Monday, May 18, 2009

Does Eskom deserve our anger?

It grates me that professional analysts can make statements / give opinions based on completely incorrect facts.

Take this piece based on a Moneyweb interview with Cadiz' Peter Major.

Eskom deserves our anger

Peter Major says that the electricity utility has behaved badly.
Felicity Duncan
15 May 2009 18:38

It's no secret that many consumers were enraged by the power failures that bedeviled the country's electricity supply last year, as well as the sharp tariff increases that have followed.

However, businesses, especially power-intense businesses like mining, were hurt much worse by the problems. In January last year, for example, Eskom told its big mining clients that they would have to reduce their usage by 20% (later adjusted), which meant that production and safety at the mines were severely compromised.

They then also faced massive increases in their costs. This, combined with other cost increases, has made it increasingly difficult for mines to produce profits in South Africa.

Explained Cadiz Corporate Solutions' Peter Major: "We always complain or acknowledge how hard and how sticky these mining costs are and how the last few years I think they've been rising at a compound rate of way over 20%, probably closer to 25% per annum for the last three, four years.

"So they're probably going to be lucky to get away with a 10% labour increase and now that you've got a 34% increase in electricity and that's probably their biggest cost component after labour, so it shows that the pressure never comes off mining companies."

Eskom has defended itself by saying that it had been significantly undercharging South Africans for electricity for many years, and had therefore had trouble maintaining the grid, and that the current big increases are needed just to enable Eskom to break even. But according to Major, this is no excuse.

"It's true [that Eskom has been undercharging] but it kind of angers us because we expected Eskom to be managing itself correctly and we never wanted Eskom, we never expected SA or anybody to be subsidising us, because you build a business and you want certainty in your business and if you see the cost increase of electricity has been 7% a year or say 2% below inflation for five or ten years, you kind of build that into your price, you assume those guys are running that business properly.

"Now after years and years, they say, "Oh, we weren't running it properly, now we're going to slam you with 35% this year on top of the 40% last year" and now you're shell-shocked, what's going to happen next year, will we have another 25, 30% body slam? I think we have a right to be angry here. It means that this company was not managed correctly at all and for a long time."

Old regime - thousands of megawatts built that were mothballed due to the "total onslaught" strategy. No power stations were built subsequent to the eighties due to the surplus power. Factor in the cost of capital incurred each year on . .more dormant assets and work out whether the old pre-1994 regime was that good.

Next, look at the last power station we did build - Majuba. Built on what turned out to be an unusable coal field. Now that we need it, Eskom has to truck in coal supplies from all over.

Then. Consider that Eskom presented its planning in 1997 showing South Africa would run out of power in 2007. But the government and NERSA followed the California debacle by spending the next 10 years attempting to get private companies into a market with the lowest (uneconomic) price of electricity in the world. Seemingly, NERSA and the government forgot (as did California) that security of supply was the first and most important priority. In desperation, Eskom began building Braamhoek (peak power) anyway, under an arrangement that a new entrant might take this over if one was found.

Finally, consider that Eskom began applications for a smoothed set of increases in 2003, warning that without these, the price would have to radically escalate as a future build began. These were denied.

As a paid analyst, do your homework.

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