ESKOM One Year Application 2018/19

NERSA 1 November 2017

Nelson Mandela Bay Business Chamber

Comments and Recommendations

Overview

• The Nelson Mandela Bay Business Chamber

• What the application means for the Nelson Mandela Bay

• Why we reject the application

• Eskom’s inefficiencies

• Conclusion

• Recommendations

Nelson Mandela Bay Business Chamber

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Largest business association in the Eastern Cape with a membership of around 700businesses, employing over 100 000 people

Represents a broad spectrum of businesses in Nelson Mandela Bay

Estimated value of investments made by member companies in the past year isR18.2 billion.

The Chamber is leading business transformation by example through its staff,Board and membership equity representation

The Chamber is the voice of business in in Nelson Mandela Bay, committed toretaining and growing local investment and growth in the region.

Lobbying, representation and strategic interventions are key focus areas toaddress obstacles and facilitate an enabling environment for business

High input costs are affecting the viability of businesses and as such the Chamberhas been very active in protecting business interests in relation to electricity tariffs

The application

Eskom tariffs have increased 2.5 times since 2008 in real terms

The application means a further increase of 27.5% to the tariff charged to the municipality

The application means an increase of R850 Million to the NMBM consumers

R 265 Million increase to households

R 160 Million increase to small business

R 425 Million increase to industry

The effects of the application

With thanks to The Herald newspaper

The effects of the application

Eskom’s generation including IPP’s reduced by 7% since 2008

We will further reduce our electricity usage

Eskom will sell less and decline further

Economic decline, SA will shrink

Investment will reduce further

Poverty, unemployment and inequality will increase

The NMBBC strongly rejects the application

Eskom’s increases must be contained below inflation to stimulate usage

On what basis do we reject the application?

• Insufficient information and disclosure

• Proposed costs do not reflect costs of an efficient licensee

• The Supply/Demand situation has fundamentally changed since 2015. Tariff structures must be revised

Conditional Participation- Rights Reserved

Lack of disclosure

Eskom and Nersa deprive the public of proper participation by not disclosing relevant information

• Coal cost detail

• IPP contract detail

• R77 billion capital expenditure in 2018/19: no detail

• Regulatory asset base information is non-existing

• Primary energy calculations per methodology are missing

• Cost and subsidisation of SPA and foreign sales are undisclosed

• Integrated 5 year IDM plan is missing, but cost is part of the application

Efficient Cost

ERA Section 15.1

(a) Must enable an efficient licensee to recover the full cost of its licensedactivities, including a reasonable margin or return;

(b) Must provide for or prescribe incentives for continued improvement of

the technical and economic efficiency with which services are to be

provided;

(c) Must give end users proper information regarding the costs that their

consumption imposes on the licensee's business;

(d) Must avoid undue discrimination between customer categories.

Proposed costs do not reflect the costs of an efficient licensee

The application includes inefficiencies raised in the public domain.

The public is simply being asked to pay for Eskom’s inefficiencies

Governance Failures

• Corruption, fraud and maladministration are neither lawful costs, nor efficient costs.

• Current investigations:– Denton’s report, July 2015

– Coal Quality Management review; PwC 26 November 2016

– State of Capture: public Protector of South Africa 4 October 2016

– Verification and compliance re. Tegeta appointment; National Treasury April 2016 & April 2017

• Total estimated cost (Eskom) = R14,5 billion

Did NERSA investigate? If so what are the conclusions? If not why not?

Qualified Audit Report

• Effective steps not taken to prevent irregular expenditure. The full extent could not be quantified.

• Effective steps not taken to prevent fruitless and wasteful expenditure in contravention of the PFMA.

• Goods, works or service not always procured as required by section 51(a)(iii) of the PFMA.

• Contracts were not awarded in accordance with the PFMA.

• Irregular expenditure: R3 billion

• Fruitless and wasteful expenditure: R510 million

Did NERSA investigate? If so what were the conclusions? If not why not?

