Transcript Document

1
Eskom’s application for Multi-Year Price
Determination (MYPD) Rule Changes
Avianto - 2 October 2007
2
Recapping on the MYPD
•
•
In February 2006, the NER had made a determination of the revenues
allowed for Eskom Generation, Transmission and Distribution for the
period 1 April 2006 to 31 March 2009
The allowed revenues and the percentage price increase were as follows:
R’million
2006/7
2007/8
2008/9
Allowed revenues
36 693
40 084
44 506
5.1%
5.9%
6.2%
Percentage price increase
•
•
On 30 April 2007, Eskom made an urgent application for rule changes
to be applied to the current MYPD
Eskom is proposing that the rule changes be applied in the last year of
the MYPD being 2008/9 and in the next MYPD (2009-2012)
3
Stakeholder comments received
• NERSA presents a summary of stakeholder comments
received in response to the consultation paper of
Eskom’s application for Multi-Year Price Determination
(MYPD) rule changes
• Comments have been received from 5 Stakeholders
which are Chamber of Mines, EDI, EIUG, Eskom and
Sasol
• NERSA has sought to represent stakeholder views fairly
and accurately while still providing the information in a
format suitable for reference.
4
Issues for discussion
Eskom’s application – Mbulelo Ncetezo
Eskom Risk Position
Primary Energy costs
Variance on Capital Expenditure
Triggers for re-opener
Once-Off Adjustment
General issues and Way forward
5
Summary
• Eskom approached the Energy Regulator requesting a
rule change within the MYPD on 30 April 2007
• Eskom focussed on the following areas:
 Primary Energy cost variances
 Variances on capital expenditure
 Rules on a trigger for re-opener
• If the rules are accepted, they apply with immediate
effect
• Eskom is willing to absorb under recoveries of the first
two years of the MYPD i.e. 2006/7 and 2007/8
• If Eskom’s request is accepted by the Energy Regulator,
the resultant adjustment is 18% price increase
6
Eskom’s proposals for rule change
• Primary Energy cost treatment
 On a yearly basis within the MYPD, just before the
end of the financial year, a revision of primary energy
forecasts be made
 New Forecasts be used to set tariffs for the following
year after a prudency test by NERSA
 This will results in a full pass-through of the variances
and
 Involves an annual audit of Eskom’s submission by
NERSA
7
Eskom’s proposals for rule change
• Variance on capital expenditure
 A similar rule as Primary Energy (i.e. an annual basis prior to the
end of a financial year within MYPD, Eskom submit actual year
to date Capex with forecast to year end)
 The return and depreciation for variances will be rolled into next
year’s for allowed revenue of next year
 Involves annual audit of Eskom submission by NERSA
8
Eskom’s proposals for rule change
• Trigger for a re-opener
 Current re-opener based on balance of correction factor (only
tracks revenue variances, not costs)
 Does not track uncertainties in stage of expansion and demand
growth
 A re-opener based on adjusted earnings band
 It strikes a balance between MYPD incentives and allocation of
risk
 Re-opening if change in costs and revenues pushes rate of return
outside allowed bands
 If accepted, be applied immediately
9
Conclusions on Eskom’s application
• The relief be considered after a full analysis of Eskom short term
risk and mitigation plan
• NERSA to determine risk mechanism for the next MYPD sharing
risk to Eskom and customers in accordance to the ability to manage
risks
• Aspects of primary energy volatility be considered in the next MYPD
• Eskom provides a clear report on how it is planning to meet short
term security of supply risks
• Before any final decision, NERSA will review procedures and costs
projections, to consider the extent and nature of cost recovery and
any other appropriate regulatory mechanisms
10
Conclusions on Eskom’s application
2008/9
Scenario
1
Base case MYPD
6.2%
2
Adjusted capital expenditure
only without primary energy
8.0%
3
Adjusted primary energy only
without capital expenditure
11.0%
4
Both adjusted primary energy
and capital expenditure
14.2%
5
Eskom proposed
18.7%
11
Issues for discussion
Eskom’s application
Eskom Risk Position – Brian Sechotlho
Primary Energy costs
Variance on Capital Expenditure
Triggers for re-opener
Once-Off Adjustment
General issues and Way forward
12
Conclusions on Eskom’s application
#1 Your views are requested
on the overall request by
Eskom for rule changes
and on NERSA
preliminary conclusions
on these proposals
•
•
•
•
•
Need for full short and long-term risk
quantification and auditing
What mechanism is used for
regulating PE costs and aligning it
with MYPD?
