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Submission by the National Consumer Forum to the National Energy Regulator of South Africa on the request by Eskom for a 35% increase in electricity tariffs

22 January 2010

Chairperson, ladies and gentleman:

The National Consumer Forum, like most organisations and individuals concerned about Eskom in recent years, has become more than a little despondent about the Nersa hearings.

The reason is that a pattern seems to be emerging in this process. It starts when Eskom makes a request for an increase of fantastic proportions - and insists that we are doomed to a dark future if it does not get what it wants. In other words, there are no other options, so just pay up!

Then we all very respectfully make our submissions to the hearings, trying to quantify our own concerns and impact on the final decision. So far, it appears we have failed.¹ Price hikes have come thick and fast, adding to the punch-drunk state of the South African consumer.

However, the world has changed substantially since the most recent increase of 31% was allowed, just six months ago. We would like to summarise some key indicators reflecting the financial position of consumers, as this is key to assessing the affordability of electricity prices.

1. Context of affordability

Since the last price increase:

• South Africa has lost about 500,000 jobs as global economies slowed - bringing to a million the country's job losses in the past year or so. (Business Unity has in this forum warned of hundreds of thousands more job losses that will result purely as a result of more Eskom increases.)
• the South African economy has stopped growing and is at its deepest decline since 1994
• the decline in the mining sector bears similarities to those last seen in the fourth quarter of 1961
• manufacturing has had its biggest decline ever in our country's history²

A million fewer jobs means five million dependents without a regular source of income, so they must receive from the pockets of other consumers - most relatives or friends - whose spending power is in turn reduced. So everyone must cut their spending.

But how do you cut spending when the inflation rate outstrips your wage increases - an inflation rate that Eskom has already exacerbated by 1,5% over the past two years, according to economist Mike Schussler.

Eskom's price increases have already added 91 % to the cost of electricity since 2005, compared with overall cumulative inflation of 35% over the period, says Schussler.

So what will happen if another price hike of this magnitude is allowed?

• More consumers will lose their homes
• More consumers will be disconnected from electricity and water - Soweto residents owe the council nearly half a billion rand for water by November 2009. Electricity to the area is mainly supplied by Eskom, but figures are difficult to find. Eskom's figures from 2007 showed at Soweto residents owed R1,8 billion, with just one quarter of residents actually paying anything.
• More consumers will have their goods repossessed - the number of summonses issued for debt among private persons rose from 95,000 in September 2008 to 123,000 in September 2009.
• Fewer consumers will afford a good education, good health care, and three healthy meals a day

Signs of misery

How do we know this? It's plain to see - all the signs of misery are already appearing:

• Almost 500,000 consumers closed their bank accounts - who needs a bank account when you have no money and no savings? For the first time in six years, the number of South Africans with bank accounts actually dropped, despite the population of banking age growing by 800,000 people.
• Food prices have until recently been rocketing at double the inflation rate; these prices have not reversed - they just increase more slowly now
• The biggest single reason for consumers borrowing money or taking out a loan is to buy food (over one in ten say they do this); almost one in six South Africans say they often have to borrow money from friends and family to buy basic items like food and rent.³
• The proportion of consumers that belong to a burial society has dropped from 25% in 2008 to just 20% in 2009; more people are finding they cannot even afford the reassurance of a dignified death.
• Only 14% of South Africans have a retirement or pension product; those that don't give their reasons as not having a job (47%), and not having money to invest (30%).
• Consumers say it themselves: Recent research revealed that eight out of ten people say that it will be very difficult to cope with these price increases.

Making energy unaffordable

Given the proposed increase of 35%, the amount of total household expenditure spent on electricity will increase from 3% in 2008 to around 9% by 2012.

So, if your monthly expenses are R15,000 a month, you would need to find an additional R900 a month for electricity costs. If you weren't able to convince your boss to give you a salary increase well above inflation, you will have to cut back on spending somewhere else or go deeper into debt.

High levels of debt

The average household spends 40% of its income paying off its debt. The electricity price increases will lead to more payment defaults - not just to the electricity bill, but other payments left outstanding by the higher toll of Eskom's bill. These defaults will lead to blacklisting and the many miseries that this brings.

The nation's financial misery will by heightened by consumer ignorance: despite having a cutting-edge National Credit Act and a National Credit Regulator, only a quarter of us know what 'debt counselling' is.⁴

Add Eskom-style price leaps to these ingredients, and we are staring into a future of untold consumer misery.

2. Supply side

As the context of electricity price increases has become less forgiving, the policy options seem to be opening up - allowing Nersa to factor into its decision that Eskom does in fact have other alternatives to simply raising prices.

