# Social Category > South African Politics Forum > [Article] COSATU's Response to Eskom Multi Year Price Determination (MYPD2) Part 1

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COSATUâs Response to Eskom Multi Year Price Determination (MYPD2)

1.    Introduction

COSATU welcomes the opportunity to make a representation on Eskomâs MYPD 2 Application. We particularly welcome the arrangement for public hearings in the provinces to enable as many interested parties as possible to air their views on the Eskom application.

Given the huge socioeconomic impact, this unprecedented increase in the electricity tariffs demands this extension of public hearings. Our only concern is the timing of the public hearings, which are scheduled almost immediately after the festive season. We however want to make a special appeal to NERSA to take the views of stakeholders seriously. We find it incomprehensible that despite about 170 submissions against Eskomâs application for an interim price increase of a 34% in April 2009, NERSA caved in to Eskomâs demand anyway and awarded it a 31.3% tariff increase.

In this submission we focus in the main on the impact of the proposed tariff hike on the economy and the low-income earners. The submission also covers proposals on the funding options for the capital expansion programme, free basic electricity (FBE) and costs and efficiencies.

2.       Impact on the Economy

The 35% tariff increase each year over the three years is too high and would have devastating impact on the economy and will negatively affect any efforts to create decent work, particularly in the context on the ongoing global economic crisis. While the economy has shown signs of recovery, with the GDP growing by 0.9% in the third quarter of 2009, the country is not yet out of the economic crisis, given the fact that close to million jobs have been lost in the first three quarters of 2009. As part of measures to address the economic challenges facing the country due to the global economic melt-down, the government, business, labour and community have agreed in the Framework for SAâs Response to the Global Economic Crisis (the Framework) that electricity prices must be moderated and this is what the framework says: â[T]he parties recognise the need for adequate infrastructure to lay the basis for growth and development. At the same time, the parties agree that excessive increases in administered prices may exacerbate the negative impacts of the current situation and agree that increases in administered prices should carefully balance these different considerationsâ[1][1].

Eskom contends that its application is âbased on balancing the short-term economic impact of price increases against the severe long term consequences of insufficient electricity supplyâ. Accordingly, instead of shocking the economy through a huge tariff increase, it has decided âto smooth the price trajectory to allow for more efficient adjustments to be made at both micro and macro levels of the economyâ. At the same time, Eskom acknowledges and agrees with the findings of the Human Sciences Research Councilâs July 2008 study which showed that high electricity prices âplace the economy on a lower growth path, with higher inflation, lower GDP and employmentâ (Eskomâs MYPD 2, 30 Nov 69).

COSATU reiterates its views expressed in its submission to NERSA on Eskomâs application for a 34% interim tariff hike, that the high electricity tariffs have, among others, the following impact:

Â§  Destroys prospects for SMEâs
Â§  Forces low income consumers to substitute electricity with dirty energy with significant negative externalities.
Â§  Huge arrears (as people fail to pay their bills), disconnections and illegal reconnections.
Â§  Reduction in the use of electric appliances with knock-on effect on the economy as the demand for electric appliances decline.

Furthermore, steep electricity tariff hikes are in variance with the objective of the democratic government to address the legacy of the past in relation to access to clean and safe energy. This objective is clearly articulated in section 2.7.8 of the RDP which states that â[T]he electrification programme will cost around R12 billion with annual investments peaking at R2 billion. This must be financed from within the industry as far as possible via cross-subsidies from other electricity consumers. Where necessary the democratic government will provide concessionary finance for the electrification of poor households in remote rural areas. A national Electrification Fund, underwritten by a government guarantee, must be created to raise bulk finance from lenders and investors for electrification. Such a fund could potentially be linked to a Reconstruction Fund to be utilised for other related infrastructural financing needs. A national domestic tariff structure with low connection fees must be established to promote affordabilityâ.

This section of the RDP also reminds all of us about important role of government in ensuring the sustainability of the electrification programme. Once more, in variance with this principled view on the role of government in the electricity sector, Eskom proposes far reaching measures to liberalise the electricity market. COSATU finds it outrageous and opportunistic for Eskom to use the crisis in the electricity sector, which is as a result of failed attempts in the late 1990's to privatise Eskom, to justify privatisation. In terms of the revised Eskomâs MYPD 2 application, Eskom will sell 30% of its stake in the Kusile (its construction now delayed to give Eskom a chance to get private equity) power station to private interests. 

In as far as COSATU is concerned, privatisation of state owned assets can take various forms, including the following:

Â§  Outright sale of the enterprise;
Â§  Partial sale of the enterprise;
Â§  Introducing strategic equity partner;
Â§  Introducing management contract between government and the private sector; and
Â§  Commercialisation and corporatisation.

