OREANDA-NEWS. Fitch Ratings says the recent announcement by National Energy Regulator of South Africa (NERSA) to award a tariff increase of 9.4% compared with Eskom Holdings SOC Ltd's (Eskom) (Long-term local currency IDR BBB/Stable) request of 16.6% will result in an under-recovery of operating costs (incurred in the financial year ended March 2014).

Fitch expects Eskom to take measures to improve cost savings by focusing on business productivity and reducing primary energy costs. The utility could also use the regulatory clearing account (RCA) and submit the fourth-multiyear price determination to help support its financial profile before turning to the government for additional support.

Fitch had assumed a tariff increase for Eskom of approximately 12% for FY16/17 effective from 1 April 2016. NERSA's decision to award a lower tariff increase has a mildly negative impact on the key credit metrics of funds from operations (FFO) interest coverage or FFO adjusted leverage ratios; however, this does not alter our rating assessment, which continues to be driven by sovereign support.

NERSA's tariff determination allows Eskom to recover ZAR11.2bn compared with the ZAR22.8bn originally requested, the under-recovery of which may lead to operational and liquidity pressure, placing strain on Eskom's standalone credit profile of 'B-'. Fitch also sees a risk of the national grid coming under pressure if Eskom reduces usage of open cycle gas turbines given the costs of fuel has not been fully recovered under the RCA applications with NERSA.