Electricity Crisis and Pricing: briefing by Eskom and NERSA

Meeting report

Electricity crisis and pricing presentations: Eskom
Mr Jacob Maroga, CEO: Eskom, noted that the main challenges around the electricity crisis included the financial sustainability of Eskom, the extraordinary times that the country found itself in, the extraordinary measure that were required, where the company found itself now and further financial constraints that they were experiencing. The progress to date included the capital expansion programme that Eskom had embarked on. The key principles underlying their application for a price hike on the tariffs were listed (see attached presentation for details) Regulatory rules that adjusted to changing industry drivers were explained. A review of recent history was given as well as the reasons for electrical systems operating with a reserve margin and other buffers. The two key components to the reserve margin – namely, the operating reserve margin and the generation capacity net reserve margin - were clarified. The re-establishment of the buffers that were linked with Eskom’s recovery programme were listed.

Mr Maroga continued to give a review of the plans that Eskom had executed during Winter 2007. It had utilised tools such as the colour coding, and the original prognosis and review was detailed. Comparisons were made of peak energy demand for 2006 and 2007. The operating challenges to meet demand for winter 2008 were given. Both the ability to meet the demand and the further plans for energy would be needed. A review of load shedding and energy saving by such shedding was given. The reasons for stopping the planned or scheduled load shedding were listed, and these included the impact upon industry, the evidence of savings, and other agreements with customers. Eskom’s engagements with the top eleven metros and municipalities, key industrial customers and other customers were clarified. The prognosis for Winter 2008 was given. The assumptions and scenarios for planning purposes were listed. The colour coding would be used once again. Load shedding would be the last mechanism used to manage the system under any scenario. The colour coding for May through to August 2008 was given.

Mr Maroga gave his concluding statements that included issues such as energy savings that were required to manage network constraints. An important component of their proposal was that regulatory rules should allow for adjustment to changing fuel and capital costs.

Discussion
Mr O Monareng (ANC) thought that Eskom should deal in percentages. The Committee needed to understand why the 53% price hike was required.

Mr Monareng asked what impacted the credit ratings and what were the reasons for whether the rating was positive or negative.

Mr Monareng was aware that Eskom was not a company that was running at a loss. Once the Members received an explanation perhaps they could understand why Eskom could not revert to the profit margins to fund the expansion.

Mr Monareng asked if there had been consideration for the poor, as it was known that there could not be the same targeting on price hiking as with other targeting.

Ms N Mathibela (ANC) asked for further clarification about the metros and municipalities and what they had done.

Mr S Vundisa (ANC) knew that Eskom was a profit-making organisation and asked what was the role of Eskom in relation to the Accelerated Shared Growth Initiative for South Africa (Asgisa) as nothing appeared in terms of renewable energy.

Mr Maroga clarified that there were eleven municipalities including metros. He mentioned the tenders for large equipment such as boilers and turbines and the fact that there was not a company in South Africa that dealt with that. However, in the building of boilers, steelwork and welding would be required and this would happen in South Africa, although the company undertaking that part of the work was an international company. Part of the Asgisa contribution by Eskom could be seen in how the company was beginning to look at Asgisa benefits in its procurement strategies. In respect of the work on the boilers and turbines, part of the evaluation process for the tenders questioned how each company would localise their manufacturing, utilise local partnerships and build local skills. This would also meet some of Eskom’s strategic objectives.

Ms Mathibela asked if their pricing included considerations of the performance bonuses.

Mr Maroga replied that Eskom staff had not received bonuses, nor had there been any calculation of bonuses. The authority over the bonuses was the Board. He hoped that the Board would not only look at the technical calculation but would also note what needed to be done about bonuses in the current context. The Board would ultimately make the judgement. His view was that there should be a different remuneration structure that acknowledged the kind of challenges that Eskom and its staff were facing, and that the Board should begin to provide incentives for people to deal with those challenges. It would not be proper to be seen to profit from the kind of emergency that South Africa was experiencing. The power system challenge was probably the biggest crisis in South Africa and Eskom needed to attract and retain the best and the brightest staff. Those whom they attracted also, for their part, needed to feel valued, and part of that value could be shown through incentives. This would not mean that people would profit out of this emergency, but merely that their worth would be recognised. 

