Eskom on its 2013/14 Annual Report

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Public Enterprises

03 September 2014
Chairperson: Ms D Letsatsi-Duba (ANC)
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Meeting Summary

The Acting Chief Executive said Eskom was under pressure due to the Multi Year Price Determination (MYPD3) low price increase, a flat demand and increasing operating costs (OCGTs and cost of maintenance). Eskom was however working closely with Government to explore possible levers to close the funding gap. Despite that, Eskom was able to make a R 7 billion profit during the financial year. In addition, Eskom was also on track to achieve the first synchronization of Medupi Unit 6 in the second half of 2014, with full commercial operation expected six months thereafter.

Safety was the foundation for all of Eskom’s operations and key to its performance and sustainability. As at 31 March 2014, Eskom had connected 5.2 million customers to the grid. Challenges included transmission performance vulnerabilities due to aging assets and uniform networks; with distribution, it had to manage the risk of increased exposure of employees and contractors to crime-related assault incidents; backlogs in maintenance, refurbishments and reliability needed to be addressed, with a particular focus on preventative maintenance for reticulation networks. Backlogs in customer connections also needed to be addressed. Debt collection, especially from municipalities was still a major challenge and was significantly increasing. Municipalities made up about 42% of electricity sales, and outstanding municipal debt remained significantly high despite structures being put in place to address this. Defaulting municipalities were primarily situated in the Free State, Mpumalanga, and North West provinces. Some of the challenges at these municipalities included inadequate skills, non-functional municipal billing systems, municipal electricity revenues not being ring-fenced and inadequate capacity within municipalities regarding electricity tariffs.  Eskom was working closely with the shareholder, the Cooperative Governance and Traditional Affairs (CoGTA) department and National Treasury at provincial and national level to address the systemic causes of municipal arrear debt. With regard to Independent Power Producers (IPPs), the total energy procured from short-term IPPs for the year was 3 671 GWh at a cost of R 3 266 million. The first project under the renewable energy independent power producers (RE-IPP) programme was commissioned on 15 November 2013, adding 7MW. Eskom has successfully facilitated the connection of 21 RE-IPP projects.

Looking at financial sustainability, Group revenue of R139.5 billion increased by 8.3% from the R128.8 billion in 2013. Revenue growth has been offset by escalating primary energy and operating costs. Sales were 9490 GWh lower than forecast on the National Energy Regulator of South Africa (Nersa) tariff application. In addition, the R255 billion of borrowings would be repaid by 2052. The revenue shortfall of R225 billion created by the MYPD 3 determination has serious consequences for Eskom’s business and future sustainability.

Members were very pleased with Eskom’s Youth Programme which prepared youth for senior positions within Eskom, through various training initiatives. However the rising municipal debt and the impact it had on Eskom’s finances were a serious concern. The tender awarded to Ariba for Koeberg was awarded irregularly and this was a great concern. Why was Eskom’s technical committee overruled in its recommendation of allocating the tender to Westin House instead of Ariba?  Questions raised by Members included: what were the corporate social investment projects Eskom was involved in? Was there a project within Eskom which looked at solar panels for disadvantaged municipalities who still could not connect to the grid? What plans did Eskom have for upgrading its ageing infrastructure? How many substations were there around the country and in which areas were they? How far was Eskom in renegotiating its pricing contract with BHP Billiton? Why were contracts with IPPs signed over such long periods of time? Could Eskom explain the impact of the credit downgrading on the entity? What systems were put in place by Eskom to ensure that coal is not wet? Where was Eskom in ensuring there was enough coal supply in the country? Where were we in negotiations with Waterberg coal? How far was Eskom’s reach in developing rural communities? What plans did Eskom have in place to address the shortfall within existing coal power stations? Did the Department of Energy therefore need to initiate some kind of baseload procurement process to get more Independent Power Producers (IPP) baseload on stream within the next 3-5 years to make up for the shortfall which would come from coal? What plans were in place to prevent and/or minimize load shedding?

