TICK­LING A NERVE

Thabi Leoka col­umn

Financial Mail - Investors Monthly - - Contents - THABI LEOKA

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

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