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‘Significantly enhanced' shareholder scrutiny to be expected, Eskom’s De Ruyter says

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‘Significantly enhanced' shareholder scrutiny to be expected, Eskom’s De Ruyter says

Eskom CEO Andre de Ruyter
Eskom CEO Andre de Ruyter

22nd January 2020

By: Terence Creamer
Creamer Media Editor

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Eskom’s new CEO is not overly troubled by the prospect of shareholder intrusion in the State-owned electricity utility, saying that a high level of shareholder scrutiny is to be expected given the current crisis at the organisation. The only way to ensure that the shareholder does not assert its authority, Andre de Ruyter adds, is to deliver results in line with its expectations.

“In any business, whether it’s public or private, when the business is not performing, you can expect significantly enhanced shareholder scrutiny – that’s not unusual,” De Ruyter told Engineering News & Mining Weekly in an interview.

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“I think the best way of making sure that shareholders do not start to exercise their powers is to be successful and deliver the results that the shareholders expect,” he added, indicating that he had fully embraced both the restructuring roadmap published by the Department of Public Enterprises (DPE) as well as the stipulation that there be no forced retrenchments or privatisation.

Borrowing an analogy developed by former South African Post Office CEO Mark Barnes, Engineering News & Mining Weekly further pressed De Ruyter on whether it was acceptable for the hospital owner to enter the theatre when the doctor was performing heart surgery. His response: “If the heart surgeon has his second or third operation where, to use and American phrase, the patient-care outcome is negative, then he should expect some enhanced scrutiny.”

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De Ruyter stressed, however, that his experience during his first couple of weeks at Eskom had been one of a shareholder that was receptive to “rational, well-founded, data-driven arguments”, even when these triggered outcomes that were politically unpalatable. The former Sasol and Nampak executive was “intimately involved” in the decision to declare Stage 2 load-shedding on January 4 – a move that directly contradicted President Cyril Ramaphosa’s December 11 assertion that there would be no load-shedding until January 13.

There was no directive that the lights should not be switched off, nor any attempt at face saving once Eskom presented the shareholder with evidence that load-shedding was the best course of action “for the system and for the business at that particular point in time”.

Following its recent lekgotla, the National Executive Committee (NEC) of the African National Congress reaffirmed a resolution taken at its 54th National Conference, stating that the governing party should avoid political interference in the operational matters of State-owned companies, other than interventions in the case of mismanagement and possible company failure.

The NEC also confirmed that Eskom’s new management would be supported in taking the measures required to ensure more reliable supply, especially by improving the quality of engineering across its operations. “Cabinet should assist by fast-tracking additional, affordable sources of electricity supply, including gas, clean coal and regional partnerships as well as renewables, in order to provide Eskom with the space it needs for repairs and maintenance,” the NEC statement read.

The ANC statement could prove significant in the coming weeks, should the Eskom board approve a proposal that there be strict adherence to maintenance protocols and schedules across the coal fleet, which could increase the risk of load-shedding for at least two years.

MAINTENANCE FIRST?

Eskom is undertaking a “fundamental” reassessment of its maintenance philosophy, owing to the poor performance of its aged and under-maintained coal fleet. This has resulted in a steep rise in unplanned breakdowns to between 10 000 MW and 15 000 MW, as well as a decline in the fleet’s energy availability factor, which has fallen to about 67%.

De Ruyter indicated his preference for a return to preventative maintenance, likening the current approach to running alongside a bicycle because the chain had come off. “We need to stop and put the chain back on so we can start peddling again.”

The immediate risk of such a plan would be a resumption of load-shedding to manage the imbalance between supply and demand. The rewards, however, could be a far more stable future system along with significant financial benefits for Eskom, which is currently burning diesel at a cost of about R6-billion a year; a level that is well above that catered for in the regulated tariff.

To mitigate the effects of the supply deficit would require a reinvigoration of demand-side management and energy-efficiency initiatives, as well as demand-response incentives and potentially even power buy-backs. “While we need the space to conduct necessary maintenance, there is a lot that we can do, and that South Africans can do, to ensure that demand is kept to manageable levels.”

The new maintenance plan is already being canvassed with the Eskom Technical Task Team as well as key customers to assess how to mitigate the potential negative impacts. “We have to plan thoroughly, communicate proactively and give adequate warning. What makes load-shedding very disruptive is the fact that there is very little warning, especially for our industrial and mining customers, which makes it enormously disruptive.”

De Ruyter expected the maintenance plan, along with some of the solutions to mitigate the negative consequences, to be fully fleshed out and approved before the end of the first quarter.

CORPORATE PLAN & UNBUNDLING

In parallel, he was paying close attention to the corporate plan which, besides operational stability, was being geared towards stabilising Eskom’s financial position and slowing the pace of debt and interest-payment increases. The utility’s debt stood at more than R454-billion at the end of September and interest payments are set to balloon in the current financial year to R38-billion.

Part of the solution, De Ruyter said, related to securing a cost-reflective tariff, as well as ensuring that the National Treasury’s recent equity injections into the utility were not nullified through the National Energy Regulator of South Africa’s (Nersa’s) treatment of these injections as revenue.

Eskom approached the courts last year for urgent relief and would hear soon whether Judge Jody Kollapen concurred with its argument that Nersa erred in its treatment of the R69-billion bail-out communicated by Finance Minister Tito Mboweni in February last year. Should the relief be granted, the wholesale tariff will increase by 16.5% on April 1 instead of the 8.1% already sanctioned and by another 16.5% in 2021, instead of the 5.22% already approved.

“As long as equity injections get treated as revenue, then we are back to square one.”

That said, De Ruyter immediately acknowledged that tariff adjustments alone would not be sufficient to ensure financial sustainability, indicating that any hikes needed to be complemented by cost reductions, improved procurement practices and possibly also debt relief.

“A cost-reflective tariff should not be an opportunity for inefficiency. We understand that that is not an acceptable way forward. We need to convince not only the regulator but also consumers that our tariffs are indeed based on an efficient, well-run operation. We are not going to South Africa and saying: ‘We want to stay as we are and just pay us more in terms of tariff’.”

He was more coy on the debt-relief options, saying only that there was currently a big focus on the cost of debt and how the existing government guarantees could be better leveraged.

De Ruyter was far more assertive, though, in arguing against what he called a precipitous legal unbundling of the vertically integrated utility into separate generation, transmission and distribution business.

“Moving precipitously to legal unbundling comes with risks. These risks include various tax events; you may trigger capital gains tax or forgo some accumulated tax losses. You may also run into labour-relations difficulties if you start transferring people between different legal entities. You may create great discomfort among your lenders in terms of the asset base against which they are lending you money, and so forth.”

While agreeing with the ultimate objective of separation, as outlined in the DPE roadmap, De Ruyter felt it “prudent” to initially pursue a divisionalisation of the entities to create a prototype for independent operations without “manifesting the risks” associated with full legal separation.

During this initial phase it was likely that managing directors would be appointed across the three units, but that they will continue to report to De Ruyter as CEO of the Eskom Holdings Company.

“Ultimately the end state is completely consistent with the road map. All we are saying is that, while we are agreed that we are going to Cape Town, what we now need to decide is whether we go via Kimberley or Bloemfontein.”

  

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