Meeting report

Eskom – Integrated Results for the year ended 31 March 2014
Mr Collin Matjila, Eskom Acting Chief Executive, commented on Eskom’s financial health, saying currently Eskom was under pressure due to the Multi Year Price Determination (MYPD3) low price increase, a flat demand and increasing operating costs (OCGTs and cost of maintenance). Eskom was however working closely with Government to explore possible levers to close the funding gap. On safety, he said employee safety performance has shown a positive trend for 2013/14, however contractor and public fatalities were still a concern. As a mitigating action, Eskom has conducted investigations into these incidents, and lessons learnt will assist in mitigating future incidents. He explained that Eskom was managing tight electricity supply to ensure that electricity demand was being met in such a way that national power system integrity is protected. Some of the highlights included of the past year was making a R 7 billion profit, achieving the Lost Time Injury Rate (LTIR) target among employees. Eskom was also on track to achieve the first synchronization of Medupi Unit 6 in the second half of 2014, with full commercial operation expected six months thereafter.

He explained that the changing environment required a response from Eskom that would ensure sustainability. Safety was the foundation of all of Eskom’s operations and was key to its performance and sustainability. Eskom was a 100% state-owned electricity utility, strongly supported by the government and supplied approximately 95% of South Africa’s electricity. Eskom performed 201 788 household electrification connections during the year, the highest in a single year since 2002. As at 31 March 2014, Eskom had connected 5.2 million customers to the grid. With regard to generation, one of the key highlights was that Koeberg unit 2 ended a record run of 484 days when it was shut down for scheduled refueling on 24 March 2014, marking a continuous run from one refueling to another. There were however a number of challenges, one of which was load shedding. With regard to transmission, one of the challenges was that performance vulnerabilities remained with the ageing assets and uniform networks. With distribution, Eskom was experiencing challenges in managing the risk of increased exposure of employees and contractors to crime-related assault incidents. In addition, backlogs in maintenance, refurbishments and reliability needed to be addressed, with a particular focus on preventative maintenance for reticulation networks. Backlogs in customer connections also needed to be addressed.

Debt, especially by municipalities, was still a major challenge and was significantly increasing. Eskom was working closely with the shareholder, the Cooperative Governance and Traditional Affairs (CoGTA) department and National Treasury at provincial and national level to address the systemic causes of municipal arrear debt. Energy losses due to equipment theft, illegal connections, meter tampering and illegal vending of pre-paid electricity remained serious challenges. He explained that Eskom was committed to building strong skills and growing human capacity by retaining core, critical skills and by effectively developing skills and talent. Eskom’s Youth Programme trained engineers, technician and artisan learners. About 4 325 learners were part of the programme as at 31 March 2014 and 7.8% of gross employee benefit costs were spent on training.

With regard to “keeping the lights on”, a highlight was that there was more planned maintenance during the past winter than the same period in the three preceding years, this was done in line with the its generation sustainability strategy. Some of the challenges included:
• Inadequate reserves available during the day to meet demand, but minimal reserves available at peak period
• Eskom’s generating plant has had to be to be run at significantly higher load factors
• Four power system emergencies were declared during the year
• Increased costs due to the significant reliance on the open-cycle gas turbine (OCGT) fleet in the current year.

Key milestones achieved at Medupi in the first quarter of 2014/15 was that welding challenges were effectively resolved, the boiler was mechanically complete and ready to continue and Eskom remained on track for the targeted first synchronization of Unit 6 by the second half of 2014. Looking at environmental performance, he said Eskom has embarked on an extensive retrofit programme to reduce emissions at the highest emitting power stations, but the execution of this programme would require long outages and a significant amount of capital (currently R72 billion in nominal terms). Despite the retrofit programme and Eskom’s best efforts, there remained a risk that Eskom may not be able to fully comply with the new national emission standards, which come into effect in 2015 and 2020. Given the above, Eskom expects to achieve 57% compliance with the national emission standards by 2026.

On coal and water resources, he said one of the highlights was that coal stock days remained at 42 days, which was above target. However, despite the overall coal quality being on target, coal-related load losses were experienced at Arnot, Matla and Tutuka power stations. Production performance of some cost-plus mines continued to be a challenge. In addition, Eskom was experiencing operational challenges with the rail transportation of coal. The total energy procured from short-term Independent Power Producers (IPPs) for the year was 3671 GWh at a cost of R 3 266 million. The first project under the renewable energy independent power producers (RE-IPP) programme was commissioned on 15 November 2013, adding 7MW. Eskom has successfully facilitated the connection of 21 RE-IPP projects.

