Light of day: Eskom says it needs higher power tariffs because of the high cost of coal from which it produces electricity and to fund new infrastructure. Picture: SUPPLIED
Light of day: Eskom says it needs higher power tariffs because of the high cost of coal from which it produces electricity and to fund new infrastructure. Picture: SUPPLIED

The decision by the National Electricity Regulator of SA (Nersa) to award Eskom only a 5.3% tariff increase for the 2019 financial year — together with Public Enterprises Minister Lynne Brown’s reneging on her pledge to appoint a capable board — will pile additional pressure on the utility as it grapples with imminent bankruptcy.

Eskom had applied for a 19.9% increase — four times the annual inflation rate, which Statistics SA put at 4.6% in November. That increase would have further damped growth because electricity is one of the two biggest cost factors for employers.

The regulator made its decision after conducting public hearings and receiving 23,000 submissions from individuals, intensive users of energy, non-governmental organisations and other stakeholders.

Had Nersa granted Eskom’s request, the price of electricity would have jumped to 106.87c per kWh from April. This would have been more than double the cost of power from the 41.57c/kWh that Eskom charged in April 2010. For the five years ending March 2018, Eskom was granted a tariff increase of 8% a year, which took its allowable revenue to R180bn by 2017.

Eskom says it needs the higher tariffs to compensate for the high cost of coal from which it produces electricity.

It also needs higher power prices to fund investments in new infrastructure.

However, the market price of coal tells a different story.

When Nersa granted Eskom a price increase to 41.57c/kWh in March 2010, the price of coal was just more than $83/tonne. After a short-lived spurt to $130/tonne by June that year, the coal price dropped to $45/tonne by 2015, by which time Eskom was experiencing daily load shedding and spiralling costs. Last week, the price of the commodity had risen to $95/tonne.

Eskom is the single-largest buyer of coal in SA and has long-term supply contracts. Its huge buying power enables it to influence what it pays for coal on short-term contracts. Coal is Eskom’s biggest cost input at about 40% of revenue.

The utility has, however, found itself running out of money because of corruption and inefficiency. It received a qualified audit in 2017 for incurring R3.6bn in irregular and wasteful expenditure. In addition, the utility illegally gave R1.6bn to disgraced consultancy firm McKinsey and the politically connected Trillian.

Last week, Brown confirmed Zethembe Khoza as chairman and appointed two additional nonexecutives with no corporate experience — professors Malegapuru Makgoba and Tshepo Mongalo.

It was a condition of some of the funders invested in Eskom bonds that the board be strengthened before the end of November for them to continue lending to the utility.

In August, some of the lenders threatened to recall their loans, relenting only when Eskom agreed to suspend its finance director. The power utility has R471bn in debt, some of which is backed by the state.

Khoza is the third nonexecutive chairman since March 2015. Since then, the company has had five CEOs and three finance directors. Eight of the top executives, including finance director Anoj Singh, are on suspension on allegations of misconduct.

Singh and former acting CEO Matshela Koko played a key role in the company incurring the R3.6bn irregular expenditure and paying over the R1.6bn to McKinsey and Trillian. Last week, advocate Mzungulu Mthombeni handed over to Eskom his report advising the utility to reinstate Koko as he had found him not guilty, according to leaked documents. Koko will probably still face charges related to the Trillian and McKinsey saga. His name appears on documents showing participants in meetings where the matters were discussed.

In November, Eskom was forced to admit it had only R1.2bn in the bank, which it said was not enough to pay salaries for its more than 49,000 employees beyond December.

Last week, acting CEO Sean Maritz said it had since secured another R3.5bn, presumably in loan advances, and would be able to pay salaries.

It costs at least R8bn a month to fund Eskom’s operations and the utility needs to have a cash buffer as working capital. The lower tariff hike will add to its woes.

Because of these problems, it has delayed the publication of its interim financial results, which should have been released in November. It now says they will be released before the end of December.

Whatever the results look like, Eskom has now come under additional pressure as it will have to convince sceptical markets of its ability to trade itself back into solvency.