Support for request for Eskom to
provide report on short-term risk
mitigation strategy. Report to also be
used by customers for better
assessment of security of supply risks
Preference for rule change to
implemented in 2008/9 and then
carried forward into MYPD2
Eskom’s opinion is that they have
already provided a risk review of the
PE costs but will provide a report to
NERSA soon. A view is also suggested
that service quality mechanism be put
in place to ensure customer needs are
addressed.
13
Conclusions on Eskom’s application
#2 Your views are requested
on Eskom’s request for
additional revenues and
NERSA overall approach
in evaluating Eskom’s
application
•
•
The application was for a rule change
followed by revenue adjustment
Preference still exists for this approach
or rather
– Ad-hoc revenue adjustment followed by
PE cost adjustment mechanism
•
•
Noted Eskom’s agreement to forego
revenue adjustments for shortfalls in
first 2 years. However, Eskom still
posted a profit of R6 454 m. Any
adjustment would have resulted in
significant over-recovery for Eskom
Eskom should not be allowed to
maintain a high cost of operation and
also be allowed to apply for increased
PE and CAPEX costs
14
Conclusions on Eskom’s application
- Changing parameters
#3 Your views are requested
regarding the changes in
the key business
parameters of Eskom and
their effect on Eskom’s
revenues and costs
•
•
•
•
•
•
Agreed that Eskom should increase their
baseload Gx capacity. Coal not preferred
option but rather nuclear
National growth not new to industry and
Eskom should have foreseen it;
Agreed that commodity and metal prices
has increased more than average inflation
Agreed that Eskom is exposed to external
cost pressures. However increase in
marginal cost due to operational failures
and subsequent contingency plans should
be absorbed by Eskom. The cost
associated with 2006 blackouts should
form part of this application
Increasing prices should not lead to
devastating effect on EDI
Support for broad conclusion by NERSA
15
Conclusions on Eskom’s application
- Changing parameters
#4 Your views are required
regarding the expectations
for customers to start
paying for future capacity
or letting future
customers pay if Eskom is
to be able to finance the
expansion programme
and if customers are to see
a reasonably predictable
price path
•
•
•
•
Present customers have benefited
from investments made several
decades ago. Advantage of cost of
service and MYPD is that it
spreads costs over time
Concern that even with price
increase for financial viability,
such prices are set against a lack
of cost-reflective tariffs in SA
Imperative that customers must
pay for economic cost of electricity
as well as for future capacity –
prices must reflect replacement
cost
Agreed that drivers in increase PE
cost be analysed fully
16
Summary conclusion on Eskom’s application
- Changing parameters
#4 Your views are required
regarding the expectations
for customers to start
paying for future capacity
or letting future
customers pay if Eskom is
to be able to finance the
expansion programme
and if customers are to see
a reasonably predictable
price path
•
•
•
Coal cost production is a volume business
– per unit cost should therefore decrease
as production increases as fixed cost
contribution lowers. Not clear how far
higher volumes from locked collieries
were able to mitigate the costs associated
with imports or, alternatively, if risks of
lower than contracted delivery from tied
collieries are borne exclusively by Eskom
Existing customers will have to
contribute to new Gx as the full capacity
will not taken up in the short-term by
new customers – existing customers will
benefit from spare capacity and reliable
supply
Prices should cover for real cost based
expenditures and not future capital
charges (which Eskom should provide)
17
Conclusions on Eskom’s application
- Changing parameters
#5 Your views are required
regarding the envisaged
significant increases in
prices followed by higher
levels of continuing price
increases than those
planned in 2005 when the
MYPD was developed and
your views on prices
reaching economic levels
in 10 to 12 yrs rather than
35 to 30 yrs as was the
