Terry Markman presented the Free Market Foundation’s (FMF) oral submission at the National Energy Regulator of South Africa’s (NERSA) public hearings on Eskom’s tariff increase application on 5 February 2019.
Eskom has applied for tariff increases of 15% per annum for three years. If granted, these increases will result in a 381% above inflation increase for the decade 2007-2017.
The FMF believes the reasons for the requested tariff increases include: gross inefficiency, poor management, maladministration, corruption, high wages, and overspending on the Medupi and Kusile power stations.
Annual Eskom reports show that, between 2007 and 2017, the number of employees increased from 32 674 to 47 658. However, employee costs over the same period increased from R9,451-million to R33,178-million. According to the World Bank, Eskom was overstaffed by 66% in 2016. In May last year, Chairman Mabuza reported that the staff complement should be at least 30% less.
Eskom’s failure to contain costs and tariffs so as to provide customers with adequate electricity at a reasonable price has done enormous harm to the economy with losses in production and job losses, the FMF says. It adds that, while Eskom has employed an additional 20 000 people to produce less electricity in 2017 than in 2007, it has probably been responsible for the estimated 100 000 job losses elsewhere in the economy.
A substantial increase in tariffs will result in lower demand from consumers, which, in turn, means reduced revenue for Eskom. By not addressing underlying flaws, increasing tariffs will only temporarily plug a hole that will never be fixed.
Markman, former chairman of the FMF’s Energy Policy Unit, made clear that Eskom should not receive any increase until costs have been prudently and efficiently determined. Eskom’s actions do not merit any sort of increase, no matter how large or small, he says.
Markman explains that NERSA must tell the Departments of Energy, Public Enterprises, and the Treasury, to address the fundamental problems afflicting Eskom. NERSA should advise government to establish an independent grid, sell power stations and encourage competing power generation, deregulate the energy sector to increase competition, reduce staff and sell assets to pay down debt and create an energy market. Competition will force energy producers to be efficient, curtail costs and provide South Africa with energy security.
When European Union countries introduced competition in the form of access to grids, prices fell by up to 20%. The UK broke up its electricity monopoly and it took 20 years for prices to double. The US has a multiplicity of competitive companies. It is international best practice to have competition in energy.
The bottom line is that giving in to Eskom’s past demands has not led to an increase in efficiency and the solving of internal problems, according to the FMF. So NERSA has to put its foot down, it beleives. Eskom should receive no increases and be forced to solve its internal problems. Companies in financial trouble resolve their problems by increasing efficiency, reducing their wage bill, selling off assets, and recovering amounts due to them and not just blithely proceed with business as usual.