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Policy  |  Submissions

COSATU’s comments to Nersa on Eskom’s Multi Year Price Determination 3 (MYPD3) Application, November 2012

3 November 2012

  1. Introduction

COSATU welcomes the opportunity to make a representation on Eskom’s MYPD 3 Application. We note that once again NERSA has decided to take the public hearings to all the provinces. As we indicated during the MYPD 2, this arrangement is good because it enables a wide range of interested parties in all corners of our country to air their views on Eskom’s application. We once more want to raise our concern about the timing of the public hearings, which will start when most of our members would still be on leave or just returned from the festive season.

We will as always, consider the Eskom’s application informed by the following important factors:

  • The impact of the applied increases on jobs
  • the impact on the economy; and
  • the impact on access to electricity by the working class and the poor

Therefore this submission analyses the Eskom application, comments on the impact of the application on the economy and jobs, impact on low-income earners, free basic electricity (FBE) and the proposal by Eskom for MYPD 3 to cover 5 years and not 3 years.

  1. Our Understanding of Eskom’s Application in brief

In the MYPD 3 Eskom requests an average electricity price increases of 16% a year for a period of five (5) years; not for three (3) years as it happened with the MYPD 2. Out of the 16% electricity price increases Eskom request over a period of 5 years, i.e. from 2013-2017, 3% will go into the support for the introduction of Independent Power Producers (IPPs) which Eskom says entails:

  • 1020MW from Department of Energy’s Peaker Plant, and
  • 3725MW from the renewable energy IPP bid programme.

Therefore, if it were not because of the introduction of IPPs, Eskom would need only an average of 13% increases each year until 2017/18. Now, the 16% increase every year until 2017/18 will result in electricity price hikes from the current Eskom’s price of 61 cents per kilowatt-hour (c/kWh) in 2012/13 to 128c/kWh in 2017/18. This translates into a massive 110% increase in Eskom’s electricity prices by 2017/18. Table 1 below as shows how Eskom’s proposed increases would affect its various customer categories over the MYDP 3 period:

Table 1 (see page 6 of Part 2 of the application)

  13/14 14/15 15/16 16/17 17/18
Municipalities 13.26% 18.65% 18.70% 18.85% 19.01%
Urban 20.53% 14.23% 14.13% 13.85% 14.01%
Rural 14.59 13.46% 16.07% 13.45% 12.79%
Homelight 20A -0.74% 9.00% 8.99% 9.00% 9.00%
Homelight 60A 4.95% 13.96% 13.95% 13.94% 13.92%
Homepower 14.37% 13.88% 16.43% 13.11% 12.37%
Total tariffs 16.07% 15.95% 16.18% 15.89% 16.04%

Eskom says these increases are important for the following reasons:

  • To avoid electricity black-outs
  • To ensure that electricity prices reflect the costs of supply
  • To support a sustainable electricity industry
  • To grow the economy and create jobs

Lastly, Eskom’s application is based on an assumption that the electricity demand will increase by 1.9% annually from 2013/14 to 2017/18.

  1. COSATU Position of Eskom’s MYPD 3 Application

COSATU notes that section 16 of the Electricity Regulation Act (2006) enjoins Nersa to allow Eskom as a licensee to recover “efficiently and prudently” incurred costs and make a reasonable return. We want to repeat our position in relation to the role of Nersa in this regard:

“The Energy Regulation Act enjoins Nersa to act in the public interest even as it strives to ensure the sustainability of the electricity industry. In our view, working in the public interest means that the regulator must work in the interest of the overwhelming majority of our people: the workers and poor. Working in the interest of the majority means determinations that take into account the pressing challenges facing them. These challenges include the high unemployment rate that has been exacerbated by the global economic crisis, high levels of poverty and inequalities in the country. Making determinations in the public interest means not increasing electricity tariffs in a manner that would remove the majority of our people, who have been denied access to electricity for many years, from the grid...”[1]

The conditions that informed this COSATU position have not changed. Eskom is making its application for high electricity prices in a context of a deepening and widening global economic crisis; increasing job losses; poverty and inequalities in our country. Despite these conditions, Eskom continues to ask for high electricity tariffs, as table 2 below from its application shows.

Table 2: Revenue and price increases from 2006/07 to 2012/13

Period MYPD1 Interim MYPD2
Years 06/07 07/08 08/09 09/10 10/11 11/12 12/13 (applied for) 12/13 (revised by Eskom and granted by Nersa)
Increase 5.1% 5.9% 27.5% 31.3% 24.8% 25.8% 25.9% 16%
Revenue R36.7bn R40.1bn R50.8bn R62bn R85.2bn 109.9bn R141.4bn R130.3

These high increases entrench a trend of electricity prices which are way above the rate of inflation as table 3 below indicates.

Table 3: Eskom’s history of average tariff adjustments including MYPD 3 and CPI [2]

Year Average price adjustment CPI
1997 5,00% 8,62%
1998 5,00% 6,87%
1999 4,50% 5,21%
2000 5,50% 5,37%
2001 5,20% 5,70%
2002 6,20% 9,20%
2003 8,43% 5,80%
2004 2,50% 1,40%
2005 4,10% 3,42%
2006 5,10% 4,60%
2007 5,90% 5,20%
2008 27,50% 10,30%
2009 31,30% 6,16%
2010 24,80% 5,40%
2011 25,80% 4,50%
2012 16,00% 5,60%
2013 16,07% 4,30%
2014 15,95% 4,50%
2015 16,18% 4,80%
2016 15,89% 5,00%
2017 16,04% 5,60%

While historically, between 1997 and 2006, the increases in the prices of electricity were either below the level of inflation or just closer to it, the country is now forced to accept increases that are three times the rate of inflation.

