Sour taste over Eskom's 'sweetheart' deals

By Time of article published Mar 18, 2010

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By Tony Carnie

Recent press reports about "sweetheart" power prices for some of Eskom's 138 biggest customers have outraged ordinary South Africans, soon to be walloped with hefty tariff hikes.

Last week, Eskom hotly denied claims that some of its customers were paying as little as 6c to 9c a kilowatt-hour when suburban residents braced themselves for municipal tariff hikes which would push the price of home power to somewhere between 80c-90c/kWh from July 1.

Within three years, suburban tariffs are expected to climb further, to around 115c-120c/kWh for homes using more than 600kWh.

The government-owned power company was responding to questions by DA MPs Pieter van Dalen and Elza van Lingen in parliamentary sub-committee meetings.

Since then, Van Dalen has been accused of "sensationalising" the issue of low prices, although recent Eskom reports strongly suggest that multinational mining and resources giant BHP Billiton paid around 11c/kWh in 2008 and around 14c/kWh last year. The company is not named in the Eskom annual reports, but identified simply as one of three "international end- users".

Subsidising

Separate analysis of these reports by the Earthlife Africa group suggests that Eskom is effectively subsidising some of its customers by selling them electricity at tariffs far below the actual cost of producing the power.

One example is the Mozal aluminium smelter in Mozambique which paid roughly 14.8c/kWh for power last year at a time when Eskom calculated its "average total cost" of producing electricity at 27.3c a unit.

During 2008, Mozal appears to have paid just 11.8c a unit, when Eskom costs were estimated at 18.9c.

"Eskom's own data shows that it is selling power to some of the largest and richest multinational corporations on the planet at below the cost of production. So it has become crucial to open up some of these contracts for public debate and scrutiny rather than hiding behind 'commercial secrecy' arguments," said Earthlife spokesman Tristen Taylor.

When Van Dalen was asked about the source of his information on cheap industrial tariffs this week, he said: "Yes, there is substance to our information.

"Clearly, some of the conclusions have to be based on intelligent supposition when you are dealing with a climate of secrecy, but Brian Dames of Eskom Generation also told the portfolio committee on public enterprises that 9c was being paid by some of these companies. It's not something we just sucked out of our thumbs."

According to Van Dalen, BHP struck a cut-price deal before 1994 when Eskom had spare capacity. While the tariff was linked to fluctuating commodity prices, BHP smelter tariffs would allegedly never rise above 17c/kWh until the contract expired at an undisclosed date. "We don't want to push them away from South Africa - but surely BHP needs to come to the party if their tariffs have not gone up for 10 to 15 years. There is no incentive for them to save power or to generate their own power when they have guaranteed rock-bottom prices like this. It's just not fair on the rest of the country."

Eskom and regulator Nersa have denied suggestions that big industry price structures are secret - with the exception of a limited number of customers which include "an aluminium smelter in Mozambique and two mines in Namibia".

They said the identity of the companies and exact tariffs had to remain "confidential", yet the broad outline of the BHP sweetheart power deal has been an open secret for several years.

The group has three power-hungry aluminium smelters in the region - two at Richards Bay and a third near Maputo, which collectively consume more than 5 percent of Eskom's total capacity.

Though the first deal for the Bayside smelter was signed before 1994, subsequent expansions at Hillside and the newer Mozal smelter seem to have been blessed by former president Thabo Mbeki.

At a smelter opening ceremony in Maputo in October, 2003, former BHP chief executive Chip Goodyear said: "I need also to pay tribute to President Mbeki. If it were not for some of the decisions made by the South African authorities and the state utility Eskom, southern Africa would not have a Hillside smelter, nor a Mozal smelter, indeed probably not even a southern African aluminium industry which will soon supply some 7 percent of the world's aluminium production."

Together, the three smelters devour over 2 000MW of power at one time - more than the city of Durban and its biggest industries. This has caused a series of windfall losses by Eskom in recent years. Last year, Eskom reported a loss of more than R9.5 billion associated with the cheap smelter contracts and a R1.6bn loss in 2008 for the same reasons.

Yet, despite similar significant smelter losses, South Africa signed a new sweetheart power deal in 2007 with Canadian-based Alcan Inc, on the eve of South Africa's biggest power crisis.

The new long-term deal with Alcan for a 1 350MW aluminium smelter at Coega in the Eastern Cape is thought to have been the first contract under the Development Electricity Pricing Policy (Depp) which offers lucrative but strictly confidential sweeteners for foreign industries to invest in South Africa, including "developmental electricity tariffs".

The Depp guidelines make it clear that selected customers "may be exempted from contributing to cross-subsidisation of other customers".

