EDITORIAL: Someone’s got to pay for the electricity, Mr President

If President Cyril Ramaphosa wants Eskom to hold off on its 18.6% tariff hike, he’d better be prepared to foot the bill.

Eskom doesn’t manage to produce a lot of electricity these days but someone has to pay for it. If it’s not customers, it’s going to have to be taxpayers. How Ramaphosa plans to put this extra ask through the tax system is a question only he can answer. There’s little scope to hike taxes without crushing the economy even more than it is already being crushed by load-shedding. And what would make it so much more difficult is that Ramaphosa’s own finance minister, Enoch Godongwana, is busy with a restructuring of Eskom’s debt that will be conditional on the power utility getting its own house in order so that it doesn’t come back for more bailouts. If Eskom were, in theory, to accede to the president’s plea and skip the tariff hike it needs to cover its costs, it seems unlikely that Godongwana would go ahead with plans to relieve the power utility of a chunk of its debt.

Not that Eskom can or should accede. Indeed Ramaphosa’s suggestion is fairly outrageous. It continues a long history of political meddling in a regulatory process that is supposedly independent. That politicking about electricity tariffs is one of the reasons why SA has had more than a decade of tariff increases, of a cumulative about 500% — yet Eskom still hasn’t achieved the “cost-reflective” tariffs it needs to be financially sustainable.

What the president wants, he told the ANC Free State provincial conference at the weekend, is that Eskom should consider halting the hiking of electricity prices, “especially for now while our people are struggling under high levels of load-shedding”. He certainly has a point. Paying electricity prices that businesses and households, especially poorer ones, can’t afford for electricity that is not provided is an outrage in itself. It is hitting the economy hard. And SA finds itself caught in an ever more vicious cycle, one energy economist refers to as the “death spiral”. It’s one in which Eskom keeps losing sales due to load-shedding; and because of the high tariffs, one that encourages those who can afford to get off the grid. But the more Eskom loses sales, the more it needs to charge for each unit of electricity to cover its (very large) fixed-cost base. And so the spiral continues.

Very wrong

But Eskom does not decide electricity pricing. There is an independent body, the National Energy Regulator, to which Eskom has to apply in excruciating detail for the revenue it needs to cover every line of the costs it expects to incur. Nersa then interrogates Eskom’s estimates and holds public hearings and eventually makes a determination. This time, Eskom applied for total revenue of R351bn from all its customers to cover its costs for 2023/2024. That would have translated to an estimated tariff hike of 32%. Instead Nersa disallowed a bunch of those costs (as it always does) and approved R318bn of revenue, a tariff hike of 18.65%, followed by 12.74% in 2024/2025. How Eskom plans to close the gap and what it might mean for its operations is as yet unclear — even without the added pressure from the president.

For all that, there is something very wrong with the whole regulatory process, which needs urgently to be addressed. There are big question marks over the way Nersa applies the regulatory methodology. That’s reflected in the fact that Eskom has challenged Nersa’s tariff decisions in court often in recent years and has generally won. There are even bigger question marks over whether the regulatory methodology itself is still appropriate for a changing electricity market, in which Eskom is no longer the only player. Nersa itself has conceded a new approach is needed but nothing ever seems to happen.

More fundamental is the question of Eskom’s costs themselves. The power utility applies for tariffs to cover its “efficient costs” and Nersa probes its application on that basis. But what is “efficient”? We know the power utility’s procurement processes are racked with rent-seeking and corruption. That has to be inflating its cost base. So too might the many and varied public procurement requirements, which the government imposes on public entities, from localisation to ownership requirements. If SA needs cheaper electricity, it is within Ramaphosa’s grasp to do something about Eskom’s costs.