The ruling party is recognising the risk to social stability (not to mention the political risk to itself) of constantly hiking electricity prices. Government is now open to selling off Eskom's power stations. This will apparently be able to cut the price increase by 10% - from 45% to 35%.⁵

Some mining companies have gone a step further with this option; sell off a greater share of the power stations in question, and your increase can come down to 25%.⁶

Now we are getting somewhere. At this rate, we need one or two more good suggestions like this one and we will be in striking range of the inflation rate - which is where the National Consumer Forum believes that Eskom should be targeting its increases. It has done enough damage to the economy and public confidence, and now needs to fall in line with the national effort to keep our country stable.

Recent surveys show that most consumers simply don't believe Eskom anymore⁷, and it is not just the poorer consumers that are suffering but the middle classes.⁸

But more needs to be said about the privatisation option. While we do not have a problem with privatisation in principle, it is not a panacea. Firstly, it is very dangerous unless effective competition and control can be assured.

And secondly, it should not be used as a last resort when government fails to discharge its duties as a shareholder representing the South African pubic. And there has been a clear failure at Eskom. The institution, expertise, infrastructure and services of Eskom remains a national asset and should be nurtured as such; government cannot and should not shirk the responsibility of overseeing efficient and accountable management of this asset.

If we begin to flirt with privatisation, consumers do not want another Telkom debacle - where a monopoly corporation driven by profit-seeking shareholders is let loose on South African consumers like a wolf among a flock of sheep - with consequences for our national economic development (notably in internet-based communications) from which we are still trying to recover.

How does Nersa feature in this? By allowing Eskom to continue milking consumers and other end-users of electricity, Nersa simply facilitates the pouring of good money after bad. On the other hand, by restricting the seemingly endless supply of cash, Eskom will be forced to do more with less, and will need to apply its collective mind to do so.

We are convinced that it is no coincidence that more innovative solutions to our power crisis have emerged since the blood-letting in the South African job market last year; government is now looking more critically at Eskom, and must continue to do so, as the general economic slowdown will put even more drag on national efforts to alleviate poverty in coming years.

Innovation

We have seen a remarkable lack of innovation coming out of Eskom in terms of practical alternatives to coal-fired energy. We expect more of Eskom than 'more-of-the-same' - the reliance on coal-powered generation needs a re-think. The ruling party's financial interest in building such plants only fuels public suspicion about the lack of innovation in Eskom's thinking about how new capacity should be generated.

And here we hope that the ongoing discussions about pricing and energy-generation models will give more consideration to more renewable technologies in the household - the promotion of solar geysers has been long overdue, but so much more can and needs to be done.

Eskom needs to solve its bad debt problem before it loads paying consumers with its non-payments. And we feel much more needs to be done in exploring in-feed strategies that would allow businesses and consumers to sell power into the national grid, to reduce the capacity that Eskom itself needs to build.

3. Recommendations

We call on Nersa to:

• Prioritise the social impact that Eskom's proposed increases will have in our current economic predicament, when considering Eskom's request
• Protect South African consumers from an insidious trend that sees both the public and private sectors dipping at will into consumers' pockets - as the line of least resistance to maintain profits or boost coffers
• Insist that Eskom finds a more fair and reasonable model to assume the burden of its expansion costs
• Further pursue its legal mandate and authority to ensure that Eskom's structures, personnel, direction and commitment are once again re-focused on serving the nation in an accountable and professional way - and to re-establish the credibility of the organisation and its leadership in the eyes of consumers.
• Restrict the increase in electricity tariffs to the rate of inflation

Thank you for the opportunity to present at this forum.

Footnotes:

1. In a briefing from the Department of Energy on 20 October last year, MP F Adams (ANC) pointed out that with the last price increase, there had been a public outcry, yet NERSA had granted the increase. It would seem, he said, that the public's views were not taken into account. He reiterated that the National Energy Regulation Act stated that the decisions taken had to be in the public's interest.
2. Adcorp Employment Index
3. Finmark Trust
4. Debt counselling gives consumers the best chance to avoid disappearing down a whirlpool of debt - but research last year found that only 24% of the population had heard of either the National Credit Act or the National Credit Regulator.
5. In December, shortly after the departure of CEO Jacob Maroga, Eskom said it had a mandate from government to sell 30% of Kusile and this could possibly increase to 49%. On the strength of this Eskom would be able to reduce its original proposal of 45% hikes over three years to 35%.
6. AngloGold Ashanti and other large companies came up with a proposal in terms of which Eskom could reduce its proposed increases to 25% should it sell a controlling stake, in other words more than 50%, in Kusile.
7. We can see this from what they say when asked to agree or disagree with the statement: "The rise in the price of electricity is fair because Eskom needs to build more power stations". Agree: 24%. Don't know: 9%. Disagree: 67%
8. "What is obvious … is that government has a tough job ahead in trying to placate an increasingly discontent middle class which finds itself continuously squeezed by taxes, utility costs, falling real incomes and poor delivery service from potholes to crime." Financial journalist Maya Fisher-French, writing for Moneyweb.

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