Eskom must not be allowed to hold South Africa hostage with its “pay-up or face load shedding narrative”, an opposition leader told energy regulators on Wednesday. Democratic Alliance MP and shadow minister of energy Gordon Mackay told the public hearings in Johannesburg that Eskom should not receive a tariff increase.

1. Eskom MYPD 3
Selective Reopener
Presentation by the Democratic Alliance to the
National Energy Regulator of South Africa
23 June 2015

2. • DA strongly opposes any further tariff increase:
• The Economic Climate
• The Eskom Story
• Increased NERSA Scrutiny
• Conclusion
Presentation Content

3. • Point of departure: Caught between a rock & hard place:
• Load shedding (33 days in first 100 in 2015) vs. huge electricity price hike – both
have economic consequences
• Cost to GDP of load shedding sitting at between 0,4% to 0,6% - locking SA in to
a low growth path
• SA’s economy is much weaker now then at the time MYPD 3 determination
• Cumulative effect of load shedding
• Stagnant economic growth
• Risk of further credit down grades
• Increasing unemployment
• Weak currency
• Inflation is accelerating
• Declining disposable incomes
• Economists question whether SA’s economy can withstand yet another shock
• The impact on SMME’s, jobs & undermining the NDP
NERSA MUST balance Eskom’s “needs” with mitigation of economic
consequences
Economic Climate

4. The Eskom Story
• Above inflation tariff increases since 2003
• Selective re-openers in virtually every year of MYDA 1 & 2
• Blatant misuse of monopoly power to distort pricing outcomes
• Doubling of electricity price since 2009
• No significant improvements in cost base management or improvement in operational
efficiencies
• Lack of transparency in coal and diesel contracts
• Unaccountable leadership politicised board & management appointments
• Mismanagement of new build program – inefficiency at the heart of Eskom application
• Biggest “cost push” factor
• Root cause of reliance on OGTs
• Standard & Poor’s – “Speculative Grade”
• Eskom has structural problems that can not be addressed via tariff increases
Eskom’s monopoly position combined with Nersa capitulation on tariff increases
means there is no incentive for Eskom to better manage its costs - making Eskom
an ever expanding black hole & burden to the SA consumer

5. Increased NERSA Scrutiny
• NERSA must insist on clarification:
• Why was Eskom’s maintenance program allowed to deteriorate to the point
where costly diesel is necessary
• Why has above inflation increase for the past 12 years plus Government quasi-
bailouts no stabilised Eskom’s balance sheet
• What structural changes will Eskom embark as its clear the status quo can not
continue
• NERSA must obtain assurances:
• That Eskom will adhere to the updated price determination managing costs
appropriately – otherwise makes a mockery of tariff setting process
• That cost containment & improvement in operational efficiencies are realistic,
attainable & implementable
• NERSA cannot continue to signal to Eskom that inefficiencies will always be
rewarded by higher tariffs
• NERSA must endeavor to achieve smoother pricing through regulatory certainty
• Political considerations must not be entertained

6. The Way Forward
• NERSA must regulate in terms of its guiding legislation
• No mechanism seemingly exists to approve Eskom’s application
• No proof of improvement in cost management or operational efficiencies
• NERSA must assess outcomes against input costs – “value for money” assessment
• SA and NERSA must not be held hostage by Eskom’s “Pay-Up or face Load
Shedding” Narrative
• Various funding mechanisms exist and are available to Eskom
• Equity sale
• Use of existing guarantees & loans over a longer period
• Eskom should pursue alternative funding options BEFORE tapping consumers
• Reform of the Electricity Sector is vital
• Independent Systems Market Operator
• Competition – effective benchmarking of costs
In denying Eskom’s unjustified tariff increase NERSA can send a
strong message that reform of the electricity sector is the only option
to achieve long-term pricing sustainability

7. Conclusion
• Tariffs increases may well be good for Eskom, but they are bad for South Africa
• The economic consequences of sharp & sustained price hike will be significant
• Jobs losses will be the true cost of any potential tariff increase
• NERSA must weigh Eskom’s needs against those of the South African economy
• A myopic view / full adoption of the Eskom narrative cannot be accepted
• Economic Impact assessment of load shedding vs. Tariff Increases
– Ratings Agency
– Chamber of Mines
• Eskom can not be allowed to continue abuse its dominant monopoly position
• NERSA must explicitly acknowledge that structural reform of both the
electricity sector and Eskom is necessary
• Tariff increases must be contingent on improvements in cost management &
efficiency enhancements
– ESKOM has failed to make a compelling case in this regard
• We can not stabilise Eskom at the cost of destabilising the broader economy
The DA believes any further tariff increase must be declined in the
interest of jobs & economic growth