There has been much press coverage regarding Eskom’s proposed tariff increases following a series of presentations at roadshows around the country. Nersa, the industry regulator, has been asked to approve an increase of 35%, compounded over 3 years, to fund the capital expansion programme necessary to assure continuity of supply. Airports Company of South Africa (Acsa) has requested a 132% increase on tariffs to reflect the expansion of facilities in the airport network; today, it appears as though the regulator will reject this application with the publication of a draft permission document where a 59% tariff increase is recommended for 2010/11.
The fragile recovery from the recession has seen a mixed performance across different industrial sectors whilst domestic expenditure fell in Q3 of 2009. Against this background, it is inconceivable that a business in a competitive market could introduce such tariff increases; why then, should they be considered for public enterprises?
The business of determining tariffs is through the application of pre-defined and agreed models. Whilst there is some variation between different models, the principles remain the same. The regulated entity is required to distinguish between the operating costs and the assets used to deliver both regulated and non-regulated services. In practice, the separation of costs is often best achieved using Activity-Based Costing (ABC) models which also trace indirect or overhead costs through to products and services. The tariff formula will allow for the recovery of operational costs (including depreciation) and provide for a return on the capital expenditure. The model will further facilitate provisions for over and under-recoveries in prior periods and adjustments based on economic indicators.
The debate surrounding Eskom’s proposed tariff increases is centred on the charge that the organisation is proposing to use the increased tariff revenue to fund its capital expenditure programme. In the current market, Eskom has been unsuccessful in securing long-term funding for the capital expansion plan. The alternative of interruptions in supply cannot be considered a serious option. Undoubtedly, many of Eskom’s current problems can be laid at the door of politicians who were unable to see the case for increasing generation capacity in the mid-90’s. The problem may yet return to the government, if calls for Nersa to recuse itself from the process are successful. If that happens, the key to future tariffs will depend upon the extent to which the Treasury can support Eskom.
Acsa faces a different dilemma. A massive capital investment programme, including the construction of the new King Shaka International airport in Durban, is culminating in the same year to coincide with the 2010 world cup. The tariff model enables ACSA to recover capital expenditure in the previous 5 years over the next 5-year cycle. There seems to be no accommodation for smoothing tariff increases, something which could have been achieved by the earlier introduction of tariff increases which could be offset against rises in successive years. The aviation industry argues that the acceleration of many of Acsa’s capital projects and the R6.7bn decision to construct the new Durban airport have been politically motivated and do not reflect industry demand. Whilst the regulator has to balance the interests of a recession-hit aviation industry with those of Acsa, the decision to limit the increase is interesting given that the tariff model has been in place for several years now. No wonder Acsa has commented that “We are hopeful that our regulating committee will share its approaches and models with us to ensure our full appreciation of the areas of difference.”
The opinions expressed are based on information in the public domain at the time of writing.