The Chairperson responded that bonuses would then be referred to as incentives and would be used to attract skilled people. Furthermore the media had said that there were investigations that the bonuses were inflated using funds from the Asset Maintenance Fund, so that world creditors would see Eskom as making profit.

Mr Maroga rejected any suggestion that the books were changed to attain big bonuses. There were both internal and external checks and balances. The fact that there was an application with the Regulator that indicated over-expenditure on coal should be an example of that. Over the past three years Eskom spent R13 billion, over and above what was budgeted, on the purchase of coal. They did not stop buying coal or using power stations on the basis of financial considerations.

Ms Mathibela asked about their capacity, since Eskom had stated that they did not have skilled people.

Mr Maroga replied that skills, specifically skills of technical artisans, and in engineering and project management, were required across the world. Eskom was doing refurbishment in the Ermelo area, and even there it was not unusual to find advertisements placed in the local newspapers by Australian companies looking for project engineers. The skills shortage in these areas was a global phenomenon. Some of the things that Eskom had done were to partner with international companies. They had also gone overseas to recruit skills. The biggest issue was the resources to be spent on salaries because of the exchange rate. They were also beginning to spend money on artisan training.

Ms Mathibela mentioned the ageing plants, and said hat in 1994 government stated that they would electrify one million houses. She questioned why then Eskom did not add new plants in order to ensure that there was sufficient capacity.

Ms D Seamodimo (ANC) mentioned that the presentation had said that there as R264 billion approved since 2004. She wanted to know if the plan was for five years, if there was money outstanding, and if they would use that money.

Mr Vundisa asked what impact would have the price hike have on economic development.

Mr Maroga replied that the price hike would have an impact. However, both sides should be looked at. It should be considered whether the full potential had been reached for Eskom, in the long term, to be viable and sustainable, and, if not, what the impact on the economy would then be.

Mr Vundisa asked what impact the price hike would have on the working class and the poor.

Mr Vundisa commented that Eskom had given comparisons with India and China. The rate unemployment in South Africa was high, and therefore proper comparisons could not be drawn to those countries.

Mr Maroga replied that the price hike had to be placed in context. He had mentioned China and India because they had an impact on the global supply of capital equipment. They were the largest consumers of that equipment, and as they grew the suppliers were responding by prioritising their needs, and this affected South Africa.

Mr Vundisa questioned why the burden was high on households, and not on business, in terms of inflation and increases.

Ms A Dreyer (DA) noted that it was clear that the challenges were daunting. In South Africa there was a skills shortage crisis and so she questioned where Eskom would find the people to help address the problems.

Mr C Kekana (ANC) was concerned whether the electricity price hike would be able to boost the economy to create jobs for the poor. He questioned whether the poor would have to wait five years before there was sufficient electricity in order for them to obtain jobs.

Mr Maroga replied that employment was an important issue. There was a clear need to grow the economy but in order for it to grow more energy was required. Eskom’s recommendations for power conservation were aimed both at dealing with the current operations and allowing for growth. He indicated that the issue that gave confidence was that there was room for saving, and that Eskom were the cheapest suppliers of electricity in the world. They were 74% cheaper than Canada but clearly their efficiency was not the best. Many studies had indicated that South Africa was the most inefficient per unit of Gross Domestic Product (GDP) output. The issue for South Africa was how to minimise its energy requirements while maintaining the GDP output. This was a national challenge. In countries where energy was priced correctly, and the culture of energy efficiency was entrenched, less energy per unit GDP output was used.

Mr M Matlala (ANC) asked how much how would Eskom be planning to spend on the expansion programme if they received the 53% hike at the end of the financial year.

Mr Matlala stated that this was an indictment of poor planning. The issue of ageing equipment should have been known. He was worried that some of the people that had been instrumental in the creation of the problems were now consultants.

Mr Maroga replied that the issue was not only around poor planning but that policy, regulatory and operational issues had also conspired to put Eskom where it currently was. If South Africa dealt with policy, regulation and usage the problem could be solved. It was not only an Eskom issue. South Africa as a whole had to ensure that the right policy intervention was used.

