Six reasons why Numsa opposes Eskom's application for a 16% electricity tariff increase

Starting from next week Tuesday 15 January, the National Union of Metalworkers of South Africa(Numsa) will take to the streets in protest against Eskom's application for an average 16% annual electricity tariff increase between 2013 and 2018. Our shopstewards will picket at the nine provincial public hearings that the National Energy Regulator of South Africa (Nersa) will holdbetween now and the end of January 2013. [see Annexure for venues of the pickets]

The pickets will be in support of the demands that we will be making through oral presentations inside the hearings that:

1. Nersa should not grant Eskom the 16% increase that the electricity utility is applying for

2. Nersa must reject Eskom's request that the next multi-year price determination (MYPD) should have a duration of  five years; running from 2013 to 2018 instead of the prevailing three years

3. Nersa should grant Eskom inflation-matching increases for three years (2013/4 to2015/6)

4. Over the next few years, there should be a thorough review of the country's electricity pricing policy with the aim of replacing the current practice of short-term multi-year price determinations with a 20-year electricity price path and model. The year 2016/17 should betargeted for the phasing in of a negotiated andagreed long-term electricity price path and model.

It is Numsa's view that Eskom's application - if approved - will lead not only to job losses but also general price increases. We also believe that this application is predicated in its entirety on short-termism. Through no fault of Eskom, the application is not informed by the kind of long-term planning that the electricity sector requires and which the Integrated Resource Plan (2010-2030) sought to address. To be talking aboutscenarios where Eskom will provide 65% or 100%of the country's future electricity requirementspost-2018 with no certainty is not good enough. We need an electricity price trajectory that factorsin the following:

1. The electricity capacity that is required between now and 2030

2. The number of power stations to be built

3. Who will build these power stations and how will the built programme be financed.

Our opposition as part of a broader energy campaign:

The campaign that we are launching next week against the proposed electricity price increases is part of a broader union drive to ensure that:

1. The country's energy system is brought under democratic control with a strong social and public mandate

2. Eskom's mandate remains the electrification of the country and support for sustainable industrialisation in South Africa

3. We reverse the corporatisation of Eskom and make the electricity utility act in the interest of the public.

4. As mitigation against rising electricity prices and greenhouse gas emissions, primary energy sources such as coal are declared a strategic resource and are brought under public ownership and democratic control

5. Access to energy becomes a human right and that the amount of free basic electricity is increased from 50 to 100 kilowatt hours (kWh)per month.

6. Energy production and distribution does not become a profit-making exercise

7. Ecological and environmental damage are kept to the minimum in the process of generating, distributing and consuming energy

8. The burden and costs of producing, transmitting and distributing electricity is not shifted onto poor customers

Why are we opposed to Eskom's application and why are we calling for a review of the electricity pricing policy?

Numsa is opposed to Eskom's application for an average 16% increase over the next five years for SIX reasons:

Reason 1: The increases punish electricity consumers and customers for incorrect policy choices made in previous years

A scrutiny of Eskom's application to Nersa for tariff increases reveals that policy miscalculations of the past are the drivers of the key cost components of the third multi-year price determination (MYPD 3). We are asked to pay for failure to make timely decisions to build power stations and for a belief which was religiously held by elites in government and within business inthe1990's and early 2000's that the private sector,through independent power producers (IPPs) would finance and provide new generation capacity.

Now that the dreams of ‘liberalised electricity markets' have come to nil, Eskom must shoulder the bulk of the provision of the much needed infrastructure. Unfortunately, the electricity pricing policy and the methodologies that Nersa uses to determine Eskom tariffs mean that this burden is passed onto electricity consumers and customers. As Numsa, we think that this is wrong and unfair!

We are also of the view that the refusal of the state to capitalise Eskom is tantamount to privatisation of the utility, as the mandate of the utility becomes less about electrifying the country and ensuring economic development but more about maximising profit.

Reason 2: The increases will lead to job losses

Electricity is a key input in manufacturing, mining and other important sectors of the economy. It isalso a significant cost for firms in these sectors.There is ample evidence that many companies are already reeling from the threefold averageincrease of Eskom's electricity price from around 20c/kWh in 2007 to the present rate of 61c/kWh. Eskom's application to Nersa to double the price of electricity - a whopping 110% increase - over the next five years will undoubtedly be the last nail in the coffin for many companies.

A snap electricity cost survey that the union conducted in November 2012 amongstcompanies with energy-intensive production processes which Numsa organises in revealed that as a result of the proposed tariff increases, 37.5% of the companies surveyed anticipated that they would have to close down. Even more distressing is the fact that all but one company stated that they would have to retrench workers as a result of the proposed tariff increases. The companies further stated that the job losses would range between 300 and 600 jobs per company in the five year period.

