Eskom creates a perfect storm

Eskom is struggling to keep the lights on. After being granted an inflation-busting 27% increase in tariffs last year, its cupboard is so bare that it is back, cap in hand, asking for another 34% increase in tariffs.

The increase is to allow the utility to break even: it will not cover the capital cost of its expansion programme, which is designed to keep the lights on as the economy expands and grows.

The Mail & Guardian understands that Eskom intended applying to the National Energy Regulator of South Africa (Nersa) for an 88% increase to help fund its capital expenditure, but was persuaded to put in the less steep 34% request.

Eskom’s continuing problems can be blamed on poor management. Although the utility prides itself in tying long-term coal contracts to each power station it has built, it did not plan adequately for greater electricity consumption.
This means it has had to source coal from more expensive short-term or spot contracts. This has been exacerbated by high international coal prices, driven in part by shortages in Australia.

Eskom will spend an additional R6-billion this year sourcing coal and the consumer will be sent the bill.

Many of the groups that took part in the Nersa hearing this week criticised Eskom’s application, saying it lacked clarity and transparency. The utility has failed to explain adequately why its costs have continued to spiral out of control.

Eskom said the increase is needed to fund rising manpower costs, maintenance costs and “sundry costs”, including additional costs to return old power stations to service, and bad debts.

Meanwhile, its coal purchases rose to R19.6-billion in 2008-09 and are set to rise to R25.3-billion in 2009-10, an increase of R5.7-billion.

The total shortfall is aboutR14-billion. At R15-billion, the 34% increase would meet the company’s operational and fuel costs, with a little to spare.

Industry observers point out that, despite the public outcry and the fair criticism of the company’s lack of transparency about its expenditure, the country does need electricity.

Eskom’s funding shortfall for its capital expenditure programme amounts to more than R144-billion for the next five years. This suggests that the Nersa will give Eskom the hike and that a second one can be expected in September.

The Energy Intensive Users Group (EIUG), which represents 40% of all the electricity sold in South Africa, criticised Eskom’s lack of transparency and the company’s apparent excessive operational expenditure.

In its presentation the EIUG said Eskom’s books should be audited independently.

The reasons for Eskom’s main expenditure costs, namely manpower, maintenance, sundry expenses and increases in coal expenditure, led to some tough questions for the company.

Trade union Solidarity pointed out that, although staff costs have increased, employee numbers at Eskom have shrunk.

Suggestions have also been made that unhappy staff have resigned from Eskom, only to be brought back on a consultancy basis at, in some cases, three times their previous salary, creating a contractor to permanent employee ratio of almost one to one.

Eskom’s spokesperson Fani Zulu said there has been a net increase in staff of about 2 000 people over the past year.

In addition, in a bid to retain skills, there have been salary adjustments for skilled staff.

Zulu said Eskom rehired staffers who had resigned on a contract basis only where necessary but the ratio is nowhere near 1:1.

Sundry costs will amount to R8.8-billion this year because of return to service (RTS) costs and bad debt.

The company does have a problem with nonpayment in places such as Soweto and in parts of the East Rand, Zulu said. He could not, however, give an indication of how much the company is owed.

With respect to RTS costs, Zulu said the additional manpower required to revive old power stations as well as maintenance and upgrading expenses all contributed to higher “sundry expenses”.

But the EIUG criticised the vague figures saying: “Generation availability improvement has been sighted as a significant cause in increased operational expenditure costs but has not been separated out of the operating cost mix to substantiate this component.”

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