The “business as usual” stance adopted by Eskom in its application for a 19.9% increase in tariffs for 2018/19 came under sustained attack during the Gauteng leg of the National Energy Regulator of South Africa’s (Nersa’s) public hearings on Thursday.

Eskom interim CEO Sean Maritz kicked off the hearings with an appeal for the utility’s application for allowable revenue of R219.5-billion to be reviewed on its merits, rather than the “negative information that currently drives public opinion” about the utility.

Maritz described the application as an “honest representation” of the business and what was required for it to remain on a firm operational footing.

However, both Nersa panel members and several presenters expressed deep unhappiness with Eskom’s failure to make material adjustments to its business model in a context of falling sales and a rising surplus, which was set to widen further with the introduction of new coal-fired capacity.

FALLING SALES
During the hearings, the utility again revised its sales forecast for 2018/19, lowering it to 211 TWh, from the 216 TWh presented in its original application. Both forecasts represent a marked deviation from the 244 TWh of sales assumed by 2018 in the third multiyear price determination, or MYPD3.

As a consequence of the lower sales, Eskom’s acting CFO Calib Cassim indicated that, even with no increase in the allowable revenue, rebasing for the “more realistic” sales figure translated to 9.4% tariff increase for 2018/19.

However, Eskom was also applying for an increase in its allowable revenue of R14.3-billion to cover higher operating, primary-energy, and independent power producer costs, as well as to cater for international power purchases.

Nersa chairperson Jacob Modise asked whether it was fair for consumers, and potentially the taxpayer (owing to Eskom’s solvency risks and a debt burden that would peak at R500-billion), to bear the burden of Eskom continuing on a business-as-usual trajectory.

He also asked whether, in light of a surplus that could rise to close to above 8 000 MW, the utility should not be considering the decommissioning of expensive generation and even the curtailment of some of its capital projects.

DECOMMISSION PLANTS, CUT CAPEX
Such a scenario was also presented in a new study by Meridian Economics, which argued that Eskom could make immediate costs savings, without undermining security of supply, by accelerating the decommissioning of three of its older coal-fired power stations and by halting construction of units 5 and 6 at the Kusile project, in Mpumalanga.

Presenting the study this week, Meridian MD Dr Grové Steyn said the early decommissioning of Grootvlei, Hendrina and Komati and putting a halt to Kusile units 5 and 6, could yield net financial savings of between R15-billion and R17-billion.

However, Eskom said it was not considering any accelerated decommissioning of expensive generation for 2018/19, but would begin placing generation units in “cold reserve” from 2019/20.

Acting group executive for generation Willy Majola said the units would be placed into cold reserve rather than decommissioned as a way of mitigating the risk of supply uncertainties. “Furthermore, they will serve as a back-up for renewables.”

Eskom also rejected any curtailment of the Kusile and Medupi projects, describing the proposal as making “no business sense”.

Acting group executive for group capital Peter Sebola stressed that the 12 units at Medupi and Kusile were being built concurrently, not sequentially, and that Medupi and Kusile were 85% and 82% complete respectively.

“The majority of contract packages are placed and committed for Medupi and Kusile,” Sebola said, adding that, in the event that part of or all of the works were suspended, there would be significant contractual and commercial implications.

Nevertheless, Nersa CEO Chris Forlee persisted with the panel’s attack on the application’s business-as-usual approach, asking Maritz to reflect on what he would do if he was leading a private business, which was being confronted with declining sales and rising costs.

Maritz responded by suggesting that Eskom’s mindset was not one of profit maximisation, which could be achieved in the hypothetical case presented by closing unprofitable operations and raising prices. Instead, it was a regulated enterprise focused on building State assets to sustain the country’s economy.

However, Forlee described the answer as inadequate and requested the interim CEO to apply his mind further so as to provide a more comprehensive response by Monday.

NOT FIT FOR PURPOSE
Various business representatives also questioned whether the utility was doing enough to cut costs and realign its business model to the reality of falling demand and a growing electricity surplus.

Business Unity South Africa’s (Busa’s) Martin Kingston argued that Eskom’s business model was “no longer fit for purpose” and was presenting a risk to both the economy and the national fiscus.

“Eskom is arguably the greatest risk to South Africa’s fiscal sustainability and its poor performance is increasing the risk of triggering a further ratings downgrade.”

Kingston noted the concern expressed in the recent Medium-Term Budget Policy Statement that a failure by Eskom to secure a tariff increase would necessitate government assistance. “Such assistance will have a significant negative impact on the fiscus and the South African economy at large.”

Nevertheless, Busa did not believe the 19.9% hike to be justified, particularly in light of insufficient cost cutting by the utility to date.

“An inflation-linked increase may be justified provided that it can be motivated and that poor governance, mismanagement and corruption at Eskom is addressed, and a new board and competent and credible management is appointed,” Kingston said.

Likewise, Sibanye-Stillwater senior VP Peter Turner said Eskom should immediately engage in aggressive cost-cutting and that Nersa should limit any increase to the rate of inflation.

The gold and platinum miner represents 2.9%, or 665 MW, of Eskom’s national demand and is one of the utility’s top five private customers.

“Electricity is a significant and growing portion of our operating cost and has contributed to the closing down of four shafts and 8 702 direct job losses in the last four years,” Turner reported. He added that a further double-digit hike would directly result in three additional shafts becoming loss-making.

Meanwhile, the Association of Cementitious Material Producers’ Dr Dhiraj Rama argued that there should be “no increase” in tariffs until the alleged poor governance and corruption at Eskom had been “satisfactorily addressed and consumer confidence restored”.

The hearings will continue on Friday and on Monday.