The electricity price

October 24th, 2011, Published in Articles: Energize

Sir

I’m told by people in the know that there are many signs that a volcanic eruption is about to happen. There are earth tremors well in advance and there become increasingly more violent tremblers, leading up to an earthquake or two. Even animals become restless and some flee the area. Only some time later does the volcano start to rumble, spew out dust and gas and eventually the whole thing blows its top, making a right mess is things for miles around.

And so it is, it seems, with the electricity price. Everyone was horrified back in 2008 when Eskom proposed that, in order to keep afloat, it needed to bloat the price of electricity by 25% per year for many years. But the boat was soon becoming so overloaded that the only things that were soon still floating were Eskom’s obscene profits and executive remuneration.

Then the first rumbles started. It took a while for the horrific price increase to filter through the huge and cumbersome municipal bureaucracies, so in 2009 people were still blissfully unaware of the full magnitude of what was about to hit them. By 2010 the rumbles were so disturbing that it was becoming harder to ignore them through all the patriotic pleas to save electricity. People started taking to the streets in true South African democratic fashion. If the so-and-so’s don’t want to give you what you want, why, just trash everything in sight. This methodology was apparently recently exported to several European countries with great success.

But I am wandering off the point. The first serious rumble started when it was announced that the  country’s only zinc smelter would close because of the high electricity price (and other factors which are not germane to this argument). That rattled a few cages, but when the second round of super-increases hit the bills, the serious stuff really hit the ventilator. Even the cadres were aghast at what they had unleashed and consumers across the board decried the inflated power bills. Press condemnation inflated worse than the price. The ground began to heave. Structures trembled and swayed. But of course, dithering was the preferred course of action.

When it was eventually realised that the electricity price had reached a tipping point and that the volcano might well blow, in stepped the energy department with a bold gesture to appease the fury. It wanted, it announced blandly, to radically change the methodology used by the National Energy Regulator of SA (NERSA) to determine electricity tariffs for Eskom. As if would change reality.

The mountain is rumbling – perhaps it was not consulted about this bold plan, and there might be one or two impediments to its cooperation anyway. Eskom is due to submit its next dose of self-aggrandising largesse for 2013 – 2016 shortly. Industry is trying to ward off another 25% increase for its factories and the domestic customers who are being left to their own devices are being rumbled so hard it feels like a night out in a rough neighbourhood. Eskom needs to fund another R345-billion or so. Small change compared to the price for a handful of new nuclear units, one might argue. It sounds very much like the tectonic plates are pushing hard, something like between a rock and a hard place.

It is now common cause that the way Eskom applied to NERSA for tariff increases created very, very, very perverse incentives because even if Eskom doesn’t meet its targets, it still gets the money. Strange that few noticed that two years ago when the last price increase proposal was on the table. It was suggested then that Eskom broaden its equity base, improve its credit, be a bit more innovative in sourcing its funding and use a more realistic match between asset life and debt profile. But it seems the mountain was not grumbling loud enough  to pay much attention.

Not to be outdone, NERSA  has meanwhile invited stakeholders to submit written comments on the now questionable Eskom pricing methodology, the iniquitous inclining block rate tariffs and proposals on the whole mess that is purported to be the municipal tariff structure. And although objections on these matters were vigorously ignored in 2009, there is perhaps a slim chance to lower the temperature of the magma chamber a little and stop the widening cracks, but it has to be all done, Sir, before your erudite readers will have had a chance to read this.

So there will not be much opportunity to insist that a loss-making company such as Eskom (never mind the phantom profits which it gouged from hard-pressed customers) should not be paying tax, for that amounts to double-dip taxing. Neither will there be much opportunity to protest the obscene rates of return that Eskom is demanding in spite of its cosy government guarantees, or the creative book-keeping methodologies on asset valuations that will move the earth. There will likewise be no chance to argue that Eskom is not bring any real cost-cutting or productivity improvements to the table to justify its outrageous rises in operating costs. Many other points, unfortunately too numerous to mention here, will unfortunately also have gone up in smoke.

Pity that by the time your readers read this, Sir, it will be too late to protest the distortion of tariffs to appease the gods of the mountain, particularly the iniquitous inclining block rate tariff. How can it be considered fair to use the same breakpoints for a large family compared to a small one? The true cost of delivery is distorted in the mess of municipal tariffs.This a great disadvantage to the poor and hinders small business and job creation.
I fear that it may be too late to stop the eruption, although it behoves one to always hope that there may be ways to escape its most terrible consequences.

Until such time, Sir, I remain your most humble and loyal servant

Jacob Marley