The Eskom group currently employs 1 305 employees with recognised disabilities. Although the disability percentage of 2.77% is below its 3% target, it is above the government target of 2%.

Eskom’s Financial Sustainability
Ms Tsholofelo Molefe, Eskom Financial Director, said the Group revenue of R139.5 billion increased by 8.3% from the R 128.8 billion in 2013, an increase of 8.3%. Revenue growth has been offset by escalating primary energy and operating costs. Eskom required a rate of return on assets that will enable it to maintain and replace the current asset base. Sales were 9490 GWh lower than forecast on the National Energy Regulator of South Africa (Nersa) tariff application. Primary energy costs have increased by 14.2% year-on-year from 28.05c/kWh to 32.04c/kWh. On its debt maturity profile, Eskom has to be responsible in managing its debt profile. The R255 billion of borrowings would be repaid by 2052. The revenue shortfall of R225 billion created by the MYPD 3 determination has serious consequences for Eskom’s business and future sustainability. Financial sustainability cannot be achieved through efficiencies and savings alone – cost-reflective tariffs remain a key imperative.

Mr Matjila concluded that it was critical for Eskom to ensure a balance between security of supply, asset creation, financial sustainability and environmental compliance and to responsibly manage the trade-offs that were required. On municipal debt, he said municipalities made up about 42% of electricity sales, and outstanding municipal debt remained significantly high despite structures being put in place to address this. Defaulting municipalities were primarily situated in the Free State, Mpumalanga, and North West provinces. Some of the challenges at these municipalities included inadequate skills, non-functional municipal billing systems, municipal electricity revenues not being ring-fenced and inadequate capacity within municipalities to manage electricity tariffs. On the new Build Programme, he informed Members that Medupi was the first coal-generating plant in Africa to use supercritical power generation technology. Synchronization of the first units was expected to take place starting in the second half of 2014. The synchronization of Ingula’s Unit 3 was targeted for October 2015.

Discussion
The Chairperson thanked Eskom for the presentation. She said the downgrade of the entity would surely affect Eskom’s capacity; these are some of the issues which Members needed to assist Eskom with where possible. Eskom had a mandate not only to meet the country’s energy needs but also to create jobs and expand the country’s economy.

Mr E Marais (DA) complimented Eskom on its youth programme, which prepared youth for senior positions within Eskom, through various training initiatives. On corporate social investment (CSI), Eskom was spending R 132 million on these projects; what were some of these projects which Eskom was involved in? Was there a project within Eskom which looked at solar panels for disadvantaged municipalities who still could not connect to the grid? He asked that the Chief Executive comment on an article in Die Burger which spoke to a contract which was awarded on the turbines in Koeberg, but switched to another company at the last minute.

Ms D Rantho (ANC) asked that Eskom provide more clarity on its plans to upgrade its aging fleet; substations which were meant to supply small communities were now forced to supply a growing number of individuals within those communities because of the growing influx. Some of these substations could not stand the demand. How many substations were around the country and in which areas were they? She suggested that Eskom spend less on luxury expenses such as hotel accommodation and conferences. Eskom needed to focus more on delivering on its services. How far was Eskom in renegotiating a pricing contract with BHP Billiton? Eskom has signed contracts with IPPs with other countries: why are these IPPs signed over so many years, what happened if expectations were not met, could Eskom pull away from these contracts which were sometimes for as long as 20 years? Could Eskom explain the impact of the credit downgrading on the entity?

