BHP Billiton’s signboard outside Richards Bay. Picture: SUNDAY TIMES
BHP Billiton’s signboard outside Richards Bay. Picture: SUNDAY TIMES

MINING giant BHP Billiton is insisting that Eskom honour its contract to supply the company with discounted electricity in terms of an until-recently confidential pricing arrangement.

The arrangement, which means that Eskom supplies BHP Billiton smelters with power at well below cost price, has become enormously expensive for Eskom as the cost of power generation has rocketed over the past five years.

Having been at the receiving end of negative public attention over the prejudicial and secret arrangement, BHP Billiton chairman Xolani Mkhwanazi, writing in Wednesday’s Business Day, rejects suggestions that the company has profited unfairly from the deal.

Dr Mkhwanazi says the contracts were concluded in good faith and the company’s investments in the smelters were made on condition of the pricing agreement with the government.

"BHP Billiton expects our contracts to be honoured. We believe absolutely in the sanctity of all contracts," he says.

"We also understand that as a business, we have a responsibility to fulfil our obligations to our employees, customers, suppliers and shareholders and the broader community of Richards Bay and KwaZulu-Natal.

"The Eskom contracts were negotiated on a risk-sharing basis and in terms of a recognised international model. First, this was important to ensure the financial viability of the smelters over the long term, which is necessary to provide a reasonable return on the substantial investment. Without that we would not have made the investment. We have invested more than R60bn in our aluminium business in Southern Africa during this time."

Eskom has made several attempts to renegotiate the special pricing deal, beginning in 2009.

While a new agreement was reached on the company’s Mozal smelter, by 2011 negotiations had failed to produce a new arrangement for its two Richards Bay smelters.

In October last year, Eskom referred the arrangement to the National Energy Regulator of South Africa (Nersa) in the hope that it could review the contracts.

BHP Billiton’s announcement that it wants its contracts to be honoured sets the stage for a public showdown at Nersa, which has said it plans to hold public hearings on the deals this month or the next.

Nersa member for electricity Thembani Bukula has been quoted as saying that one of the possible outcomes is that the contracts may be declared invalid.

But energy commentators are doubtful whether Nersa has the ability to set aside contracts it has previously approved. At least one, if not both of the two contracts — agreed in 1995 and 2001 — must have been approved by Nersa, which came into existence in 1995.

For both companies the stakes are extremely high: the pricing arrangement (which includes several variables) has been calculated by energy analyst Chris Yelland to mean that at present BHP Billiton is entitled to pay between 20c and 26c per kilowatt hour at its Richards Bay smelters. By contrast, Eskom has an operating cost per kilowatt hour of 47c and supplies other large industrial and mining customers at an average of 56c-58c/kWh.

In his article in Business Day, Dr Mkhwanazi also accuses Eskom of having profited by billions from the arrangement over the years, as the risk-sharing formula in one of the arrangements was linked to the aluminium price. Between 1995 and 2008, when the price was high, Eskom generated "significant additional revenue and benefits" which amounted to R45bn cumulatively in 2008 prices, Dr Mkhwanazi says.