Concern over Eskom’s excessive profit motive

Eskom is a state owned entity which enjoys the trading environment of a monopoly protected by unacceptably high tariffs through a Multi-Year Price Determination (MYPD) process, yet it is not being held accountable enough for its growing inefficiencies and poor judgments or forecasts.

04/06/2016 11:38:51

Concern over Eskom’s excessive profit motive

Cost reflective pricing allows an entity to justify price increases based on the costs incurred by the entity, rather than by market forces. A monopoly should only be allowed “cost reflective pricing” where there is absolute transparency and efficient operations. The public’s trust in Eskom has been rocked by the skyrocketing electricity tariffs, without a corresponding increase in the KiloWatt output of the utility, which makes the current situation untenable.

Following OUTA’s input and participation at the MYPD methodology review discussions held at the National Energy Regulator of SA (NERSA) offices on Thursday, we are concerned about the assumptions made by Eskom in their effort to seek tariff increase applications in light of growing allegations of maladministration and corruption within the entity. For OUTA this has predominantly been an exercise around transparency in the State Owned institution with our continuing court case against Eskom and NERSA, our intention is to open up the decisions for greater scrutiny, so that action can be taken by the public when discrepancies are found.

OUTA’s question to NERSA and Eskom remains one of when the public and civil society can get access to detailed, auditable schedules indicating not just the average price paid for Coal, Diesel, and Transport, but specific prices paid to each provider - including volumes and qualities of supply for each contract. This information is being tracked by Eskom, but is not being provided to civil society and it is in the public interest that these become available before trust can be restored in Eskom.

More specifically, we find it rather disturbing that Eskom is allowed to get away with questionable and erroneous forecasting of electricity sales, which are contrary to fundamental economic principles. In an environment where electricity tariffs have increased at over 16% per annum for some time, against the backdrop of a declining economy, how it was possible for Eskom to forecast a growth in electricity kilowatt sales of 4% appears to be not only ludicrous but rather reckless. Of concern is that Eskom’s tariff setting processes allows them to claw back the shortfalls against their excessive forecasted sales targets from the public and as such, they become the beneficiaries of their questionable forecasts.

“Our issue with the reflective discussions on Eskom’s performance is not so much about what is transparent, but more so on what is not transparent about the contracts and dealing with suppliers,” says Ted Blom, OUTA’s Energy Specialist Consultant. “This week’s MYPD methodology hearings did however provide us with hope and insight that NERSA is moving closer towards a greater oversight and monitoring over Eskom, by ensuring that more regulation exists in the publication of key metrics by Eskom”.

“As far as we are concerned, Eskom’s management does not appear to be in control of critical issues. This is evident by the SOE’s runaway costs, missed deadlines, deteriorating financial stability of the entity, worrying financial ratios and 5 year maintenance backlog as a result of poor management decision making,” says Blom. “Society, including business, must do everything possible to hold Eskom to account for their unacceptable conduct, which is crippling South Africa’s ability to be a competitive and thriving economy.”

OUTA is furthermore concerned by the absence of business organisations at these important hearings with NERSA.

OUTA is a proudly South African civil action organisation, that is purely crowd funded. Our work is supported by ordinary citizens who are passionate about holding government accountable and ensuring our taxes are used to the benefit of all South Africans.