Eskom MYPD 3 Selective Reopener

Presentation by the Democratic Alliance to the National Energy Regulator of South Africa

23 June 2015

• DA strongly opposes any further tariff increase:

• The Economic Climate

• The Eskom Story

• Increased NERSA Scrutiny

• Conclusion

Presentation Content

• Point of departure: Caught between a rock & hard place:

• Load shedding (33 days in first 100 in 2015) vs. huge electricity price hike – both have economic consequences

• Cost to GDP of load shedding sitting at between 0,4% to 0,6% - locking SA in to a low growth path

• SA’s economy is much weaker now then at the time MYPD 3 determination

• Cumulative effect of load shedding

• Stagnant economic growth

• Risk of further credit down grades

• Increasing unemployment

• Weak currency

• Inflation is accelerating

• Declining disposable incomes

• Economists question whether SA’s economy can withstand yet another shock

• The impact on SMME’s, jobs & undermining the NDP

NERSA MUST balance Eskom’s “needs” with mitigation of economic consequences

Economic Climate

The Eskom Story• Above inflation tariff increases since 2003

• Selective re-openers in virtually every year of MYDA 1 & 2

• Blatant misuse of monopoly power to distort pricing outcomes

• Doubling of electricity price since 2009

• No significant improvements in cost base management or improvement in operational efficiencies

• Lack of transparency in coal and diesel contracts

• Unaccountable leadership politicised board & management appointments

• Mismanagement of new build program – inefficiency at the heart of Eskom application

• Biggest “cost push” factor

• Root cause of reliance on OGTs

• Standard & Poor’s – “Speculative Grade”

• Eskom has structural problems that can not be addressed via tariff increases

Eskom’s monopoly position combined with Nersa capitulation on tariff increases means there is no incentive for Eskom to better manage its costs - making Eskom

an ever expanding black hole & burden to the SA consumer

Increased NERSA Scrutiny• NERSA must insist on clarification:

• Why was Eskom’s maintenance program allowed to deteriorate to the point where costly diesel is necessary

• Why has above inflation increase for the past 12 years plus Government quasi-bailouts no stabilised Eskom’s balance sheet

• What structural changes will Eskom embark as its clear the status quo can not continue

• NERSA must obtain assurances:

• That Eskom will adhere to the updated price determination managing costs appropriately – otherwise makes a mockery of tariff setting process

• That cost containment & improvement in operational efficiencies are realistic, attainable & implementable

• NERSA cannot continue to signal to Eskom that inefficiencies will always be rewarded by higher tariffs

• NERSA must endeavor to achieve smoother pricing through regulatory certainty

• Political considerations must not be entertained

The Way Forward• NERSA must regulate in terms of its guiding legislation

• No mechanism seemingly exists to approve Eskom’s application

• No proof of improvement in cost management or operational efficiencies

• NERSA must assess outcomes against input costs – “value for money” assessment

• SA and NERSA must not be held hostage by Eskom’s “Pay-Up or face Load Shedding” Narrative

• Various funding mechanisms exist and are available to Eskom

• Equity sale

• Use of existing guarantees & loans over a longer period

• Eskom should pursue alternative funding options BEFORE tapping consumers

• Reform of the Electricity Sector is vital• Independent Systems Market Operator

• Competition – effective benchmarking of costs

In denying Eskom’s unjustified tariff increase NERSA can send a strong message that reform of the electricity sector is the only option

to achieve long-term pricing sustainability

Conclusion• Tariffs increases may well be good for Eskom, but they are bad for South Africa

• The economic consequences of sharp & sustained price hike will be significant

• Jobs losses will be the true cost of any potential tariff increase

• NERSA must weigh Eskom’s needs against those of the South African economy

• A myopic view / full adoption of the Eskom narrative cannot be accepted

• Economic Impact assessment of load shedding vs. Tariff Increases– Ratings Agency

– Chamber of Mines

• Eskom can not be allowed to continue abuse its dominant monopoly position

• NERSA must explicitly acknowledge that structural reform of both the electricity sector and Eskom is necessary

• Tariff increases must be contingent on improvements in cost management & efficiency enhancements

– ESKOM has failed to make a compelling case in this regard

• We can not stabilise Eskom at the cost of destabilising the broader economy

The DA believes any further tariff increase must be declined in the interest of jobs & economic growth