A National Foundry Technology Network (NFTN) research study conducted recently paints a similar picture. According to the NFTN study, seven foundries have closed in the last three years alone due to increasing operating costs such as electricity. As a result, employment in the foundries industry is estimated to have declined by between 10% and 15% since 2008. Further electricity increases will threaten the jobs of the15 000 workers currently employed by foundries.

Considering the already high level of unemployment in the country, these job losses will be disastrous. The negative impact of the previous multi-year price determinations on the South African economy, especially in the light of the global economic crisis that commenced in 2008, has been felt in the sectors that Numsa organises in. We simply cannot afford more job losses as a result of electricity price hikes!

Reason 3: The requested increases will be inflationary and will lead to general price rises

Contrary to Eskom's absurd assertion that the impact of the increases will be minimal, the impact of such increases on the poor will be devastating to say the least. The impact of these increases onpoor households will be considerably greater than Eskom estimates. As a union, we do not buy the disingenuous assertion in the MYPD 3 application that the impact of the proposed price increases on the South African economy will be muted. We know that electricity price increases lead to significant upward revision in the calculation of the consumer price index (CPI), giving rise to general price increases. The 16% average increase that Eskom is requesting will lead to higher food prices and increased prices of other consumer goods.

As many municipalities who distribute electricitypurchase their power from Eskom, the 16% increase will also lead to tariff hikes at local government level when local authorities apply for increases in June. This will have a furthernegative impact on local economies and destroy local jobs.

In the light of bad macro-economic policy that led to de-industrialisation over the last 19-years, we cannot afford this destruction of local economies.

Reason 4: Eskom's application is not aligned with other electricity and energy-relatedpolicies

In the last two years a number of policies that relate to energy have been put on the table. The first policy is the 20-year electricity plan known as the Integrated Resource Plan (IRP) which detailsprojected electricity needs up to 2030.

The second policy discussion is about the future of coal. The ruling party - the African National Congress - has been discussing the question of mineral sectors that need to be declared as strategic. There are also discussions around the South African Coal Roadmap and securing coal for electricity generation.

As a union, we do not believe that the price of electricity can be contained without securing coal supply contracts for electricity generation and an agreement on an appropriate coal pricing model that may involve public ownership of collieries. Any price path needs to factor these policy discussions.

It is our opinion that failure to develop a cohesive electricity and energy policy will reflect the lack of government coordination and its failure to deal with strategic issue of the country's competitive advantage when it comes to electricity.

Reason 5: Through the increases consumers and customers are asked to pay for Eskom's inefficiencies

Numsa believes that the methodology for determining Eskom's applications to Nersa forces consumers and customers to pay for Eskom's inefficiencies. Both the investigations by Nersa and the Public Protector into the load shedding debacle revealed that one of the causes of the blackout was failure on the part of Eskom to secure coal contracts on time. We also know that there have been delays in Eskom's builtprogrammes and projects. We know that some of these delays are regarded as work under construction and factored into the calculation of the costs that get passed onto consumers and customers. Why should customers and consumers be asked to pay for Eskom'sinefficiencies?  

Reason 6: The increases are consistent with Eskom's corporatisation drive

Numsa believes that Eskom's balance sheet is healthier than in previous periods. Despite the reduction in tariffs in year 3 of MYPD 2, Eskom's net interim profit declared for the year ended March 2012 of R12.4 billion suggests that the balance sheet is currently very healthy and is only a marginal decrease on its 2011/12 profits (assuming a break-even scenario for the second half of the year).

It is very clear from Eskom's application that its primary drive for these exorbitant tariff increases is to achieve a standalone investment grade by 2017/2018. As a state-owned entity Eskom should not be pursuing financial autonomy nor generating a return for our government at the expense of the economy and South Africans, especially the poor. We find it baffling that at the end of the MYPD 3 period, Eskom will have accumulated R46 billion for its shareholder, our government, at the cost of South Africans and the country's economy.

Eskom cannot be allowed to destroy the South African economy and worsen the misery of the millions of our people who are already suffering because the electricity utility wants to improve its credit ratings.

Conclusion:

Numsa believes that a discussion on a new electricity price policy is required where options of the state capitalising Eskom, taxing largeindustrial customers and using development finance institutions will be on the table. It is therefore important that in considering the MYPD 3 application Nersa takes a long-term view and not just the narrow interests of Eskom into account.

As a union we reject any attempts to blackmail the country in order to satisfy rating urgencies who were directly responsible for influencing our own government to adopt neo-liberal policies in the first place. The triple crisis of poverty, unemployment and inequality requires that we act differently.

Details of public hearings 

Statement issued by NUMSA, January 13 2013

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