Eskom and privatisation

Eskom, electricity sector restructuring and service delivery in South Africa by Stephen Greenberg (for Alternative Information & Development Centre) Final, Sept 2002 Table of Contents

Page

Timeline of major events

3

Executive summary

5

1.

The international context of restructuring

11

2.

Electricity supply in South Africa 2.1 Historical overview 2.2 Financing and foreign borrowing 2.3 Local government and electricity provision under apartheid 2.4 Provision of electricity to black households 2.4.1 A brief history of electricity provision in Soweto 2.5 Electricity supply and the environment

14 14 18 21 22 23 25

3.

Restructuring of the electricity sector and state owned enterprises 3.1 Policy continuities from late apartheid to post-apartheid 3.2 Local government and electricity sector restructuring 3.2.1 Igoli 2002 and electricity corporatisation

27 27 35 38

4.

Eskom: Preparing for privatisation? 4.1 Commercialisation 4.2 Destruction of jobs 4.3 Ring-fencing of regulated activities 4.4 Eskom Enterprises: the unbundling of non-regulated functions

39 39 42 43 47

5.

The National Electrification Programme, 1990-2002

49

6.

The impact of restructuring on service delivery 6.1 Bowing at the altar of cost recovery: arrears and non-payment 6.2 The cut-offs campaign by Eskom and local councils 6.3 Pre-payment meters 6.4 Community responses to ‘user pays’ cost recovery policies

55 55 58 60 62

7.

The impact of restructuring on costs, pricing and tariffs 7.1 Overview of tariff design 7.2 Recent trends in electricity tariffs 7.3 Cost reflectivity, structural increases and tariff restructuring 7.4 The reorientation of cross-subsidisation 7.5 The ‘free electricity’ policy

64 64 66 70 72 76

8.

Analysis of electricity sector restructuring

79

9.

Elements of a more appropriate strategy for providing electricity

83

1

Key web-sites to visit

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Appendix Graph A1 – Electricity produced by generator Graph A2 – Percentage of total electricity produced by generator Graph A3 – Cumulative percentage of rural households connected, 1995-2000 Graph A4 – Cumulative percentage of urban households connected, 1995-2000 Graph A5 – Electricity consumed by end user category Graph A6 – Percentage of electricity consumed by end user category Graph A7 – Eskom electricity sales by end user category Graph A8 – Percentage yearly price change by end user category, 1981-2001

85

References

89

Tables Table 1 - Foreign loans to Eskom, 1951-1968 Table 2 - Foreign bond issues and direct loans, 1970-1982 Table 3 – Electricity disconnections by municipalities, 1996-2001 Table 4 – Electricity provision going backwards… Table 4 - Actual prices charged by Eskom to selected consumer categories (c/kWh), 1988-2001 Table 5 - Selected Eskom tariffs and charges, 2001 Table 6 - Selected tariffs and ‘cost reflectivity’, 2002 Table 7 - Summary of actual and expected tariff increases resulting from restructuring Table 8 - Amount of electricity used by selected appliances Graphs in text Graph 1 – Eskom interest cover and debt:equity ratio, 1985-2001 Graph 2 – Eskom debt and interest repayments, 1980-2000 Graph 3 – Eskom profitability indicators, 1980-2000 Graph 4 – Eskom employment, 1960-2001 Graph 5 – Eskom and local government connections, 1991-2001 Graph 6 – Eskom electrification programme expenditure, 1991-2001 Graph 7 – Eskom average capital costs per connection, 1992-2001 Graph 8 – Actual Eskom electricity prices by end user category, 1980-2001 Graph 9 – Eskom tariff increases and CPI, 1980-2002

19 20 59 59 68 69 71 75 78

39 40 41 43 50 52 53 67 70

Acknowledgements Thanks to Heli Guy, Osborne Galeni, Peter McInnes, Anna Weekes, George Dor and Erika Schutz for responding to requests for information and comments.

Stephen Greenberg is an independent researcher based on Johannesburg, and can be contacted at [email protected]

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Timeline of major events Date 1882 1906 1910 1922 1948 1948 1951 1957 1958 1960s 1960s 1962 1964 1966 1972 1973 1973 1973 1974 1976 1979 1980s 1982 1983 1984 1984 1985 1985 1986 1986 1987 1987 1987 1989 1990 1990 1992 1992 1993 1993 1994 1994 1995

