Eskom Annual Report: 2006/ 2007 briefing

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Public Enterprises

09 November 2007
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Meeting report

MINERALS AND ENERGY & PUBLIC ENTERPRISES PORTFOLIO COMMITTEES
9 November 2007
ESKOM ANNUAL REPORT: 2006/ 2007 BRIEFING

Chairpersons:
Mr E Mthethwa (ANC); Ms F Chohan (ANC)

Documents handed out:
Eskom Annual results 2006/ 2007 presentation
Eskom Annual Report 2006/ 2007 [available at www.eskom.co.za]

Audio recording of meeting

SUMMARY
The Committees, sitting jointly, were briefed on Eskom’s Annual Report for the year 2006/ 2007. The main achievement for the reporting period had been the progress of the capital expansion programme though the initiative had faced funding challenges. Eskom reported that there were major challenges to electricity supply given the increased demand for energy and the long time lines involved in building additional power stations. The panel reported major achievements in employment equity, Black Economic Empowerment (BEE) procurement standards, safety measures, developing energy efficiency strategies and stated that the overall financial health of the public entity was sound.

The Committees were concerned about Eskom’s insistence on reduced consumer demand for electricity given South Africa’s economic growth projections. Members expressed concern with Eskom’s early warning systems around power outages and load shedding. They were satisfied with the financial standing of the entity but queried Eskom’s intimation that tariffs would be increased and asked if increases in operational costs could not be financed through income and profits. Queries were also made around the reserve margin. The Committee noted that there had been insufficient time at this meeting to engage fully on all issues.

MINUTES
Mr Valli Moosa, Chairman of Eskom, introduced the Eskom panel, which included the newly appointed Chief Executive Officer Mr Jacob Maroga. Mr Maroga, an electrical engineer by training, had formerly been employed in the distribution and transmission division of Eskom. He had replaced the former CEO in March 2007 after a national and international search process. Mr Maroga was an electrical engineer by training and had been formerly employed in the distribution and transmission division of Eskom. Mr Bongani Nqwababa, Finance Director of Eskom, was also present.

Mr Moosa mentioned that the Eskom had received an unqualified budget from external auditors in the reporting period. Eskom was in the process of its biggest-ever capital expansion programme, which was on target, and in some instances had been slightly above target. In the financial year new higher wattage (500 MW) power stations had been built in Atlantis and Mossel Bay.

Mr Moosa said Eskom’s board had been looking to oversee capital expenditure of R78 billion for a new site in Lephalale and several large scale contracts had been awarded in this regard. In the next ten years R150 to R200 billion would be made available, with an overall R1 to R1.2 trillion to be invested in Eskom as a whole. Mr Moosa said that a stable governance structure was necessary for Eskom and therefore a wide range of international personnel with varying expertise had been selected for board membership.

Eskom had dealt with the pressing issue of the large demand for electricity and energy that faced the country. Mr Moosa stated that Eskom was unable to match the supply of electricity with demand and had noted that in the years to come demand would grow even more. Open Cycle Gas Turbines (OCGT) also known as “back-up generators” had been invested in for use at times when electricity was in short supply. These were not sufficient. The country required base load power stations of high mega wattage. These were costly to build, the preliminary work of environmental impact assessments took up to 48 months to complete and then a further four to seven years to erect. Until such structures were built South Africa would continue to demand more electricity.

With regard to global warming and climate change Mr Moosa stated that South Africa had no specific Kyoto Protocol emission targets but that Eskom had a multi-generational outlook and had been making efforts to forecast regulatory practices for up to at least 30 years. Mr Moosa was confident that the next annual report would reflect drastic improvements with regard to environmental preservation.

Eskom had made inroads to finding and securing new sources of energy through cleaner coal technologies and methods that substantively reduced harmful emissions, such as harnessing wind power and developing solar energy. From an environmental perspective energy efficiency would take on significant importance in years to come and the major challenges faced would revolve around continuing to provide low cost energy for South Africans.

