs were “prudently incurred” by Eskom before allowing recovery.
“That is nice in theory, but Nersa does not have the detailed operational knowledge to determine what is and is not prudent, just like I could not tell you about how much costs any other company could save if it faced genuine competition.
“It is also a political dead end because the costs are already incurred. The only decision is whether they should be paid by the consumer or by the government and therefore taxpayers.”
ALSO READ: Nersa confirms R54bn secret settlement with Eskom, consumers to pay
Regulatory clearing account model assumes consumers will keep paying Eskom
The regulatory clearing account model assumes that consumer demand is price inelastic. In other words, that no matter what the price, consumers will keep on paying. Therefore, recovery of last year’s costs is basically being extracted from the same consumers in theory.
“But that is changing. Even without a competitive electricity market, consumers do have more choices than ever before. They can turn to roof-top solar for example. Large companies can and are building their own electricity plants. Therefore, as Eskom prices go up, consumption of Eskom-produced electricity is going to continue decreasing.”
Mavuso says the only way to fix this absurdity is to accelerate the pathway to competitive electricity markets. “We are on that road already, with licensed electricity traders and private electricity generators able to build plants and supply customers.
“Eskom’s transmission division is ready to be unbundled into an independent system operator that can buy from the cheapest providers. But much of the regulatory detail still needs to be finalised and the grid infrastructure needed to connect many more producers across the country still needs to be built.
“We should be single-mindedly focused on getting that done. It is the only pathway to rational pricing of electricity and that is critical to enabling our economy to grow.”
ALSO READ: Justice minister Kubayi suspends DG Doc Mashabane as Madlanga commission delayed
We share the president’s anger over Madlanga Commission delays
Mavuso also pointed out that many South Africans can share President Cyril Ramaphosa’s anger over the delays to the start of the Madlanga Commission of inquiry into the police service and any meddling in its investigations.
“The commission should be getting to work this week with a deadline of three months to produce a preliminary report. The focus is on the explosive allegations made by KwaZulu-Natal police commissioner Nhlanhla Mkhwanazi about meddling in investigations of political assassinations in the province.
“The allegations strike at the heart of the police as an independent and trustworthy institution that serves the interests of justice. It is critical for the confidence of all South Africans that the allegations are properly investigated and we get proper insight.”
The delays led to two senior members of the department of justice, including director general Doc Mashabane, being sent notice of their potential suspension. Mavuso says it is good to see the president ordering swift action.
ALSO READ: Mkhwanazi ad hoc committee adopts draft terms of reference in ‘marathon’, ‘poorly managed’ meeting
We want to see more of this kind of accountability – maybe at Eskom and Nersa too?
“It is the kind of accountability we want to see much more of across government. When civil servants do not deliver, they must face the consequences. Of course, suspensions must be swiftly followed by disciplinary actions including dismissal, but it is a start.
“I have written about many other suspensions that happened in other parts of government in the last few months. It is starting to become a trend. If this age of accountability takes hold, it will start to shift the deep malaise that undermines public sector delivery.
“The president’s actions should be praised, both for decisively acting to get the Madlanga Commission on its feet and for furthering a culture of accountability.”
