Tariff hike unlikely to save Eskom

Tariff hike unlikely to save Eskom

The Cape Chamber of Commerce and Industry says tariff increases is unlikely to save Eskom if it does not tackle costs that appear to be rising out of control.

“A quarter of Eskom’s generating capacity is off-line undergoing maintenance or being repaired after breakdowns yet the costs continue to rise,” said Janine Myburgh, President of the Chamber.

Over a period of six years primary energy costs (mainly coal) increased from R19bn to R70bn. That was an annual increase of 24.3% which is roughly four times the rate of inflation.

“We need to ask some serious questions about these costs because there are allegations that Eskom is paying something like four times the going rate for coal from some BEE companies,” said Myburgh.

Earlier in March Fin24 reported that Anglo American [JSE:AGL] wanted to withdraw its supply of coal to Eskom because of government requirements that blacks must own at least 55% of a supplier.

 

Energy analyst, Ted Blom, a former senior executive at Eskom, said that he was certain that Eskom’s costs were rocketing as a consequence of having to source from the black controlled companies.

Noting that long-term contractors which included BHP Billiton [JSE:BIL], Anglo American, Exxaro [JSE:EXX] and Glencore [JSE:GLN] were paying in the region of R170 a ton, it was industry talk that “the BEE price is R460 a ton plus the costs of transporting”.

He pointed out that many of the BEE mines were not “mouth” suppliers. Many of the long term suppliers had coal mines right next to Eskom’s coal-fired plants but other coal supplies had to be trucked in.

According to Myburgh the Chamber has always supported BEE and it understood that there would be additional costs from smaller suppliers, but these should be kept within reasonable limits. The best way to do this was to be transparent about the prices.

“This is not commercially sensitive information. It’s about public tenders and the prices and quantities should be public knowledge,” she said.

“We have also heard some shocking stories about diesel purchases from some unlikely middle men. We need to know what Eskom is paying and why it cannot buy directly at wholesale prices, discounted for bulk purchases”.

According to a Sunday Times report, a dentist, Dr Maxine Kekana, and a beauty therapist, Monica Nkosi, were among the suppliers given the task to deliver R200m worth of fuel to Eskom.

 

Kekana’s company Kekoil and Nkosi’s firm Kamoso are two suppliers Eskom uses from time to time despite having contracts with major oil suppliers, including PetroSA.

The newspaper reported that at the time the two women secured the deals their companies were relatively new to the energy sector and that their companies did not meet Eskom’s broad-based black economic empowerment criteria.

Cosatu opposes tariff increase

Meanwhile Cosatu has vowed to take Eskom on over its plan for a further electricity tariff hike on top of the 12.69% for direct customers that will kick in on April 1.

Cosatu’s national spokesperson Patrick Craven told Fin24 on Monday that if its submission to energy regulator Nersa to reject Eskom’s application for a further tariff increase fails, the trade union federation would consider rolling mass action.

Eskom on Friday confirmed in a statement that the price increase to be implemented on April 1 to direct customers was still 12.69%, and for municipalities from July 1 14.25% as approved by Nersa.

However, the embattled state power utility has initiated a selective re-opener of the multiyear price determination (MYPD3) for the 2015/16 financial year onwards that proposes an adjustment in the tariffs.

This is due to costs incurred to secure further short-term power purchases and increased use of open cycle gas turbines.

A previous Eskom CEO, Brian Dames, said power from the open cycle gas turbines which run on imported diesel cost between 16 and 18 times more than the electricity from coal power stations.

Said Myburgh: “The picture might have changed a little with the recent drop in oil prices but it is still massively expensive, especially when we have natural gas off the West Coast. Eskom has talked about using gas but nothing has happened yet.”

Alternatives to raise funds

On the alternatives for Eskom in raising funds, Craven said it should cut fat, drastically improve its revenue collection capacity and manage contracts effectively to address its financial problems.

Government as the shareholder must also intervene in a big way to help Eskom out of its financial problems, he said.

Referring to the R10bn municipalities owe Eskom, Craven said it is unfair for municipalities to put a huge mark-up on top of the Eskom electricity tariff, making electricity unaffordable for many poor households, and then fail to pay Eskom.

Craven suggested that Eskom also review the low electricity prices it charges intensive electricity users like smelters, as well as address electricity theft and bribery and corruption inside its ranks.

Another cost cut measure for Eskom would be terminating its three-year contract to sponsor the New Age’s business breakfast briefings, “which don’t add any value in addressing the challenges the country is facing (unemployment, poverty and inequality)”.

Craven also suggested that executives give back “undue bonuses” for the money to be used effectively in addressing Eskom’s financial problems.

On the enormous impact a further electricity tariff hike would have on cash-crunched consumers, Craven said workers and their families have already been slapped with increases in personal income tax and the fuel levy.