Mr Jacob Maroga, CEO, Eskom noted that the Annual Report covered the period to April 2006 to March 2007. The presentation covered shareholder compacts and demonstrated that targets had been met in the key performance areas, and the indicators and outcomes were tabled. Eskom had had sound financial performance and was in sound financial health, reflected by pleasing responses by investors. Satisfactory relations with customers were reflected through increases in electrification, gains in stabilising electricity prices, progress in matching tight supply with high demand and responding to the energy supply challenge through the capacity expansion programme over the next ten to twelve years, one of the largest programmes on the globe.

Mr Maroga noted improvements and gains in Eskom’s building programme, employment equity, education and training, safety, Black Economic Empowerment (BEE) procurement, diversification of energy resources, circumvention of the challenges posed by global economic constraints, achieving financial sustainability and restoring public confidence in Eskom. In terms of future forecasts and expectations the capacity and capital expansion programmes would be achieved.

Discussion
Chairperson Mr Mthethwa asked for feedback with regard to the re-commissioning of power stations such as Camden, as this related to the core problems around electricity supply.

Chairperson Ms Chohan asked Members to pose questions in categories. The first would pertain to financial queries, increase in capacity and capital requirements, the second category should relate to carbon emissions, environmental preservation and energy efficiency, and the last category would cover general queries.

Mr M van Dyk (DA) addressed issues that pertained to financials and capacity. He asked if an increase in tariffs would contribute to overall inflation. He noted the R6.5 billion in profit and asked this had not been redirected into production to cover costs and avoid increases in tariffs. With regard to the expected R16 to R17 billion tax overruns, he asked why had Eskom not approached Treasury for funds.

Mr van Dyk expressed concern that the presentation had not addressed cable thefts and wanted to know the number of risk management meetings held in this regard.

Mr van Dyk was unconvinced that sudden changes in weather were sufficient explanation for power outages and queried the early warning systems in place to deal with shortages in power supply.

Mr C Gololo (ANC) commented that the rise in levels of economic growth in South Africa would translate into increased general spending over the next twenty years. He wanted to know if Eskom planned to build more power stations. He asked how many of the new electricity connections referred to in the presentation reflected electrification in the rural areas.

Ms N Kondlo (ANC) noted that the capacity expansion programme was an interesting and promising initiative but that the presentation lacked clarity on the challenge posed by the reserve margin, which had been under 10% for some time. She wanted to see the link between the expansion programme and an increased reserve margin demonstrated, and moreover a reserve margin in line with international standards. She further queried the possibility of tariff increases given that the economic standing of the majority of South Africans qualified them for free basic electricity.

Ms N Mathibela (ANC) asked where were the women who were mentioned in the presentation as representative of BEE procurement or black women owned enterprises, and at what levels they were represented.

Mr M Matlala (ANC) asked what had caused the decrease in group profit after tax as reflected in the presentation. He noted the differences between rates for domestic users who were Eskom customers and those who were municipality customers. He wanted to know if one of these groups would be affected more adversely than the other, in the event of future transformation within the electricity supply industry. He asked if a report that reflected Eskom’s ability to reach its targets versus its backlog was available; and how much had been done in the three provinces affected in this regard.

Mr C Kekana (ANC) also referred to the reserve margin and expressed uncertainty that reserve margins would be able to cope in the interim period, given the time needed to build stations and increase supply.

The presenters from Eskom answered the questions in general terms and expanded also upon what had been reported in the presentation.

Mr Moosa stated that the reserve margin would not improve in the next five to seven years and that if demand for electricity continued to increase at an accelerated rate there would be significant shortages in supply. Demand and consumption needed to be curbed. He remarked that there was indeed a very direct relationship between weather (temperature) and demand for electricity, noting that low temperatures resulted in high consumption of electricity. He added that although it was possible to make long-term weather predictions and have these factored into hourly demand. However, because of the twenty-four hour cycle of power stations during winter months, maintenance for stations was scheduled for summer months. Such maintenance required cuts in supply and was primarily targeted at industrial users from whom Eskom bought back power. Electricity supply interruptions were the last resort, as turbines in Drakensberg and other procedures were put in place before supply was interrupted.