Figure 1: Eskom’s trajectory of average tariff adjustments (incl. MYPD 3) & CPI

In our view, Eskom’s call that the price of electricity must speedily be cost-reflective is informed by its desire for “completely eliminate government support” as it also said in its MYPD 2 application. It wants to improve its “standalone” credit rating within the MYPD 3 period. It is clear that Eskom increasingly wants to operate like a private company whose main objective is to make more profit. This is why in this MYPD 3 it wants its return on assets to increase from 0.9% to 7.8% over MYPD 3 period. This represents a massive 767% over this period. COSATU repeats its call that Eskom must operate according to developmental objectives of the country and not like a profit thirsty monster it has become.

  1. Impact on the Economy and Jobs

We have already indicated that the global economic is deepening and widening. South Africa’s trading partners are experiencing serious economic difficulties and thus our economy will continue to be adversely affected. Already the GDP increased by a mere annualised rate of 1.2% in the 3rd quarter of 2012 compared to 3.4% in the second quarter. The rate of unemployment increased by 5.1% in the same period; with an overall unemployment rate at 25%. This confirms findings of the Human Sciences Research Council’s July 2008 study, which Eskom agreed with in its MYPD 2, that high electricity prices “place the economy on a lower growth path, with higher inflation, lower GDP and employment”. It remains COSATU’s position that the 16% annual increase in electricity prices will only serve to exacerbate the already gloomy economic situation.

Accordingly, we want to reiterate our views that the high electricity tariffs have, among others, the following negative impact on the economy:

  • Destroys prospects for SMEs
  • Forces low income consumers to substitute electricity with dirty energy
  • Huge arrears (as people fail to pay their bills), disconnections and illegal reconnections. Already, Eskom has indicated that it has more than R3bn electricity debt in Soweto only
  • Reduction in the use of electric appliances with knock-on effect on the economy as the demand for electric appliances decline.

Steep electricity tariffs will have a negative impact on the objectives contained in the beneficiation strategy, industrial policy action plan, new growth path and government’s infrastructure development programme. We have no doubt that high electricity prices will result in job losses, push up prices of basic commodities, including food, and with inflation rate increasing the SARB will raise the repo rate and thus further pushing workers and the poor deeper into poverty.

  1. Impact on Low-income Households

In its MYPD 3 Eskom admits that a “transition towards cost reflectivity poses several challenges...” including negative impact on poor households. We have argued before that a reliance on tariffs for Eskom’s capital expansion programme amounts to calling on “consumers to pay for capital expenditure for services they would enjoy later or services that they may not even be able to afford in future”.

We welcome the fact that in the first year of Eskom’s MYPD 3 it proposes that tariffs for low-income households (Homelight 20A) be reduced by 0.74% and Homelight 60A tariffs be increased by only 4.95% in the same period. However, all this would unfortunately be seriously off-set by tariff increases averaging 9% for Homelight 20A consumers and 14% for Homelight 60A customers, which include a large number of the working class, for the remaining period of the MYPD 3.

Furthermore, the price of Eskom electricity is a cost to municipalities, which is in turn passed to consumers. The high electricity tariffs are likely to force the majority of poor people to revert to dangerous and dirty sources of energy.

  1. Free Basic Electricity

We note that in the MYPD 3 Eskom is not saying anything about the FBE. In its MYPD 2 Eskom had proposed an increase in FBE from 50kWh to 70kWh per month for all 20Amp FBE customers. COSATU is unhappy that the FBE has been at 50kWh despite studies showing it can only be sufficient for a few light bulbs and a radio, while 120kWh per month can be enough for a few light bulbs, a small refrigerator and a modest television set.[3] We maintain that FBE should be increased to 200kWh to help low-income earners to lead a better life in the context of rising electricity prices.

It is also clear that the poor households and low-income earners did not benefit from Nersa’s inclining block tariff structure in the MYPD 2 because of problems around it, including its non-applicability to customers using pre-paid meters.

  1. Energy Efficiency

While COSATU does not support high electricity tariffs which in part are meant to force energy efficiency, we support a proposal for a mandatory Energy Conservation Scheme “to prompt SA’s largest energy users to curb their usage” of electricity. We further support a call for the review of any special pricing agreements that are still in force.

  1. Conclusion

COSATU does not support the proposed 16% increases in the price of electricity because it runs counter to the objectives the country has set itself. Eskom has indicated that it is making its application under uncertain conditions in the electricity industry, including its future role in relation to the Integrated Resource Plan. However, it proposes a 5-year period for the MYPD 3. COSATU rejects this proposal precisely based on Eskom’s assertion that there are still decisions to be made by government in relation to the electricity industry. COSATU calls for decisive measures to ensure energy efficiency which will in turn ensure that the country does not have to expand the electricity generation capacity massively in future. COSATU notes that decision in relation to the FBE does not rest with Nersa, but believes that Nersa can influence a decision to increase the FBE substantially. Lastly, COSATU call for an inflation-linked tariff increases for the MYPD 3.

Patrick Craven (National Spokesperson)
Congress of South African Trade Unions
110 Jorissen Cnr Simmonds Street

Tel: +27 11 339-4911 or Direct: +27 10 219-1339
Mobile: +27 82 821 7456
E-Mail: patrick@cosatu.org.za

[1]See COSATU S77 on high electricity prices; 2010
[2] CPI figues for 2012-2017 are projections; see the following links: http://www.eskom.co.za/c/article/143/average-price-increases/; http://viewswire.eiu.com/index.asp?layout=VWCountryVW3&country_id=1660000166
[3]See Komives, Foster, Hapern & Wodon, 2005.