Power utility Eskom on Thursday said it welcomed the National Energy Regulator of South Africa's (Nersa's) indication that it could work on a mechanism to pass higher primary energy costs on to consumers.

Eskom has long lobbied the regulator to introduce a pass-through pricing mechanism in much the same way that oil prices are passed on to the consumer through the petrol price.

The utility again raised the issue as part of its application for a further price increase of 53 percent in real terms of a nominal 60 percent in its 2008/09 financial year.

While Nersa refused Eskom's application for such a steep price hike, allowing an increase of a further 13.3 percent this year, the regulator did state that it would develop a mechanism that would take into account unforeseen changes in primary energy costs and other costs.

Significant step the regulator agreed to

"The mechanism must also take into account the efficiency of costs; the prudency with which the costs are incurred, Eskom's measures to control these costs and its ability to predict such costs at the time of the application," Nersa said at the end of its press statement related to its determination.

Essentially, such a pass-through mechanism would mean Eskom does not have to carry the risk of fluctuating coal and fuel costs that would otherwise have to be recovered by revenues.

"This is a significant step that the regulator has now agreed to," said Jacob Maroga, CEO of Eskom on Thursday.

The escalating costs of coal and diesel have left Eskom reeling in the last few months.

Eskom is tied in to a number of long-term contracts with coal producers, but it is also required to buy coal at market prices to satisfy hungry power plants being run harder than usual.

Sharp rise in the fuel price

Long-term contracts have some predictability; shorter-term contracts reflect the price volatility.

The coal purchased is also subject to transport costs, which are impacted upon by the recent sharp rise in the fuel price.

But besides primary energy costs, Eskom has also indicated that it would like the increase in capital costs to be passed on the consumer.

The utility is embarking on a massive capital expenditure programme that will see it spend R343-billion in the next five years, and as much as R1.3-trillion by 2025 to double its current capacity.

This capex is not financed directly through tariffs at present.

While the pass-through rule is unlikely to be applied before Eskom's next financial year, Maroga said the extent to which it could be applied immediately "would help".

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