Under fire in Parliament for trying to produce a “model” balance sheet and using “unorthodox” methods of accounting, Eskom’s chief financial officer, Paul O’Flaherty, argued yesterday that the power parastatal was simply seeking an improved investment grading by the rating agencies.
Eskom indicated that a political decision was needed to resolve the problem of companies that claimed to be under stress because of punitive electricity prices and sought special discounts or “special relief” measures.
Appearing before the trade and industry portfolio committee yesterday, Eskom’s head of regulatory and legal affairs, Mohamed Adam, said a precedent had been set with the special pricing deal for the BHP Billiton aluminium smelters, indicating that Eskom would not necessarily like to repeat that experiment. The smelter deal has now been referred to the National Energy Regulator of SA for a “prudency” review.
Guarding against “a shotgun approach”, Adam said interventions would have to come from the government. “We are criticised for the BHP Billiton [pricing deal]… we could repeat the mistakes of the past.”
Melbourne-based BHP Billiton has received favourable electricity pricing since the 1990s through the deal.
Chief executive Brian Dames agreed that policymakers would have to consider this issue, not Eskom.
A number of industries, including foundries in the Eastern Cape, have argued that their businesses would be more sustainable if they could be supplied directly by Eskom – stripping away the municipal mark-up costs of power.
Dames said Eskom had raised the matter with the National Treasury which had underscored that it was not Eskom’s mandate but was in the ambit of the policymakers.
Geordin Hill-Lewis, a DA trade and industry committee member, said he had spent some time trying to understand Eskom’s apparently “reasonable case” as to why it was seeking increases nearly three times the inflation rate. “I would like to challenge your definition of cost-reflective tariffs,” he said.
He also put it to Dames and O’Flaherty that Eskom’s proposed tariff hikes of 16 percent a year for the next five years presented “an extremely dangerous threat” to the country’s industrialisation strategy, economic growth targets and the future success of job creation.
O’Flaherty had presented the depreciation as a cost “and you have revalued all of your existing capacity [against] what it would cost to replace it now. I understand that is unorthodox at best,” Hill-Lewis argued.
He also questioned why it was seeking a return on capital of more than 8 percent when even the return on equities on the JSE had been some 6.6 percent for the last 10 years.
“You have a company that is building a balance sheet that would make any company in the world proud,” he said, but argued that as a state-owned company it had a “wider social mandate other than the pursuit of profit”.
O’Flaherty responded that the aim was that, within five years, Eskom’s balance sheet would have credit metrics that supported it as “an investment grade company”, effectively reducing the interest cost of its borrowings.
Currently it was supported by government guarantees of some R350 million but, if the state had to step in and provide funding for the ambitious R360 billion medium-term build programme, “the effect on the sovereign would be extreme”.
“We are saying Eskom needs to build a strong balance sheet for future growth,” he said.
ANC MP Sue van der Merwe noted that the trade and industry committee was interested in the impact of electricity costs on industry.
“To be quite frank, contrary to our desire that we should grow that section [industrial development] of the economy, it is shrinking.”