Eskom and Department Annual Reports: briefings

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
10 November 2004
ESKOM AND DEPARTMENT ANNUAL REPORTS: BRIEFINGS

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
Eskom Annual Results 2003 presentation
Eskom Annual Report 2003 (available at http://www.eskom.co.za )
Department of Minerals and Energy (DME) 2003 / 2004 Annual Report presentation (document awaited)
Department of Minerals and Energy (DME) 2003 / 2004 Annual Report (available shortly at www.dme.gov.za)

SUMMARY
The Committee was briefed by Eskom and the Department of Minerals and Energy (DME) on their 2003 / 2004 Annual Reports. Both highlighted their performance and achievements over the 2003 / 2004 reporting year, including financial results and future challenges.

Members were concerned about the implementation of government's indigent policy, Eskom's continued involvement in the Pebble Bed Modular Reactor (PBMR) project and its lack of investment in new electricity generation capacity. In addition, Members were concerned that the DME had received its first qualified audit report from the Auditor-General, government's R500 million allocation to the PBMR project and the failure of free electricity to reach all the intended beneficiaries.

MINUTES

Eskom Briefing
Mr T Gcabashe, Chief Executive Officer, said that Eskom placed continued importance on good corporate governance and compliance with the King II report. Its corporate values were excellence, integrity, innovation and customer satisfaction. In 2003, the company had electrified an additional 175 396 homes; had procured goods and services to the value of R7.3 billion from BEE companies; had spent R20.6 billion on BEE since 1998 and had spent R714 million with black women-owned companies since 2002.

It reported a figure of 91.8% achievement on its Human Resources Sustainability Index; 56.3% on racial equity; 27.8% on gender equity and 1.4% on disability. The company had invested R505 million in the development and training of employees and had supported 1 850 bursaries of which 80% were set aside for black persons. It had reduced public fatalities from 24 to 20 and had the lowest number of work-related fatalities in 30 years in 2003. Eskom achieved compliance with ISO 14 001 in 2003; reduced its number of contraventions of the operational sustainability index from 3 to 2; achieved a figure of 89.6% in technical performance and had met its targets for unplanned grid separations, unit capability factors, unplanned capability loss factors and system minutes lost. These figures were well within international benchmarks.

The highlights of Eskom's financial performance included an after-tax profit of R3.5 billion; improvement of its debt to equity ratio to 0.30; electricity sales growth of 4.8%; group return on total assets declined from 13.07% to 10.35% and Eskom Holding's real rate of return declined from 1.69% to 0.53%.

Discussion
Mr C Kekana (ANC) wanted to know if Eskom played a big enough role in rural economic development and whether it was able to solve increasing quality of supply problems. He also wanted to know whether the company was committed to government's indigence policy.

Mr Gcabashe responded that Eskom realised the importance of electricity as a basic need for rural development and that it was fully committed to achieving the Presidential target of 100% electrification by 2008. This would include large-scale electrification of rural areas. He added that Eskom followed the indigence policy set by government, but that only 8% of eligible people were collecting their free, basic electricity allowance.

Mr M Ntsokolo, Eskom Managing Director: Distribution, said that quality of supply problems were mainly due to old equipment and illegal activities by members of the public, including theft. The company was currently undertaking refurbishment of the older parts of the transmission grid and would institute more robust grid planning for future economic development.

Adv H Schmidt (DA) commented that Eskom's very low debt to equity ratio was due to the company's lack of capital investment in new power stations. He was concerned at the company's declining return on assets and asked whether 15% was not the international benchmark that would attract foreign investors. Mr Gcabashe confirmed the points about no new capital investment and the 15% international benchmark, but added that new capital investment would now have to be made as the country was running out of generation capacity. He did not think the debt to equity ratio would go as high as it had been in the late 1970s and early 1980s, however.

Mr B Nqwababa, Managing Director: Finance, added that the issue was being discussed with the National Electricity Regulator (NER) which determined Eskom's annual tariff increases. However, the NER were only prepared to increase tariffs to a level that would guarantee Eskom a rate of return of 11%.

Mr L Greyling (ID) asked whether Eskom's CO2 emissions had increased and whether the company was reconsidering its funding of the Pebble Bed Modular Reactor (PBMR) project.

Mr Gcabashe confirmed that CO2 emissions had increased due to the larger volumes of coal being burnt to generate more electricity. Eskom, the Industrial Development Corporation (IDC) and British Nuclear Fuels (BNF) were the main investors in the PBMR project. However, Eskom had decided to withhold further funding as it would in future play the role of potential customer. More funding was required to build the demonstration reactor and if successful, Eskom would be the first customer. The IDC had taken over the role of lead investor and had received funding support from the Department of Trade and Industry. Discussions with potential foreign investors were ongoing, but details had to be sought from the IDC.

Prof I Mohammed (ANC) asked whether Eskom was scaling-back the number of new electrifications and whether and when new power stations would be built.

