8% hike bad for Eskom, good for rates

Feb 28 2013 22:32
Cape Town - The 8% tariff increase over five years the National Energy Regulator of SA (Nersa) granted Eskom on Thursday is good news for inflation, according to an economist.

In a commentary, Nomura emerging markets economist Peter Attard Montalto said: "This is bad news for Eskom's balance sheet...

"The government is asking Eskom to accelerate its infrastructure programme and take the bulk of that programme on its shoulders, whilst not allowing it to raise funds through user-pay-principle to fund it.

"This is good news for inflation though, and will shave some 0.16pp off our forecast from July this year which means inflation may well only be around 5.0% at year end - hence no need to hike rates this year at all, nor well into the middle of next year."

Eskom had asked for a 16% increase in electricity prices in each of the next five years, which would more than double the price, taking it from 61 cents a kilowatt hour in 2012/13, to 128c a kWh in 2017/18. 

"The decision of the energy regulator is based on facts," Nersa chairperson Cecilia Khuzwayo said.

She added it was important to note that Eskom's application for a 16% hike was made with the backdrop of "continuing global economic recession".

The parastatal previously said it needs the increase to cover the costs of supplying the electricity needed to power South Africa and invest in infrastructure. 

The proposed increase was met with criticism from political parties, unions, civil society, businesses, and South Africans in general.

The Federation of Unions of SA said it was pleased with the lower tariff rate.

"We welcome the 8% increase.... Although the increase will still be felt by working people, we feel that this is much better than the 16% requested by Eskom," Fedusa general secretary Dennis George told Sapa.

He said the decreased rate will impact on inflation.

George said the 8% was exactly half of Eskom's bid and this meant electricity, which cost 65c per kilowatt hour in 2013, would cost 89c per kilowatt hour by 2018.

Business Unity SA (Busa) praised Nersa to limit the electricity price rise.

"The excessively steep rises in electricity tariffs in recent years have been damaging to growth and employment," Busa special policy adviser Raymond Parsons said in a statement.

"[The increases have] raised the costs of doing business, and have put many business enterprises at risk."

The debate around the price-determining mechanism highlighted the uncertainty within Eskom's decision-making model, said Henk Langehoven, senior economist for the Steel and Engineering Industries Federation of SA (Seifsa).

"It fortunately also brought to the fore the results of business putting its collective mind to the problem and highlighted alternatives to asset evaluation methods," he said.

"This result shows that these inputs carried weight and influenced Nersa's decision," said Langehoven.

The Congress of SA Trade Unions welcomed the lower electricity hike, but was still cautious.

"It still amounts to a rise in the cost of living and could still jeopardise jobs in struggling companies," spokesperson Patrick Craven said.

"We will also have to check what percentages municipalities are going to add on to the 8%, which is likely to mean many thousands of consumers paying well above that amount."

Craven said that Nersa's decision to halve the asked-for increase was most likely due to campaigns conducted by the union federation and other organisations.


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