Mr Matlala wanted to know how much electricity was sold to the neighbouring countries. He heard that some countries were paying to little and asked for the different tariffs customers were being charged.

Mr Matlala noted that the shareholders (the Government) were not adding money, but that the customers and consumers were having to do so. Each year Eskom was making a profit and he asked if that profit could not have been utilised.

Mr C Molefe (ANC) asked for further elaboration on the crisis and the amount of electricity given to the neighbouring countries. This was because it was not indicated that there would be a need to raise the prices, at the time of the energy summit, when permission was given to Eskom for the building for the new power plant.

The Chairperson asked how could Eskom use the same people who had shown questionable leadership now as consultants.

The Chairperson mentioned international opinions about the process at Eskom. There was an Eskom Act that gave Eskom the status of conversion into a corporate entity. He asked if Eskom was a public or private utility, as it was difficult for the Committee to understand certain issues. If Eskom was a public utility then electricity should be a public good and not a commodity, and therefore it should comply with resolutions taken by the country. The fact that the very people who had presiding over the processes that led to the lack of electricity were made consultants showed poor planning. Another argument raised was that the National Energy Regulator of South Africa (NERSA) had said that they were not given proper information that the R60 billion was equity and not a loan. The R60 billion was money that was supposed to support Eskom as a public utility.

Mr Maroga replied that Eskom was a company that operated along accepted corporate governance principles, as would any company with one shareholder, the State. Clear policy direction was received from the shareholder. Whether Eskom was a public or private company, the power station cost of R84 billion had to be funded. They could discuss whether a private company would have a higher expectation of return than a State-owned company. There was a need to make sure that Eskom’s primary mandate was that of public good rather than profit maximisation. Regarding the R60 billion, he noted that Eskom was discussing with the shareholder the modalities of that disbursement. Currently there had been no finality on this issue. There was a commitment from National Treasury but they still had to work out how it would be disbursed and over what period of time.

The Chairperson asked what had happened since Eskom had been given permission to expand four years ago, and why were they being referred to the National Treasury now.

Mr Maroga replied that the drivers that were pushing the costs up included the increased capital expenditure, that was not present in previous years, and the increased cost of power, and that also stemmed from cost restraint. Eskom had an agreement with the shareholder that they did not pay dividends. The underlying issue was that even if they did not pay dividends the size of the spend was so large that it could not be funded by the cash from operations. If tariffs did not change, there would have to be a large commitment from the shareholder.

The Chairperson responded that the unions had been saying that Eskom had made a quantum leap, instead of steadily going forward toward a tariff increase. It would make them quite unpopular with the public. He suggested that perhaps the Committee should make its submission on this issue.

The Chairperson mentioned that there was an undertaking by the Minister and the former CEO of Eskom that once the new electrical generators had come from France and once they had negotiated with municipalities and service providers for sufficient capacity, then that would be enough. They had budgeted R97 billion to upgrade capacity. However, now two years later the new CEO painted a grim picture, and the former CEO had become a consultant.

Mr Maroga replied that the current problems should be placed into perspective. It seemed as if all the problems had arisen in Eskom and thus it was thought that Eskom was the problem. However, the problem stemmed from policy issues, regulatory issues and how the economy had developed. It must be realised that there was a multiplicity of issues that culminated in the current challenges. The question had been raised that if Eskom knew that there would be capacity problems, why did it not build further capacity. Before 2004 there was clear policy that Eskom could not build further. After a change in policy in October 2004, which allowed Eskom to build, Eskom had then begun the process of understanding the task ahead, such as the procurement processes and so forth. Unless the policy and regulatory environment was understood the problem may be misdiagnosed.

The Chairperson continued that there had been another statement, in one of the previous strategic plans, to the effect that Eskom guaranteed that the new capacity built would be absorbed by Eskom, and not the public. He asked how then the Committee could trust Eskom, when they had previously said that their power needs were seen to.