While tariffs could be adjusted every year, the guidelines give the cosy assurance that "adjustment is expected to happen infrequently, if ever".

The policy has a strict confidentiality clause which prohibits anyone from Nersa, Eskom and government departments from revealing any information about the benefits given to special customers.

While the Alcan deal collapsed in the aftermath of the January, 2008, Eskom power crisis, it nevertheless signalled that the doors of the post-apartheid government remained wide open for special deals with select customers.

Significantly, President Jacob Zuma also had a private meeting with Anglo American boss Cynthia Carroll during his recent state visit to London, to discuss industrial policy issues.

Anglo is one of the three largest suppliers of coal to Eskom power stations, and also one of its biggest electricity buyers.

And while it may be simple coincidence, eyebrows have been raised about past migrations of some very senior officials between Eskom, BHP and power regulator Nersa.

For example, former Nersa CEO Xolani Mkhwanazi resigned in 2004 to head BHP Billiton aluminium operations. He later became chief operations officer of BHP's local corporate relations arm and now chairs the group's South African operations.

Eskom treasurer and executive director Mick Davis joined BHP predecessor Gencor in 1994. After a spell as chief financial officer of Billiton plc from 1997 to 2001 he became chief executive of Xstrata, which also supplies coal to Eskom.

A third notable "migrant" was Derek Keys, former Gencor CEO who became finance minister in the post-1994 government. Soon afterwards he moved to Gencor's new home in London, before this formerly South African-based company transmogrified into the global BHP Billiton group.

Observers also speculate that the scuppered Alcan smelter deal at Coega might be resurrected at some point in the near future if Eskom decides to build South Africa's second nuclear power station. Earlier this month, Eskom environmental consultants identified the little hamlet of Thyspunt as their first choice site for a massive 10 000MW reactor. Thyspunt is just 80km south of Coega.

Transparent

Eskom and Nersa remain adamant that the vast majority of local power tariffs are transparent and fair and published every year on Eskom's website.

Yet Nersa full-time regulator Thembani Bukula remained cautious this week about revealing actual prices for certain customers.

"Each of the 138 big customers referred to have unique and confidential contracts (as defined in the Promotion of Access to Information Act, 2000) that cover the unique nature of their business."

Such guarded responses have fuelled suspicions that Eskom has failed to come clean.

Speaking on condition of anonymity, a senior manager of a large municipal electricity department said: "I'm not sure that 'secret' is the right word, but some of those tariffs are very secretive. Eskom keeps the tariff structures close to their chests.

"Yes, there is an Eskom tariff book, but to my knowledge some of the bigger 'contract deals' are not reflected in that tariff book. I'm talking about contracts with the likes of the Mittals and BHP Billitons of this world."

Referring to the group of nearly 40 companies which collectively use more than 40 percent of the country's total power supplies, he said: "The Energy Intensive Users Group (EIUG) is a powerful lobby and some of its members seem to escape the cross-subsidisation element of the other tariffs. So big industries are not really contributing to the social element of electricity tariffs."

ID MP Lance Greyling also remains suspicious.

"Eskom doesn't want to tell us too much because other customers will start demanding the same prices as well.

"Until they do tell us, no one will really know what the truth is. So we just have to keep digging until they give us some straight answers."

- The Mercury will publish Part 2: Eskom's Transparent Prices as Clear as Mud tomorrow.

SA's biggest power guzzlers

- AECI

- Afrox

- Air Products SA

- Anglo Operations Ltd

- Anglo Platinum

- Anglo Coal

- Anglogold Ashanti

- ArcelorMittal SA

- Assmang Ltd

- BHP Billiton SA Ltd

- Cape Town Steel & Iron Works

- Columbus Stainless (Pty) Ltd

- Consol Glass (Pty) Ltd

- De Beers Consolidated Mines

- Exxaro Resources

- GFL Mining Services

- Harmony Gold Mine Company Ltd

lHighveld Steel

- Hillside Aluminium Limited

- Implats

- Kumba Iron Ore Ltd

- Lonmin Platinum

- Mondi Ltd

- Pretoria Portland Cement

- Pulp United (Pty) Ltd

- Rand Water

- Richards Bay Minerals

- SA Calcium Carbide

- The South African Breweries Limited (SABMIller)

- Samancor Manganese

SAPPI Management Services (Pty) Ltd

- Sasol Synfuels Ltd

- Scaw South Africa (Pty) Ltd

Sishen Iron Ore Company (Pty) Ltd

- Transnet Ltd

- Xstrata Alloys SA (Pty) Ltd

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