Ms N Michael (DA) asked about its coal and coal supply. In summer in the Highveld, it would start raining, what kind of systems were put in place by Eskom to ensure that coal is not wet? Where was Eskom in making sure that that there was enough coal supply in the country? Where are we in terms of the negotiations with Waterberg Coal? There were so many conflicting reports on the matter and clarity from Eskom was needed. How was the quality of this coal seeing that the country has already used most of its coal supply? On the turn-on of Medupi, she said there was a great discrepancy. She reminded Members that Minister Lynn Brown had informed Members that Medupi would be turned on in December 2014 while there were also talks that the plant would be turned on during the second half of the coming year. She argued that it was important that the public be informed about what “soft turn” on and “turn on” were. Medupi would not be going on line in December 2014. They had a “soft turn on” and this should be made clear by Eskom. She informed Members that she had paid a site visit to Medupi the previous week and was greatly disappointed that she was not allowed to do her oversight properly. There was fuel gas desulphurization at Medupi but not at Kusile. Eskom has indicated that by 2026, Eskom would only be 56% compliant with national emissions. This was a serious concern because it went not only against the country’s own environmental regulations but against every environmental treaty internationally. This was not something to be proud of, this was very worrying. The projected shortfall of R 225 billion was also a serious concern, over R 300 billion was needed for the Ingula, Medupi and Kusile projects. Can South Africans expect another electricity tariff price increase, if so, what would be requested and what was the time period?

A Member asked about municipal debt due to Eskom. According to the Department of Cooperative Governance and Traditional Affairs (Cogta), it was over R 10 billion and many of the municipalities were in arrears. This debt had serious impacts on Eskom’s sustainability in the long run, however switching off these municipalities was a last resort. It was understandable that Eskom was a state owned entity, therefore providing services to the country still remained a priority. However in terms of managing municipal debt, what measures was Eskom taking to sort this out? In addition, Eskom’s downgrading would also impact negatively on the ordinary man on the street. What were the timelines for getting this money back from municipalities and how would municipal debt be managed in the future? Municipalities were not serving the people as they should. He also appreciated Eskom’s youth programme and asked that more details be provided to the Committee on it and on skills development programmes. How far was Eskom’s reach with regard to developing rural communities?

Mr L Greyling (DA) thanked the Committee for inviting the Portfolio Committee on Energy to the meeting. He said it was clear that the country was currently in an electricity crisis. One of the reasons for this was the delays with the build programme. The other problem seemed to be with the running of existing coal power stations which resulted in a number of unplanned outages. What this indicated was that Eskom has run these stations too hard and these stations were no longer able to produce at their maximum level. This meant that there would be even less capacity within the country in the next couple of years. Would Eskom agree with this statement? If this was the case, what plans did Eskom have in place to address this shortfall within existing coal power stations? Did the Department of Energy therefore need to initiate some kind of baseload procurement process to get more Independent Power Producers (IPP) baseload on stream within the next 3-5 years to make up for the shortfall which would come from coal? Given that there would have to be more procurement from IPPs, what were the reasons for some of the IPP contracts which were currently not being signed? One explanation which was going around was that the original cost estimates which Eskom gave the bidding companies on grid extension were now far higher than the original estimates; was this the case? Why was it that the bidding companies were now forced to take on these costs; what was being done to address this issue? The World Bank loan given to Eskom included the extension of the grid through the connection of IPPs. The country could not afford delays with connecting to the grid. What was Eskom’s cost recovery on its distribution side?

Mr R Tseli (ANC) said there seemed to be challenges between procurement and asset management in Eskom, these challenges contributed significantly to load shedding. Could Eskom explain? He also congratulated Eskom on its youth programme. How was the gender balance at senior management level, including people with disabilities? He informed Members that there has been a call in the media for Eskom to be privatized; what was Eskom’s view on this? What was Eskom doing to protect industries from load shedding?

Ms G Nobanda (ANC) asked what was the impact of the Preferential Procurement Policy Framework Act (PPPFA) on transforming Eskom’s procurement policy? She informed Eskom that Members faced a number of challenges when responding to community questions during oversight visits; how could Eskom be of more assistance in this regard?

Ms P Van Damme (DA) said the presentation indicated that Eskom conducted customer surveys to assess the quality of service delivery provided to the public. However no indication was given about the results of these surveys. Could Eskom provide clarity on this?

