ALBERT Einstein is credited as having said, "if you can’t explain it simply, then you don’t understand it well enough yourself."
Having listened to the arguments presented to the National Energy Regulator of SA (Nersa) during public hearings this week, I can’t help but feel this is an apt description.
I mean that with no disrespect to the experts who presented to the panel, but the scale of the chaos and misinformation in Eskom has made it nearly impossible to make any accurate pronouncements.
The big question is whether Eskom "needs" a second tariff hike in the 2015-16 financial year.
In this respect it is useful to have a little context.
According to the third multiyear price determination that came into effect on February 1 2013, Eskom is permitted an annual tariff increase of 8.1% over the five-year duration of the deal.
Eskom had originally sought an annual increase of 16% but Nersa felt the application was filled with nonprudent items and 8.1% was more than sufficient to cover maintenance and capital expenditure.
It felt there were significant efficiencies to be made in Eskom without burdening consumers with an even bigger tariff increase.
Although Eskom got less than it wanted — and depending on who you ask, less than it needed — the multiyear price determination also allows Eskom to request a tariff variation of up to 10% once a year, in accordance with the regulatory clearing account.
In other words, the price of electricity is expected to go up 8.1% every year but can go up as much as 18% without Eskom being forced to reopen the multiyear price determination and show the public its financial underbelly.
This was the case earlier this year when Eskom used the regulatory clearing account process and was granted an additional 4.6% over and above the 8.1% tariff.
This came into effect on April 1 and brought the tariff increase for the year to 12.7%.
The current uproar is over yet another application for a tariff increase during this fiscal year — for 12.61%. That would bring the grand total for tariff increases during the 2015-16 financial year to a staggering 25.3%.
In the urgent application sent to Nersa last month, Eskom broke the 12.6% requested tariff increase into 10.1% to recover the costs associated with its open-cycle gas turbines and the short-term power purchase programme.
It also requested a 2.5% increase in the environmental levy. According to its calculations, this is necessary to cover the additional R32.9bn it needs to spend on running open-cycle gas turbines and R19.9bn on the short-term power purchase programme.
If not granted the tariff increase, Eskom warned SA would pay a much higher price in terms of forced outages, which would cost the economy more.
This is where it gets a little fuzzy. On first reading, it is hard not to be furious at the idea that the economy is being held to ransom by an incompetent and seemingly unscrupulous power utility.
For starters, by requesting a "selective reopener" — something that until now has never even existed — Eskom has been able to conceal part of its finances.
There is no question Eskom underestimated the costs associated with running the open-cycle gas turbines and its additional reliance on short-term power producers, but it failed to mention the savings made in other areas as a result of the delays in Medupi and Kusile coming online.
Unlike the projects managed by Eskom itself, independent power producers in the renewable energy sector have been producing far more power than anticipated, so Eskom has been overcollecting on the environmental levy.
To make matters worse, when Eskom CEO Brian Molefe made his presentation at the public hearings on Tuesday, he changed his tune and revised the previous request of a 12.6% increase down to 9.58%. If that doesn’t make the numbers look like a thumb suck, I don’t know what does.
The fact of the matter is that without a full reopener it is almost impossible to know where savings have been made and where they can be made.
A number of suggestions have been made about how Eskom could generate extra revenue by unbundling and restructuring its generation fleet and selling noncore assets and/or power stations.
While this might indeed be a possible path forward, I suspect that even if Molefe wanted to do this, the data necessary to begin a process like that — let alone do it efficiently and sustainably — aren’t even obtainable.
In a similar vein, Eskom came under fire during the hearings as a result of its poor maintenance record. According to its own submission, 50% of its plants don’t function after maintenance work has been done.
Just imagine if that were the private sector. Imagine if after taking your BMW in for a service there was only a 50/50 chance it would be working when you got it back. Would you be brave enough to take your elderly but still functioning car in for a service? I certainly would not.
The result of this chaos is that no one — not Nersa, not the mining industry, not the lobby groups, not even the very knowledgeable industry experts — knows for sure where the money is going and where it can be saved. I have a sinking feeling that not even Molefe knows.
What we do know is Eskom is in deep financial trouble.
Even more worrying, it is probably right in its assessment that more load shedding will cause greater harm to the economy than another rise in electricity prices.
We already know increasing tariffs will stoke inflation and add to the cost burden of domestic and business consumers.
We also know load shedding caused a drop in mining and manufacturing production and badly damaged business confidence in the first quarter of this year. The question is, which is worse?
I hate the idea that Eskom’s incentive structure has become so perverted that its failures are consistently being rewarded.
I suspect the Reserve Bank’s statement that we can expect inflation to breach the 6% upper limit of the inflation-targeting range is indicative of how the latest pantomime over electricity tariffs will play out but it leaves me with a deep-seated feeling of injustice and I daresay that, at the first opportunity, I will be moving off grid.
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