/ 23 October 2012

Eskom’s R5-billion smelter gambit

Eskom's CEO Brian Dames.
Eskom's CEO Brian Dames.

The mechanism to change the deal may not exist, and if it did, regulators might be wary of using it for fear it could open the gates to all manner of legal challenges. If those legal challenges failed, South Africa could take a knock to its reputation.

But perhaps those are risks worth taking for R5.17-billion per year.

That's the amount of extra revenue Eskom could gain if it normalises its contractual relationship with two BHP Billiton smelters via what amounts to a complaint to regulators, a process it will launch this week.

All of Eskom's customers pay its normal, regulated prices, CEO Brian Dames said on Monday, while presenting details of the parastatals application for price increase over the next five years. All but one: BHP Billiton. But over the course of the next week Eskom will put its contract with BHP before the National Energy Regulator of South Africa (Nersa) for review.

That amounts to an escalation to negotiation by other means. Eskom and BHP have long discussed changes to a secret sweetheart deal that was put in place at some time during the 1990s. In terms of one of its smelters, Mozal in Mozambique, those talks have succeeded. But, as Eskom told Parliament earlier this year, a similarly "mutually agreeable" outcome could not be found around the Hillside and Bayside smelters in South Africa, which continue to pay a much reduced rate for the power they consume.

That rate is not known; Media24 won the right to get sight of the contract but BHP lodged an appeal and officially the documents remain secret. According to information leaked to Democratic Alliance MP Pieter van Dalen, however, it is in the region of 10 cents per kilowatt hour – while Eskom says it will cost 61.38 cents per kilowatt hour to services industrial customers in 2013.

Modern smelters, ones more efficient than Bayside and Hillside, use around 14 megawatt hours of electricity for every tonne of metal produced. In the year to the end in September, Hillside and Bayside produced a combined 719 000 tonnes of metal. If it were to pay Eskom's cost price for the same production in 2013, its extra bill would come to R5.17-billion for the year – or around six times the combined outstanding amount all of Eskom's customers currently owe it.

The contract, and the lost revenue, has been a thorn in Eskom's side for many years, and the problem was thrown into ever more stark relief as prices for all other electricity users started ramping up sharply after 2008. Now, it seems, the company has had enough, and is trying what may be the only remaining way for it to get out of the contract.

Whether the attempt will work is an open question.

Eskom says Nersa has broad powers to consider discrimination in the electricity market, for instance, and could wield such powers to amend the contract. On Monday the regulator itself would say only it would consider any application made to it, then follow procedure. Lawyers the Mail & Guardian spoke to had sufficient doubt about the outcome of such a process to decline to provide any opinion on the record, and even in private vacillated. Any outcome would be open to court review and subsequent appeals, they said. And if a regulator sought to intervene in an iron-clad contract, it would hark back to South Africa's less-than-welcoming approach to Walmart's entry into the market, and could dent investor confidence.

"I wouldn't be too sure that [Nersa] has the balls to go down that road," one lawyer said.

But the regulator is likely to feel political pressure to intervene; Eskom has come under increasing fire for honouring the contract and that criticism is now likely to shift to Nersa, should it not attempt to fix the problem.