With regard to building additional power stations to meet increased demand, Mr Moosa said these were planned for in the near future, but he emphasised that demand still had to be controlled. There were several options available to the country for capital expansion to be funded. National policy had to be formulated to avoid price increases. Though each option carried implications the rationale was that tax-payers or electricity users would fund the programme. The financial health of Eskom must be maintained and it was important to note that amounts spent on building had not tallied with income in the past. Eskom was forced to borrow in order to cover costs. Another funding option would be where private sector would build power stations to be bought back by Eskom.

Mr Moosa stated that electrification targets envisioned that all South Africans would have electricity by 2012. The speed of achievement on this target would be determined by funds available through National Treasury as the programme was Treasury-financed.

Mr Maroga noted that Camden was the first of the re-commissioned power stations to be completed, and five units would be up and running by the end of November. Gautvlei was expected to be complete and functional by 2011. He added that the number of power stations had been constrained by building regulations. He stated that the issue of cable thefts had not been neglected, and was in fact linked to number of deaths reported upon in the safety section of the Annual Report, and the presentation and that the issue of risk management had been extensively reported on in the full Report.

Mr Maroga noted that although electrification had initially been confined to urban areas, recent efforts had been focused on rural areas. Efforts had been made to properly address pricing and subsidies. He added that the profiles of, and categories in which women were represented, in terms of BEE procurements and regulations, would be reflected in a more detailed document at a later stage. Electricity Distribution Industries (EDIs) treated customers equally across the country and this translated into uniform tariffs. He further responded that reserve margins in relation to Soweto outages reflected problems at distribution level and that synergy between available funding and necessary building had to be achieved. Funds had to be available right up to the end of a project. He added to the issue of early warning systems and stated that load shedding happened as a consequence of sudden incidents, and as such the impact of early warning was limited.

Mr Bongani Nqwababa added that Eskom’s financial regulation was conducted through multi-price determinants, through the National Energy Regulator of South Africa (NERSA), over a three year period. The system was based on the costs of operation compared to fixed revenues and then Eskom used funds according to the regulations. Within this system Eskom did indeed use income generated and profits for operations. This, however, was not sufficient especially given the capital expansion programme and there was a need for external borrowing. Inflation would certainly be impacted by increased tariffs. The same dynamics applied to electricity as to the crude oil market; namely that all basic commodities and services were subject to price increases linked to a rise in oil prices. In this case the increased cost of low grade coal affected the cost of coal in general, and hence the production and supply of electricity, as well as related commodities and services.

Mr Nqwababa added that increased costs in capital equipment added to the need for tariff increases, and equipment favoured a seller’s market susceptible to global trends and economic fluctuations. All of this contributed to declined profitability. These processes affected operations but were not represented as a ‘pass through cost’ on the customer because of the National Energy Regulator of South Africa (NERSA) regulation. Eskom had to absorb the cost, which amounted to close to R6 billion.

Mr Nqwababa also touched on cable theft, noting that it was dealt with on page 91 of the full report and had declined from 1142 in the last reporting period to 449 in this year. Legal action was taken against some of the biggest cable dealers and this was a reflection of progress made.

Chairperson Mr Mthethwa commented that the comparison of Eskom to other Southern African Democratic Community (SADC) entities was helpful, but should have indicated pricing comparisons and been specific about which entities were being compared. He also thought that there was a need to be more specific about domestic customers versus industrial customers. In regard to the reserve margin issue he asked what was meant by “the need for decreased demand”, given that the growth of the economy inevitably meant increased demand for electricity. The Chairperson also asked for clarification on the crude oil example.

Chairperson Ms Chohan asked if an analysis had been conducted on price and tariff increases. Based on the graphic presentation of electricity pricing, she asked that the comparison should show the pricing of households versus the industrial customers. She noted that there was not sufficient certainty in terms of the reserve margin, and asked then, in percentage terms, how much was directed towards future planning.

Mr van Dyk asked for further clarification on his previous query on early warning systems. He referred to general accusations against Eskom that warnings had not been timeously issued, and that this had affected the economy negatively. He added that Eskom seemed to be unable to sufficiently deal with warnings and gave a personal example of how an enquiry call to Eskom on one occasion had been inefficiently dealt with. He asked how load shedding issues would be handled during 2010.