Event Electricity first used in South Africa, in Kimberley Formation of Victoria Falls Power Company (later renamed Victoria Falls & Transvaal Power Company, the VFP) Power Act allows for eventual state expropriation of the VFP Electricity Act passed, creating the Electricity Supply Commission (Eskom) Eskom expropriation of the VFP creates an effective monopoly in bulk electricity supply National Party comes to power Eskom takes first foreign loan (from World Bank), followed by many more in the next 2 decades Commission of Inquiry into the use of nuclear energy in South Africa appointed Electricity Act consolidated and updated Eastern Transvaal becomes the centre of power generation with discovery of new coal resources Start of massive expansion programme to meet rising demand from industry, manufacturing and mines Last major municipal power station built – after this, Eskom built all remaining major power stations Electricity Act amended to allow Eskom to operate in the southern African region Agreement reached between South African and Portuguese government on construction of Cabora Bassa hydro-power project in Mozambique Electricity Act amended to allow Eskom to generate capital from charges for development purposes Coal prices rise as result of global energy crisis, contributing to pressure on electricity tariffs National grid substantially completed through a gradual process of connecting power stations to a single 400V transmission system in the preceding 2 decades Bantu Administration Boards established to take over supply of services to African townships Construction of Koeberg nuclear power station started Soweto uprising Soweto Electrification Project initiated by the government, with bulk supply provided by Eskom Large-scale farm electrification programme carried out by Eskom Black Local Authorities Act passed, establishing ‘self-governing’ local authorities in black townships Only 5% participate in elections to black councils in Soweto, underlining the illegitimacy of these structures Koeberg nuclear station begins operating De Villiers Commission of Inquiry into electricity sector restructuring makes recommendations to bring Eskom under tighter management and follow business principles Eskom employment reaches a peak at 66 000 workers Although prices of electricity begin to drop, this benefits industrial and mining companies far more than residential users in the coming years Rent boycott called in Soweto to oppose massive increases in charges by the local council to cover costs of electrification. Boycott spreads to other townships, especially in the Transvaal White Paper on Energy Policy calls for a shift to a market-orientation in the electricity sector White Paper on Privatisation and Deregulation sets out government plans for privatisation Electricity Act updated and Eskom Act passed, both based on recommendations from the De Villiers commission Eskom launches ‘Electricity for All’ programme to extend electricity to black townships and rural areas Formation of Soweto People’s Delegation (SPD) to negotiate an end to the rent boycott ANC and other organisations of the liberation movement are unbanned Greater Soweto Accord sees the SPD agree to payment of an interim service charge in exchange for a writing off of arrears by the administration National meeting on electricity hosted by the ANC, resulting in the formation of the National Electrification Forum (NELF) comprising the ANC, DBSA, DME & Eskom to make proposals on sector restructuring Eskom takes over reticulation networks in Soweto and 37 other black local authorities as part payment of arrears. In the next few years, Eskom extends its control of electricity provision in the townships Local Government Transition Act reaffirms the right of municipalities to supply electricity in their areas Eskom begins work on Pebble Bed Modular Reactor (PBMR) Reconstruction & Development Programme (RDP) launched as the ANC’s election platform, calls for electricity sector restructuring and cross-subsidisation of services to the poor ANC comprehensively wins the first democratic elections in South Africa National Electricity Regulator (NER) replaces the Electricity Control Board with much wider powers, to oversee the sector

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1995 mid1990s 199596 1996 1996 1996 1996

