Transcript SEIFSA PRESENTATION TO NERSA HEARINGS ON ESKOM …

SEIFSA
PRESENTATION TO
NERSA HEARINGS ON
ESKOM’s 35% PRICE
INCREASE APPLICATION
21 January 2010
By Guy Harris
SEIFSA Council Member
Agenda
• SEIFSA Overview
• SEIFSA Contributions
• SEIFSA Concerns
• Key Inputs and Rationale incl:
• Inflation Increase, Capital, Loans, Privatisation; then
only above inflation Excessive Increase (Loan) not
vice versa
• Transparency
• Questions
• Follow Up
SEIFSA Overview
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SEIFSA, through its member associations,
represents 2300 companies employing 230 000
people, ranging from unskilled to professionals.
Contributes substantially to SA’s GDP and to
exports.
Key beneficiator of our country’s mineral wealth
and a key supplier into other advanced industries.
Member companies range from large energy
intensive users (such as BHP, Arcelor Mittal,
Samancor and other Ferroalloy producers,
Highveld, Columbus, Hulett Aluminium, and Scaw
Metals) supplied directly by Eskom to many
smaller businesses dependent on their
municipalities for their electricity.
Major provider of inputs to other industries,
including those involved in 2010 infrastructure.
SEIFSA Contributions
• Many decent jobs directly and indirectly
• Forex (exports and import replacement) at
time of trade deficit
• Committed to encouraging our members
and their employees to conserve
electricity and take advantage of Demand
Side Management (DSM) measures
available and other Energy Saving
Company (ESCO) led initiatives
• Can contribute to build program and local
capacity development of SWH
manufacture, Smart Metering etc. and will
encourage our members to seize these
opportunities
SEIFSA Concerns
• Impact of excessive electricity price
increases on jobs, exports, growth and
sustainability not only in our sector but also
our customers’ sectors.
• High inflation, especially in administered
prices, is hurting jobs and interest rates
• Lack of smoothing after years of keeping us
in a fools paradise (supply and cost)
• Impact on our employees and the indigent in
our country, some of who are related to our
employees who are naturally concerned, as
are we, about their plight.
• Inadequate action over distribution losses
due to illegal connections (> R6bn pa?)
• What will happen to security of supply when
the 38 large users are back to operating at
normal capacity?
Key Inputs and
Rationale
• Price increase should be limited to 8% or
less (33% more than upper CPIx limit) with
no further increase in 2010 but must not
exceed 10% nominal in any year of MYPD2
• Impact on inflation and subsequent flow through
impacts on interest rates, etc
• Impact on economic growth, decent jobs and
exports/current account deficit
• Especially given economic crisis, could push
companies over the edge
• Carbon tax of R30bn in Eskom projections,
should be withdrawn and deferred until
back to inflation related increases or
increase reduced by tax
• As above
8% is Eskom’s base operating cost increase
excluding new build related which should be capitalised
Key Inputs and
Rationale
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The approach
that:
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should
recognise
It was decisions by government to
defer the build program that got us into
this position
Government is the sole shareholder of
Eskom and therefore there should not
be major problems with delaying price
increases so that there is adequate
time for business and other consumers
to adjust their approaches, prices and
budgets accordingly.
Key Inputs and
Rationale (Cont)
• Government should rebate the taxes
(Corporate and VAT) on Eskom’s
“windfall profits” and above inflation
increases back to Eskom as equity.
• This will both mitigate the increases and
eliminate the iniquitous situation where
consumers effectively have to pay the tax
(via price increases) which accrues to
government despite its poor decision making
• If 35% increase granted then projected
Corporate Tax of R71 bn over next few years
Dividends paid should be reinvested as equity (e.g. R1.6bn in 2006)
Key Inputs and
Rationale (Cont)
• If these increases are inadequate to
maintain required build rate, without losing
investment grade rating, further “quasi”
equity funding should come from the
shareholder
• Treasury has debt capacity (direct or via
guarantees – R176bn guarantee acknowledged)
• Poor decision making was not the fault of
consumer or totally Eskom’s
• Municipalities should have strict guidelines
so that only primary electricity cost is
adjusted in their rate increases
• Avoid profiteering
Key Inputs and
Rationale (Cont)
• DSM should be funded and managed
by government not Eskom
• Focus, no conflicting interests
• Poor track record of Eskom
• Incentives for investing yesterday not
when we are back in crisis; 12 months
have been lost
• Cogen and IPP should be
coordinated by a credible
independent entity not Eskom
• Focus, no conflicting interests
Above also driven by climate change policy
of government not just electricity policy
Key Inputs and
Rationale (Cont)
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Increases should be contingent on
satisfactory transparent management
and technical reviews of Eskom
(including its current and planned
facilities)
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To ensure optimal supply and minimal supply
interruption.