case in previously
• Price increases of 12 – 13 %
above inflation will have severe
impact on intensive users due
to the long-term nature of their
operations
– Risk impact to the economy
needs to be fully understood
and the message also be sent
to foreign investors
– Ripple effect of inconsistent
price increases may lead to
perceived unregulated market
18
Conclusions on Eskom’s application
- Changing parameters
#5 Your views are required
regarding the envisaged
significant increases in
prices followed by higher
levels of continuing price
increases than those
planned in 2005 when the
MYPD was developed and
your views on prices
reaching economic levels
in 10 to 12 yrs rather than
35 to 30 yrs as was the
case in previously
• Independent studies show that
prices are too low for
sustainability with greater
concern being on reliability of
supply
• Even without any rule change,
there would still be a price
spike in 2009/10 under same
MYPD – prudent to intervene
earlier
• Current mechanism does not
address higher coal cost
production and international
plant price increases – heart of
matter
19
Conclusions on Eskom’s application
- Changing parameters
#6 Your views are required
regarding the blanket
pass- through protection
to Eskom without any
evident strategy to bring
under control those costs
that are perceived to be
out of control
• Eskom is not requesting a
blanket pass-through but
rather that PE costs consists of
a higher uncontrollable
component and must therefore
be managed as pass-through
item
• Eskom accepts need for
appropriate incentives
• Why did Eskom not fix coal
prices with their suppliers in
line with the MYPD? The risk
is simply passed downstream
whilst there was an accepted
price increase arrangement
20
Conclusions on Eskom’s application
- Changing parameters
#7 Your views are requested
on the process to be
followed to arrive at a
final decision as outlined
above
•
•
•
•
•
Process supported in principle;
Ambitious to expect to develop the
main aspects of the rule changes by 20
December and would only be feasible
had NERSA accepted Eskom’s
proposal regarding rule changes for
2008/9;
One of the reasons for the present
dilemma is the MYPD1 was developed
in a highly compressed programme –
internationally 24 months
Propose that the adjustments only be
for 2008/9 and rule changes only be
done within the MYPD2 cycle i.e. not
on 20 December
One stakeholder proposes a multi task
team (lead by NERSA) to recommend
rule changes
21
Industry specific issues - Eskom in particular
#8 Your views are requested
with regard to industry
pressures mentioned
above specifically ASGISA
and its effects on
electricity prices and the
acceleration of these
prices to LRMC in a
shorter time horizon than
in the past and on the
increased operational risk
of Eskom as evidence with
the 2006 blackouts and
exposure in the coal
market due to short-term
security of supply
•
•
•
Paragraph not clear. Term LRMC
need clearer definition. If this
term means the cost of new
capacity, it’s not clear how this can
happen since in 10 years most of
the capacity will still be old and
written down
Had prices been at LRMC levels,
the expansion programme would
have been fundable with minimal
price increases
Reason for the inevitable price
increases is the CAPEX
programme forces inefficient
prices to LRMC levels
22
Industry specific issues - Eskom in particular
#8 Your views are requested
with regard to industry
pressures mentioned
above specifically ASGISA
and its effects on
electricity prices and the
acceleration of these
prices to LRMC in a
shorter time horizon than
in the past and on the
increased operational risk
of Eskom as evidence with
the 2006 blackouts and
exposure in the coal
market due to short-term
security of supply
•
•
•
2006 blackouts were evidence of
tight network capacity conditions
that Eskom is currently operating
under – need to strengthening
certain projects in the Cape that
were planned for later years
Faster growth rate translates to
higher demand for coal creating a
sellers market in the process
Natural market forces will lead to
higher demand and no reserve
margin, it can no longer substitute
artificially lower prices. Why is
this all of a sudden so new?