Mr M Mackay (DA) said there was mounting evidence that the tender awarded to Ariba on Koeberg was awarded irregularly and this was a great concern. Why was Eskom’s technical committee overruled in its recommendation of allocating the tender to Westin House instead of Ariba? There also seemed to be a case that some Eskom Board members deliberately misled the Minister with the information made available to her with regard to the announcement of the tender. The Chief Executive was asked to go on record to clarify these rumours. Eskom was also asked to make available all the documents relevant to the tender process to the Committee so that if there was any foul play, it could be resolved. A further delay on Koeberg would have significant impacts on the country’s energy supply and energy security. What kind of delays could be expected at Koeberg seeing that Westin House was seeking litigation against Eskom on the issue?

The Chairperson thanked Members for their engagements on the presentation. She said the role of the Committee was not only to conduct oversight on the work of Eskom, but also to assist with the challenges faced by the entity. She asked what percentage of the grid would be allocated to IPPs. According to the presentation, R10.6 billion was spent on diesel to keep the lights on. Could this figure be explained?

Mr Matjila responded on the process of the procurement of the steam generator replacements, saying Eskom had a very robust procurement process and the entity had a proud history of fair and objective evaluation processes. Similar processes have been followed in all of Eskom’s procurement structures. The Koeberg procurement process was followed with the same transparency and integrity which has been associated with Eskom over the years. He acknowledged that bidders were aggrieved by one of the other issue, therefore there were structures within the law which allowed for such objections including going to court. Equally, Eskom had the right to protect itself and its interests when faced with court action. The party which was aggrieved has, for various reasons approached the court and Eskom has subjected itself to the court process. The hearing would be Friday, 5 September 2014. Eskom was therefore constrained in its ability to provide the Committee with answers on the merit of the case. This would prejudice the court process which had already begun.

On the questions relating to municipal debt he said the increase in municipal debt was a matter of concern because this not only had an impact on Eskom’s finances but also on the ability of municipalities to provide services to communities, particularly if Eskom enforced credit control measures, including the termination of electricity supply. This would have an adverse impact on consumers, some of which may be paying their bills. Eskom has therefore engaged on a process with municipalities, a provincial forum has been set up in each of the affected provinces. The forums would include the MEC’s for Cogta and Finance, together with senior officials from the Premier’s office in the provinces. Mayors as well as the managers of the various affected municipalities have also been invited. The strategy which has been adopted by Eskom started with an assessment of the reasons which inhibited municipalities from paying their bills; in an attempt to understand the root causes. Eskom has already issues termination notices to three municipalities in the Free State. In addition, Eskom was engaged with four provinces which were heavily impacted by unpaid debt; in Mpumalanga there were seven municipalities as such, and Eskom has met with the Cogta MEC in the province. Agreements were reached with the defaulting municipalities that payment arrangements be made to ensure that all outstanding debt was paid by March 2015.

 In the North West there were six municipalities where agreements were reached with the Cogta MEC to finalize payments agreements with defaulting municipalities to ensure payment by March 2015. In Gauteng there were three municipalities and Eskom has met with the provincial Treasury and the MEC of Cogta and these discussions were still ongoing. One of the affected municipalities was Randfontein, which has subsequently settled its outstanding debt in full as a result. Payments plans have been put in place for the rest of the municipalities in the province. In the Free State there were seven municipalities that had unpaid debt and notices for termination have been served. The actual implementation of the termination has been suspended, pending the engagements with the provincial government. Eskom has agreed to look at three categories of municipalities which would be a pilot to address some of the structural challenges faced by municipalities. Broad categorization included municipalities which were able to but not willing to pay their bills, municipalities which were able to but could not pay and municipalities which were completely unable to pay. The categorization was intended to identify municipalities with serious structural challenges such a lack of a Tax base or a lack of sufficient income to sustain themselves. These were then passed over to national government to attend to. This also enabled Eskom to identify those municipalities which were able to pay but were not willing to so that measures can be taken to enforce credit control. Municipalities with certain challenges would be assisted, some around structuring the tariffs or ensuring that the budgets are formulated in a manner that would ensure that what was intended for electricity consumption was ring fenced. There were a number of such successes in the Free State. Eskom was committed to making sure that there was minimum impact on consumers.