The country is likely to face even steeper electricity tariffs as private sector gets more involved in the electricity sector. Furthermore, Eskom wants more involvement of Independent Power Producers (IPPs) in the electricity market. Empirical evidence shows that reforms initiated by developing countries in the 1990s to attract private investment did not result in the expected outcomes. Instead, private investment declined rapidly after 1997. While initially Brazil and other Latin American countries attracted half of private investment, much of it was spent on existing assets that were privatised rather than on new projects[2][2]. To attract private investment countries adopt cost-reflective tariffs which âhurt low income consumers who are not able to afford even basic electric servicesâ[3][3].

3.       Impact on Low-income Households

Eskomâs revised MYPD 2 exposes the extent to which the Electricity Pricing Policy (EPP) will hurt the workers and the poor. The EPP allows Eskom to cover all the costs of generation, transmission, distribution and service to the network. The EPP calls for electricity tariffs to âreflect the efficient cost of rendering electricity services as accurately as practical...and that the tariff structures must be set to recover the energy costs, the network usage costs and service costs associated therewith for a particular consumer categoryâ[4][4]. This implies that big industrial users will only pay for generation and transmission; and thus will continue to pay less. Domestic consumers will pay for generation, transmission and distribution.

Now Eskom wants NERSA to âpermit prices to rise overtime to reflect the true economic cost or long-run marginal cost of producing electricityâ. In keeping with Eskomâs desire to have market solutions to the electricity crisis, the MYPD 2 application contends that cost-reflective tariff would also ensure âcomplete elimination of the need for Government support and a consequent tax burdenâ¦and send the correct price signal to encourage efficient usage of electricity and optimal allocation of scarce resources to the macro-economic level, thus ultimately increasing economic efficiency, reducing the cost of doing business, reducing inflation rates and increasing economic growth ratesâ (Eskomâs MYPD 2, 30 Sept 64).

According to Eskomâs revised application, South Africaâs industrial and residential tariff levels of 50c/kWh and 28.99c/kWh respectively, are amongst the cheapest in the world[5][5]. While COSATU may not contest this assertion, our concern is the end-user price of the electricity. The price of Eskom electricity is a cost to municipalities, which is in turn passed to consumers. Using the average end-user residential electricity price of 80c/kWh, if Eskom gets 35% tariff hike each year of the MYPD 2 period, it means households would pay R1.08, R1.50 and R1.97 in 2010, 2011 and 2012 respectively in nominal terms. This translates to a whopping 146% increase over the MYPD2 period. The high electricity tariffs are likely to force the majority of poor people to revert to dangerous and dirty sources of energy.

COSATU has been consistent in raising its concern that residential consumers of electricity, while they use less of electricity, they pay more than industrial users. 

In terms of figure 1, those who consume more electricity pay less and those consuming less pay more. This has to change.  In this diagram, Curves A and B represent a short-run marginal cost curve for electricity utility and a cost-plus mark-up tariff respectively[7][7]. Curve C is the âeco-social justice tariffâ which combines a free lifeline and redistribution from high to low electricity consumers. In essence, COSATU proposes a stepped-up lifeline block tariffs model, with cross-subsidisation to achieve this objective. If this is what NERSA meant by inclining block rate tariff to address affordability and to protect the poor in their June 2009 price determination, COSATU supports NERSA.

But Eskom disagrees that industrial customers pay less than residential customers. According to Eskom, âthe cost of supply to an average industrial customer is significantly less than the cost to supply a residential customer because:

Â§  Typically a residential customer is supplied on the network at a low voltage whereas a large industrial customer would be supplied on the network at a high voltage. This means that many more electrical networks have to built, maintain and operated to supply smaller customers than that which is required for larger customers on higher voltage networks. Residential tariffs overall costs therefore have a much bigger percentage of network costs than for larger customers.

Â§  More electrical losses occur at the lower voltages as the electricity has to travel further distances.

Â§  As a ratio of overall consumption, smaller customers also tend to use much more electricity in more expensive peak periods.

Â§  Smaller customers have a poorer lower load factor (use electricity inconsistently throughout the day) than larger customers. This means that their average cost of electricity per kWh is higher than of larger customer who uses electricity more evenly throughout the dayâ (Eskomâs MYPD 2, 30 Sept 65-66).

Furthermore, Eskom does not support stepped-up block tariff model because it is not in the EPP and that âthe majority of Eskomâs residential customers are on Homelight 20Amp with an average consumption of 80kWh per month, of which 50kWh per month is already free. This option will result in the higher consuming poor and middle class (typically the township households) being mostly negatively impactedâ (Eskomâs MYPD 2, 30 Sept 69).

4.       Free Basic Electricity

The ANCâs 2000 local government elections manifesto promised free basic electricity to all the citizens of the country notwithstanding their income. This is what the manifesto promised:

âANC-led local government will provide all residents with a free basic amount of water, electricity and other municipal services, so as to help the poor. Those who use more than the basic amounts will pay for the extra they useâ[8][8].                      

