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Eskom operating costs could have been R85bn lower - OUTA

Mar 06 2018 17:49
Carin Smith

Cape Town - Had the National Energy Regulator of South Africa (Nersa) more rigorously challenged Eskom over the past decade, the power utility could have been operating at costs R85bn lower than it does currently, the Organisation Undoing Tax Abuse (OUTA) claims.

Nersa is only now beginning to realise the role it needs to play in bringing Eskom’s electricity tariffs in line with reasonable generation costs, OUTA said in a statement on Tuesday.

OUTA has analysed a document released by Nersa, which provides its reasons for deciding to allow Eskom a tariff hike of only 5.23% for 2018. Eskom had asked for a 19.9% price increase to achieve an annual revenue of about R220bn for the 2018/2019 financial year.

OUTA had opposed any price increase for Eskom, because of what it calls "an ongoing decline in efficiencies, maladministration, corruption and lack of leadership accountability over the past decade".

The average price of electricity for Eskom direct customers will increase on April 1 from 89.13c/kWh to 93.79c/kWh, excluding VAT. The new tariffs include a 7.32% increase in the Eskom charge to municipalities for bulk electricity, which will ultimately be passed on to municipal customers, according to OUTA.

“We have studied Eskom’s performance indicators over the past decade and believe Nersa has been remiss in discharging its mandate to challenge Eskom’s runaway costs, which they keep factoring into their tariff framework,” Ronald Chauke, OUTA’s energy portfolio manager said in a statement.

Although the Nersa document was critical of Eskom’s inefficiencies and inability to forecast sales properly, OUTA believes the regulator is now having to step in and curb Eskom’s costs at a late stage. According to OUTA’s calculations this will be too big a challenge to address in the short term.

"Nersa allowed [Eskom] too high an increase, with a knock-on effect on the economy that Nersa notes is likely to cost about 4 255 jobs and a combined loss of household income of about R1.7bn," said Chauke.

OUTA believes Eskom’s high costs of operation over the past decade are due largely to state capture and "political meddling by people connected to the Guptas and the previous state president".

OUTA is worried about what it calls Nersa’s lack of action as regulator "in challenging the gross developments of rising primary energy costs, runaway capital expenditure projects, staff headcount and other operational inefficiencies".

According to OUTA’s assessment of Eskom’s financial statements over the past decade, the Medupi, Kusile and Ingula projects have incurred a combined excessive cost overrun of at least R280bn. Two of these projects remain far from completion and OUTA claims this factor alone has added an estimated R28bn in unnecessary interest costs to Eskom’s operation.

OUTA further claims that Eskom's high asset valuations has enabled Eskom to increase its “allowable revenue” based on the inflated Regulated Asset Base (RAB) by a further R8bn a year, used in its price application at 2.96% of asset value.

OUTA claims this is partially due to what it calls “never ending” power plant projects and partially due to "dubious revaluation of existing assets".

As for increasing primary energy costs, OUTA claims these have not been scrutinised sufficiently by Nersa, allowing it to escalate from R14bn a year in 2007 to R82bn in 2017. OUTA says this translates into an estimated R47bn a year overspend after allowing for inflation-related increases.

OUTA believes the primary energy overspend is linked to "rampant corruption and favourable coal contracts to a selected few suppliers, which Nersa has allowed to go unchallenged".

"Adding to the inflated RAB, the borrowing costs and runaway primary energy costs, a further R10bn a year overspend is attributed to excessive staff costs, due to the 52% higher than required headcount, giving rise to a 32% drop in manpower productivity over the past decade," claims OUTA.

Nersa told Fin24 on Tuesday afternoon that it has noted OUTA claims. The regulator said it is going through the OUTA statement and will respond in due course.

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nersa  |  eskom  |  energy  |  tariff hikes
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