On the CSI projects which Eskom was involved in he responded that these projects were mostly done through the Eskom Foundation. More details on these projects would be provided to Members. Some of these projects included bursaries for needy students and childcare facilities where Eskom was building power stations. On IPPs he replied that Eskom had an Integrated Resource Plan (IRP) from the Department of Energy (DoE) which guided processes with IPPs. Eskom therefore was mandated to provide access to the grid to any IPP which has been approved and to enter into supply agreements with terms and conditions. Eskom would continually engage with the DoE to preempt any hiccups in the period of concession.  On the concerns raised on unplanned outages he said there has been an increase in unplanned outages during the year under review, this was a reflection on a number of factors, one of which was ageing infrastructure and infrastructure which has not been maintained. Other causes included certain inefficiencies from contractors which were employed to conduct maintenance on planned maintenance. Eskom would attack the issue of unplanned outages very aggressively. Changes were already taking place, such as partial load shedding. The seasonal nature of the country, especially winter and summer, also needed to be taken into consideration, supply and demand therefore needs to be managed.  He said Eskom would continue with a campaign to conserve energy especially in the afternoons. Usage needs to be reduced. Eskom has already engaged in industry and agreements have been reached to relieve some of the power usage in the evenings which is usually high during the day. Industries have therefore been asked to shift some of its production schedules to the evenings, preferably to after 8 pm. Eskom would therefore look at ways to incentivise such behavior through some negotiated terms.

He said the contracts for some of the window 3 IPPs which have not been signed would be signed one the DoE has completed the process. On the questions raised on coal supply and how Eskom would mitigate the recurrence of the problems which took place in 2008 and 2013 of load shedding. A number of strategies have been put in place; these include the logistical reconfiguration of stock handling on site. This would include lifting some of the stockpile containers to a certain level, to ensure that water was not kept static in the various containers. There was also a concerted effort to ensure that coal stock days are maintained at the high level of 42 days. He acknowledged to Members that the quality of the coal has become a challenge and Eskom was currently addressing this. Measures to further beneficiate the coal, among others, were being looked at to ensure that conveyance of the bad coal was restricted. This was however a complicated and costly process. This was a continuous process, which also included the training of personnel at coal stockyards with a review on the entire stock handling process to ensure that quality was maintained throughout the process. On Medupi, he said Eskom has been trying to explain the issue of synchronization and Eskom would continue to try and find a more simple way to deal with synchronization. However, simply put, it would be the first time that the generator runs through the injection of steam at Medupi, this would be the first time that power was put into the grid. This however was not the full power of 800 Megawatts (MW) but it would be anything between 100 – 200 MW. This would enable for a number of things to be done such as the technicians to balance the plant itself and the grid. As the process of balancing continued, power would be pumped into the grid. This process would take anything between 3-6 months before optimum power was reached. Full operation of unit 6 would be reached by June 2015.

On the Waterberg coal contracts, he said the negotiations were continuing however there have been ups and downs. Eskom however was confident that there would still be sufficient coal for the Waterberg area. The coal for Medupi was already secured and has already been transported to the coal stockyard. There were a number of milestones which would be looked at, including heavy oil fires first into the turbines then going into the coal mines. One of the challenges in the Waterberg area however was that of water shortages. Eskom has therefore taken certain investment decisions for the construction of water pipes to ensure that the supply of water was at a sustainable basis. On the fuel gas desulphurization he said this was excluded because of high costs. Plans have been put in place to mitigate any potential impacts on the environment. Eskom was determined to commit to all environmental regulations.

On the privatization of Eskom, he said Eskom was not “married to the concept”, all stakeholders were being mobilized to get involved in the country’s energy needs. The private sector has also been engaged in the process. For example, the renewable energy IPPs were from the private sector. Eskom, together with the DoE were looking at procuring more power from these IPPs. Eskom was already procuring just under 1000MW of power from the private sector. With regard to the protection of industries from load shedding, he said Eskom has taken into account the economic costs of load shedding, therefore load shedding needed to be avoided as much as possible. Eskom would be reducing load on a managed basis so that rotational load shedding would be avoided. Discussion were currently being finalized with the National Energy Regulator of South Africa (Nersa) to amend the protocols that would allow Eskom to reduce weight load and avoid rotational load shedding. Load shedding would be a last resort. Parts of the engagements with industry were around how load would be managed to meet the requirements while minimizing the impact on the economy.

