Revised Eskom tariff application: Breaking Eskom's monopoly is now the only choice
The fact that Eskom's tariff increase application appears to have been revised to 35% does little to dampen concerns about possible inflationary effects of such a tariff hike. Indeed, a 35% increase will probably still push inflation outside of upper target range of 6% - and will have a profound effect across the board for South African consumers and businesses alike. This tariff hike is the consequence of an array of failings by the ANC government and Eskom management. It follows years of mismanagement of coal stocks, inadequate risk management, lack of proper maintenance and massive ‘non-technical losses' within Eskom, and, more broadly, the ANC's blocking of attempts to build new power plants and tendency to interfere for political purposes at every possible opportunity - as was the case with their attempts to prevent Jacob Maroga's departure as CEO last month.
These issues all need to be acknowledged, but what we really need now is a solution. And the fact is that whether Eskom's tariff application is eventually 35% or 45% does not change the fact that this is the third major tariff hike in as many years. Each time we have been told that Eskom was getting its house in order; each time we have been left disappointed. The ongoing tariff hikes are simply not sustainable, and their implications for inflation and the wider health of the economy must now be given proper consideration.
What we have yet to see is any real acknowledgment from Eskom that there are alternative way in which to secure South Africa's power generation needs. To be sure, capital does need to be raised - there is certainly no question that Eskom needs funding to the tune of about R400bn right now to expand its operational capacity. But we need to have a debate in South Africa about whether endless tariff hikes are the only solution. We think there is a strong case for putting an alternative plan on the table.
The fact that Eskom is able to reduce their tariff application, given the problematic situation, goes to show that there is still hope to design a hybrid funding model that could serve to mitigate the problems associated with higher electricity prices. This plan needs to provide for the injection of private capital in power generation in South Africa. We should not be surprised that Eskom is in the state it is in - it holds a monopoly over power production, and its decision making structures are buried deep within the power structures of the state. This is a setup designed to fail. The ANC needs to put ideological blindness to partial privatization to one side, and acknowledge that the crisis we face can never be properly resolved without breaking Eskom's monopoly.
An outline of our proposals for Eskom is contained in the document which follows below, which is a copy of our submission to the National Energy Regulator of South Africa earlier this year. In short, we believe that Eskom's generating capacity needs to be separated from distribution. This would allow for direct market competition between generators. Bringing independent power producers into play is right now the only real hope for creating the market efficiencies needed to guarantee South Africa's future energy supplies.
APPLICATION BY ESKOM FOR A TARIFF INCREASE: WRITTEN SUBMISSION TO THE NATIONAL ENERGY REGULATOR OF SOUTH AFRICA BY THE DEMOCRATIC ALLIANCE
Introduction
On 19 March 2008, the Democratic Alliance (DA) by means of a media statement urgently requested an independent commission of enquiry to assess Eskom's management of the electricity crisis, its current production capacity and its ability to ensure a continuous future supply.
As such, the DA proposes that until completion of the enquiry, no application for an increase (as formulated in Eskom's recent application) be entertained by the National Energy Regulator of South Africa (NERSA).
Background
1. In 1998 Cabinet instructed Eskom not to proceed with the building of new power generation capacity.
2. The Minerals and Energy White Paper issued in 1998 warned government that due to growing demand, South Africa would run out of power by 2007/8 should steps not be taken soon to build new power stations.
3. Government in May 2001 decided that steps to reform the electricity supply industry would be implemented.
4. Government continually made assurances that there was no power crisis. As recently as March 2006, former Public Enterprises Minister Alec Erwin denied there was a national power crisis and told a joint sitting of three parliamentary committees that "there is no national energy crisis". In August 2006, Erwin also confirmed this in an answer to a DA parliamentary question by saying: "we are confident of a reliable electricity supply in the future".
Eskom Management
5. Mismanagement of Eskom was, inter alia, evident from the following:
a. The low level of coal stocks at numerous power stations, indicating poor primary energy management;
b. The poor quality of coal and inadequate stock-piling of coal reserves reflecting little power asset management;
c. The slow flow of coal transported by road from mines to power stations - with contractors who are unable to deliver on time;
d. The awarding of bonuses to the executive board with no regard for the crisis;
e. The failure to conduct proper credit control;
f. The total ineptitude in minimizing so-called non-technical losses, which include theft, internal fraud and mismanagement. Currently non-technical losses account for 10 percent, or appropriately 3000Mw. If this were properly managed and controlled, the need for load shedding would not exist;
g. The loss of skills at all levels in Eskom since the mid-1990s with the resultant reduction in effectiveness;
h. Lack of adequate maintenance at power stations over the past decade;
i. Little risk management as the electricity reserve margin started to decline;
j. Inadequate price increases in recent years to finance additional infrastructure for sustainable power supply; and,
k. Poor planning, considering Eskom's crucial role in the Growth Employment and Redistribution (GEAR) and Accelerated and Shared Growth Initiative for South Africa (AsgiSA) government economic policies.
