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Eskom in downward spiral

Municipal debtors more than double as increased tariffs bite.

JOHANNESBURG – Eskom is in a downward spiral, with lower than expected sales volumes, escalating operating cost, failing plants and consumers who increasingly battle to pay the rising tariffs.

It nevertheless showed a profit of R7.1 billion for the year ending March 31 2014, compared with R5.2 billion in the previous financial year, thanks to increased tariffs and a profit of R2.1 billion on embedded derivatives. That refers to the contract with BHP Billiton that bases the tariff the company is charged for electricity on the aluminium price and the US dollar. In the previous year a loss of R5.9 billion was reported on this item.

Eskom’s strategy to deal with its financial woes is based on a savings drive, recovering over-expenditure from the tariff and asking government for financial assistance.

Eskom’s sales of 217 903 GWh showed an increase of only 0.6% over the previous year. This was the result of a 3% decrease in sales to mines and a 9.6% decrease in international sales. Local sales to industrial customers increased by 5.6%. The revenue increased by 7.4% to R139.5 billion following the 8% average tariff increase determined by the national energy regulator (Nersa).

Production by Eskom’s open-cycle gas turbines reached 3 621 GWh against a budget of 1 284 GWh in the previous year. This led to an over-expenditure of R8.1 billion. Eskom says in its integrated report: “this funding needs to be found elsewhere within the approved budgets, until it is recovered as a part of the regulatory mechanism.”

This means that Eskom will apply to Nersa to recover the expenditure from consumers through increased tariffs. It is also expected to use this mechanism to recover other amounts to compensate for lower than expected sales and increased spend on independent power producers.

Nersa has been mulling over a similar application regarding the previous tariff period (2010-2013) since late last year and a response that is expected to lead to an increase in consumer tariffs is overdue.

If Eskom’s applications are successful, consumers will have to pay the 8% annual increase earlier granted for the five-year period from 2013 to 2018, as well as an extra percentage to recover over-expenditure from 2010-2013 and further increases to compensate for over-expenditure for 2013/14. Eskom has earlier indicated that it will in future use this mechanism every year to cover deviations from the assumptions its tariff determination was based on. The mechanism allows for the recovery of prudently occurred costs.

In its integrated report Eskom says if necessary, it will apply for the re-opening of the tariff determination for 2013-2018 (MYPD3).

From Eskom’s results it is clear that increased tariffs are putting pressure on consumers’ ability to pay for electricity. Municipal debtors have more than doubled from R1.2 billion in the previous year to R2.6 billion in the year ending March 31 2014. Eskom sold 41.9% of its electricity to municipalities, down from 42.2% in the previous year.

The utility says historically, payments by municipalities strongly correlated with them receiving their equitable share from National Treasury. In the past this was sufficient to settle outstanding electricity debt, “but this is no longer the case with municipalities facing increased electricity prices and reduced funding”, Eskom says in its integrated report.

Eskom executive Erica Johnson said it is clear that Eskom’s traditional debt collection mechanisms don’t have the desired effect on municipalities any more. The utility has restructured the debt of some municipalities and has recently given notice to three municipalities in the Free State that their power supply will be disconnected if it doesn’t make payment. She said some municipalities in Mpumalanga are also clearly battling.

Eskom hopes to save R50 billion to R60 billion over the five-year tariff period through a company-wide programme. This is in response to a R225 billion shortfall after Nersa granted only an 8% annual tariff increase instead of the 16% Eskom applied for.

It has repeated its call for financial support from government. Several cabinet ministers have over the past months been considering this, but no announcement has been forthcoming.

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