Eskom Applications FEBRUARY 2019 MIDRAND - Ted Blom/Melanie Veness - Nersa

Eskom Applications
      FEBRUARY 2019
 Ted Blom/Melanie Veness
        MIDRAND

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Agenda

1 Background     –   Eskom captured since 2001 (For Profit)

2 Regulatory     -   Benchmark

3 Evidence       -   Inefficiencies

4 Confirmation   -   Eskom Executives Comments

5 Conclusion     -   Application not justified

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Background
1 Vision – Eskom captured since 2001 (For Profit)

2 Focus -    Maximize profit vs Cheap electricity

3 Result -   Most expensive tariff ever in real terms

4 Short sighted & Reckless non prudent behaviour

5 Application devoid of reality

6 Putting SA and our economic lives at risk

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Regulatory -1
Tariff principles 10 16. (I) A licence condition determined under section 15
relating to the setting or approval of prices, charges and tariffs and the
regulation of revenues- (a) must enable an efficient licensee to
recover the full cost of its licensed activities, including a
reasonable margin or return; (b) must provide for or prescribe
incentives for continued improvement of the 15 technical and economic
efficiency with which services are to be provided; (c) must give end users
proper information regarding the costs that their consumption imposes on
the licensee's business; (d) must avoid undue discrimination between
customer categories; and (e) may permit the cross-subsidy of tariffs to certain
classes of customers. (2) A licensee may not charge a customer any other
tariff and make use of provisions in agreements other than that determined
or approved by the Regulator as part of its licensing conditions. (3)
Notwithstanding subsection (2), the Regulator may, in prescribed
circumstances, approve a deviation from set or approved tariffs.

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Regulatory -2
Tariff principles 10 16. (I) A licence condition determined under section 15
relating to the setting or approval of prices, charges and tariffs and the
regulation of revenues- (a) must NOT enable an in-efficient licensee
to recover the full cost of its licensed activities, including a
reasonable margin or return; (b) must provide for or prescribe
incentives for continued improvement of the 15 technical and economic
efficiency with which services are to be provided; (c) must give end users
proper information regarding the costs that their consumption imposes on
the licensee's business; (d) must avoid undue discrimination between
customer categories; and (e) may permit the cross-subsidy of tariffs to certain
classes of customers. (2) A licensee may not charge a customer any other
tariff and make use of provisions in agreements other than that determined
or approved by the Regulator as part of its licensing conditions. (3)
Notwithstanding subsection (2), the Regulator may, in prescribed
circumstances, approve a deviation from set or approved tariffs.

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Regulatory -3

•   Separate applications for each licence
•   Not complied with properly
•   TX & DX costs CANNOT rise same as GX – no reasons supplied
•   TX – farmers are being discriminated against
•   Application incomplete – R50bn hole
•   Revenue assumptions invalid
•   Ignores impact of IPP on revenue- incorrect structure in
    application

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EVIDENCE -1

• Capex inefficiency

•   Medupi                 > R100bn (R170bn-R69bn)
•   Kusile                 > R100bn (R170bn- R69bn)
•   Ingula                 > R30bn (R40bn –R9bn)
•   Arnot Coal             > R2bn (Lack of investment)
•   Overvaluation of RAB   > R800bn ( AFS vs MYPD)

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EVIDENCE-2

• Opex inefficiency

• Headcount            > R 30bn pa
• Salaries             > R 9bn pa
• Operating costs      - Keep increasing

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EVIDENCE-3

• Tariff Inefficiency

• If escalation from 2005 is 30% CPI
• Current Tariff should be  R1.43 K/wh

• Over recovery since 2005 > R1.4trillion, but only R120bn
  assets

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EVIDENCE-4

• Coal inefficiency

•   Coal Consumed pa              120mtpa
•   Long-term costs at R250,00*   R30bn
•   Actual Eskom coal costs       R 73.3 bn
•   Inefficiency                  ~R40bn
•   Including “special prices”    +R200 p/ton
•   Including “Fronting”          + 100%

• * market estimate

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EVIDENCE-5

• Revenue inefficiency

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EVIDENCE-5

• Revenue inefficiency

• Phantom vending machines ~ R5bn

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Confirmations

Eskom is dead !!!

  Killed by own staff
 - Corruption
 - Inefficiency
 - Gross negligence

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Confirmations 1

• Mabuza
•       Eskom is not sustainable, warns its Chairperson Jabu Mabuza – 702
•       ‘Bold steps’ needed to save Eskom, Jabu Mabuza says, as more load-shedding
        looms
•       Mabuza says the way in which the company is operating now ‘is not sustainable’
•       Mabuza said they were engaging stakeholders to find financial alignment, with the
        aim of about R30bn in savings over the next five years.

https://www.businesslive.co.za/bd/national/2018-11-28-bold-steps-needed-to-save-eskom-jabu-mabuza-says-as-more-load-shedding-looms/

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Confirmations 2

• HADEBE:
• 'IF WE KEEP RUNNING ESKOM THE SAME WAY,
  WE'RE IN TROUBLE'
• CEO Phakamani Hadebe says even if it’s granted a
  15% increase in the price of electricity, for three
  years, Eskom would still have an R50 billion debt
  hole to plug.

•   https://ewn.co.za/2019/01/15/hadebe-if-we-keep-running-eskom-the-same-way-we-re-in-trouble

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Confirmations 2

• HADEBE:

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Confirmations 3

Oberholzer

Incorrect coal quality is now compounding
Eskom’s problems, with an impact of about
1,000MW, Oberholzer said. “My mining
colleagues are not playing ball,” he said. “If you
supply Eskom, please understand your
responsibility to the country.”

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Confirmations 3

Oberholzer
Eskom is in dire financial straits with R419bn in debt, which
it is unable to service from its own revenue. Lack of
investment (in Eskom tied coal mines) has caused supply
issues for Eskom of late. Last year, Eskom had six of its 15
coal-fired power stations with less than 10 days of coal
supply — well below the minimum threshold of 20 days. An
aggressive drive to procure coal has yielded some results.
There are now only three power stations with less than 10
days of coal supply, Oberholzer said. And while it is in the
grips of a financial and operational crisis, it has a long-term
strategy to move back to cost-plus mines.

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Confirmations 3

Oberholzer
Apart from cutting investment in cost-plus mines,
other decisions taken in the past have put Eskom in
a difficult situation. The construction of power
stations Medupi and Kusile was done in a hurry and
now present design challenges and are not
delivering the output that was envisaged,
Oberholzer said.

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Confirmations 4

Eskom blames Nersa

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Confirmations 5

Eskom own admission

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Conclusions

Surely tariff increase of 70%
        is premature
  3 yr increase definitely
          unethical

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Conclusions

1.   Disconnect between execs & Management
2.   Applications do not reflect Board statements
3.   Lack of Transparency – “slush funds”???
4.   No stability & Price certainty
5.   Eskom damage “self inflicted”
6.   Eskom has become drain on SA
7.   Applications are irregular & not justified
8.   Eskom application insensitive to SA needs
9.   Eskom = “Business as Usual”/ SA dying

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Conclusions

   Scrap these applications until we see a full

   NERSA Forensic Report
          &
Fundamental Restructure
      of Sector
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Thank you

      Melanie Veness
            &&

          Ted Blom
        082 857 2534
Ted.Blom@MiningandEnergy.co.za

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