Eskom Multi-Year Price Determination: Eskom and NERSA briefings

PMG 4 December 2012.

Date of Meeting:

4 Dec 2012

Chairperson:

Mr F Adam (Western Cape, ANC)

Summary:

Eskom and the National Energy Regulator of South Africa (NERSA) explained the principles behind, basis for, and process to be followed in determining the Multi-Year Price Determination (MYDP3) of the increases requested by Eskom. Eskom firstly explained that there were a number of policy considerations to be taken into account. Eskom had requested a move to a five-year price determination, which would spread the increases and allow for greater certainty for customers. Eskom had started from the premise that security of supply, economic growth and job creation were essential. The move to cost effective tariffs was the optimal way to cover the ongoing costs now and allow for cost recovery in the future, although it was also emphasised that the MYPD3 did not cover anything new that might be proposed under the Integrated Resource Plan. If costs were not recovered through the tariff, they would still have to be recovered by government by some other means, and this was a transparent process, that also allowed for subsidisation. Eskom fully appreciated the impact of any increases and had tried to protect the poor, by moving from the Inclining Block Tariffs used in the past to a simpler and more effective tariff that would see low-use consumers pay less in the next year, would encourage energy savings and allow for cross-subsidisation. Eskom would itself embark on rigorous efficiency gains. It described its efforts to contain coal costs. The tariffs were calculated at 13% for Eskom’s own needs, plus another 3% for the Independent Power Producers, totaling 16% per annum.

A summary was given of Eskom’s primary energy costs and operating costs, and the mix of revenue. Eskom would not be able to recover capital expenditure but only depreciation, so the additional amount would have to be borrowed from the markets, and it was stressed that it had to establish and maintain good credit rating. The generation, distribution and transmission grids were illustrated, noting that Eskom distributed to about 5 million customers, of whom about 4.5 million were domestic, and supplied in bulk to184 municipalities. Its other contributions to the economy involved 35 000 people employed on the new build projects, about 12 000 learners in the skills development system, contributions to BBBEE businesses and local suppliers and one of the world’s largest energy saving programmes. It had connected 4.2 million households since 1991. The differential tariffs were fully explained, with graphs to illustrate real increases.

Members discussed whether the emphasis should lie with pro-poor or pro-development strategies, commented on the cost of electricity affecting the middle class, and the implications for rural consumers, particularly when municipalities were charging huge additional tariffs. Members suggested that the agricultural sector needed more support and subsidies. They questioned with whom Eskom had special pricing arrangements and called for details, but were told that BHP Billiton had appealed against a court decision that details be released, so this was sub judice. Members asked about negotiations around coal, questioned whether consumers would get the benefit of falling coal prices, whether other options were considered, including greater input from Cahorra Bassa. Eskom explained the “cost buckets” applied by NERSA. Members asked if, in principle, Eskom deserved increases, given the profit it had made in the last year, and called for more explanation on the calculations on returns and costs, and the credit rating. They asked if amounts spent on boosting staff morale were necessary and had had an impact. They also questioned the depreciation models used, and asked if Eskom had any comparative costing in other countries.

NERSA briefly summarised the main components of the Eskom application, noted the six pillars of the MYPD3 process, noted that the date for public comments had been extended to 30 November and that over 150 comments were received. NERSA had taken radio (SABC and community) and television slots, which were listed. It also gave the schedule for the public hearings between 15 and 31 January. NERSA was hoping to make its final decision by 28 February. The new tariffs would apply to domestic consumers from 1 April and to municipalities from 1 July 2013. Members asked if there was still a process of appeal to the Minister, suggested that it would be more useful to consult with municipalities through the South African Local Government Association than with individual mayors, asked about the venues for public hearings and suggested that perhaps innovative methods such as radio programmes or phone-ins should be broadcast.

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