6. The above has led to a serious loss of confidence in the ability of Eskom to manage its own affairs, both from a financial and an operational perspective.
7. While it could reasonably be expected that Eskom would address the current shortfall in electricity generated by virtue of substantially reducing the above stated non-technical losses and thereby eliminating the need for load shedding, Eskom has steadfastly ignored these issues while embarking on a build programme to construct new power stations.
Failure by Government
8. In his 8 February 2008 State of the Nation Address, President Mbeki apologized on behalf of government and Eskom for the national electricity crisis. In his 4 June 2009 State of the Nation Address, President Zuma did not refer to the Eskom financial crisis at all.
9. As stated, Cabinet prohibited Eskom in the past from building further power stations. This was done on the rationale that investment by the private sector would follow.
10. This premise could only be true on the assumption that the necessary changes to the regulatory environment to encourage private sector involvement would have been effected.
11. However, government failed to introduce any measure to meaningfully facilitate the introduction of private sector investment, which by its very nature entails substantive investments of billions of rand over long periods.
12. Failure by government to introduce appropriate measures such as separating Eskom's generation capacity from distribution, allowing for direct market competition between generators to supply electricity directly to consumers in an open market and introducing legislative and other measures for the unbundling of Eskom and privatization of its electricity power generators, has led to a lack of interest in the local market.
13. In addition, there has been a lack of consensus with regard to the root causes of the crisis between Cabinet and Eskom.
Government as shareholder
14. Government, as the sole shareholder in Eskom, has continued to reap rewards from Eskom in being paid dividends. Since 2000 the government has received approximately R13 billion in tax from Eskom.
Dissolution of the Executive Board of Eskom
15. Government as the 100 percent shareholder of Eskom, has the legal standing and ability to remove the entire Eskom board due to non-performance and reckless behaviour of a government institution at an annual or specially convened meeting by the shareholder, being government.
16. By allowing the payment of bonuses to the executive board, government is condoning the failure of Eskom to fulfill its mandate to the public. In fact, the approval by the former Minister Erwin of Public Enterprises of the payment of such bonuses clearly indicates government's culpability in the failure of Eskom; and,
17. In addition, government failed in its duty to the public as shareholder of Eskom to ensure the continued successful conducting of business by Eskom as is evident from the crisis.
Public not privy to full tariff increase application
18. As per Eskom's request, NERSA agreed to withhold from the public certain commercially sensitive information pertaining to the cost of primary energy.
19. There are no substantial grounds for Eskom to keep information regarding the tariff increase a secret. Given that, if approved, the nominal tariff increase of 34 percent which reflects the real cost for the consumer will have a substantial effect on consumers, the public cannot be expected to accept the increase.
Independent review
20. Expecting government, and in particular, the public, to under these circumstances condone or even support an abnormal nominal 34 percent increase, which is around three times the inflation rate, is without grounds or basis. In fact, Eskom's motivation that an increase in coal prices and labour costs are the key factors for the tariff hike is hard to believe.
21. It is therefore the DA's view that an independent multi disciplinary-task team be appointed to investigate the causes and possible solutions to the current financial crisis on an urgent basis. Taking into account that coal companies' net profit increased by almost 200% since 2008 it appears that Eskom subsidises its contractors via the taxpayer. Furthermore Eskom retrenched 2177 employees in the 07/08 financial year.
22. Agreeing to the increase would most probably lead to further mismanagement and a failure by government to appreciate and realize the true extent of the crisis, Eskom and by extension, South Africa finds itself in.
23. Finally, over and above an acceptable tariff increase close to the inflation rate, alternative sources of income must be explored, such as a government guarantee of Eskom's obligation or international loans. In addition, the government's policy of allowing Eskom to remain the sole purchaser and supplier of electricity needs to be changed to attract foreign and local investment.
Conclusion
24. A 34 percent increase in electricity prices would have a significant impact on economic growth, future interest rates, business profitability, employment and foreign investment. Due to the current economic recession, a 34% increase is unacceptable. Despite the fact that Minister Hogan defend the 34% increase in Parliament on 09 June 2009, a problem of cheap energy prices over years cannot be rectified overnight. It will raise the inflation rate, create unemployment and lead to more poverty and more businesses going bankrupt.
25. As such, and before considering a further prices increase, the DA again calls for the appointment of an independent multi-disciplinary task team to investigate the causes, extent and solutions to the current electricity crisis. Meetings as to the viability of a price increase cannot be restricted to merely the government and Eskom, as Eskom is a public enterprise responsible to all South Africans.
26. It is furthermore proposed that such an independent review, consisting of members of government, political parties, Eskom, the private sector and experts be appointed as a matter of urgency.
27. The DA therefore proposes that until completion of the enquiry and proper consideration of its recommendations by all stake-holders, no application for an abnormal increase as mentioned in paragraph 20 as formulate in Eskom's recent application, be approved by NERSA.
Statement issued by Manie van Dyk, MP, Democratic Alliance shadow minister of public enterprises, December 1 2009
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