BHP Billiton could be enjoying subsidies to its South African electricity costs worth about R3 billion a year as a result of a highly favourable supply contract entered into back in 1992.
The R3bn estimate is based on the limited information that was made available last week by Eskom following a ruling by the Supreme Court of Appeal.
South Africans will have to wait until next month’s hearings of the National Energy Regulator of SA (Nersa) into the controversial contract to get a clearer picture of the cost and supply implications relating to the supply contract for BHP Billiton’s aluminium smelters.
BHP Billiton will not comment on the details of the contract but an Econometrix report that it commissioned stated that any power producer should not link its electricity prices to commodities and certainly not to those commodities that did not form part of its input cost structure. The report by Econometrix is on the aluminium industry’s impact on the South African economy.
The report argues in support of Eskom’s electricity supply contract with BHP Billiton and contends that the electricity difficulties facing the country are attributable to Eskom’s poor supply management.
It was commissioned as public speculation grew about the extremely favourable terms of the confidential electricity supply contract. Last week, following years of legal action by Media 24, details of the pricing formula underpinning the contract were made public.
The pricing formula is based primarily on the international aluminium price and the rand/dollar exchange rate.
Media24 reports said these details indicated that Eskom was providing BHP Billiton with electricity at 22c a kilowatt-hour. This compares with the 57c a kilowatt-hour that other industrial consumers are being charged by Eskom and with Eskom’s average operating cost of 47c a kilowatt-hour.
At the current rand/sterling exchange rate, BHP Billiton is paying about 1.5 UK pence a kilowatt-hour, the same price that Eskom was charging industrial consumers back in 1992 when the controversial contract was drawn up.
For the public, which faces another round of possible power outages, the favourable pricing enjoyed by BHP Billiton is particularly galling as general consumers are paying as much as R1.40 a kilowatt-hour.
The controversial supply contract is believed to account for about 6 percent of Eskom’s production capacity.
BHP Billiton has so far not been available to comment on the terms of its electricity supply from Eskom but is expected to provide some details during the hearing called by Nersa. The hearing has been scheduled for the end of April.
Eskom spokeswoman Hilary Joffe said it was important to note that such contracts were part of the country’s industrial policy in the 1990s. The BHP Billiton tariffs should be compared with what other large customers, such as the mines and Sasol, were charged and not with the price charged to individual consumers, she added.
Despite these circumstances and the prevalent use of favourable supply contracts to industrial users, analysts said on Friday that Nersa would need to get an explanation as to why the BHP Billiton contract was so unusually long – at more than 25 years, with many years still to run.