The Chairperson noted that the negotiations had gone through NEDLAC and that something totally different to the original proposals had come out. The 53% that was being asked by Eskom was supposed to be phased in over five years. Now it was said that there would be an immediate rise in electricity prices of 32%, to be followed by another 14% rise, and this added up to 43%. There would then be an approximate 2c per kilowatt rise in prices, which would bring the total rise to 53%. Furthermore, the electricity price would then rise each year by 20%. This approach could be called an “ostrich” approach.

Mr Maroga replied that the issue of pricing was not about the amount specified, but was rather about principles. It was about the required funding and the undertaking into the operations of Eskom. It would take a period of time. The company was 85 years old and assets must be put in place along a plan that envisaged that Eskom would be operating for fifty years and beyond. When Eskom asked for funding it was referring to a long-term predictable sustainable path. The plan needed to be articulated in such a way that money needed to be spent, so that power stations could be built. Rating agencies had looked at what the funding would be spent on, and what the revenue from operations was spent on. If there was a mismatch between the liabilities and revenue there would be a rating to the effect that Eskom would not be a good funding destination. There was a mismatch between what Eskom could be committed to do and their tariff path, so they could not maintain a good credit rating.  

The Chairperson mentioned the problem of the shortage of coal. South Africa was one of the largest exporters of coal and this begged the question of why there would be a shortage of coal. There was the suggestion that if the coal industry had been privatised, causing the shortage of coal, then why should the State not buy over two or three mines and make them State institutions, thus ensuring that there was coal for Eskom.

Mr Maroga replied that exports accounted for a maximum of four percent of the consumption per annum. It was small, yet significant when there was a problem. The principles laid down that when there was a challenge they could not just continue to support whomever they were exporting to. There was the Southern African Development Community (SADC) and the Southern African Power Pool (SAPP), whose utilities made up an entity. There was a protocol around emergencies. When countries in the SAPP were in a power crisis they would be able to use the SAPP as a resource. It would be shortsighted to depart from what the protocol stipulated. When there was load shedding in South Africa, proportionately the load shedding also happened elsewhere in SADC. There were negotiations for power stations to be built in other areas of Africa, and a lot of that power was earmarked for South Africa.

Electricity Price Increase 2008/09: NERSA presentation
Mr Thembani Bukula, Electricity Regulator: NERSA, realised that there were severe time constraints and therefore gave a very brief summary of his presentation. A brief introduction and background to the price determination was given. The application for a 53% increase for 2008/09 by Eskom was clarified. The financial modelling assumptions were listed. The various pricing scenarios were illustrated. Timelines from the application date until the time that the final decision would be taken were also illustrated. The consultation paper of the 8 April 2008 was explained. The responses received to the application from Eskom totalled 370.

Discussion
The Chairperson reminded the presenter that in 1994 South Africa had been informed that those that had no access yet to electricity would get access at a reasonable price level. He questioned whom NERSA was protecting and whose interests it had at heart.

Mr Bukula replied that the poor and the indigent represented only 2% of the consumers. He did not want to get into an avenue that had not been properly debated. The figures were there and solutions were at hand and would be put on the table.

Mr Molefe noted that everything worked within policy and regulation. However he asked what would happen if NERSA came to a determination that people found displeasing.

Mr Bukula replied that could not predict what would happen. NERSA were sure that their task was to ensure that the licensee operated efficiently and produced electricity efficiently and at a reasonable price and return. If NERSA was faced with an application it would follow due process and would have to take into consideration all the submissions, as well as the applications. NERSA had received more a number of presentations that were unprecedented in the country. He was sure that the Regulator, following all the proper procedures, would definitely arrive at an appropriate conclusion. If the decision was not accepted there was legal recourse that could be taken, whereby an application could be made to Court.

Mr Kekana asked if there were presentations made by government in its fiscal capacity.

Mr Bukula replied that National Treasury was scheduled to give a presentation but that this had had to be postponed. The submission by National Economic Development and Labour Council (NEDLAC) indicated the issues that were being challenged by the Department.

The Chairperson mentioned that the Committee was the oversight structure to NERSA. He cautioned that the decision taken must not take the South Africans on to the streets.