Feature Article: ESKOM has not been starved of income

We hear a great deal about Eskom’s shortage of income. Yet we never see a published report showing that the National Energy Regulator of South Africa (NERSA) is allowing the state-owned utility to increase its average electricity price by an estimated cumulative 347.65% for the period 2009 to 2018.

Had Eskom been a private vertical monopoly energy supplier, subject to price control at the hands of NERSA, it is inconceivable that the regulator would have granted it the price increases that Eskom has enjoyed. NERSA would never have allowed the average price per kilowatt hour charged to escalate from 22.10 cents to an estimated 98.93 cents per kilowatt hour in 9 years, or to put it differently, for the price to multiply 4.48 times between 2009 and 2018, a huge above-inflation increase. In the UK, by contrast, the electricity price in the privatised electricity industry took 20 years to double.

An increase of an average of 11% has been assumed for the years 2015 to 2018 according to the table shown in the article. There may be a few cents difference in the average prices but it is the total picture that really matters.

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How many private firms will have been able to extract such huge price increases over nine years?

How many individuals who earned (say) R22,100 per month in March 2009 are likely to be earning R98,930 per month in March 2018? It would take some rather spectacular salary increases; the kind of percentage increases enjoyed by Eskom, such as 49.95% in 2010, 24.80% in 2011, and 25.80% in 2012. These are the income increases they would have had to earn for their electricity bills not to have a negative impact on their standard of living.

Despite the spectacular price increases it has received, Eskom is still pleading poverty. How is this possible? What would cause a salaried employee whose income has increased from R22,100 per month to R98,930 in nine years to possibly plead poverty? This would only be possible if the person was spending more than they were earning. For this, their expenditure would have to escalate at an even greater rate than their income.

It is a common phenomenon that a price-regulated entity, whether state-owned or private, that is dependent on “cost-related” increases, will do everything possible to increase the costs. In a privately owned company this will not include inflated wage costs but in a state utility it is to be expected. I have been told by recruitment companies that it is impossible to find alternative jobs for Eskom employees as the salaries they earn are substantially above market rates.

Private companies will attempt to persuade the regulator, for instance, that depreciation rates must be calculated on replacement rather than historical value, a mechanism that substantially increases costs. Eskom has persuaded NERSA to accept this method of calculation in arriving at its total costs for purposes of price determinations.

Another potential cost-increasing factor in a state-owned entity that is protected from competition by restrictions on entry by competitors, is a failure to maintain high productivity. Competition has a remarkable effect on the ethos in competing enterprises. If they are lax and unprotected by barriers to entry, they are driven by the ultimate potential of bankruptcy to be efficient and cost-conscious.

Until Eskom faces open competition we will not know whether it is functioning efficiently and is properly controlling costs. We also will not know what the price of electricity should be at any given time. We will only have that information when the electricity market is fully competitive with a range of competitors vying for the business of electricity customers. The most visible sign that we do have a fully competitive electricity market will be when households in South Africa can choose from many different suppliers of electricity at the retail level. That is the ultimate sign of a properly functioning market.

Author Eustace Davie

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