Tag Archive | MYPD3

Eskom- the elephant in the room…

For weeks now Parliament has been listening to a litany of warnings from Brian Dames, CEO of Eskom, and Paul O’Flaherty, financial eskom logodirector, on the necessity to maintain a rock solid balance sheet to the outside world, particularly the banking and loan sector, in order to secure and maintain loans by Eskom subject to favourable considerations by the rating agencies.

This is important, they say, in order to ensure electricity rates at a revised figure, carved down from what was originally asked for to a much lesser 16% increase per year for five years and which is now proposed to the national energy regulator (NERSA), supported by the department of energy (DOE).

The whole application is termed the third of the multi-year price determinations known as (MYPD(3), given the love of acronyms in the energy world but not so loved it seems during the hearings being conducted by NERSA around the country.

In fact, the deep distrust of Eskom and the possibility that they are not working in the national interest of the consumer but rather their own has become almost a theme of those taking the podium to express their displeasure at constantly increasing electricity prices.

It all goes back to a simple question asked by an MP in Parliament during the explanation given by Eskom to the energy portfolio committee on the reasons for their MYPD(3) application.   “Why”, asked the MP,  “did Eskom on the one hand try and run its business like a commercial giant when in fact it is a state utility providing a service to the consumer and presumably not trying to make a profit at the expense of the consumer?”

The retort from Eskom was that any failure to get loans without a strong balance sheet would result in even higher electricity rates. But is this really true many have asked during the current NERSA hearings.  Is it a question of credit agency ratings or the need to show profits that is driving the Eskom bid for 16% increase at least per year?

Energy Intensive Users Group who are responsible for 44% of electricity consumption say that in their calculations, Eskom needs only 10% at most.

In Cape Town, National Union of Miners said succinctly, “Consumers should not be punished for policies of the past and NUM questioned whether a “R46bn shareholder return was justifiable for a state company.”

In reality, there is no doubt that Eskom does not consider itself a state utility, or at least it certainly does not act like one. A reading of their website quickly clears up any doubt on that issue, the language of the site painting a solid picture of competence and financial strength to the world in general.

In fact the financial problem for the country is what can the foundries that are going insolvent, the struggling businesses facing imponderables and the ordinary citizen facing unheard of monthly municipal accounts, do about an organisation determined to make the kind of profits that give good sleep to bank managers only.

Quite clearly, this scenario will have to be played out before Budget day.

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NA smallWith Parliament now open, parliamentarians already at work in some of the committees and training in progress for the new MPs, the State of Nation Address is now scheduled for 14 February, followed by a week of debate, the President’s response being on the 21 February and the Budget set for 27 February.

Parliament of South Africa 20.12.2012

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Posted in Electricity, Energy, Finance, economic0 Comments

Eskom MYPD electricity call is to sustain ratings

 Eskom stands by its MYPD3 asking price…….

Brian Dames, CEO, Eskom, on their Multi-Year Price Determination (MYPD 3) application to the National Energy Regulator of South Africa (NERSA), told parliamentarians of the trade and industry portfolio committee that price increases were necessary. He said that on one hand they had to have a respectable balance sheet to obtain development money whilst on the other hand, Eskom was coming from a background where investment activity had been inactive over the years.

“To keep the lights on”, Dames said, “there is now a cost.”

Electricity currently below cost

He said that because of historical reasons, electricity was currently charged at below cost-reflective levels and was not sustainable. Electricity prices needed now to have a “transition to cost-reflective levels to support a sustainable electricity industry that had resources to maintain operations and build new generating capacity, guaranteeing future security of supply.”

Dames said that Eskom had also recently issued an “interim integrated report” for the six months ended 30 September 2012 setting out a contextual review of the company’s overall performance from 1 April 2012 and in the light of this had presented the NERSA application.

He said that the current MYPD 2 was ending and consequently Eskom had to submit such an application to NERSA to determine the country’s electricity price adjustment for 2013/14.

However, this time Eskom was proposing a five-year determination for MYPD 3, running from 1 April 2013 to 31 March 2018, which would ensure a more gradual and predictable price path for households, businesses, investors and the country as a whole.

Eskom’s five-year revenue request translated into average electricity price increases of 13% a year for Eskom’s own needs, plus 3% to support the introduction of Independent Power Producers (IPPs), giving a total of 16%, representing a total price increase from the current 61 cents per kilowatt-hour (c/kWh) in 2012/13 to 128c/kW h in 2017/18.

