Why Eskom's CEO is talking 'nonsense' - Analysts

Energy expert and managing director of EE Publishing Chris Yelland told Justmoney that interim Eskom CEO Brian Molefe has recently made several statements in the media that have raised a few eyebrows.
 
According to Yelland some of the statements that have been made, particularly regarding to defaulting municipalities and the installation of prepaid meters to assist in Eskom’s cash flow problems are not viable and can’t be acted upon. Below are five points that some consider Eskom cannot carry out.
 
1.       Bypassing defaulting municipalities:
 
Eskom has told Justmoney that is has reached an agreement with ten of the 20 defaulting municipalities, which will exclude them from the interrupted service that Eskom is planning to implement from June.
 
In a recent statement, Molefe said that it would be unfair to cut off customers in these municipalities who have paid their bills, and therefore suggested bypassing the municipalities and going directly to the customers.
 
However, Eskom has pointed out that this is just a proposal at present. “The proposal to bypass defaulting municipalities still needs further discussions with the South African Local Government Association (SALGA), the Department of Cooperative Governance and Traditional Affairs (COGTA), National Treasury and other partners,” said an Eskom spokesperson.
 
In response to the proposal of bypassing municipalities and dealing directly with customers, Yelland says: “This is absolute nonsense. I don’t know where the CEO of Eskom gets such ideas, but it is absolute nonsense. Eskom’s performance on revenue collection is as bad, if not worse, than the municipalities. Their performance in Soweto where they supply directly and not through a municipality is the worst in the whole of South Africa, and it has 83% non-payment of electricity in Soweto.”
 
He adds: “For Eskom to suggest they take over this function for municipalities is absolute rubbish. Not only is it rubbish, the constitution of South Africa gives the municipalities the right to reticulate electricity, and if anybody, including the CEO, thinks that it can just be bypassed at a whim, then they haven’t got a clue.”
 
2.       Installing prepaid meters:
 
Molefe has suggested bypassing municipalities and going directly to customers, which he states could help with Eskom’s financial problems. One of the ways suggested to assist with this would be to install prepaid meters.
 
Yelland slams this way of generating more revenue as “nonsense”, explaining that Eskom will ultimately lose money.
Yelland points out that there are some municipalities with prepaid meters that have terrible revenue collection records, while there are others that have good revenue collection record. “It has nothing to do with the meter, it has everything to do with the management of the system.”
 
The same applies to credit meters, where customers pay municipalities on a monthly basis. Some municipalities have excellent revenue collection records, while others don’t. “It’s all to do with the management and revenue collection and credit control enforcement and cut off, and working on the problem for decades. You can’t neglect the problem for 20 years and then think you can solve it by putting in a prepaid meter.”
 
Yelland adds that with credit meters, customers pay a deposit when they purchase a house to get a connection. This deposit is repaid if you sell your house and cancel your connection, however, you will need to pay another deposit to establish a connection at your new house.
 
If Eskom installs prepaid meters in place of credit meters, it could end up losing money, as it will have to repay all the deposits to houses that are on credit meters. “If you want a credit meter you pay three month’s deposit. So you are actually prepaying three months in advance when you are on a credit meter, and you are only paying one month in advance on a prepaid meter. So, in fact, it’s not going to solve Eskom’s cash flow problems, it’s going to worsen them,” says Yelland.
 
3.       Cutting off defaulting municipalities:
 
Energy expert, Ted Blom, welcomes this potential move adds: “I think it’s going to alert the public and the municipality that Eskom is serious about collecting outstanding fees. And that will probably be a good thing. It’s not fair that Eskom has to carry unpaid bills for months and months and eventually write them off.”
 
However, Yelland believes that Eskom is not planning on cutting off supply to defaulting municipalities, but rather that this is a scare tactic to make the municipalities pay their outstanding bills.
 
“I think this is a game of naming and shaming municipalities publically, of threatening them and putting immense pressure on them politically, as well as immense pressure from customers within the municipalities who are paying their bills, who are outraged at the idea of their municipality being cut off when they are paying customers. This puts immense pressure on the municipality itself to make an arrangement with Eskom. So I believe this is all part of a game.”
 
Yelland notes that this “game” seems to be working as ten municipalities have already reached payment agreements with Eskom. Whether Eskom will carry through on its threat if some municipalities call its bluff is anyone’s guess.  “The reality is they have never done it in the past,” adds Yelland.
 
4.       Ending load shedding by the end of the year:
 
Blom believes that the supply problems are only going to get worse as we head into winter as the demand will increase. If the situation gets worse, with Eskom losing large percentages of capacity on a daily basis, Blom believes that some South Africans could start to experience up to 12 hours of load shedding at a time.
 
According to Eskom, the power utility needs a buffer of between 3000MW and 5000MW, meaning a decrease in demand, or an increase in supply, in order to avoid load shedding, as well as to reduce the maintenance backlog.
 
However, Blom believes that Eskom will need much more power if it is to stop load shedding by the end of the year.
 
Yelland disagrees, saying that the 3000MW to 5000MW buffer is sufficient if Eskom wishes to stop load shedding by the end of the year. However, the question is where will this extra 3000MW come from?
 
Yelland points out that it is not so easy to generate this extra capacity, as between 3000MW to 5000MW will be the capacity of Medupi when it is up and running, however, it is expensive to build power stations such as this, and takes many years to complete.
 
5.       Taking austerity seriously
 
In a comment to Justmoney on Monday, Democratic Alliance Shadow Minister for Public Enterprises Natasha Mazzone highlights that Eskom needs to be more transparent in the procurement process that it goes through for the catering contracts and food subsidies. She noted that spending R1 billion on food subsidies for staff while electricity prices are increasing because of Eskom’s financial problems is not viable.
 
Mazzone added that while Eskom employees should receive a meal, especially if it is a term in their contracts, Eskom is obligated to ensure that it gets the best possible food for the best possible price. (For the full DA article on the Eskom food subsidies, click here.)
 
With regards to the food subsidies, Yelland says: “I am concerned about the mixed messages coming from Eskom, on the one hand they have made public statements that they are embarking on an austerity drive and they are looking at all their costs, and every deal with a view of cutting out unnecessary costs. There have even been reports of cut downs on tea and water and biscuits at meetings and things like that. For this to come out now sends a confused signal, especially as the CEO indicated yesterday that he does not intend to look into it and do anything about it [and]  that he thinks it’s in order.”
 
Yelland acknowledges that this problem won’t be an easy way for Eskom to address this issue.
 
He explains: “I think to simply scrap these catering contracts or food subsidies would be very bad for Eskom at this time as well. The reality is that Eskom’s average remuneration of its employees (about R550 000 per annum per employees average across its 40 000 employees) is very high already in comparison to other large companies. So, the above, together with further generous meal subsidies, some would see as seriously over the top. And it’s occurring at a time when their prices are going up, when there’s load shedding, and when they’re in financial difficulty, and it just sends out a bad signal. 
 
“I think it just needs very careful PR management. But I don’t think they should go around cancelling these things. It could do a lot more harm to labour relations at a time when things are very tense already.
 
“I think they just need to work towards being consistent with the message that they are watching their costs..”
 
In light of all the criticism and bad publicity that Eskom has faced recently, the parastatal seems hesitant to provide Molefe’s vision and goals for the power utility. Justmoney sent through questions to Eskom asking for comment from Molefe regarding his vision for Eskom as interim CEO, along with questions regarding the defaulting municipalities, but only received answers to a few of the questions, to view Eskom’s response, click here.