Eskom’s monopoly has caused loadshedding, sabotaged SA’s future

02 August 2019
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The government’s conduct over the last century and more has led to the situation South Africa finds itself in today with regards to the provision of electricity.

Tracing a series of legislative and regulatory interventions in the electricity market, we can see how this came to be.

In the 1890s, companies like Victoria Falls Power (VFP) generated electricity for the Witwatersrand.

Transvaal’s 1910 Power Act stated VFP could be expropriated after 35 years.

The 1922 Electricity Act established the Electricity Supply Commission (Eskom). Eskom built generating stations for the Eastern Transvaal, Natal and Cape Peninsula.

VFP, the major Transvaal supplier, applied to erect a large power station at Witbank.

Eskom objected because VFP sold power at a profit to benefit shareholders, whereas Eskom was required merely to cover its costs.

It was agreed that Eskom would finance and own the plant, but VFP would design, build and operate it and transmit surplus power to its grid.

In 1932 Eskom was licensed to establish Klip Power Station. Eskom provided the capital and ceded the licences to VFP, who built and operated it.

In 1938, Eskom financed Vaal Power Station and VFP built and ran it to feed into Eskom’s and VFP’s grids. Sir Ernest Oppenheimer, the founder of Anglo American Corporation South Africa, urged Eskom to expropriate VFP. In 1948, Eskom purchased VFP’s power stations.

In 1962, a commission of inquiry recommended that municipalities should not expand their generating capacity, but merely distribute Eskom power to consumers. Johannesburg’s application to build a new power station was refused.

In the 1970s, Eskom extended its transmission lines, resulting in a national grid. Legislation allowed Eskom to use tariffs to build up capital.

The Trade and Industries Board investigated electricity supply and Eskom contended to the board that it had to keep building power stations to prevent shortages.

Eskom over-estimated future demand and began building power stations, leading to excess capacity, yet supply interruptions were common.

In 1983, the De Villiers Commission recommended that Eskom should run on business principles and recover five percent more revenue than its expenditure.

The 1987 Eskom Act scrapped the no-profit principle and Eskom was renamed Eskom.

In 1987, only 40 percent of people had electricity. In 1993, Eskom and municipalities made 300,000 new electrifications, two-thirds by Eskom; in 1995, 450,000 new connections; and, in 1997, half a million.

In 1998, the government’s energy policy White Paper observed that Eskom had a de facto monopoly on constructing generation capacity, and, by 1980, had invested in expensive over-capacity with customers bearing the costs.

Competition would apply downward pressure on electricity prices.

Government would, over time, consider encouraging private-sector participation in generation, permitting open transmission-system access and letting customers choose electricity suppliers.

Independent Power Producers (IPPs) would be allowed. But fundamental market restructuring would be deferred and developments in other countries would be studied.

Eskom would, in the long term, be restructured into separate generation and transmission companies.

Its power stations would be allocated to different companies to introduce generation competition, stated the White Paper.

In 2000, government announced it intended to privatise state-owned companies. This was shelved in 2004.

Eskom would remain state-owned to implement the national socioeconomic programme, with IPPs merely augmenting supply.

Eskom told the government in 1999 there would be electricity shortages in 2007 unless there was urgent large investment in new power stations, which some privatisation would have achieved.

The government failed to finance new build, and did not allow generation competition.

In 2007, power supply fell behind demand for some months. Eskom introduced widespread rolling blackouts (loadshedding).

Because Eskom owns the transmission system, IPPs have had to sell power they generate to Eskom at a price determined by government.

Price control undermines market competition.

To overcome this, in 2012, the government introduced a bill to create an Independent System and Market Operator to purchase electricity from producers and sell it on to distributors at a wholesale tariff.

The bill went to second reading but was withdrawn. Loadshedding was reinstituted in 2014 and 2019.

The Madras High Court in India has ruled that lack of electricity affects education and health and causes economic disparity, and denial of access to electricity should be regarded as a violation of human rights.

Eskom’s supply interruptions impair municipalities’ ability to carry out their constitutional objects of ensuring sustainable provision of services and promoting socioeconomic development.

Soweto’s debts to Eskom have been forgiven, although they equal the Eskom debts of all other municipalities combined and have already been scrapped twice.

Power supply to Soweto has not been cut off, whereas poor rural municipalities are cut off regularly.

This violates the principle of the Rule of Law that laws should apply equally.

The 2006 Electricity Regulation Act is impartial about who should produce new generation capacity.

Its 2011 Regulations, however, state that the Minister may determine that the producer of new capacity should be “Eskom as part of its services as the national electricity producer”.

This, too, violates the principle that laws should apply equally.

The Constitution gives citizens the right to choose their trade. This is consistent with a competitive regime in matters of trade as being in the public welfare, the Constitutional Court has held.

The Companies Act stipulates that a company must not carry on business recklessly.

A company is reckless if it fails to heed standards of diligent businesspeople or take reasonable measures to prevent foreseeable harm, say the courts.

Eskom is a company.

It has recklessly contributed to Kusile and Medupi’s delays and cost overruns by reportedly not carrying out sufficient scoping or risk management and appointing diverse subcontractors and managing them itself rather than appointing the usual single head contractor to procure and manage subcontractors.

Eskom is also an organ of state, say the courts. The Constitution requires organs of state to promote economic and efficient use of resources.

Government’s conduct as regards electricity policy over more than a century does not inspire confidence in such economic and efficient use of resources.

Instead, it has sabotaged South Africa’s future, and this can only be reversed by finally allowing competition and private enterprise in the electricity market.

Gary Moore is a South African lawyer and senior Free Market Foundation researcher. The views expressed in this article are those of the author and not necessarily those of the Free Market Foundation

This article was first published on City Press on 26 July 2019


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