Business Day
*Eskom's return on investment under fire at hearing*** *Linda Ensor, Business Day, Johannesburg, 16 January 2013*National Energy Regulator of South Africa (Nersa) commissioners on Tuesday probed the effect that a government-enforced revaluation of Eskom's assets has had on its much-higher provision for depreciation over the next five years.
Business organisations, businesses, the City of Cape Town, trade unions and a host of civil society organisations on Tuesday attended Nersa's hearings on Eskom's tariff application, to oppose its request for an average annual increase of 16% over five years.
Another cause for concern was the provision Eskom had made for the return on investment, which the hearings were told was too high.
The law and the government's electricity pricing policy lay down a tight framework within which Nersa has to make its third multiyear price determination (MYPD3).
But the Nersa member responsible for electricity and chairman of the hearing panel, Thembani Buluka, said on Tuesday there was nevertheless room for the regulator to exercise its discretion.
"We can still be creative about it within the law," he said.In terms of the government's electricity pricing policy, Eskom was required to revalue its assets by a multiplier of five so that it could generate sufficient cash flow. Its desired rate of return would be calculated on these revalued assets.
This, together with the use of depreciation replacement cost of accounting, meant the provision for depreciation has soared from R10bn in MYPD2 to R43bn at the end of the next five years.
Nersa allows Eskom's tariff to cover its operational costs, which include depreciation.
Eskom CEO Brian Dames told the hearing that the tariff application would allow the state-owned company to generate the R1-trillion in revenue that was required to cover its projected costs. These costs included R185bn for depreciation and a return on assets of R187bn --- which over the five-year period would rise from 0.9% at the start to 7.8% at the end, giving an average over the period of about 4%. Most of the returns would be used to cover interest costs of R140bn, with the rest retained as equity.
Eskom financial director Paul O'Flaherty said the company now required full depreciation replacement cost to achieve an investment grade rating, and was willing to accept a lower rate of return in the early years of the MYPD for this.
City of Cape Town director of electricity Les Rencontre told the hearing that Eskom's revaluation of assets and its use of depreciated replacement cost had added R64bn, or over 2%, to the depreciation charge. He urged that the "adjustment" in the value of the assets be disallowed as it added to the increase in tariffs.
Independent Democrats-Democratic Alliance (DA) MP Lance Greyling said the return on equity and depreciation costs reportedly comprised 34% of the "unreasonable" tariff increase applied for and should be "thoroughly interrogated".
He said he believed that Eskom should be depreciating only newly built assets and not the assets for which capital expenditure had already been paid off.
"The fact is that Eskom will never have to replace its entire fleet all at once, therefore it should not be entitled to claim depreciation on the replacement value of the entire fleet," Mr Greyling told the hearing.
The DA was adamant that 7.8% was far too generous a return, especially since JSE-listed companies had on average achieved returns of only 5.5% over the past decade. "Given that the only shareholder in this case is the South African government, this could in some ways be viewed as a double taxation on electricity consumers," Mr Greyling said.
"Globally, most electricity utilities only derive a return on equity amounting to 4%, and the DA feels this would be a far more realistic return for Eskom," he said.
National Union of Mineworkers deputy general secretary Karl Cloete also argued that the return on assets that Eskom wanted was not justified.
He said that after five years it would have accumulated R46bn for its shareholder, the government.
*From: http://www.bdlive.co.za/business/energy/2013/01/16/eskoms-return-on-investment-under-fire-at-hearing*
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