1997 1997 1998 1998 1998 1999 1999 1999 2000 2000 2000 2000 2000

2000 2001 2001 2001 2001 Mar 2001 2001 2001 2001 2001 2002 Mar 2002 2002

Electricity Working Group (EWG) takes over from NELF to carry forward proposals on distribution sector restructuring Establishment of Eskom internal power pool in preparation for creation of broader energy trading market Transitional local government structures elected National Framework Agreement (NFA) on restructuring of state-owned assets signed by government and unions Constitution opens the way for private sector delivery of services by making a distinction between service authorities and service providers Government formalises neo-liberal macro-economic strategy with the adoption of the Growth, Employment & Redistribution (Gear) strategy EWG proposals handed to an internal government committee, the Electricity Restructuring Inter-departmental Committee (ERIC), for further work. Amongst other recommendations, ERIC suggested the formation of 5 independent Regional Electricity Distributors (REDs) to replace existing distributors Municipal Infrastructure Investment Framework (MIIF) downgrades standards and service levels in line with fiscal tightening and ‘user pays’ cost recovery policies Bulk debt normalisation committee established by Eskom, the SA Local Government Association and several government departments to manage arrears debts White Paper on Energy Policy consolidates and formalises restructuring proposals to date Local Government White Paper confirms the principle of ‘user pays’ cost recovery for municipal services Eskom Amendment Act mandates the Minister of Energy to constitute Eskom as a company, and repeals Eskom’s tax exempt status Unbundling of non-core functions into Eskom Enterprises, a wholly owned subsidiary of Eskom, in preparation for eventual privatisation National Electrification Co-ordinating Committee (NECC) formed to refocus the electrification programme Statistics South Africa finds that the number of households using electricity for heating and cooking has actually declined since 1994 because of inability to pay for electricity Johannesburg’s privatisation plan, Igoli 2002, is implemented in the face of strong resistance from municipal workers and affected communities PriceWaterhouseCoopers (PWC) appointed to carry out Electricity Distribution Industry Restructuring Project. Report released in the same year Average electricity tariffs rise faster than inflation for the first time since 1986 Eskom Enterprises makes its first acquisition in the telecommunications field by buying a controlling stake in Telkom Lesotho. This is followed by many further acquisitions in the telecoms and energy sectors in Africa ANC promises free electricity of 50 kWh per month to households in councils it wins in the 2000 local government elections. The promise is soon watered down to free electricity only to those who pay for additional use and who do not have arrears Biomass Energy Ventures is the first independent power producer to be granted a license from the NER Arivia.com is formed out of the telecommunications networks of parastatals Denel, Transtel and Eskom to provide telecommunications services to government and the private sector as a separate entity The Energy Management Programme of the DME takes over the finances of the national electrification programme from Eskom Eskom generation, transmission and distribution sectors are separated into stand-alone entities in preparation for partial privatisation Eskom power stations are reorganised into 5 corporatised clusters in preparation for partial privatisation Eskom steps up electricity cut-offs to payment defaulters, especially in Soweto Rise of independent community movements to oppose electricity cut-offs and to carry out reconnections in defiance of Eskom and municipalities Eskom Conversion Act passed, preparing the conditions for Eskom’s conversion into a company in terms of the Companies Act Commercial electricity tariffs drop dramatically, meaning that residential users now pay by far the highest tariffs out of any group of users National Electricity Advisory Committee (NEAC) set up to take over the job of the NECC Eskom converted into a company Municipalities are cutting off the electricity supply to a monthly average of 90 224 households for failure to pay Exelon (US company) pulls out of PBMR project

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Executive summary This paper looks at the restructuring of Eskom and the electricity sector, and traces the actual and potential effects of this process on the ability of low-income households to access electricity. The first section takes a brief look at the international context of restructuring. It indicates an international agenda led by transnational corporations, and supported by the World Bank, for the privatisation of services globally. It then traces the impact on delivery standards and prices resulting from privatisation of the energy sector in other countries. It concludes that the privatisation of services can lead to rising prices, poor service and a threat to the long-term sustainability of energy supply. At the same time, global economic instability verging on recession in the past year has meant that there may be greater caution being exercised by governments in privatising services, and by multinationals in investing in developing country services, especially where the desired levels of profits are not guaranteed. The second section gives an historical overview of electricity supply in South Africa, and looks at the role of local government under apartheid. From 1948, Eskom had a monopoly on generation and transmission, and shared the responsibility for distribution and supply with local authorities. The utility was used by the state to build an industrial and mining sector that relied on artificially cheap electricity for its profitability. The section focuses in on the provision of electricity to black households under apartheid, and to the case of Soweto in particular. Before the 1970s, black households generally did not receive an electricity supply although in some areas white local councils provided a supply to neighbouring townships. On the other hand, the white population and businesses received a high quality supply, cross-subsidised from the generation and transmission sectors and also from large-scale users. After the Soweto uprising, the state tried to undermine resistance through a programme of selective reforms, including the provision of electricity to some black townships and the formation of elected local authorities. Soweto was the first black township where almost all formal houses were electrified. However, the state left operation and maintenance of newly constructed infrastructure to the illegitimate black local authorities. This was a failure, as the local authorities had extremely limited resources and attempted to increase revenue by pushing up rent and service fees for township residents. Residents in Soweto and the Transvaal in particular responded with a wellorganised rent boycott that forced the government and its various arms to the negotiating table. In Soweto, the key demands were the writing off of arrears, upgrading of services, and affordable service charges. White consumers were paying lower tariffs than black consumers for a number of economic and political reasons. A short section then looks at environmental issues related to past and future electricity generation options. Electricity generation in South Africa has relied on the burning of low-grade coal, and this has serious negative environmental effects. The failure to provide black households with electricity brings the negative environmental consequences of having to use wood, paraffin and coal for domestic use right into the home. A comprehensive electrification programme therefore has positive environmental and social impacts that may outweigh the negative effects caused by the methods of generating electricity. One solution is to focus attention on environmentally friendly and renewable sources of energy generation. While the post-apartheid government has indicated its desire to take this direction, in reality it remains locked into a nuclear energy programme started under apartheid as a potential path away from coal fired power stations. There has been opposition to the use of nuclear energy from civil society, including the trade unions. This opposition has centred on the negative health effects, long-term waste management problems and potential increase in electricity prices.

