State-owned power producer Eskom moved on Monday to defend its highly unpopular application for price increases of 35% a year for the three-year period from April 1, 2010, to March 31, 2013, at the first of what would be nine provincial-based public hearings between January 11 and January 22.

The hearings form part of the second multiyear price determination period, or MYPD2.

The utility faced stiff opposition from all six of those who made oral presentations at the Nelspruit Civic Centre in Mpumalanga, as well as some challenging questions from members of the four-member National Energy Regulator of South Africa (Nersa) panel.

Pulp and paper producer Sappi, for instance, warned that South Africa's power prices were set to rise to above those of the US by 2011, should the increases be approved, while the rate of increase provided very little time and space for adaptation.

Sugar producer TSB, on the other hand, cautioned that thousands of rural jobs were at risk should the price increases be sanctioned, while the Mpumalanga Cane Growers Association estimated that the price increases could precipitate a fall in net operating income from around R4 000/ha to below R2 000/ha. This, it said, could lead to large-scale disinvestment by sugar farmers, which would affect employment, land values and undermine thousands of small-scale growers.

DANGEROUS & DIRTY

Labour federation Cosatu, meanwhile, sustained its vocal opposition to the proposed hikes, warning of serious economic consequences and probable job losses. It warned that it could also lead to an increase in illegal connections or result in poor households reverting to "dangerous and dirty" power sources.

Cosatu also rejected the notion of moving toward cost reflectivity as outlined in the electricity pricing policy (EPP), and supported by Eskom in its application.

Cost-reflective tariffs, Cosatu asserted, would result in the continuation of the current pattern of households paying far higher tariffs than those paid by industry, owing to the fact that it cost Eskom less to supply industrial consumers than was the case with domestic customers. These customers also faced the added burden of municipal tariffs, which were already at least double those charged by Eskom.

The labour federation also called for an alternative funding plan that relied more heavily on injections from the State, Eskom's sole shareholder.

KUSILE & PRIVATISATION

But it rejected the proposal by Eskom, sanctioned by its board and the shareholder, that some 30% of the Kusile power station, which is being built at a cost of R142-billion in Mpumalanga, be set aside for private investors.

Cosatu said that it rejected all forms of privatisation, which would lead, ultimately, to even higher tariffs, owing the fact that a private-sector dominated industry would be driven by the profit motive.

The presenters were the first of what would be more than 70 speakers that would present their case to the Nersa panel -presided over by Thembani Bukula, Smunda Mokoena, Dr Rod Crompton and Ethel Teljeur - as the hearings assembled at other venues across the country.

Arguably, the presenters also represented the key sentiments and arguments of the some 300 oral and written submissions made by business, labour and community organisations since Eskom's initial request for increases of 45% a year in October last year - Eskom revised that figure to 35% in a subsequent application submitted at the end of November.

IN DEFENCE

Defending the application, interim Eskom chairperson and CEO Mpho Makwana stressed that the higher tariffs were needed to sustain South Africa's current and future economic growth, which would depend heavily on the availability of electric power.

Eskom had based its application on an average demand growth of 3% a year over the period and should its application be accepted, the power price over this period would rise to 82 c/kWh from below 30 c/kWh.

He also stressed that, despite receiving loan injections and guarantees from its shareholder, and the group's plans to raise additional bonds, export credit-agency and development-finance money, substantial tariff increases would still be needed to provide the base for raising the capital necessary for its R400-billion capital expenditure programme.

On average, the utility needed to spend some R103-billion a year on capital projects over the MYPD2 period and Makwana argued that, even if it received the 35% yearly increase and managed to raise about R40-billion a year in debt over the period, it would still face a R14-billion funding shortfall in 2011/12 and an R8-billion shortfall in 2012/13.

Makwana warned that, even under a scenario of 35% a year, the supply system would face several risks and stressed that Eskom might need to seek a reopener of the tariff hearings should it receive a price increase that was not sustainable.

The utility also defended its move to sell a 30% stake in Kusile, which it said would be complex, but would relieve substantial funding pressure. Makwana indicated that it had been mandated to investigate the possibility of raising the stake for sale to 49%, but stressed that neither its board nor its shareholder had sanctioned such a move.

He also stressed the importance of integrating independent power producers into the energy production mix, but said that outstanding regulatory and funding issues still had to be clarified.

RATE OF RETURN QUESTIONED

Eskom also defended the basis on which it calculated its rate of return, which it said it had benchmarked against utilities in Asia and the US. It also stressed that it accepted that it would not be able to achieve such a return during the MYPD2 period.

But the panel had persistent questions about whether it was appropriate for Eskom to base its return on assets on a revaluation of its mature assets, instead of on the basis of historic costs. A recent study by Genesis Analytics indicated that Eskom's tariff increases could be moderated by as much as ten percentage points, to 25% a year, if it were to use a valuation method based on historic prices.

But Eskom stressed that its application was in line with the electricity pricing policy, which apparently allows for returns to be calculated on revalued assets.

Makwana admitted that the increases would be "a bitter pill to swallow", but that the country would be better off for taking the leap toward greater cost reflectivity.

The current reality, he added, could not be wished away and South Africa had to make a choice between guaranteeing a reliable electricity supply, or taking the economy on a "downward spiral" based on the status quo.

Nersa would make known its final determination by February 24, 2010, with the approved increases then scheduled to come into force on April 1, 2010, the start of Eskom's financial year.