Hilary Joffe
25 March 2008
column
Johannesburg — WAS it (power) crisis management? Or was it no kind of management at all? The news of Eskom's application for a 60% tariff increase last week made one wonder whether Eskom and its regulator were being left, yet again, to muddle through the crisis -- in the absence of any sort of coherent policy response.
The news came out of the blue in a terse announcement from the National Energy Regulator (Nersa). Eskom said nothing as it waited, apparently, for the government to get its communications act together. A full day later, the public enterprises department finally released a statement supporting the "principle" of an electricity tariff increase to cater for higher fuel and demand-side management costs. The statement provided only a threadbare explanation of these costs, and the post-cabinet briefing the following day was no more helpful.
There are some strong policy arguments in favour of hefty tariff increases, chief of which is that higher prices are the best way to cut demand, and cut it in a way that relies on market principles, not on a bunch of bureaucrats deciding who should get power and how much of it. SA is extraordinarily inefficient in the way it uses electricity, the argument goes, because tariffs are so low that they don't reflect the true cost of supplying power. If tariff increases hadn't been kept below inflation for most of the past two decades, we might not be where we are now. So the price of electricity needs to more than double, not only to make it viable for Eskom and private sector players to provide more power in the longer term, but also to force down consumption in the short term.
BUT this is not why Eskom now wants a tariff increase for the coming year (from April 1) that is nearly four times the increase Nersa agreed to just three months ago. Why Eskom's management didn't see at least some of this coming is a very good question. But diesel and coal costs have gone up sharply, not only because market prices are up but also because Eskom is using a lot more of these fuels as it struggles to meet demand. It wants the regulator to allow it to "pass through" higher fuel costs, on the basis that it has no control over prices. In the previous two years, it absorbed R7bn of under-recoveries on fuel; if the tariff increase is not granted, it will run an additional R5,3bn short on fuel costs in the year to come. Added to that is the more than R2bn of demand-side management initiatives the government has announced, but Eskom seems to have to pay for. In total that's a shortfall of more than R7bn (against total revenue last year of about R40bn), and Eskom can't make up for it with higher volumes as it has done in previous years.
The concern is that if it runs into operating losses, that will affect its credit rating, making it more expensive for Eskom to go the to bond market to do the borrowing it needs to fund its R343bn build programme. And while the R60bn in government loans promised last month will shore up Eskom's balance sheet, it won't add to its income.
The regulator has expressed shock; it will no doubt give Eskom a hard time, to the extent that it can given that, as a monopoly, Eskom knows more about its business than anyone else can. But assuming Nersa agrees to even some of what Eskom has asked for, what happens next year? Or the year after that, particularly once Eskom's capital spending escalates and tariffs have to be raised to start covering the costs of the new power stations as they are built? Is there a plan for how electricity should be priced and regulated to get us through the crisis? Or do we just let Eskom and Nersa deal with it, and blame them when it all goes wrong?
The power crisis itself is curbing growth, but so too might sudden sharp tariff increases, which would affect not only inflation and interest rates but also potentially profits and jobs. Policy makers need to be alert to those trade-offs. But the government also needs to look again at the way Eskom is governed and regulated, because the current approach clearly hasn't worked to ensure that the pricing or the supply of electricity have serve d SA's economy as they should.
Joffe is senior associate editor.
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