Mr Kekana congratulated Mr Moosa and Eskom on what had been achieved in solar energy. He asked that more imaginative and creative answers be provided to the Committee than broad general responses.

Mr Matlala requested a comparison in figures of the previous and current year as well as illustration of how the hiccups in EDI had affected current restructuring.

Mr Gololo commended Eskom on their efforts to combat HIV/AIDs and asked if tool-kits were being sold to Eskom’s suppliers. He reflected that the 3% increase in employment of people with disabilities was commendable, but wanted to know the categories and levels at which these individuals were employed.

Ms Mathibela requested a break down of the gender equity figures. With regard to safety she enquired if Eskom had embarked on education programmes of people working in the industry, as well as community members.

Ms Kondlo asked if Eskom had conducted investigations into causes of accidents - for example personnel working while fatigued, and faulty equipment. She referred to challenges in personnel retention, and how these were being addressed. She noted that a large number of individuals were being trained but did not remain at Eskom where their skills had been acquired.

Chairperson Ms Chohan asked that one member of the Eskom panel should talk through the situation around Eskom’s subsidiaries.

In answer to the queries on price comparisons, Mr Maroga responded that it would be useful to use residential tariffs but difficulties would be posed by the wide range (approximately 2000) of tariff brackets. With regard to climate change he noted that long time lines and gaps between planning and implementation, because of the ten to fifteen years building time, posed challenges. Other variables like economic growth projections and currency fluctuations also had to be factored in and these inevitably affected plans. Over the next 20 to 25 years, based on current strategies and plans, it was anticipated that carbon emissions would have decreased.

Mr Maroga reiterated that load shedding was always a last resort and events that made it necessary to load-shed occurred in real time, which meant limited time for warnings to be issued to customers. He assured the members that Eskom took 2010 seriously and it had presented an opportunity for the appointment of a Chief Executive to deal specifically with electricity supply for the tournament. The plans involved supply being bought back, mostly from industrial customers, to ensure sufficient capacity to deal with the 2010 demand. The plan included sufficient infrastructure redundancy, back-up generators and supply strategies used in the past, which Eskom had discussed with previous hosts of World Cups.

In terms of growth it was possible that demand be reduced without the economic growth being negatively affected. He referred to basic strategies that could be employed by consumers to reduce demand and consumption. There had been a large reduction in the number of fatalities. EDI hiccups had impacted on municipal supply with particular asset ownership and maintenance.

The increased numbers in disability employment were reflective of increases across all employment levels. In the area of safety accidents were not confined to vehicular accidents but included electrocution. Training, such as defensive driving and electrocution precaution, had been provided for personnel. Despite the challenges faced in personnel retention, this had not impacted on maintenance of plants. Owing to global challenges in the built environment and increased demand for skilled personnel, it was a fact that Eskom’s trained individuals were targeted by major international entities.

Mr Nqwababa clarified his crude oil example and stated that he had merely used it to illustrate the cost and pricing dynamics of a global commodity, noting that coal was indirectly impacted by high prices of crude oil.

With regard to National Treasury and financing, he explained that the current policy was that NERSA regulated spending and Eskom had not as yet approached Treasury directly for funding. He referred to page 151 of the main report for clarification on the cash reserve increase. Working capital had increased because current liabilities had increased at a faster rate.

Chairperson Ms Chohan interjected that, based on sales growth, the presumption was that consumption had decreased.

Mr Nqwababa responded that this was addressed on page 154 of the main Report, which reflected that cash generation was higher because working capital had increased. He further directed members to page 67 of the main Report for relevant safety statistics.

Mr Maroga referred to page 93 of the Annual Report with regard to subsidiaries. He reported that on a net basis Eskom’s subsidiaries were operating on profits of over R200 million a year. He gave specific examples of those that had made considerable profits and one that had made a loss over the last financial year.

Chairperson Ms Chohan closed the meeting. She noted that a two hour meeting had been insufficient to deal with an entity like Eskom. She expressed the need to engage with the financial statements, and noted that there would be site visits by committee members to various Eskom sites. Longer sessions would have to be planned in order to sufficiently plan for future endeavours.

The meeting was adjourned.

 

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