We are going to pay for Eskom's mistakes

[Dave A]

I was reading this article on Eskom's suggestion that consumers must carry the risk of Eskom's cost fluctuations.

Consumers should carry the costs of fuel hikes and coal-price fluctuations rather than Eskom, the power utility said on Wednesday.

Eskom CEO Jacob Maroga was arguing for regular electricity-price adjustments similar to those in the fuel sector.

"When we started with the current multi-year model of pricing, we did identify certain categories of costs that were very difficult to predict, even in a year, let alone a three-year period," he said at a media briefing in Johannesburg.

Eskom had suggested to the National Energy Regulator of South Africa (Nersa) a system, used worldwide, of "pass-through costs".

There were certain costs Eskom could not forecast with such accuracy that it could manage them on its own, he said.

"So with those costs, you pass through those costs to the consumer."

Giving as an example the effects of oil prices on the cost of petrol, Maroga said producers could not be expected to take either the risk of the fluctuations in oil prices or those of the currency exchange on their own.

"So there's a formula that if the price of oil changes, the petrol price changes to reflect the pass-through costs. So they're passing the risk of the oil cost to the consumer. And we want to do the same."

At the moment, Eskom adjusted prices annually. Under a multi-year pricing system, it would do so every three years.

Eskom had indicated to Nersa it could not predict with a good measure of accuracy the prices of coal, particularly that bought on-the-spot.

"And we want to pass through those costs to the consumer," said Maroga.

Eskom had seen that it was increasingly using short-term contracts -- rather than those over 30 or 40 years -- "and that is where the volatility of prices happens".
article from M&G here

Now that might seem reasonable enough on the surface, but when you scratch a little deeper, what we are being asked to pay for is Eskom's management mistakes.

The issue of short-term contracts is a good place to start. Why are there short-term contracts paying spot prices on what is a long term project? It never used to be like that. A power station was built with a life expectancy with a dedicated supply of fuel to have it run for the term.

The introduction of short term contracts was a management mistake - and we're expected to pay for it.

Then there is the problem of rising fuel costs to transport the coal to the power station.

When you build a coal powered station there are a few things to consider - the main one being where you are going to get the coal. So you place the power station as close to a plentiful supply of coal as possible because it is far cheaper to move electricity an extra 100km than to move the coal an extra 100km. But no - we've got to road freight the stuff in from 80km and more away. Why?

And then we come to the fact that the coal is being shipped in by road.

In the past the coal was brought in by conveyor. The coal mine was only a few kilometers away and a conveyor ran directly from the coal mine to the power station. Even if the mine ended up being too far away for a conveyor system to be viable - it would make far more sense to run a railway line between the colliery and the power station. Especially now with the high cost of diesel.

Yet another management mistake. And we, the consumers, are expected to pay for it.

[SilverNodashi]

Dave, what you're saying is very true, but the sad (and possibly) negative truth is that this is Africa, and management in Africa (as we've seen many many times is quite often an act of greed, and everyone else has to pay for it.

Regardless of how true this is, no one is going todo anything about. Those who have the power to make drastic changes to the management of Eskom are probably being bribed with the money we pay so they don't do anything. And the masses who are affected don't have the balls to stand up for what is right

[duncan drennan]

I agree with you 100%.

A big problem is that as consumers we have no alternative. Even if we don't pay (via price increases) we do pay (via taxes). If Eskom were to go under, then the government would have to bail them out, because there would be no alternative (and that alternative is far worse than price increases!)

We are in a difficult situation and I would like to see Eskom's management taking the shots. If they made bad contract decisions under pressure, they should take the dive on this. They are clearly acting in an incompetent manner, yet we are still not seeing any action against them as management individuals.

[SilverNodashi]

But who is man enough to say "I've made a mistake"?

To be honest with you, it's going to be much better to invest in an alternative power solution, personally and business-wise, than to invest in Eskom Management's future. Solar power is viable, and affordable.

[Dave A]

I see the point of profiting from bad management has been raised.

The huge increase in the electricity price was the result of poor planning and management on the government's part, so it should not be allowed to get tax income from that, Business Day reported on Friday.

The government would get a R4-billion boost in taxes if Eskom was allowed to increase its prices by a nominal 60%, the newspaper said.

If the National Energy Regulator of SA (Nersa) grants the hike, Eskom has projected that it would make a pretax profit of R12,7-billion.

At a tax rate of 28%, the extraordinary tariff hike would generate almost R4-billion in tax, which would see the government profiting from its own bad judgement, said the paper.
from M&G here

[Chatmaster]

Did anyone pick up the comments by Mike Shussler about the fact that Eskom are not one of the cheapest suppliers in the world and that this increase would make them amongst the most expensive. He also mentioned something about Eskom exporting electricity below cost and us paying more already, thus they cannot increase the price. I missed the news bulletin and only heard from someone else.