ESKOM underfire in Capetown and Beyond

Posted On Friday, 18 January 2013 08:18 Published by eProp Commercial Property News
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The City of Cape Town, trade unions and a host of civil society organisations opposed Eskom’s request for an average annual increase of 16 percent over five years at Nersa’s hearings on Eskom’s tariff application.

Construction IndustryThe Cape Town Chamber of Commerce made damning statements about Eskom’s management stating that its fundamental thought processes were flawed and outdated. It put up front that “the proposed increases are unaffordable and will have a devastating effect on the economy and small business in particular.”

The chamber expressed what it called “grave” concerns about the management of Eskom. “We believe that maintenance was neglected in the good years to improve the bottom line and we are now paying the price for this in an expensive catch-up operation.”

In terms of the government’s electricity pricing policy, Eskom was required to revalue its assets by a multiplier of five so that it could generate sufficient cash flow. Its desired rate of return would be calculated on these revalued assets. This, together with the use of depreciation replacement cost of accounting, meant the provision for depreciation has soared from R10bn in Multi Year Price Determination2 (MYPD2) to R43bn at the end of the next five years. Nersa allows Eskom’s tariff to cover its operational costs, which include depreciation.

A number of business and other parties have postulated that there was something very flawed in Eskom generating profits for its sole shareholder, the Government. There is a broad body of thought that believes that Eskom,as a utility company, should operate on a non-profit basis in the interests of the country and the Government should be content with its VAT income from electricity sales.

Another issue the Cape Chamber took with Eskom was the policy of keeping electricity flowing to the domestic market whilst cutting or rationing supplies to major industrial customers such as the mines and through buy-back schemes. The point made that since mines and industry are the backbone of the country they should have preferential treatment. Of course rationing electricity to the domestic market would be very unpopular politically.

Other issues raised were: the alleged abuse by municipalities in the passing on of Eskom tariff increases to the consumer; under investing in electrical infrastructure and 13 reasons why gas powered powerstations are superior to coal.  This in the light of world-class gas discoveries off the coast of Mozambique and Tanzania. 

What’s interesting to note is Eskom’s regarding gas as unimportant. By contrast the National Development Plan produced by Minister Trevor Manuel and Cyril Ramaphosa does see gas as very important and a more affordable alternative to Nuclear power.

On matters of depreciation of Eskom’s assets, other parties made their voices heard:City of Cape Town director of electricity Les Rencontre told the hearing that Eskom’s revaluation of assets and its use of depreciated replacement cost had added R64bn, or over 2 per cent, to the depreciation charge. He urged that the "adjustment" in the value of the assets be disallowed as it added to the increase in tariffs.

Business day quotes Independent Democrats-Democratic Alliance (DA) MP Lance Greyling as saying that the return on equity and depreciation costs reportedly comprised 34 percent of the "unreasonable" tariff increase applied for and should be "thoroughly interrogated".

On a more populist note the National Consumer Forum branded Eskom a “parasitic institution” for wanting to increase the price of electricity by 16 percent, and suggested that electricity be tax-free like brown bread and milk.

Liz McDaid of the Southern African Faith Communities' Environment Institute criticised the power utility for prioritising its revenue over service delivery.

In short Eskom’s proposal, if accepted, is for a five-year determination for MYPD3 to ensure a predictable, longer-term price structure.  The increase would take the price of electricity from 61 cents a kilowatt hour in 2012/13 to 128 cents a kWh in 2017/18 - more than doubling the price over five years.

The Cape Argus reports  Eskom chief executive officer Brian Dames and chief financial officer Paul O’Flaherty on Tuesday told the hearings the application supported investment by independent power producers and by Eskom. An average annual increase of 13 per cent is intended to meet Eskom’s needs over five years, plus 3 percent to introduce new independent power producers. Eskom boss Brian Dames told Nersa he believes the company has struck an optimal balance.

The hearings are continuing around the country.

Last modified on Saturday, 05 October 2013 14:39

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