TICKLING A NERVE
Thabi Leoka column
Eskom has announced a plan to interrupt electricity supply to defaulting municipalities, from June 5 2015, beginning with the 20 biggest defaulters. Says acting CEO Zethembe Khoza, “Nonpayment for electricity undermines Eskom’s statutory obligation to generate and supply electricity to municipalities nationally on a financially sustainable basis. We have therefore decided to exercise our right, according to the provisions of the Electricity Regulation Act 4 of 2006, and the supply agreement with municipalities, which entitle us to disconnect the supply of electricity to defaulting municipalities.”
Though this may seem drastic, especially since many municipalities are cash-strapped, we believe it unfair that the utility has to carry the burden of unpaid bills or even write off debt. We regard Eskom’s financial health as a priority. Municipalities serve residential customers, industrial/manufacturing companies, commercial enterprises and some mining companies, but Eskom itself, measured on capacity, distributes significantly more electricity to customers directly than all the municipalities combined. Minister of Co-operative Governance & Traditional Affairs Pravin Gordhan says municipalities owe Eskom about R10bn. The difficulty with Eskom cutting off power to them is that in many of these municipalities businesses that pay their bills on time will also be affected — over and above the effects of load-shedding — which could damage these firms’ profitability. This would ultimately affect regional economies and thus the national economy.
The generating and transmission segments of the industry under Eskom’s control cannot operate effectively if the distribution segment (mainly under the control of municipalities) is hampered by serious inefficiencies and financial difficulties. One of the key structural deficiencies of the distribution segment has been excessive fragmentation. There are too many poorly run and unviable municipal distributors, suffering from severe debt problems, nonpayment for services, insufficient asset management and a lack of technical resources.
The residential sector is also a challenge for Eskom. According to the Treasury, SA’s metropolitan municipalities were owed R94bn as at June 30 2014, with the amount for outstanding government debtors representing 4,8% (R4,5bn) of the total. Households owed about 61,6% or R57,9bn. Part of the problem is that smaller municipalities that use electricity to generate their own revenue fail to maintain their infrastructure and end up not paying Eskom for the electricity they sell. As of July 2014, Eskom was owed R2,9bn by rural municipalities, mostly in the Free State and Mpumalanga.
Residential pricing is beset by difficulties. Despite significant reductions in charges to poorer customers, nonpayment rates are accelerating. The losses incurred have either put municipalities in serious financial difficulty or the brunt of the burden has been placed on large customers. Poorer customers using less than 33 kWh a month are supplied with electricity at below cost. The poorest households spend about 47,7% of household income on food and 32% on housing, water, electricity, gas and other fuels. Though government provides some support to municipalities to fund free electricity, a significant amount is funded through cross-subsidisation.
According to a study by the Energy Research Centre at the University of Cape Town, there have been cases where several houses in informal settlements are connected to a single household with a legal connection to municipal power lines — owing to insufficient legal connections being available. The owners of that household then resell the electricity at a profit to their neighbours without a legal connection to the municipal line. The study shows that illegally connected households end up paying more than they would have if they had their own connection. In some instances, the home owner with a legal connection bypasses the meter yet still charges the other households for electricity. In this case, Eskom loses potential revenue both from the legally connected house that is bypassing the meter and from illegally connected households.
There are far too many poorly run and non-viable municipal distributors