On the PPPFMA he said this was intended to achieve certain objectives which Eskom agreed with. An application was made to National Treasury and an exemption from the PPPFMA was granted. This exemption came to an end in 2012. During the period which Eskom was exempted, the entity was able to separate the procurement transformation process within Eskom and this resulted in an incline in spending on Broad Based Black Economic Empowerment (BBBEE) initiatives. Black businesses were integrated into the economy as a result. However this was slowed down as a result of the expiry of the exemption. Eskom was however looking to find ways for regaining momentum.

Ms Molefe said Eskom has implemented the instructions from National Treasury and the entity was very committed. With regard to how far Eskom was to renegotiating the contracts with BHP Billiton, she said the contracts were with Nersa and a public consultation process still needed to be undertaken. Eskom therefore had to wait for the Nersa process to unfold. On the question on the impact of the downgrade on Eskom, she explained that the rating agencies looked at Eskom’s credit worthiness, which included Eskom’s borrowings and its ability to repay the debt. Regulatory certainty was also looked at because the loans were over very long periods of time. She explained that the rating which took place in June 2014 did not have any specific impact on Eskom’s loans, however bases on the analysis; Eskom was concerned about the further downgrade, should it happen in September 2014. The cost of funding would therefore increase significantly, together with Eskom’s ability to access the debt/capital market. There was also the risk that the current loans could be recalled and government would then be asked to step in.

 On the question on national emissions, she said one of the biggest problems was that the funding required a significant amount of investment and this was not accommodated in the Multi Year Pride Determination (MYPD) 3. On the question on the costs of the build programme, she said it was indeed a significant concern, however the regulator has allowed Eskom a return on assets from the tariffs. At the current stage, Eskom had no intention to reopen the tariff application but in the long term, the impact could be seen. On the DoE’s IPP renewable programme she reiterated that the contracts have not yet been signed however cost estimate letters have been sent out. The reasons why the costs were high were because of the grid strengthening. In terms of Eskom’s capital expenditure Nersa has allowed for a lower return and a lower asset base has been used for calculations. There was therefore a shortfall in the capital expenditure and this has had an impact on Eskom’s transmission.

On the question on municipalities she said Eskom’s payment days were 15 days, however municipalities were assessed over 30 days. She said in total, the current debt owed to Eskom by municipalities was R 10.6 billion. A number of measures were being taken to recover the debt. She explained that Eskom’s residential customers were about 4.9 million of the total 5.2 million customers. The bulk of them were prepaid customers, however Eskom experienced significant challenges in Soweto with illegal connections. The metering infrastructure however was being upgraded. On Eskom’s communication strategy, she said Eskom partnered up with its customers through the “49 m” campaign. On the OCGT costs, she said the numbers were correct. In 2013, Eskom spent R 5.9 billion versus R 10.6 billion in the current financial year. It was important to note however that Eskom was not delaying others from coming into the grid. Eskom was awaiting the implementation of the IRP going forward. With regard to the customer service surveys she said the Eskom had achieved 87% of its target in this regard. One of the main issues raised by customers during these surveys was that of illegal connections.

Mr Chose Choeu, Divisional Executive, Eskom concluded that Eskom had an extensive and intensive communication campaign; one was the “49 m” where Eskom tried to communicate with all its stakeholders to persuade them to use energy responsibility. A lot of support has been received from industries, more than 200 industries have partnered with Eskom. In addition, Eskom had recently launched the Eskom APP which was a door which gave consumers full access to the work of Eskom - it was also on Facebook and other social networks.

Mr Marais asked whether Eskom was in a position to secure solar water geysers, if so, at what price?

Mr Matjila responded that the issue of solar water geysers was one of Eskom’s demand side levers which were being looked at continually. Eskom had a plan to undertake a project of this nature, the funding would be acquired from the DoE, and however there have been delays in finalizing the agreement between Eskom and DoE. Eskom would then be the implementing agents of these solar water geysers for the DoE. Eskom was hoping that the agreement would be finalized before the end of next winter.

The Chairperson thanked Eskom for their engagement.

The meeting was adjourned.

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