23
Summary of Eskom’s risk position
#9 Your views are requested
regarding the high level
risk position of Eskom as
perceived by NERSA staff
and as a basis for
concluding on a need for
intervention to assist
Eskom in its ability to
finance it capital
expansion programme
•
•
•
•
•
High risk levels are acknowledged
but Eskom should also reduce
operating costs to mitigate and
not only rely on inflated tariffs
Eskom requests NERSA to provide
details of the required for clear
risk quantifications
Agrees that Eskom may not be
able to fund its capital programme
Agreed that current mechanism is
inadequate and needs to be
reviewed
Eskom does not agree with the
conclusions by NERSA that it was
covered for risk to a net cover of
R3 bn – Eskom has given details
of this as part of disputing
24
Need for Increased tariffs to cover Risks
#10 Your views are requested
regarding using electricity
tariffs to cover the risks
and on the possible equity
injection, adoption of a
single buyer model or
selling-off of Eskom’s
assets to finance capital
projects
•
•
•
•
•
•
Support for increased tariffs to cover
CAPEX expansion risks
Eskom would still maintain its
competitive advantage of lower prices
Eskom’s analysis show that financing
pressures would come as early as
2008/9 if no adjustments are made to
revenues
Equity injection is not a viable option
in the long-term given the size of the
expansion programme
Equity injection more preferred
Single buyer model not preferred due
to technological limitations and
possible higher return by private
investors
25
Issues for discussion
Eskom’s application
Eskom Risk Position
Primary Energy costs – Willie Boeije
Variance on Capital Expenditure
Triggers for re-opener
Once-Off Adjustment
General issues and Way forward
26
Primary Energy costs
#11 Your views are requested
regarding the rules as
proposed by Eskom and
their implications on the
management of risks
within the MYPD for both
Eskom and its customers
• Eskom should have backed up
the primary energy cost by
appropriate contracts to
mitigate against the risk and
stay within the MYPD
• Further clarification of
Eskom’s proposal is
appropriate
• Eskom is not proposing
“blanket pass-through” but an
adjustment mechanism that
ensures no windfall gains or
losses
27
Primary Energy costs
#12 Your views are requested
on the current mechanism
within the MYPD to
manage kWh above the
fixed level output using
Majuba price presented in
the MYPD and the
adequacy of such
mechanism in managing
the risks. Proposals on
other mechanisms are
very welcome and will be
considered by NERSA staff
in their final
recommendations to the
Energy Regulator
•
•
Generally stakeholders concur with the
principle
One stakeholder argues that the use of
the fuel cost of the Majuba power
station as a proxy is inadequate
because:
- The principle assumes that the fuel
cost of Majuba is predictable and
controllable whereas the reality is
Majuba obtains all its fuel from a
variety of short and medium term
contract which implies a very high
degree of risk and uncertainty
regarding the price to be paid for that
fuel
- It assumes that the incremental
electricity demand can all be met by
Majuba power station.
28
Primary Energy costs
#13 Your views are requested on
the proposals presented by
NERSA staff and their views
on Eskom’s proposed rule
change for PE
• Generally stakeholders support
the proposals;
• One stakeholder does not
agree that the PE costs
problem was a planning and
risk profiling issue
• PE costs for MYPD 1 were
based on the best forecasts
available at the point in time
and that there should be a
pass-through of PE costs
subject to an analysis of
prudent cost by NERSA
29
Primary Energy costs
#14 Views are asked on the
once-off pass-through
adjustment for 2008/9
without a rule change as
an intervention to ensure
the sustainability of
Eskom’s business
• A once-off pass through will
only alleviate the present
problem without addressing
similar future problems.
