The National Energy Regulator (Nersa) turned down the heat for the energy user, allowing Eskom to levy 8% annual increases for its electricity over the next five years, half the increases Eskom had applied for.
The most obvious beneficiaries are the large energy intensive users, the beneficiators of raw materials, who account of about 44% of the load. They contribute heavily to SA exports and they need all the help they can get with the trade balance under pressure form much stronger growth in imports than exports. Their viability would have been seriously compromised had Eskom had its way.
Property owners and their tenants, directly or indirectly paying more for electricity, will also be relieved, as will lighter industry and the ordinary household (though for them the electricity supplier is not Eskom but their local friendly municipalities).
When Eskom supplied artificially cheap electricity until recently – its charges have tripled over the past five years from about 20c per Kwh to the current 61c – the municipalities did not hesitate to use the monopoly power thay had to charge local users a whole lot more.
A new funding mechanism, the equitable share formula, introduced in the 2013 Budget, will give municipalities a grant of R275 for every household with income of less than R2 300 per month – this is estimated to mean more than 59% of all households in SA. This source of funding will hopefully take the pressure off the electricity tariffs that have been used as a very convenient tax. Using the broader tax base rather than electricity tariffs to help the poor is the right approach and should help encourage industrial and commercial users in the cities that generate jobs and incomes.
Nersa thinks the right price for Eskom’s electricity is the price that would give the utility a 3% real return on the capital it employs. This, as we have discovered, is very much in line with the global average. Listed utilities world wide seem to survive and even thrive with real returns on their large capital investments with returns on all capital employed of about 3-4%. They presumably also do a reasonable job of containing their costs than Eskom.
We have pointed out before that the less Eskom charges, the more debt it or the SA State will have to issue to fund its heavy and essential expansion programme, absent a willingness to sell off some of its generating capacity to private owners.
It would be a very good idea to have other managers running power stations so that useful comparative benchmarks on operational costs could be established for Eskom. Such partial privatisation might be judged essential should extra debt have to be issued.
In Eskom’s case for 16% annual increases it had estimated that some R350bn of debt would have to be issued by 2018. We have calculated that this debt would rise to over R500bn if price increases were confined to 8% and similar operational and capital costs were incurred. Nersa is of the view that these costs, as estimated by Eskom, should be better controlled. If Eskom achieves these cost controls, it would improve cash flow and reduce the volume of debt finance.
The SA Budget and borrowing plans have factored in about R330bn of Eskom debt. This will have to be revised higher. And with the extra government borrowing requirement now running at about R100bn a year, this additional debt of about R30bn a year for five years, will not be welcome to the Treasury or the bond market.
Listed electricity utilities are in practice the least risky activity of all – they realise the lowest betas on the US stock exchanges. They therefore can and should finance what are low risk operations with high ratios of debt (around 55% of assets on average). Furthermore a real return of 3% a year, if achieved, would allow Eskom to fund with debt and meet its interest and capital repayment obligations. After all, funding essential infrastructure with debt that supports economic growth, is very different to funding consumption spending by government (as the rating agencies should appreciate).
There is however an obvious alternative for government having to raise debt or taxes to fund infrastructure. This would be to sell off some of the valuable assets it owns. Privatisation may become a less dirty word when the after-Nersa realities are understood. The price to be realised by auctioning off an established power station on Eskom’s balance sheet (hopefully to be listed on the JSE) will be greatly enhanced by regulatory certainty. With its sensible target for electricity generators of a 3% real return, Nersa may well have provided this. Brian Kantor