Electricity price hikes: Refusing to bear the sins of our elites

Amongst theologians there is an unresolved debate about the accuracy and correctness of the interpretation of scriptures that parents' iniquities will be visited on their children. This debate does not seem exist when it comes to electricity pricing in South Africa. Customers and electricity consumers are meant to pay for wrong policy choices made by political and economic elites. 

A scrutiny of Eskom's application to the National Energy Regulator of South Africa (Nersa) for tariff increases will reveal that policy miscalculations of the past are the drivers of the key cost components of the third multi-year price determination (MYPD 3). 

We are asked to pay for failure to make timely decisions to build power stations and for a belief which elites religiously held in 1990's and early 2000's that the private sector through independent power producers (IPPs) will finance and provide new generation capacity.

Now that the dreams of 'liberalised electricity markets' have come to nil, Eskom must shoulder the bulk of the provision of the much needed infrastructure. To execute the build programme, the electricity utility borrows on domestic and international capital markets; an exercise that requiresstrengthened credit ratings. 

Unfortunately the country's legal and methodological basis of electricity pricing not only enables a power producer "to recover the full cost of its licensed activities, including a reasonable margin or return", but gives the right to the regulator to pass onto consumers and customers some of the costs that Eskom incurs. If Nersa approves Eskom's application, as customers and electricity consumers we will in the next five years contribute topayment of the utility's debts; projected to be over R333-billion. 

The regulator ensures our contribution to clearing such debt by offloading depreciation onto allowed revenue and byguaranteeing Eskom a return on assets calculated on the basis of a regulatory asset base, and that includes work under construction. Jointly, returns and depreciation constitute the biggest component (34%) of revenue requirements for MYPD 3. Eskom is asking the regulator to pass onto customers between 2013 and 2018 a whopping R372-billion for depreciation and return on assets.

If the MYPD 3 application gets Nersa's nod, it will not be the first time that customers and consumers are paying for Eskom's expansion programmes. The previous two multi-year price determinations have already resulted in more than a doubling of electricity prices over a six year period; an increase which policymakers see as necessary to address Eskom's highly leveraged position. 

National Union of Metalworkers of South Africa (Numsa) members in smelters have also borne the brunt of desperate attempts to manage the pressure on the grid and supply-demand balances. In addition to its normal demand-side management programmes, over the last twelve months the electricity utility embarked on temporary buy-back contracts with large industrial customers under the demand response aggregation pilot programme (DRAPP).

Between December 2011 and May last year, Eskom spent R1, 8-billion purchasing power as smelters shut furnaces and reduced their electricity consumption. The consequence of all of this has been extended periods where our members who work for Eskom's key industrial customers were subjected short time and lay-offs.

But more cynical is the expectation that despite our objections to a private sector-driven renewable energy independent power producer programme, we should pay for Eskom's renewable energy purchases from IPPs. 

3% of the average 16% increase in electricity tariffs over the next five years will be for Eskom to buy renewable energy from private sector independent power producers. Gone is retort from policymakers that the "private sector bears all the risk" that we received when we objected to a private sector-driven renewables programme. Through power purchase agreements, IPPs will rake about R78-billion from Eskom. And we customers and consumers will pay this amount!

In place of the sadistic approach that punishes workers and consumers for ideologically-driven mistakes of policymakers, Numsa proposes that as a country in line with the Integrated Resource Plan (IRP) 2010-2030, we should in the next three years move to a 20-year electricity pricing model and replace the current practice of short-term multi-year price determinations. While finalising such a move, Nersa should between 2013 and 2016 only grant Eskom inflation-related increases.

Such a shift would be in line with Deputy-President Kgalema Montlanthe's announcement in the National Council of Provinces (NCOP) in March 2012 of the establishment an interdepartmental team to determine an appropriate price path for South Africa's electricity industry. 

Besides being in tandem with long-term planning that the electricity sector requires, a move to a 20-year electricity pricing model will provide certainty and space to review our electricity pricing policies. More importantly it will also allow us the opportunity to cleanse our electricity policies of all the neo-liberal traits that were introduced in the 1990s and make sure that we come up with an electricity price trajectorythat is in line with other economic and social policies.

It is therefore tragic that we have in front of us an application for the next five year before the tabling of the report of the task team that the Deputy-President announced. To us and our members, this approach looks and sounds like the proverbial putting of the cart before the horse.

Irvin Jim is the general-secretary of the National Union of Metalworkers of South Africa (Numsa).

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