It would have been laughable if the sums involved hadn't been so serious. Last February, finance minister Tito Mboweni gave Eskom a R69bn equity injection over a three-year period to help bail it out of its financial crisis. Last March, Eskom's regulator took the money away, deducting it from the revenue it allowed the power utility in calculating electricity tariffs over the three years. Last week, the Johannesburg high court threw out the National Electricity Regulator's (Nersa's) decision. It ordered it to give back the money and commented, scathingly, on the regulator's incompetence, given that this was the third time the courts had found that Nersa had got it wrong on tariffs.
The ruling will add almost 10 percentage points to next year's electricity tariff increases, with more to come. Eskom has welcomed that the courts insisted, essentially, that Nersa - which even before the case had conceded the principle that it could not treat an equity injection as a subsidy - must adhere to its own tariff methodology. But as mining company Glencore protested this week, SA's electricity tariffs have escalated more than 500% over the past decade. The latest ruling could just deepen the "death spiral" in which Eskom finds itself, in which ever higher electricity prices are pushing demand for electricity ever lower, as big users go off-grid - or shut down.
Perhaps not coincidentally, Nersa last month called for changes to the regulatory model for setting electricity tariffs, saying it caused "deindustrialisation" and was not suited to a new world in which Eskom would no longer be the sole provider of electricity.
That may be true, but it seemed disingenuous given Nersa's serial court defeats. A sharper regulator would have done more to interrogate Eskom's increasingly bloated cost base over the past decade, on sound rather than unsound grounds. The methodology allows for Eskom to apply for revenues or tariffs to cover its "efficient" costs. Its cost base is clearly anything but efficient.
Indeed, Eskom CEO Andre de Ruyter pointed out in a recent briefing to the South African National Energy Association that Eskom's costs had been increasing by 30% a year for the past five years. While one might have expected the power utility to derive benefits of scale in its procurement, it's quite the opposite. "Clearly we are paying a premium for buying as Eskom," said De Ruyter, who has made it clear that sorting out Eskom's income statement is a top priority as it makes its business model fit for purpose.
Politicians and some of De Ruyter's predecessors have tended to see the Eskom issue as a debt issue, whereas he seems to see more clearly than they did that the debt crisis won't go away unless the utility can keep the lights on - sustaining its revenue base - and cuts its cost base. Nor is the cost issue primarily about people costs, even though Eskom clearly is still overstaffed, even after it quietly shed 300 managerial staff through voluntary severance earlier this year. The power utility's personnel costs are just a third of what is by far the largest cost item, its R99bn primary energy bill, which consumes over 50% of its revenue.
It spends R57bn a year on coal, De Ruyter pointed out. He has made it his mission to tackle the big cost items. The process began before he arrived. It requires taking on the vested interests and the rent-seeking that have inflated procurement costs for so long. It's about the coal contracts; De Ruyter told parliament recently of seven inflated contracts that are under review. It's also about the trucking contracts that make up a sizeable chunk of the coal costs, as well as about supply chains in items such as diesel and fuel oil. Just last week, Sifiso Dabengwa resigned from Eskom's board after objecting to management's decision to cancel a fuel oil contract (with Econ Oil) and demanded an independent inquiry, which went against him.
If that means the board is willing to back Eskom's management in its efforts to cut costs, it may be a good sign. Electricity users can but hope that both management and the board are up for the challenge.
• Joffe is contributing editor
