28 January 2013

South Africa: Eskom's Proposed Price Hikes to Hit Manufacturing and Commercial Sectors Hard

Photo: Saragoldsmith/Flickr
Power lines

Since the start of public hearings on Eskom's third Multi-Year Price Determination (MYPD 3) application, different organisations have come before the National Energy Regulator of South Africa (Nersa) to register their opposition to the request of an annual average 16% tariff adjustment between 2013/14 and 2017/18. Regardless of sector and background, those that have made presentations to Nersa have been united in stating that the proposed increases will pose an economic and social disaster for South Africa as the hikes will lead to job losses, factory closures and general increases in consumer goods.

Eskom on the other hand is dogged and insists that the utility needs the R1, 09 trillion. Its spokespersons and spin doctors are crisscrossing the country preaching that "the long-term benefits, for the economy as a whole, of having a financially sustainable electricity industry" outweigh any negative short-term effects. We are also told that manufacturing and commercial sectors are less vulnerable to electricity price increases given their low electricity intensity. What we are not told is that the research that Eskom refers to was commissioned by the very same company that is asking to increase the electricity price by 110% in the next five years.

As unions organising in food production, agriculture, engineering, metal fabrication, automotive, retail and commercial services; we want to add voices of our combined membership of 538 307and say:

NO to 16% yearly average electricity increases over the next five years!

Despite Eskom spin doctoring, the electricity price hike will hit manufacturing and commercial sectors of the economy very hard!

We won't be fooled! The proposed electricity increases will affect the poor.

As the Food and Allied Workers Union (FAWU), National Union of Metalworkers of South Africa (Numsa) and South African Catering, Commercial and Allied Workers Union (Saccawu), we commit ourselves to do everything in our power to ensure that Eskom does not receive the preposterous increase that the electricity utility is requesting. As we prepare oral presentations for the hearings scheduled for 30-31 January at Midrand's Gallagher Estate, we call on our shopstewards around Gauteng and all those opposed to Eskom's application to picket and demonstrate outside the hearings.

1. Electricity: A key input in manufacturing and commercial sectors

Electricity is a key input in manufacturing and commercial sectors. It is a significant cost for firms and enterprises in these sectors. A snap electricity cost survey that Numsa conducted in November 2012 confirms the fact that electricity constitutes a significant percentage of the costs in energy intensive companies. Manufacturing, mining and smelter companies that Numsa surveyed reported that in 2011 electricity costs comprised 10.33%, 5.37% and 37.04% of their total business costs respectively. The findings confirm an earlier survey which the National Foundry Technology Network (NFTN) conducted among 42 foundries that showed that electricity made up 14% of the sector's total operational costs.

Electricity is also a significant cost for businesses that operate from office blocks and shopping centres. In a study that Utility Management for Africa (UMFA) cited in the Nersa public hearing in Kimberley it was revealed that presently a Pick n' Pay Family Store pays an average of R83 411 per month towards electricity while Spur restaurants have a monthly electricity bill of R37 292. There is ample evidence that many commercial companies are already reeling from the increase in the average electricity price between 2008 and now. In Kimberly real electricity increases for commercial buildings have increased by 319% since 2008!

The increases have led to:

* a situation where electricity costs exceed current gross rentals

* commercial companies passing the increasing costs of electricity to customers

* a mass exodus of companies from zoned business areas to residential areas where they trade illegally

* an increase in vacancies of commercial buildings properties such as malls and office blocks

* a drop in property values.

These developments directly affect members of Saccawu and indirectly affect the members of the other two unions as consumers. The proposed electricity increases will undoubtedly cripple the commercial property market further impacting on Saccawu members.

2. Manufacturing and commercial sectors cannot be looked in isolation of primary industries

It is a fallacy to look – as Eskom does - at the impact of the hikes on manufacturing and commercial sectors in isolation of what happens in primary industries like agriculture and basic metals industries. If primary industries are destroyed there will no agro-processing, retail and manufacturing. In its submission to Nersa, Agri-SA provided case studies on how electricity price increases of the last six years have had an impact on irrigation costs. Irrigation as a component of variable input costs have increased in maize production from 8% to 25%. The effects of recent electricity hikes on wheat enterprises have been far more dramatic.

The South African Cane Growers Association painted a similar picture when it informed the energy regulator that since 2008 there has been a growing gap between price received for sugar cane and electricity costs. The association projects that the tariff adjustment that Eskom is requesting from Nersa will lead to closure of four mills and "could put 35 000 jobs (direct and indirect) at risk".

There is little doubt from the evidence before us that the proposed Eskom tariff increases will reduce farm profitability as irrigation becomes more expensive. This has the potential to lead to job losses, food insecurity and increases in food prices. In such a scenario what happens in agriculture has a direct bearing in food production and agro-processing.

