Eskom’s pricing proves we need competitive markets now - BLSA

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. The whole system is far from the way prices should be set - through a competitive market in which firms aim to sell to consumers by offering them better value than others.

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The current approach was made clear last week with the revelation that the regulator Nersa has agreed to a court order that Eskom can collect an extra R54 billion in tariffs over the next few years. That is because of a mistake Nersa made back in January when setting the tariffs Eskom can charge. 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.

The calculations are based on the multiyear price determination (MYPD) method which includes several elements in setting tariffs over three years. One of those is the “regulatory clearing account” (RCA) mechanism. This effectively enables backwards-looking adjustments to tariffs if costs turn out to be higher than Nersa had expected they would be when the original tariffs were determined (or, in theory, if revenue is higher than expected The RCA has the farcical effect of allowing Eskom to charge tomorrow's customers for yesterday's costs.

Imagine other companies worked like this! We are in the midst of results season as large companies report on their financial performance for the first half of the year.