There should also be adequate
reassurance on implementing any
recommended corrective actions
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To ensure that the long term socio economic
interests of the country are met.
But avoid micro management
Key Inputs and
Rationale (Cont)
• More intensive efforts required for
sourcing locally both primary and
secondary inputs for major capex –
multiplier benefits
• When further load shedding is
required labour intensive, high value
add and high export industries
should be exempted
• Minimise impact on jobs, value add and
current account deficit
• Determined not by Eskom but by
independent body mandated to take into
socio economic priorities.
Privatisation
• A near last resort, but better than
excessive increases, which prevents
destruction of jobs and current users
subsidising future users
• Hi impact (neg) and low benefit:
• <50% of unproven, unprofitable asset
• Huge discounting for multitude of risks
• Hi impact (pos) and high benefit:
• 74-100% of proven, profitable asset
• Reduced risks further – input cost and revenue
• Close to sovereign debt return?
Who will make the right decision?
Coal stockpiling
• What drove original de-stockpiling?
• Keeping political bosses happy
• Ensuring bonuses
• Window dressing
• Cost of coal re-stockpiling left in
base cost and continuing rather than
treated as a once off?
• Will this not create a nice cushion?
Lack of transparency
• Inadequate 2009/10 data disclosure from
Eskom:
• Financial results YTD
• Ratings reports
• NERSA called for proposals in 2008 to
holding Eskom accountable for maintaining
efficient cost of supply but no update
• Government (DPE, DME, Treasury, dti)
attends hearings but stays quiet, when and
how is their input given – double
standards?
• Terms of R60bn government loan not
disclosed, should be increased and fully
front ended
More transparency
• What is needed is greater transparency and
better communication over what price
changes are likely to occur to allow for
better planning and decision making
amongst all stakeholder interest groups.
Eskom should be more transparent with
strategy and financial projections, with
opportunities for engagement with
stakeholders but stakeholders must not
abuse such transparency.
• More transparent disclosure and
opportunity/ability to interrogate data, run
models, evaluate and evaluate alternatives
• Need opportunity to hear government and
ruling party at hearings should be provided
for before any increases beyond 2010/11 are
granted .
Current users must not
subsidise future consumers
• Apply fuel pipeline principle
• Economically and morally unfair
• Any part of current increases that is there
to cover current cost of build or strengthen
financial ratios rather than meet historical
costs, not future capacity, should be
funded by way of Eskom Development
Bond:
• “Forced” loan linked to consumption
• Ranking ahead of treasury quasi equity but
behind market priced loans – interest rate must
reflect higher risk
• Secondary market to allow smaller consumers
to onsell loan
• Distributors to decide whether to onsell, retain
or distribute to (larger) consumers
4 AVAILABLE LEVERS
• Inflation Price – cost up to inflation
• Eskom borrowings – use to maximum as
long as maintain investor grade rating, support by
government guarantee if needed and government
not willing to be a responsible shareholder
• Share Capital/Quasi Equity
infusion from Treasury /
Privatisation – critical top up, use
privatisation that generates max funding at lowest
return
• Excessive “Price” as EDB – use
above inflation cautiously and gradually as there
could be unintended economic consequences
Choose wisely! It is irresponsible for NERSA to
rule on price without FIRST knowing other two
In Summary
• We understand Eskom’s predicament
• The crisis requires better management,
especially by government – shareholder
support and transparency
• The consumer must not carry an excessive
burden
• Out of the box thinking is needed, maybe
the EDB can be developed further?
• Overloading business during tough
economic times will impact on jobs in a
land with unemployment out of control
• There are localisation opportunities that
need to be taken up aggressively
2008 Annual Report
• Eskom’s policy is to fund the capital
expansion programme through its
own resources, shareholder support
and borrowings. The shareholder
support will be in the form of a
dividend moratorium, direct
shareholder capital injection and
deeply subordinated long-term debt.
What has changed to make price the funder?
What is acceptable?
• Not Eskom’s 35%, 35%,
35%
• Rather their operating
cost (excluding build
related costs which
should be capitalised)
so 8%, 7%, 6%
Questions
Follow Up
• SEIFSA
• Dave Carson
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Executive Director
Phone 011 298 9403
Fax
011 298 9503
Email [email protected]
Web
www.seifsa.co.za
• POLICY COORDINATOR
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Guy Harris
Council Member
Phone 082 5598755
Fax
086 6708949
Email [email protected]