15 January 2013

South Africa: DA to Present Submission On Eskom Price Hike Application

Photo: Chris Kirchhoff
Beaufort West, Western Cape province: Electricity pylons.

press release

The DA will today present the first of its submissions to the National Energy Regulator (Nersa) setting out why Eskom's 16% electricity price hike application should be rejected.

Our position is that Eskom should only be granted an inflation-linked price increase per annum for the next five years in order to avoid negative impacts on consumers and businesses. We have also submitted a written presentation to Nersa in this respect.

In their pricing application, Eskom assumed a 1.9% compound growth per annum in electricity demand over the next five years, but demand has slumped by 2.9% over the last six months alone. Their pricing application therefore does not reflect economic reality.

The DA takes particular issue with three components of Eskom's pricing application:

First, the company claims that 17% of its new revenue requirement is attributable to earning a higher return on assets of 7.8% for government, its shareholder. This simply is not realistic. Government cannot expect this kind of return in a depressed economy, especially not at the expense of economic growth. Globally, most electricity utilities only derive a return on equity amounting to 4%; this would be a more realistic request from Eskom.

Second, Eskom claims that a further 17% of its revenue is attributable to 'depreciation of assets increasing at 10% a year'. But Eskom has not provided any evidence for how it arrived at this figure or of how it has evaluated its assets. Some experts argue that the use of the Modern Equivalent Asset (MEA) valuation method has severely inflated the purported cost of replacement of these assets. The fact is that Eskom will never have to replace its entire fleet at once. Therefore it should not be entitled to claim depreciation on the replacement value of the entire fleet. Nor should it be allowed to use this method to justify high recovery costs from current consumers.

Third, Eskom cannot legitimately claim that full cost recovery for its new build programmes is necessary for the company to maintain a healthy balance sheet. Crippling consumers in this way will cripple the economy, thereby removing the very growth that underpins Eskom's pricing application. Consumers should not be made to pay for capital expansion; they should pay only for what they consume. The DA holds that alternative financing is available through bond issuances.

In light of the above points, we trust that Nersa will do its job and prevent Eskom from exploiting consumers and crushing businesses. Failure to do so will impact negatively on the economy and lead to large-scale job losses.

David Ross, Shadow Deputy Minister of Energy

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