It is therefore foolhardy for Eskom to argue that manufacturing and commercial services will not be severely affected by increases in tariffs. Decimation of primary industries will lead to a demise of manufacturing and commercial services.

3. Eskom increases to fuel municipal electricity hikes

According to Nersa's last Electricity supply statistics for South Africa, municipalities - not Eskom - supply electricity to 91% of manufacturing customers and 83% of commercial customers. It is generally acknowledged that it is customers that municipalities supply that are prone to the most destructive effects of tariff adjustments. Although the Municipal Fiscal Powers and Functions Act (MFPFA) does allow municipalities to levy a surcharge on electricity tariffs, even in cases where Eskom supplies power; the absence of guiding norms and standards by the Minister of Finance has meant that no Eskom-supplied area have done so. It is those municipalities that distribute electricity that impose surcharges on electricity tariffs.

What this has effectively created is a two-tier tariff system that allows Eskom customers to pay less while municipalities put a mark-up or surcharge on the regulated price of electricity; making power far more costly for municipal users. In our industry it is common to find companies in the same sector and consuming the same amount of electricity paying different tariffs. Whereas industrial Eskom direct customers are VAT-exempt and only pay an environmental levy of 3, 5 cent per kilowatt hour (c/KWh), customers that municipalities supply are saddled with surcharges on top of tariffs that Nersa sets.

Besides increases in cost structures such as capital charges, salaries, maintenance and repairs; municipalities that distribute electricity will have to factor Eskom's bulk price when formulating their applications to Nersa before 13 May 2013. Purchases from Eskom constitute the biggest chunk of the municipalities' electricity cost structure. The purchase costs which local authorities pay as they buy electricity from Eskom comes to an average of 70% of municipal electricity costs. It is no wonder that Nersa in its Municipal Tariff Guideline published in November 2012 assumes an increase for 2013/14 in bulk purchases of anything between 5, 3% and 14, 4%. This is before other costs and surcharges are added!

An Eskom study of six metros found that customers that municipalities supplied with electricity were averagely paying between 40% and 110% higher than Eskom direct customers. How can Eskom then say that manufacturing and commercial sectors will not be adversely affected?

4. What are we then calling for?

Our bottom line is that Nersa should not grant Eskom the yearly 16% average increase that the utility is asking for. Our position is that Eskom must be given an inflation-related adjustment for three years and NOT five years as it is proposed in the application.

As the three unions we advance both short-term and medium/long-term alternatives:

Short-term alternatives to Eskom's application:

1. Nersa to lower Eskom's rate of return which is projected to rise by 0, 9% in 2013/4 to 7, 8% in 2017/8. Eskom is a state-owned entity with a mandate for electrification and sustainable industrialization. It is not for profit maximisation.

2. Nersa to take out any double-counting and overstatement of costs in Eskom's application. We found that Eskom overstates what it will pay for renewables and coal. There is also some double-counting of cost items in the application

3. Re-evaluate the drive for a stand-alone credit rating status on the part of Eskom. Eskom is a state entity. The electricity utility cannot be above everyone in the country and be separate from the sovereign debt. The chase for a stand-alone credit rating is what is behind the calls high rates of return as Eskom wants to satisfy the appetite of financiers.

4. Government to capitalise Eskom as it did in 2008.

5. Launch a campaign to contain the costs of primary energy, particularly the costs of coal.

6. Stringent management of Integrated Demand Management (IDM) programmes particularly the "buy-back" programme. Our members have been put on short-time and lay-offs as employers switch-off machines and furnaces in chase of the money in the "buy energy-back" programmes managed by Eskom.

Medium and long-term interventions:

1. Use the next 3-years to review the Electricity Pricing Policy and the multi-year price determination (MYPD) methodology

2. As a way of containing the price of primary energy declare coal a strategic mineral and bring coal under public and democratic control

3. Work towards a long-term (20-year) electricity price path and funding model aligned to a revised Integrated Resource Plan (IRP)

4. Promulgate norms and standards for surcharges that municipalities impose on electricity.

Programme of Action:

In support of the alternatives outlined above, FAWU, NUMSA and SACCAWU have developed the following programme of action:

* 30 January: Shopsteward picket and demonstration outside Nersa's public hearing

* 13 February: A Labour and Business Consultative Meeting to look at implications of the electricity price increases for the manufacturing and commercial sectors

* 14 February: A consultative meeting of progressive forces to look at municipal tariffs

* 27 February: A night vigil outside Nersa's office on the eve of the energy regulator's decision on Eskom's application.

Issued jointly by NUMSA – FAWU – SACCAWU & EARTHLIFE

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