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Eskom’s equity returns ‘will push businesses over the cliff’

Londiwe Buthelezi

The equity returns that Eskom wanted in its third multi-year price determination were too generous and were ludicrous for the parastatal to expect as they would unnecessarily inflate the price of electricity, pushing many businesses over the cliff, the National Energy Regulator of SA (Nersa) heard yesterday.

Cape Town 15-03-13 -Anti electricity price hikes protest at the CTICC Picture Brenton Geach. Credit: INLSA

During the first day of public hearings into Eskom’s application for annual tariff hikes of 16 percent for the next five years, businesses and civil society asked Nersa to scrutinise Eskom’s desired R47 billion equity returns. The outcry was that these returns, as well as the projected depreciation costs, were radically escalating the firm’s revenue requirement and thus the amount by which tariffs should be increased.

Eskom’s application, which seeks 16 percent annual increases in electricity tariffs, is based on a revenue requirement of R1.09 trillion over a period of five years. The company projected a return on assets of R187 billion, most of which would go to cover its R140bn finance costs. After paying the finance costs, R47bn of equity returns would be realised.

The company projected depreciation costs would increase an average 10 percent a year, making up R185bn of the revenue requirement. It further emerged yesterday that Eskom would require electricity tariffs to be increased by 20 percent if it was to build further power stations after Kusile.

Eskom chief executive Brian Dames told Nersa that the 16 percent rise applied for did not provide for any new capacity build beyond Kusile and that if the utility had to supply 65 percent of required new capacity to 2030, it would need further tariff increases.

But organisations that made submissions to Nersa questioned the model Eskom used to calculate its revenue requirement and wanted the company to exclude depreciation in the revaluing of its assets.

“Eskom’s focus on revaluing assets and restating the balance sheet is a costly exercise for the country,” Leslie Rencontre, the director of electricity systems in the City of Cape Town, said.

DA energy spokesman Lance Greyling said this method inflated Eskom’s expenses and was just a tool to justify high recovery costs.

Cosatu said it was clear Eskom wanted to operate like a private company whose sole objective was to generate profit.

The labour federation’s Western Cape provincial organiser, Mike Louw, said Cosatu was convinced inflation-linked tariffs were achievable and that higher taxes or other forms of tax were a better alternative to increasing tariffs. “We need a different model and not this one that puts most of the pressure on the poor,” Louw said.

The National Union of Metalworkers of SA said its concern was that the mining and manufacturing industries, which were the “significant foreign exchange earners”, would be the hardest hit. The union said its calculations showed that 37.5 percent of companies in these industries would have to close if the 16 percent tariff increases were approved.

ArcelorMittal South Africa’s principal energy specialist, Dennis Britz, said the current prices were already taking a toll on steel makers that faced decreased demand for steel. Hikes of 16 percent were likely to provide enough electricity for everyone, but it would be unaffordable, he said.

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