This was the view of Human Sciences Research Council economist Dr Miriam Altman who, speaking at the public hearings into Eskom's application for a 60% price hike for the 2008/9 financial year, said that while she could not estimate with any certainty what the impact of a downgrade could be, the link between Eskom and South Africa's credit position was already strong, and any downgrade of the utility could have a knock-on effect on South Africa's sovereign rating.

"Eskom's credit rating is intricately linked with the government's credit rating and the kind of investment that you are talking about is so huge that . . . it could ‘lead' the credit rating of the country," Altman argued.

She also urged caution in accepting the assertion of Business Unity South Africa's Roger Baxter, who argued that an interest cover of one times earnings before interest and taxation (Ebit) would be sufficient for the utility. In fact, Baxter had argued that, while a three to five times Ebit was necessary for a JSE-listed entity, the fact that Eskom was 100% State owned meant that the ratings agencies should be given comfort, as government would likely step in to cover any interest-payment shortfalls should such a necessity arise.

She said that, in the context of global risk aversion, a domestic slowdown and the fact that Eskom was needed to raise a material amount of money on the capital market, it would probably be inadvisable to allow its ratings to dip and for Eskom's financial ratio to fall outside of the interest-cover and debt: equity bands sought by the ratings agencies. The impact of such a slide on the country's rating should also not be taken for granted.

All three of the rating agencies that track Eskom - Standard & Poor's, Moody's and Fitch - had placed Eskom on notice over recent months, asserting that they needed greater certainty on the nature and make-up of the funding plan to be employed in Eskom's build programme. In fact, Moody's indicated recently that it could even consider downgrading Eskom by multiple notches, unless the ambiguity as to the mix of funding sources was resolved.

Eskom estimated that a single-notch downgrade by the international rating agencies of Eskom's credit worthiness could add between R3-million and R4-million to the cost of each R1-billion borrowed on the capital markets.

Finance director Bongani Nqwababa warned in his presentation that the impact could be even more severely felt with regard to access to both the debt markets, as well as to project-stretched equipment suppliers, which were seeking to reduce their credit exposure. He also pointed to international experience showing that it took far longer for a company that had been downgraded to regain its rating, even once its ratios had been restored.

Asked by the National Energy Regulator of South Africa (Nersa) panel to quantify the costs, Nqwababa said it was impossible to offer precise figures, but that it could add as much as "R4-billion over time" to the cost of its current build programme.

Eskom was planning to spend R343-billion over the next five years on new power stations and on expanding its transmission and distribution systems and felt that it could raise a maximum of R150-billion of that on the domestic and international capital markets.

However, it argued that it would be difficult to reach that level of debt financing if its ratings were downgraded, which, in turn, would place pressure on it to raise additional funding from either its shareholder (ultimately the taxpayer), or Eskom's customers. Alternatively, projects could have to be reviewed, until viable funding plans could be found.

The agencies were said to be demanding that Eskom sustain an interest cover of three and a debt: equity ratio of 200%. But the Nersa panellists were keen to understand what the effect would be on the business and its ratings if those ratios were not sustained.

Nqwababa said he could only "play with the cards that had been dealt" and stay within the rules, as outlined by the agencies.

"Those are the rules, which are based on their [the rating agencies'] experience of utility companies across the world," he said, adding that their credibility was also geared towards the way it applied its matrices.

Earlier in his presentation, Nqwababa had also argued that it was not only access to capital markets that concerned him, but also access to reputable equipment suppliers.

"If people are not confident of your rating, they will seek to front-end load payments to limit their credit exposure," he warned, suggesting that this threat was amplified by the fact that equipment suppliers were stretched to their limits with many build programmes under way throughout the world.

"The global dynamics of a credit crunch, and the fact that there is less appetite for issuing lower-investment-grade debt, means that it is absolutely important that we maintain our strong credit rating," he averred.

Altman offered four pricing scenarios, ranging from Eskom's application for a 53% real hike in 2008/9, followed by a 43% real hike in 2009/10, through to a 15% real adjustment spread over five year. All four took as given a R60-billion injection from the fiscus.

She argued for a four-year smoothing, implying yearly tariff hikes of around 20%, as well as a far more front-end loaded injection from the National Treasury.

Treasury's favoured transfer was back-end loaded, with R6-billion for 2008/9, R12-billion for 2009/10, R20-billion in 2010/11 and R22-billion in 2011/12. Instead, Altman called for the bulk of the injection to be made in the first two years, when the utility's ratios were going to fall well below those demanded by the rating agencies.

Nersa would make a final determination on June 18.