Other Abuses

• McKinsey Trillian debacle – R1,6 billion– Pay back the money!!

• BLSA suspension of Eskom until transparent and thorough investigations take place into abuses

Tariff structures need to be revised

Eskom is only reverting to ERTSA in relation to tariffs

• The supply demand situation has fundamentally changed since 2015

• Eskom is currently facing substantial overcapacity, which will only increase

• Tariff structures need to be revised following COS studies (EPP Policy Position 23)

• Large consumers such as municipalities are overcharged

• Excessive winter and winter peak tariffs must be removed from Eskom’s tariff structures

Urgent Answers from NERSA

• Will it provide the information requested?

• Did it investigate reported Eskom abuses? If so what was the outcome. If not, why not.

• What steps does it propose to take regarding the Eskom Qualified Audit? If no steps, why not?

• Has Nersa investigated efficiencies of employment cost? If not why not?

• Will it be reviewing the tariff structures given current over supply of electricity?

What is Eskom’s improvement plan?

Could not find it in the application document or AFS

Eskom’s cost and expenditure are out of control

• Capital Spending

• Primary energy

• IPP’s

• Employment Cost

• Operational Costs

Revenue increases but profits fall

Capital Investment

77 Billion for 2018/19

66 Billion for 2017/18

59 Billion for 2016/17

This includes capital for infrastructure nobody needs or nobody will use

The capital spend is the main reason for Eskom’s cash crunch

Employment Cost

47600 employees in 2017

32600 employees in 2007

Eskom generated 10% less power in 2017 vs 2007

versus

Primary Energy

Coal spend for 2018: R57 Billion

-Out of proportion increase in coal cost since 2012 compared to global coal prices

-Coal cost escalation and contracts need disclosure and investigation

IPP’s

• IPP’s amount to a substantial financial burden on the consumer

• IPP’s have a R28.7 Billion negative impact on the revenue requirement

That is 13% of the revenue requirement

• IPP cost per KWh go up from 1.67R in 2015 to 1.86R in 2018

IPP cost is about 1R/KWh above Eskom cost

• Nersa needs to explain how it approved contracts leading to excessive costs

IPP’s - DOE’s waste

IPP contract includes Gas Peaker stations such as the 350MW Dedisa power station in the Coega IDZ and Durban’s 650MW Avon

It was built at a cost of R9.5 Billion

These power stations, commissioned in 2015, will likely never be used

Given the overcapacity, nobody needs them

Cost to the Eskom customers for these stations in 2018: R2.3 Billion

The consumer is expected to pay for irrational decisions in relation to IPP generation capacity

SPA’s and Foreign sales

• Foreign sales likely at price below what local customers pay e.g. municipalities

• South African standard customers are being asked to fund

another R4 billion for SPA’s and foreign customers

• Disclosure is required in relation to these costs

Operating Costs

• Maintenance and other operating costs increased twice as much as CPI since 2010

IDM- Integrated demand management

• IDM relates to project cost to further reduce electricity usage

• Eskom plans to waste another R511 million on this project in 2018

Eskom sales forecast

– Eskom’s application includes growth but price increases by 19.5%/27.5%

– Sales will drop: confirmed by recent history and Treasury’s comments

– Massive overcapacity > 10,000MW

The application offers no solution for overcapacity!

Eskom mentions solution, but implements none…

The only solution is to stimulate demand by containing price increases below inflation for all consumers

Only Sensible Conclusion

NMBBC’s recommendations

1. Outright rejection of the application

-Contain tariff increases below inflation

2. Application will be unlawful if approved

-Disclosure of information required

-Investigation into historic and current “inefficiencies”

-Tariffs structures to be revised

NMBBC’s Recommendations

Strategic review

Restructuring of Eskom

close power stations which are no longer required

halt to capital spend

re-negotiate IPP contracts

review coal contracts

right-sizing of personnel

reduce operational spend

halt to IDM

“May your choices reflect your hopes, not your fears” ― Nelson Mandela ―

THANK YOU