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Interim tariff hike to allow Eskom time to deal with funding shortfall – CEO

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Interim tariff hike to allow Eskom time to deal with funding shortfall – CEO

Eskom CEO Jacob Maroga speaking at the National Energy Regulator of South Africa's public hearings into an interim tariff increase (08/06/09) Cameraperson: Nicholas Boyd; Video Editing: Darlene Creamer.

9th June 2009

By: Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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The 34% interim electricity tariff increase submitted by Eskom would ensure that the power utility could guarantee the security of electricity supply, while it finalised its funding model by the end of September, CEO Jacob Maroga told public hearings held by the National Energy Regulator of South Africa (Nersa) on Monday.

Maroga noted that when one moved from capital requirements of R11-billion to R104-billion in a five-year period, one needed to step back and reflect on how one would fund this.

The utility had forecast a capital requirement of R87-billion for the 2009/10 financial year and R104-billion in the 2010/11 financial year. He said that the utility had managed to borrow close to its capital requirements for most years, but that from the 2008/9 financial year, the shortfall became significant.

Eskom was expecting to have a funding shortfall of R25,7-billion in the 2009/10 financial year and about 51%, or R52,6-billion, in the 2010/11 financial year.

The interim tariff increase would allow it space to deal with the forecast shortfall, said Maroga.

He noted that an interim increase would be the best way to allow it to develop its funding model and ensure that it could continue with its operations in a sustainable way.

The application made to Nersa was not about the 34% increase, stated Maroga, but rather about ensuring that the country understood the scale of the issues that were being dealt with, and what the country’s choices and the decisions had to be.

The electricity capacity expansion had to continue, as South Africa’s reserve margin remained well below industry levels, despite a slowdown in demand for power in recent months.

The country’s reserve margin was 11,5% in 2008, still below the targeted 15%.

Further, as the utility was operating ageing plant, which it was running for longer and harder than it should, this led to increased maintenance and subsequently higher costs.

Primary energy costs, mainly for coal, were also higher, as Eskom had to buy more coal on a short-term contracted basis, as the dedicated mines for each power station were not able to keep up with the required coal demand.

Maroga emphasised the importance of security of electricity supply for the country’s economic growth and the fact that its operations had a substantial macroeconomic footprint, supporting other industries and creating jobs.

In addition, its R385-billion new build programme was one of the biggest economic stimulus measures the country had ever seen, which would help to cushion the impact of the global economic crisis, said Maroga.

FIGURES QUESTIONED

Nersa regulator members, however, questioned a number of the figures provided by Eskom in its application, saying that a number of respondents had also highlighted that the tariff increase and other costs had not been properly substantiated or thoroughly motivated.

Eskom was expected to provide more clarity on these figures on the second day of the public hearings.

Energy Intensive Users Group (EIUG) chairperson Ian Langridge also questioned why Eskom’s application was “poorly defined” and why it was submitted late.

The EIUG felt that the regulator should not accept any Eskom tariff application after the February deadline, saying that in such instances, price increases should be held over for the following year.

Further, Langridge noted that the group had significant concerns about the power utility’s operational expenditure, which it said was “out of control” and significantly higher than the consumer price index.

Trade union Solidarity’s deputy general secretary Dr Dirk Hermann shared a similar view, saying that the utility’s primary energy and personnel costs seemed to be out of control.

He added that Eskom’s latest financial statements were not available and that most information was old and not up to date.

Langridge, meanwhile, stated that the group was mindful that the gross domestic product losses experienced in 2008 could be repeated should Eskom not be adequately regulated and financed, leading to load shedding and the closure of mines.

However, a scientific, transparent and inclusive pricing model was required by South African industry, he noted.

The mining sector also called for a longer-term electricity-pricing plan, which Chamber of Mines techno-economics adviser Dick Kruger said would allow for greater certainty regarding costs and enhanced investment.

The Chamber urged the country’s energy regulator to allow power utility Eskom a “sufficient” interim tariff to enable it to operate in a sustainable manner until the second multiyear price determination and a funding model could be developed.

Trade union Solidarity, meanwhile, again called for a probe into South Africa’s coal mining sector, questioning whether or not there could be collusion or abuse of dominant positions within the industry.

The union noted that a number of major coal producers had achieved significant increases in revenues, operating profits and net profits from selling coal.

Hermann said that Nersa should conduct an investigation and, should it find evidence of anticompetitive behaviour, it should hand over cases to the Competition Commission.

The union had already highlighted this concern in 2008, when public hearings were held into Eskom’s tariff increases.

Solidarity said that Nersa should award a 12% tariff increase to Eskom, which would take into account what was necessary for the power utility’s operational requirements in the short term, while further clarity could be provided in terms of the higher coal and personnel costs.

South African trade union federation Cosatu, meanwhile, said that the regulator should reject the tariff increase, as the current economic conditions did not warrant such a “huge” tariff increase.

Cosatu industrial policy coordinator Jonas Mosia argued that the electricity increase would also negatively impact on efforts to revitalise the economy, which slipped into its first recession in 17 years in the first quarter of 2009.

Meanwhile, Eskom would not take any major preemptive decisions before its funding model was sorted out, Maroga noted, explaining that these measures could include slowing down its build programme.

While a number of its projects had already been deferred as a result of the economic environment, such as the Tubatse pumped-storage project, slowing down the remainder of its projects, such as its two new coal-fired power stations, Kusile and Medupi, or the Ingula pumped-storage project, would have a serious impact on the country and its economic growth, he noted.

Nersa was expected to announce a decision on Eskom’s application on June 25.

Last year, Eskom was granted an average tariff increase of 27,5% for the 2008/9 financial year.

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