This commitment did not talk about any means-testing and targeting. It embraced the universality principle in meeting the basic needs of the people. The manifesto recognised the cross-subsidisation as a critical element of the FBE. It proposed that those who would consume more than the basic amounts must pay more per unit.

In implementing the manifesto commitment, the DME commissioned a study on FBE, which was done by the University of Cape Town (UCT).  Unfortunately, the UCT study concluded that the 50kWh or 65kWh of FBE would be enough to cover the needs of the poor households[9][9]. Based on the outcomes of the study the DME adopted a policy which provides 50kWh of FBE. Clearly, the 50kWh of FBE is far too low and can only be used for lighting in the main. Furthermore, 20 Amps capacity may not be sufficient for a decent life. But Eskom is proposing an increase in FBE increased from 50kWh to 70kWh per month for all 20Amp FBE customers.

Eskom does not support an increase in FBE to 100kWh âbecause it would result in most of Eskomâs Homelight 20Amp customers not paying anything for electricity given that their average consumption is below the 100kWh per monthâ (Eskomâs MYPD 2, 30 Sept 70). But some municipalities are already giving consumers 100kWh of FBE per month. According to Komives, Foster, Hapern & Wodon (2005: 43), 40kWh (which is not too different from the 50kWh) of electricity 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. This suggests that 200kWh of FBE may go some way to helping low-income earners to lead a better life.

5.       Costs and Efficiency

Eskom has now revised its sales forecast based on the impact of the demand side management (DSM) including the power conservation programme (PCP). The impact of DSM will in turn reduce primary energy costs by R12.6bn over the MYPD 2 period. COSATU support emphasis on DSM and calls for an urgent revival of the campaign for the efficient use of electricity. Any success on this front will make the building of additional coal-fired power stations unnecessary and relieve the working people and the poor from high electricity tariffs.

However, Eskom has to clarify its call to Department of Energy and NERSA for âcommitment to promulgate regulations and associated rulesâ[10][10]. In as far as we are aware, there was supposed to be a cost-benefit study on the PCP as per the provisions of the Framework which stated that â[T]he parties recognise that the proposed mandatory rationing of electricity may have a negative impact on employment and therefore agree that the proposed approach be revisited in a way that addresses any negative impact on job retentionâ[11][11]. Eskom has also budgeted for R6212m for DSM over the MYPD 2 period[12][12]. It is important to know what would Eskom do with this amount of money. In our view, the DSM is not the terrain of Eskom as there is a clear conflict of interest. This view is in line with the resolutions of the 2008 Energy Summit, which was convened under the auspices of Nedlac.

Without giving any further details, Eskom promises to implement efficiency initiatives in coal procurement. Furthermore, Eskom has not factored in its coal costs calculation the external costs as per the White Paper on energy. The petroleum market is characterised by price volatility and high oil prices will increase coal mining and transportation costs. It is therefore important for Eskom to manage petroleum price risk.

COSATU notes that Eskom will now save R2055m on human resources over the MYPD 2 period. Some of the staff members would be capacitated and redeployed to new businesses within the company. This is a welcome move which we hope would be done in consultation with organised labour. What is problematic is for Eskom to include issues which are supposed to be determined through the collective bargaining process in the application. For instance Eskom talks about âlimiting salary increases and escalating them in line with CPIâ.

6.       Renewable Energy

COSATU submits that instead of building more coal-fired power stations there is an urgent need to upscale investment in the renewable sources of energy. Empirical evidence shows that while it is cheaper to produce electricity from coal now, it is going to be costly in the medium to long term. The inverse is true in relation to the renewable sources of energy; they will become relatively expensive infinitivally but cheaper in the long term. Upscaling investment in the renewable sources of energy will not only address the challenge of climate change but will create the all-important jobs in the economy.

The framework also recognises the importance of investing in green technologies to attain the objectives stated above already: âThe parties recognise the opportunities in industries that combat the negative effects of climate change and believe that South Africa should develop strong capacity in these green technologies and industries. Accordingly, it is agreed to develop incentives for investment in a programme to create large numbers of green jobs, namely employment in industries and facilities that are designed to mitigate the effects of climate change. Government will be asked to develop a proposal for consideration by the parties. This proposal will, where appropriate, build on current initiatives of greening existing manufacturing and service activitiesâ[13][13].

7.       Nuclear Power

To reduce the costs, Eskom has decided to defer capital expenditure for the next nuclear station and target 2022 for its establishment; unless it can additional funding during the MYPD 2 period. COSATU believes that nuclear option must be removed from the energy mix. There is still a lot of question marks around the nuclear plant safety, radioactive waste disposal, and possible usage of uranium for weapons[14][14].

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