Balance sought between needs of Eskom and poor

The impact of the price increase on the economy had been considered in addition to guidance from the President’s State of the Nation Address in which he requested Eskom to consider a price path which would ensure that Eskom and the industry remained financially viable and sustainable, but which remained affordable especially for the poor. Dames said he believed that Eskom’s application achieved an appropriate balance.

In addressing the impact of price increases, Dames said that Eskom believed that poor households should be protected from the impact of electricity price increases through targeted, transparent cross-subsidisation in accordance with a national cross-subsidy framework.

A failure to achieve cost-reflective prices would sooner rather than later impact on South Africa’s economy and its growth prospects, he said.

MPs query what electricity giant has as objective

A number of opposition MPs disagreed and queried the entire cost-reflective process used by Eskom, saying that the tariffs proposed by Eskom rather posed a dangerous threat to economic growth and the future of business in South Africa, as well as job creation.

Whilst Eskom wanted a 4% targeted return in the medium term and 8% in the final year, they said, JSE majors had returned on average 6.6% per year in the last ten years. They asked if Eskom was attempting to build a balance sheet that compared with global corporates just in order to get loans.

The main thrust of certain opposition MPs queries was the sacrifice in growth rate, damage to business development, to job creation. ANC MPs complained of the effect on the poor.

Paul O’Flaherty, finance director at Eskom, said that the only sources of funding available to Eskom were debt; equity injected from Government and operating profit from its revenue. Eskom had requested for an additional equity injection from the state but that was not forthcoming leaving generation of debt to them and raising enough operating profits from its revenue.

He said in terms of depreciation factors on the figures shown, such was regulated by Nersa and that there was no way of getting around the fact that Eskom had to pay its way. According to the cash flow predictions, a trillion rand of revenue would be needed to pay for primary energy costs, employee costs and demand side management, repairs and maintenance.

Eskom must be seen as viable entity for capital programmes

Eskom’s capital program over the next five years included finishing the Kusile power station repayments, plus a further R360bn in debts, which meant that R200bn had to be raised from the market. This had to be done against a successful balance sheet. Eskom got investment status because of Government uplifting, he said. It had to show its cash metrics were moving towards a more sustainable company, he said.

Dames added that Eskom required on its equity a higher return than the sovereign because of the risk involved and in terms of the cost of debt in a normal environment and that the cost of Eskom borrowing was more expensive that the sovereign borrowing. The cost of debt had been arrived at by Eskom working with NERSA as well by as KPMG and the costs included in the MYPD 3 application were appropriate, in his opinion.

Mohamed Adam the legal representative at Eskom said on questions relating to the impact of price increases on the manufacturing sector, that the impact of price increase on the economy had been considered in addition to ensuring that both Eskom and the industry remained financially viable and sustainable, but which remained affordable especially for the poor. There was a threshold at which Eskom would also face which amounted to a tipping point if prices were too low.

Unbundling of Eskom not an option

In conclusion, Mr Dames said that the submission of the MYPD 3 application was the beginning of a public process and he rejected MPs suggestions that Eskom was a monopoly that should be broken up.    He said that any unbundling of Eskom accompanied by the introduction of private participants would fail to bring in lower prices since higher returns would be needed by private generators and distributors.

As to whether Eskom would be willing to supply certain municipal customers,  Dames said that local authorities had a constitutional right to supply the customer within their jurisdiction and  Eskom was unable to supply a number of municipal customers anyway based on their relation to the network. Also municipalities would lose revenue.

Dames said that the growth rates in the MYPD 3 submissions were lower than those required in the New Growth Path and the National Development Plan and whilst the energy reserve margin might be held in the immediate future, it would disappear if new generation capacity was not brought on line after the completion of Kusile and if there was growth. The current build programme did not address all the capacity needs of South Africa into the future.

EIUG figures do not reflect current picture

Dames, in addressing the claim by Energy Intensive Users Group (EIUG) that Eskom’s costs of maintenance were higher than they should be, said a considerable quantity of EUIG’s comments were based on inaccurate figures.

Much in the way of numbers quoted by EIUG were based upon “aspirational targets achieved during the 1990s when Eskom’s power stations were a lot younger”, it was said. The constrained power system now existing did not now allow for such philosophical assumptions. There was a balance which Eskom now needed to strike in practical realities as far as keeping the lights on was concerned.

Posted in Electricity, Energy, Finance, economic, Land,Agriculture, Public utilities, Trade & Industry0 Comments


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