Picture: THINKSTOCK.
Picture: THINKSTOCK

SOUTH Africa’s economy was being sacrificed on the alter of Eskom’s balance sheet, said Democratic Alliance (DA) MP Geordin Hill-Lewis, who also accused the power utility of using unorthodox methods in calculating its depreciation of assets.

On Wednesday, Eskom CEO Brian Dames and chief financial officer Paul O’Flaherty appeared for the second time this month before Parliament’s trade and industry committee to explain the rationale for the power utility’s requested tariff increases and the possible effect it could have on business.

Eskom has applied to the National Energy Regulator of South Africa (Nersa) for a 16% increase annually in its tariffs for five years starting in 2013.

Mr Hill-Lewis said the increase posed an extremely dangerous threat to the country’s industrialisation and job creation.

He took issue with the way Eskom depreciated its assets and the fact that it appeared to be promising its bond investors a higher rate of return than equities, which was unusual for a low-risk investment utility.

"I see you have revalued all your existing capacity at what it would cost to replace it now and then depreciated against that and listed that as a cost now. That is, as I understand it, unorthodox at best.

"It seems to suggest that you are accounting to replace every single current megawatt of capacity in the near future, when in fact you have said yourself today a certain proportion you would need to replace, but certainly not every single existing power station — that doesn’t seem right to me."

Mr Hill-Lewis then focused on the rate of return that Eskom had promised investors.

He said the JSE had provided, on average, a rate of return of 6.6% for the past 120 years and that the return of 8% above inflation as promised by Eskom was too high for a utility company.

"Jeepers people will be beating down the doors to invest with you," he said.

Mr Hill-Lewis described the return Eskom promised as "exorbitant" and said it was being funded by ordinary South Africans.

"The cost reflective tariffs that you have calculated must be worked out on the basis of the marginal cost of new generation, not including the depreciation costs of existing generation capacity," he said.

"You have a company that is building a balance sheet that would make any company in the world proud. It’s a balance sheet to hold up as a model, and I put it to you that Eskom doesn’t need that kind of balance sheet in the country that we are living in at the moment," he said.

Mr Hill-Lewis said Eskom had a wider social mandate than to pursue profits.

"Here you are trying to build in the next five years a balance sheet that might just sacrifice industry and business and job creation and growth in this country on the alter of the Eskom balance sheet. I don’t think that is right or fair or that it is necessary," he said.

Mr O’Flaherty replied it was true that Eskom was building a model balance sheet because in five years it needed a credit matrix consisting of its balance sheet and funds from operations to support its goal of being an investment grade company.

"The logic behind that is to that extent we currently have support from government of R350bn credit guarantees of which we only intend to use R150bn.

"The reason for that is if you look at government’s debt to GDP ratios, the knock-on effect on the sovereign would be extreme. What we are saying (is that) Eskom needs to build a strong balance sheet to be able to support future growth. That is true," he said.

Mr O’Flaherty said Eskom set the electricity price of the country so when its capacity needed to be replaced in 10 years, the cost of replacing it was significantly higher than the cost today.

He explained that the price increases had to factor in variables such as fluctuating foreign exchange rates.

"So what this depreciation does is give you an incremental increase in price so you don’t have price shocks, which is exactly what we are experiencing today. We never had real price increases over 25 years, (and now) we suddenly want to build and it costs an enormous amount of money, and we have got these price shocks because the debt we have to raise costs a lot more".

"It all translates into this desire of Eskom to have an investment grade rating through a strong balance sheet," he said.

On the rate of return, Mr O’Flaherty said that Mr Hill-Lewis had not factored in the dividend payouts that equities provided.

Mr Dames said Nersa had decided on the depreciation method used by Eskom. He said the revaluing of assets was not unorthodox as Mr Hill-Lewis had asserted.