Eskom can't fix systemic problems by hiking tariffs

OUTA opposes Eskom’s price applications, calling for an overhaul of the failing utility.

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03/12/2018 05:42:21

Eskom can't fix systemic problems by hiking tariffs

The Organisation Undoing Tax Abuse (OUTA) has submitted objections to Eskom’s requested price increases to the National Energy Regulator (NERSA).

OUTA believes that Eskom’s woes are due to challenges embedded in its business model which cannot be addressed by merely raising tariffs. Instead, this requires a holistic solution which has yet to be provided.

OUTA particularly opposes the price increases due to Eskom’s long history of corruption, mismanagement, overspending and inefficiency.

OUTA opposes both Eskom price applications.

The first is the Multi-Year Price Determination (MYPD4) application to set electricity prices for 2019/20 to 2021/22. The second is the application in terms of the Regulatory Clearing Account (RCA) for under-recovery during 2017/18.

The MYPD4 application

In the MYPD4 application, Eskom wants an increase in revenue which requires a price increase of 15% a year, in addition to the 4.4% increase from the already approved RCA award for 2014 to 2017.

“Eskom’s 15% per annum electricity price increase over the next three years is premised on desperate measures or attempts by Eskom to want to fix structural problems by throwing money at the problem rather than addressing or fixing the underlying root causes,” says OUTA’s submission.

OUTA is concerned about Eskom’s runaway costs, including its huge wage bill, its coal spending, its massive debt which has ballooned to almost R400bn and is expected to grow to more than R600bn, and the ever-increasing cost of the new build. These are factors built into the price application.

Eskom’s primary energy costs have increased from about R18bn to R85bn over the last decade, although electricity sales have stagnated. Eskom’s coal contracts have been a breeding ground for corruption, which helped inflate primary energy costs massively over recent years. OUTA recommends that the recently announced long-term coal procurement strategy should be published to avoid the creation of situations which favour certain entities, as the previous strategy favoured Gupta businesses.

OUTA is concerned about the revaluation of Eskom’s regulated asset base (RAB), the value of Eskom’s assets, which was substantially revalued from R717.513bn in 2017/18 to R1 268.310bn for 2019/20. This affects the pricing claim.

The RCA application

In the RCA application, Eskom wants R21.624bn in backpay from its customers.

OUTA says this is based on an outdated methodology which allows Eskom to predict higher-than-likely electricity sales, resulting in higher revenue predictions, and then ask for the extra revenue afterwards when sales don’t meet that target. This variance in sales is the key factor on which Eskom bases this application.

“This leads to Eskom becoming the beneficiary of ‘unearned’ revenue, purely based on exuberant forecasting,” says OUTA’s submission.

OUTA says there was “ample evidence” at the time that these revenue predictions were unachievable and that Eskom does not deserve to be awarded extra funds “given rampant corruption and maladministration that is being uncovered in its business processes”.

Eskom’s problems continue

Eskom is in bad shape, says Ronald Chauke, OUTA’s Portfolio Manager on Energy.

“The utility is unable to meet electricity demand during weekends of low demand and is back to loadshedding. Political meddling at Eskom has basically rendered it a hopeless strategic asset that holds the whole country to ransom.

“This is unacceptable and immediate action is required to start unbundling this grossly inefficient entity. Eskom’s leadership must be held accountable to keep the lights on and resolve these chronic operational and performance failures without delay,” says Chauke.

OUTA is a proudly South African civil action organisation, that is purely crowd funded. Our work is supported by ordinary citizens who are passionate about holding government accountable and ensuring our taxes are used to the benefit of all South Africans.