• Others would prefer that the
rule changes as proposed be
implemented for 2008/9
regarding PE and Capex costs
as there is still some
uncertainty in regard to costs
for 2008/9
30
Primary Energy costs
#15 Views are asked on
letting the aspect of PE
cost volatility to be
considered in the
mechanism to be used for
the next MYPD
• Primary energy costs must
have back-to-back agreements
to ensure primary energy cost
volatility is covered
• By not adequately considering
the aspects of costs volatility, it
forces projections to be made
of inherently unpredictable
issues
31
Primary Energy costs
#16 Views are asked on
retaining incentives for
Eskom to manage PE costs
and therefore the use of
dead-band below and above
central PE cost estimate to
ensure that the expenditure
considered for pass-through
is material
• Stakeholders support
incentives where there is
stability and forward costs can
be forecast with accuracy
• Where volatility exists, overly
mechanistic incentives
structures leads to poor
outcome
• Dead-band for PE cost is not
an appropriate mechanism, it
provides a rough measure for
allocating variances
32
Primary Energy costs
#17 Views are asked on pass
through of gas turbine
generation costs
•
Generally stakeholders agree
33
Issues for discussion
Eskom’s application
Eskom Risk Position
Primary Energy costs
Variance on Capital Expenditure – Juwith
Magabe
Triggers for re-opener
Once-Off Adjustment
General issues and Way forward
34
Views on Eskom’s proposals – Capital
Expenditure
#18 Comments are asked on
how the differences
between the investment
profile and forecasts used
for revenue setting must
be treated and on how the
Regulatory Asset Base
should be adjusted for
actual expenditure
•
•
•
•
There is a need for adjusting the
2008/09 allowed return on assets to
take into account accelerated and
increased CAPEX
Prudent cost based variances in
CAPEX must be applied to the RAB
Asset base must be adjusted for the
actual costs incurred in commissioning
the asset or strengthening the network
Eskom is exposed to external cost
pressures beyond its control but
increase in marginal cost of production
due to operational failures and the
subsequent expensive contingency
plans should be absorbed by Eskom
e.g. capital costs associated with the
2006 blackouts
35
Views on Eskom’s proposals – Capital
Expenditure
#19 Comments are asked on
whether Eskom should be
granted interim relief or
not based on changes in
the capital investment
profile and the costs
thereof
•
•
•
•
The construction of additional
Generation plants is imperative and in
the interest of future security of supply
we support NERSA’ scenario 4 (
adjustment for both PE and CAPEX)
Eskom should be given an immediate
relief through return on capital and
depreciation for 2008/09 financial
year
The introduction of interim relief will
defeat the purpose of the MYPD i.e.
diminish certainty provided by multi
year determination
There is no doubt that Eskom requires
additional revenue in the foreseeable
future to undertake the necessary
expansion of its Generation capacity
36
Views on Eskom’s proposals – Capital
Expenditure
#20 Comments are asked on
the extent to which an
adjustment on the return
and depreciation on
accelerated capital
expenditure (if granted)
must start to be recovered,
2008/9 or in the next
MYPD
•
•
•
•
Immediate cash flow is required to
relieve Eskom of the current capital
constraints due to the fact that they
have absorbed under recoveries for
2006/07 and 2007/08
If adjustment is delayed to the next
MYPD cycle, Eskom would require an
adjustment for 2006/07 to 2008/09 in
order to compensate for higher CAPEX
costs
Prices should cover for real costs based
on expenditure and not for future
capital charges.
Adjustment on return and
depreciation on accelerated CAPEX
must start in the next MYPD as
provisional expenditure has already
been built into the tariffs
37
Views on Eskom’s proposals – Capital
Expenditure
#21 Your views are requested
on the overall treatment of
Capital expenditure
variances whether due to
timing differences or
differences in costs within
a given MYPD whilst
giving due attention to
efficient planning by the
utility being regulated
•
•
•
It is imperative that capital
expenditure variances due to
timing differences are adjusted for
as per Eskom proposal (4.2 of the
consultation paper)
Agree that Eskom is exposed to
external cost pressures beyond its
control such as equipment cost
escalation
The MYPD rules have addressed
this matter and we support
continuation of the treatment of
timing based changes in CAPEX
38
Issues for discussion
Eskom’s application
Eskom Risk Position
Primary Energy costs
Variance on Capital Expenditure
Triggers for re-opener – Thifheli Mashapa
Once-Off Adjustment
General issues and Way forward
39
Trigger for re-opener
#22 Your views are
requested on Eskom
proposed rules that will
govern the trigger for reopening the MYPD during
its control period.
