SEIFSA PRESENTATION TO

NERSA HEARINGS ON

ESKOM’s 35% PRICE INCREASE APPLICATION 21 January 2010

By Guy Harris SEIFSA Council Member

Agenda

• SEIFSA Overview

• SEIFSA Contributions

• SEIFSA Concerns

• Key Inputs and Rationale incl:

• Inflation Increase, Capital, Loans, Privatisation; then only above inflation Excessive Increase (Loan) not vice versa

• Transparency

• Questions

• Follow Up

SEIFSA Overview• SEIFSA, through its member associations, represents

2300 companies employing 230 000 people, ranging from unskilled to professionals.

• Contributes substantially to SA’s GDP and to exports. • Key beneficiator of our country’s mineral wealth and a

key supplier into other advanced industries.• Member companies range from large energy intensive

users (such as BHP, Arcelor Mittal, Samancor and other Ferroalloy producers, Highveld, Columbus, Hulett Aluminium, and Scaw Metals) supplied directly by Eskom to many smaller businesses dependent on their municipalities for their electricity.

• Major provider of inputs to other industries, including those involved in 2010 infrastructure.

SEIFSA Contributions

• Many decent jobs directly and indirectly• Forex (exports and import replacement) at

time of trade deficit• Committed to encouraging our members and

their employees to conserve electricity and take advantage of Demand Side Management (DSM) measures available and other Energy Saving Company (ESCO) led initiatives

• Can contribute to build program and local capacity development of SWH manufacture, Smart Metering etc. and will encourage our members to seize these opportunities

SEIFSA Concerns• Impact of excessive electricity price increases on

jobs, exports, growth and sustainability not only in our sector but also our customers’ sectors.

• High inflation, especially in administered prices, is hurting jobs and interest rates

• Lack of smoothing after years of keeping us in a fools paradise (supply and cost)

• Impact on our employees and the indigent in our country, some of who are related to our employees who are naturally concerned, as are we, about their plight.

• Inadequate action over distribution losses due to illegal connections (> R6bn pa?)

• What will happen to security of supply when the 38 large users are back to operating at normal capacity?

Key Inputs and Rationale• Price increase should be limited to 8% or less

(33% more than upper CPIx limit) with no further increase in 2010 but must not exceed 10% nominal in any year of MYPD2• Impact on inflation and subsequent flow through

impacts on interest rates, etc• Impact on economic growth, decent jobs and

exports/current account deficit• Especially given economic crisis, could push

companies over the edge• Carbon tax of R30bn in Eskom projections,

should be withdrawn and deferred until back to inflation related increases or increase reduced by tax• As above

8% is Eskom’s base operating cost increase excluding new build related which should be capitalised

Key Inputs and Rationale

• The approach should recognise that:• It was decisions by government to defer

the build program that got us into this position

• Government is the sole shareholder of Eskom and therefore there should not be major problems with delaying price increases so that there is adequate time for business and other consumers to adjust their approaches, prices and budgets accordingly.

Key Inputs and Rationale (Cont)

• Government should rebate the taxes (Corporate and VAT) on Eskom’s “windfall profits” and above inflation increases back to Eskom as equity.  • This will both mitigate the increases  and

eliminate the iniquitous situation where consumers effectively have to pay the tax (via price increases) which accrues to government despite its poor decision making

• If 35% increase granted then projected Corporate Tax of R71 bn over next few years

Dividends paid should be reinvested as equity (e.g. R1.6bn in 2006)

Key Inputs and Rationale (Cont)• If these increases are inadequate to maintain

required build rate, without losing investment grade rating, further “quasi” equity funding should come from the shareholder• Treasury has debt capacity (direct or via guarantees

– R176bn guarantee acknowledged)• Poor decision making was not the fault of consumer

or totally Eskom’s

• Municipalities should have strict guidelines so that only primary electricity cost is adjusted in their rate increases• Avoid profiteering

Key Inputs and Rationale (Cont)• DSM should be funded and managed by

government not Eskom• Focus, no conflicting interests• Poor track record of Eskom• Incentives for investing yesterday not when

we are back in crisis; 12 months have been lost

• Cogen and IPP should be coordinated by a credible independent entity not Eskom• Focus, no conflicting interests

Above also driven by climate change policyof government not just electricity policy

Key Inputs and Rationale (Cont)• Increases should be contingent on

satisfactory transparent management and technical reviews of Eskom (including its current and planned facilities)

• To ensure optimal supply and minimal supply interruption.

