Comment on Eskom’s MYPD3 selective reopener application
Tuesday, October 20th, 2015
As requested by Nersa in May 2015.
Submission compiled by the Solidarity Research Institute, on behalf of the Solidarity Trade Union
15 June 2015
1. Introduction – about Solidarity
1.1 These comments are furnished by Solidarity Trade Union (“Solidarity”) following the invitation for public comment on Eskom’s MYPD3 selective reopener application.
1.2 Solidarity is a labour union which has members who are employees of companies in nearly every industry in South Africa. The main industries in which Solidarity is organised are metal and engineering, mining, the electrical industry, telecommunications, the chemical industry, agriculture and general industries, including tertiary institutions, aviation and other specialised areas. Solidarity’s mandate is to protect the interests of the workers who are its members. These members are, at home and at work, directly affected by the price of electricity in South Africa and as such Solidarity is exercising its mandate by responding to this request for comments.
2.1 Solidarity will not comment on the specifics of Eskom’s selective reopener application.
2.2 Solidarity’s comments concern the fact that the lack of a market for electricity in South Africa makes it impossible to judge what Eskom’s tariffs should actually be.
2.3 The only way in which it is possible to determine what the price of electricity should be, is through a market mechanism.
2.4 Solidarity therefore reiterates its call, previously made in February 2013, to the effect that a competitive market for electricity through which prices will be naturally determined, be allowed in South Africa.
2.5 Solidarity is concerned that Eskom may be more concerned with sourcing inputs from BEE suppliers than sourcing inputs based on price and quality, which is detrimental to the company, to South African electricity users and the prosperity of all people in South Africa.
3. A market for electricity
3.1 Solidarity maintains that the problem is that, whatever Nersa’s final decision on Eskom’s selective reopener application may be, it will be an offer that people in South Africa can’t refuse. Therein, and not in the specifics of the tariffs that the MYPD3 application requests, lies the fundamental problem: the monopolistic structure of electricity generation and transmission in a single entity.
3.2 Through the MYPD processes, Eskom and Nersa try to determine what “appropriate” electricity tariffs should be. This process is, partly, informed by Eskom’s plans for expansion over the following decade – possibly even the following two or three decades. Forecasting a myriad of variables over such a long period with any degree of accuracy is impossible. Mistakes will inevitably be made.
3.3 Of course, forecasts are necessarily a part of doing business, especially when it comes to capital-intensive types of business such as electricity generation. The difference here is that in a free market with many competing companies, the companies with the worst forecasting skills, or simply those with the worst luck, tend to lose their market share to existing or new competitors in the market. In this way, those companies who are better at forecasting can be more efficient. In this way, these companies gain the upper hand. This benefits the consumer through lower prices or better service.
3.4 As Eskom effectively has a monopoly on electricity generation and on the transmission network, the mistakes that Eskom and Nersa make necessarily eventually have to be paid for by South African electricity consumers, who, save for generating their own power, have no choice but to buy electricity from Eskom.
3.5 The structure of the electricity market means that it is impossible to know whether the prices Eskom and Nersa decide upon are correct or not, because the market is not allowed to naturally find the correct price through a process of competition.
3.6 Discussions on opening the market for electricity in South Africa, in various ways (including the Ismo-bill), have been ongoing for more than a decade. Solidarity urges both Eskom and Nersa to acknowledge that such an open market for electricity is what should be striven for in South Africa and to focus energies on the attainment of such.
4. Increased cost through ill-advised focus on BEE
4.1 Eskom, like many other companies in South Africa, often has a lot to say about its “contribution to black economic empowerment (BEE)”. Just as often, this “contribution” is automatically viewed as something which is positive and to even suggest that it may be detrimental in any way is met with shrill opposition.
4.2 Solidarity has on a previous occasion submitted comments to Parliament on why the BEE system is detrimental to economic growth and the personal well-being of people in South Africa. Those comments are available on request.
4.3 In this case, specifically related to Eskom, Solidarity is concerned at reports that Eskom is paying many multiples of what the utility actually should be paying for certain inputs, as a result of an ill-advised focus on BEE.
4.4 Solidarity has for years been receiving reports, both through the media and anecdotally through our members, that Eskom is paying far more to its BEE suppliers of various inputs, including coal, diesel and contracting services, than it pays to other suppliers of similar inputs.
4.5 It is not clear whether all of Eskom’s BEE suppliers are exploiting the company’s seeming inability or unwillingness to negotiate fair contracts, but it does seem as though many are.
4.6 In a competitive market, such a situation would not be cause for great concern, as a company which has increased costs as a result of overpaying for products or services from exploitative BEE suppliers would not be able to simply pass such costs on to its customers. However, this is what happens with Eskom and the MYPD processes.
4.7 Solidarity maintains that it is counterproductive to the ideals of economic prosperity, including the prosperity of black people in South Africa, for Eskom to punish all of its customers, black and white alike, in order to pay exorbitant prices to BEE suppliers.
5.1 Solidarity calls for the focus of Eskom and Nersa to be the establishment of a free market for electricity in South Africa, the only way in which it is possible to determine what the price of electricity in South Africa should actually be.
5.2 Additionally, Solidarity maintains that people in South Africa should not be made to pay for Eskom’s seeming inability to negotiate fair contracts with its suppliers.