Alternative proposals will
be happily welcome and
considered prior to
finalisation of the MYPD
mechanism
•
•
•
•
Agreement on the concept of revisiting the re-opener
Earnings band has been proposed
and it carries incentives on certain
costs categories
However one stakeholder raised
the fact that the trigger should
only re-open in extreme
conditions and ensure a stable
energy market
It shouldn’t take away certainty of
MYPD
40
Trigger for re-opener
#23 Your views are
requested on NERSA
responses to the proposals
by Eskom of the trigger for
a re-opener and also on
the comment made by
NERSA that any trigger for
re-opening should be set
based on balance of risk to
Eskom and therefore that
this can only be
determined once a
thorough review of
Eskom’s business risk and
mitigation strategy has
been applied and will only
be set for the next MYPD
• In general stakeholders
support the comment raised
• Earnings band would have a
number of beneficial
characteristics
• Mechanism proposed not in
isolation with other rules
41
Issues for discussion
Eskom’s application
Eskom Risk Position
Primary Energy costs
Variance on Capital Expenditure
Triggers for re-opener
Once-Off Adjustment – Pule Mothiba
General issues and Way forward
42
Once-Off adjustment
#24 Your views are
requested on the
independent projections
of primary energy costs by
NERSA especially that is
based on Eskom’s results
for 2006/7 and the NIRP
assumptions
• Pithead collieries fell short of
their obligations, why no
penalties for no delivery on pit
head collieries
• PE costs submitted in Eskom's’
application are already
conservative (already reduced
from initial estimates)
• NERSA analysis of PE costs
need to be shared with Eskom
43
Once-Off adjustment
#25 Your views are further
requested on the
parameters (3.8%
increases in energy sent
out and CPI) used in the
independent projections
• Use of CPI in forecast of fuel
costs is overly simplistic and
prone to error;
• Coal cost increases above CPI
44
Once-Off adjustment
#26 You are requested to
comment on the
assumptions made on
realistic forecast on
energy output from base
load generation plant
• Planning and forecasting of
energy output is highly
complex
• There are limitations to Eskom
in meeting electric energy
produced and peak demand
• NERSA need to share
assumptions with Eskom
45
Once-Off adjustment
#27 Stakeholders are
requested to comment on
whether customer funded
connections/projects
should be included or
excluded when
determining the
adjustment return on
Eskom’s accelerated and
increased capital
expenditure
• The current practice in the
MYPD is to exclude them
• Stakeholders agree customer
funded projects should be
excluded
• Connection charges do not
form part of price increase and
tariff charges
46
Once-Off adjustment
#28 Stakeholders are
requested to comment on
whether Eskom’ Corporate
Division’s capital
expenditure should be
allowed a return as part of
the Regulatory Asset Base
or Centrally Administered
Charges
• Corporate expenditure is
incurred for the benefit of
generation, transmission and
distribution divisions and
allocated to this divisions
• A return on corporate assets
should be disallowed as it is
included in Eskom holding
capital expenditure
47
Once-Off adjustment
#29 Your views are
requested regarding the
price levels presented in
the scenarios above.
Should the Regulator
consider only primary
energy or capital
expenditure or both of
them in Eskom’s rule
change application
• There should be consideration
for both PE and capex in the
application
• Utility should be compensated
for prudent costs plus a fair
rate of return
• Eskom’s PE and capital
expenditure costs recovers
prudent costs plus fair rate of
return
• Options 1 to 3 are not viable
• Scenario 5 includes
adjustments for both PE and
capex
48
Issues for discussion
Eskom’s application
Eskom Risk Position
Primary Energy costs
Variance on Capital Expenditure
Triggers for re-opener
Once-Off Adjustment
General issues and Way forward – Mbulelo
Ncetezo
49
General comments
#General comments
•
•
•
•
Rule changes at this stage of EDI
restructuring have a negative influence
on the establishment of REDs
Tariffs and Equity injection are only
two viable options, further
investigations should be done
The introduction of the MYPD
provided a measure of certainty
regarding electricity prices, the rule
changes must not detract from that
purpose
Some stakeholders support the
undertaking that Eskom application
should only be done when a full
analysis of Eskom’s risks and
mitigation plans for those risks have
been provided
50
Way forward
1)
2)
3)
16 Oct 2007 – Electricity Subcommittee
18 Oct 2007 – Publish for public hearing
22 Nov 2007 – Public hearing
1)
2)
4)
5)
6)
The closing date for registration is 18 Nov 2007
Dedicated e-mail address for this is [email protected]
6 Dec 2007 – Subcommittee considers panel report from Public
Hearing
20 Dec 2007 – Energy Regulator considers final report
21 Dec 2007 – Energy Regulator decision published – All media
types
51