• There should also be adequate reassurance on implementing any recommended corrective actions

• To ensure that the long term socio economic interests of the country are met.

But avoid micro management

Key Inputs and Rationale (Cont)• More intensive efforts required for

sourcing locally both primary and secondary inputs for major capex – multiplier benefits

• When further load shedding is required labour intensive, high value add and high export industries should be exempted• Minimise impact on jobs, value add and

current account deficit• Determined not by Eskom but by

independent body mandated to take into socio economic priorities.

Privatisation

• A near last resort, but better than excessive increases, which prevents destruction of jobs and current users subsidising future users

• Hi impact (neg) and low benefit:• <50% of unproven, unprofitable asset• Huge discounting for multitude of risks

• Hi impact (pos) and high benefit:• 74-100% of proven, profitable asset• Reduced risks further – input cost and revenue• Close to sovereign debt return?

Who will make the right decision?

Coal stockpiling

• What drove original de-stockpiling?• Keeping political bosses happy• Ensuring bonuses• Window dressing

• Cost of coal re-stockpiling left in base cost and continuing rather than treated as a once off?

• Will this not create a nice cushion?

Lack of transparency• Inadequate 2009/10 data disclosure from

Eskom:• Financial results YTD• Ratings reports

• NERSA called for proposals in 2008 to holding Eskom accountable for maintaining efficient cost of supply but no update

• Government (DPE, DME, Treasury, dti) attends hearings but stays quiet, when and how is their input given – double standards?

• Terms of R60bn government loan not disclosed, should be increased and fully front ended

More transparency• What is needed is greater transparency and

better communication over what price changes are likely to occur to allow for better planning and decision making amongst all stakeholder interest groups. Eskom should be more transparent with strategy and financial projections, with opportunities for engagement with stakeholders but stakeholders must not abuse such transparency.

• More transparent disclosure and opportunity/ability to interrogate data, run models, evaluate and evaluate alternatives

• Need opportunity to hear government and ruling party at hearings should be provided for before any increases beyond 2010/11 are granted .

Current users must not subsidise future consumers• Apply fuel pipeline principle• Economically and morally unfair• Any part of current increases that is there to

cover current cost of build or strengthen financial ratios rather than meet historical costs, not future capacity, should be funded by way of Eskom Development Bond:• “Forced” loan linked to consumption• Ranking ahead of treasury quasi equity but behind

market priced loans – interest rate must reflect higher risk

• Secondary market to allow smaller consumers to onsell loan

• Distributors to decide whether to onsell, retain or distribute to (larger) consumers

4 AVAILABLE LEVERS• Inflation Price – cost up to inflation

• Eskom borrowings – use to maximum as long as maintain investor grade rating, support by government guarantee if needed and government not willing to be a responsible shareholder

• Share Capital/Quasi Equity infusion from Treasury / Privatisation – critical top up, use privatisation that generates max funding at lowest return

• Excessive “Price” as EDB – use above inflation cautiously and gradually as there could be unintended economic consequences

Choose wisely! It is irresponsible for NERSA to rule on price without FIRST knowing other two

In Summary• We understand Eskom’s predicament• The crisis requires better management,

especially by government – shareholder support and transparency

• The consumer must not carry an excessive burden

• Out of the box thinking is needed, maybe the EDB can be developed further?

• Overloading business during tough economic times will impact on jobs in a land with unemployment out of control

• There are localisation opportunities that need to be taken up aggressively

2008 Annual Report

• Eskom’s policy is to fund the capital expansion programme through its own resources, shareholder support and borrowings. The shareholder support will be in the form of a dividend moratorium, direct shareholder capital injection and deeply subordinated long-term debt.

What has changed to make price the funder?

What is acceptable?

•Not Eskom’s 35%, 35%, 35%•Rather their operating cost

(excluding build related costs which should be capitalised) so 8%, 7%, 6%

Questions

Follow Up• SEIFSA

• Dave Carson • Executive Director• Phone  011 298 9403• Fax      011 298 9503• Email   dave@seifsa.co.za• Web     www.seifsa.co.za

• POLICY COORDINATOR• Guy Harris• Council Member• Phone  082 5598755• Fax      086 6708949• Email   guypharris@worldonline.co.za