April 24, 2018

Lights going out in Eskom management

On top of its flagrant corruption and clear state capture, Eskom is suffering the consequences of years of mismanagement and poor decision-making. Nersa tells the parliamentary Energy Committee how this former economic giant has withered away.

Eskom’s increasingly desperate proposed tariff hikes, in its efforts to bail itself out of its current financial woes, remain unlikely as long as the National Energy Regulator of South Africa (Nersa) stands firm.

Nersa told the parliamentary Committee on Energy that Eskom’s main problem lies in the fact that the electricity supplier had effectively priced itself out of the market. Its efforts to recover revenue by increasing costs to the consumer had failed, and it now faced a decrease in consumption of electricity, at least partly because citizens could no longer afford to pay Eskom rates.

The struggling electricity supplier, which in recent times has been described as being close to financial collapse, is feeling the pinch of what Nersa told the Committee amounts to “customers reaching affordability levels in the current depressed and stagnant economy”.

In brief, Eskom requires significant increases in tariffs due to dropping sales and ever-growing electricity generating capacity surplus. In the context of supply growing while demand stagnates, Eskom is also failing to curb its overall costs.

In December 2017, Eskom applied for a 20% increase in its revenue, which would have translated into a significant hike of 19.9% in tariffs for standard customers and 27% for municipalities. Nersa held public hearings in all nine provinces when this news emerged and received an overwhelming 23,000 written submissions.

'Customers have reached affordability levels in the current depressed and stagnant economy.'

The Helen Suzman Foundation warned at the time that the application would not cover the actual cashflow shortfall experienced over the past few years.

“Eskom is a major state-owned entity, which provides a crucial commodity to the economy and individual private consumers, in what is effectively a monopolistic situation. One would have expected a public utility which has such an important social and economic position in the country, to consider ways of alleviating the pressure of out-of-the-ordinary price increases on individual consumers and on the economy in general.

“No serious mention is made of this aspect in the application. In the process, Eskom projects an attitude of simply carrying on, regardless of the financial pressure it places on the economy as a whole and in particular, on the individual consumer.”

Nersa stood firm and awarded the flagging state-owned enterprise an increase of only 5.23%, which was closely aligned with the inflation rate. Nersa effectively gave Eskom R190.3bn of the R219.5bn the utility had requested.

Eskom threatened to take action and said at the time that it was waiting to hear Nersa’s reasons for the shock decision in order to assess its impact and decide on a way forward.

This month Nersa briefed the Portfolio Committee on Energy on its reasons for this decision, saying that in its view Eskom “needs to control its costs better”.

Another reason Nersa gave to the Committee for its tough stance was that Eskom had applied for a one-year period (2018/19) instead of the usual five-year cycle. Eskom told Nersa that policy uncertainty over the Integrated Energy Plan (IEP and the input and role of the new Independent Power Producers (IPPS) meant that it, Eskom, could not finalise its financial predictions over a longer term.

In the presentation to the Committee meeting, which was attended by the Deputy Minister, Nersa described Eskom as being caught in a vicious cycle as a result of its own capital overexpenditure, which had driven it to ever-increasing price hikes which in turn drove its customers away.

The only way Eskom could break out of this vicious cycle, Nersa said, was to reduce its own costs by cutting the revenue required to run its operations, while increasing its sales volumes. And the only way this could be achieved would require lower tariffs in the future, which should result in growing sales volumes. This would incrementally require smaller tariff increases moving forward, which in turn would improve revenue from sales.

The elephant in the room was of course the massive losses that Eskom is currently reeling from as a result of corruption and state capture. Gavin Davis from the DA did ask if Nersa had calculated the cost of corruption at Eskom and what savings were possible going forward if this were taken into account. He also commended Nersa for its strong stance against Eskom.

Committee members repeatedly asked if Nersa could suggest what Eskom could possibly do to break out of this vicious cycle. One possibility that came up for discussion was moving Eskom from the ministry of Public Enterprises to that of Energy, where Nersa was located. This, it was suggested, could facilitate Nersa’s oversight role in relation to Eskom.

Over the past four years, Eskom has failed to recover the allocations from the Regulator, and this had worsened over time from a shortage of 7.8% in the 2013/14 financial year to a revenue shortage of 10.8% in 2016/17.

While Eskom has consistently failed to recover revenue from sales, it continued to increase its costs at an annual average rate of 16% pa, Nersa reported to the Committee.

Muzi Mkhize, leading the delegation from Nersa, said a “road map” had been presented to Eskom to address some of its current challenges. Nersa’s main recommendation was that Eskom had to introduce cost reduction measures and improves asset efficiency.

That would include, for example, halting the use of the costly Hendrina and Arnot power stations and maximising the use of those with lower running costs. It also proposed the use of cheaper coal.

Chris Forlee, CEO of Nersa, reported that according to a study by the World Bank, Eskom employed three times more staff than was actually required.

Another cost inefficiency was the considerably more favourable tariffs Eskom had negotiated with large companies such as BHP Billiton. According to the Deputy Minister, this particular contract preceded democracy and yet Eskom continued to honour these agreements, despite its own fiscal squeeze.

The Committee appeared unconvinced that Nersa’s ‘road map’ provided the answer. Davis asked the Deputy Minister what would be done if Eskom did not comply and its debt continued to spiral. He asked if Eskom would be bailed out yet again.

Committee Chairperson Fikile Majola reminded the Committee that President Cyril Ramaphosa had indicated the need for a review of all SOEs. He said this was “a structural problem within government” and nothing less than reorganisation of the state would satisfactorily address the problem. A lasting solution had to be found for Eskom going forward, he said.

Meanwhile, the delays in deciding on a tariff increase meant Eskom was getting increasingly desperate. It has made two further applications to Nersa, which if approved in full and implemented once-off next year would amount to an additional increase of 34%. Nersa has invited comments on these applications and will hold public hearings in all provinces during May. This will mean that electricity tariffs will be decided only in August and implemented from 1 April 2019.

Moira Levy

Additional information sourced from the Parliamentary Monitoring Group

Additional Info

  • Author: Moira Levy

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