Mr Gcabashe pointed out that the number of new electrifications had normalised in the past year. There was no question of scaling-back as the number would have to increase again to meet the Presidential target by 2008. Eskom would re-commission three coal-burning power stations that had been mothballed. It would also convert one mothballed station into a gas-turbine power station. New base load generation capacity would be commissioned by 2008 / 2009. The use of natural gas as primary energy source for new power stations was receiving high-level attention. The company was currently engaged in detailed planning for this process and more details would be forthcoming in future.

Department briefing
Ms M Hermanus, Acting Director-General, highlighted that the Mine Health and Safety Inspectorate had conducted a review of the Mine Health and Safety Act; mine accidents and fatalities had decreased; the Mine Health and Safety Council (MHSC) and the Mining Qualifications Authority (MQA) had aligned their priorities with national policy objectives; and the Inspectorate had continued with a number of initiatives including skills development, support to SMMEs and HIV/AIDS education. The Mineral Development Branch had started implementation of the Mineral and Petroleum Resources Development Act; had focused on mine rehabilitation and the launch of the African Mining Partnership.

The Hydrocarbons and Energy Planning Branch had guided the Petroleum Products Amendment Act and the Petroleum Pipelines Act through Parliament; had monitored compliance with the BEE Charter in the liquid fuels sector; had completed a White Paper on Renewable Energy and had prepared the first Integrated Energy Plan.

The Electricity and Nuclear Branch had completed a draft radioactive waste management strategy; a skills master plan for the nuclear sector and an electricity pricing policy. Significant progress had been made in the establishment of the first Regional Electricity Distributor (RED).

The Auditor-General had qualified the DME's financial statements for the first time. Major deficiencies in revenue and asset management and the collection of levies in terms of the Mine Health and Safety Act had been identified. DME had underspent its 2003 / 2004 budget by R28m. R10, 6m of this amount had been rolled over to the next financial year.

Discussion
Adv Schmidt asked how many claims had been instituted against the DME as a result of the Mineral and Petroleum Resources Development Act; whether the Auditor-General's concerns were being addressed; whether the Department had a policy to deal with excess water in dormant mines and whether the government was considering extra-ordinary measures to bring down the price of petrol and diesel.

Mr Ngcobo (ANC) asked who had advised government to allocate R500m to the PBMR project; whether DME was still committed to the project and what its export potential would be.

Mr C Morkel (DA) asked if the DME would submit draft regulations to the Committee's scrutiny; whether pressure was being applied to mining companies that still needed to convert their old order rights; whether empowerment was occurring in rehabilitation activities only and whether certain municipalities had refused to be part of the RED establishment process.

Ms N Mathibela (ANC) asked for the DME's plans to reach the 30% of the population that had not yet received electricity and whether increases in paraffin prices could be avoided.

Mr Kekana asked what happened to the money if pre-paid electricity cards were not collected by eligible persons and how many women were involved in mining.

The Department responded to the above questions by line function responsibility at the direction of the Acting D-G. The Deputy Director-General: Electricity and Nuclear, Ms N Ngubane, said that government had undertaken a risk management strategy for the PBMR and its R500m investment. This amount would be used for more design work on components for the demonstration reactor. According to her information, Eskom was still committed to the project as its first potential customer and export potential was still being investigated.

Not a single municipality had indicated unwillingness to sign the RED co-operation agreement, but a number had outstanding concerns and wanted assurances from government on a number of issues, particularly the potential loss of revenue. The Department was dealing with these concerns. The Department was trying to accelerate electrification and was committed to the 2008 target set by the President for full coverage. If pre-paid electricity cards were not claimed, the funds reverted to the National Revenue Fund.

Dr R Crompton, DDG: Hydrocarbons and Energy Planning, said government had already replaced the In-Bond Landed Cost (IBLC) formula to determine local fuel prices with the Basic Fuels Price (BFP) formula. This saved motorists some R1bn per annum. It had also instituted a price "smoothing" mechanism to cushion the effect of large monthly increases on the economy. A task team had been appointed to investigate South Africa obtaining insurance against a very high international oil price, but the cost of the insurance was prohibitive. Paraffin had been VAT zero-rated and an upper price limit had been set. If the Committee requested participation in the finalisation of regulations, the Department would be more than happy to appear before it.

The Chief Director: Mineral Policy, Mr A Mngomezulu, responded that about 2 000 claims by farmers and owners of unused rights had been made against the DME. The Department, together with local government, were involved in pumping excess water from mines. A lot of consultation with mining companies about conversion had already occurred. Mining companies were doing well on the Charter's procurement requirements, but seemed to concentrate too much on the equity requirements. Only one company, Harmony Gold, complied with all the Charter requirements at this point. The "day of reckoning" for all other companies was fast approaching as their conversion applications would not be accepted if they did not comply with all the Charter requirements. Very few women were involved in mining and mining companies would have to face this hurdle when applying for conversion.

Ms Hermanus stated that the Department was addressing the A-G's concerns, but that a major problem was trying to get information from the Department's lower levels to headquarters level. This had negative implications for resolving all the A-G's concerns. She promised to supply the Committee with more information in writing.

The meeting was adjourned.