5

In the context of this background, the restructuring of the South African electricity industry is considered in some detail. The restructuring of the electricity sector is interwoven with the restructuring of state-owned enterprises, and therefore these two are considered together in some detail. The restructuring process has its roots in the late apartheid period, when the state began a process of commercialisation of Eskom as a utility. Eskom was responsible for a large proportion of South Africa’s foreign debt, but it was not tightly controlled by the state. This resulted in some faulty investment decisions that led the utility substantially to raise electricity prices in the early 1980s to cover its revenue requirements. Industry and mining, long reliant on a cheap supply of electricity and faced with the need to expand into the global economy, put pressure on the state to bring Eskom under tighter control. The state obliged, accepting the 1984 De Villiers Commission recommendations on the restructuring of the electricity industry and Eskom along business lines. The ANC picked up on this strand in the early 1990s, arguing that in order to carry out an electrification programme to meet the needs of the majority of the population, restructuring of the industry was necessary. A whole series of committees and proposals succeeded one another, eventually to be consolidated in the 1998 White Paper on Energy Policy. The core of the proposals was the need to introduce competition into the generation sector, to corporatise the transmission sector and to restructure distribution into a small number of regional electricity distributors (REDs) that would be financially and organisationally independent of one another and the state. A market relationship was to be established between the three sectors (generation, transmission and distribution). After the White Paper, these proposals received detailed attention and restructuring began to take shape around them. Meanwhile, municipalities retained their authority over electricity supply in their areas of jurisdiction. This was written into the Constitution and subsequent legislation. However, there was a strong emphasis on their right to outsource or concession supply and management functions to the private sector if they chose, and structures were put in place to support the formation of such partnerships. By the end of 2001, there were 213 municipal service partnerships in place. In the metros, utilities were corporatised as stand-alone entities. There were some conflicts between local government and central government together with the National Electricity Regulator (NER) around who had the legal authority to set tariff rates and on choice of service provider. The restructuring process significantly affected Eskom, since the utility occupied the central position in the industry as a whole. A number of changes took place in the utility, mainly as a continuation of the processes from the mid-1980s. The entity was thoroughly commercialised, bringing its financial situation well under control. The debt:equity ratio, debt and interest repayments all declined significantly. Net income and return on assets increased until around 1996 when they dropped. However, this was closely associated with short-term restructuring measures, and by 2001 both were rising. Eskom was legally converted into a company in 2001, with the government as the sole shareholder. From this point on, Eskom was required to pay taxes and dividends (to the state as the shareholder at present). The rapid expansion of generating capacity in the 1970s resulted in a sharp rise in employment in Eskom. Although white workers were the main beneficiaries of this, there was also a significant increase in the number of black workers. There was a peak in 1985, when Eskom was employing over 66 000 people. However, the process of restructuring had an immediate and significant impact on employment, with a sharp decline from the mid-1980s to the early 1990s. A brief plateau was reached for a few years and then employment dropped rapidly again so that in 2001 Eskom was

6

employing under 30 000 workers. These losses were a combination of ‘natural attrition’ and voluntary retrenchments. However, they were underpinned by ongoing low-intensity conflict with the unions that eroded the ability of the latter to take up the challenge of job losses more forcefully. Eskom was also organisationally restructured during this period, into three ring-fenced entities along sectoral lines (generation, transmission and distribution). Eskom’s power stations have been clustered into 5 separate units. Generation is to be opened to competition from black empowerment companies and transnational corporations, with the goal of ensuring 30% of the generation market was occupied by the private sector by 2004. This would be achieved either by privatising some of Eskom’s generation assets, or by allowing private companies to build new plant as extra capacity is required in the southern African region (estimated to be in 2007, with construction set to begin almost immediately to meet this deadline). The generation clusters will be structured into a form that allows them to be sold off with ease. Since transmission is a natural monopoly, this sector will be corporatised and separated from Eskom with the state as the sole shareholder to begin with. The medium term aim is to separate out the high voltage from the low voltage transmission, with the possibility of privatising low voltage transmission. However, this privatisation is not on the immediate agenda, and the sector will only be corporatised and removed from Eskom’s control in the meantime. In addition, a power market will be constructed where generators sell their electricity to the market and distributors purchase from the market in a competitive environment. Eskom has formed an internal power market as a pilot, and a Southern African Power Pool is also in operation. The distribution and supply sector is being reorganised into 5 REDs. Eskom’s distribution functions and infrastructure has been ring-fenced with the aim of merging it with the infrastructure of local government and transferred to the REDs. Local government and Eskom (or the state) will be the joint shareholders in the REDs to begin with, although the involvement of the private sector is on the cards in the future. Large-scale industry and mines will be allowed to purchase power directly from suppliers, therefore giving them a choice and the ability to buy from the cheapest supplier. It is accepted that small-scale consumers (residential and commercial) will be a captive market without choice of supplier, and therefore government will regulate tariffs, setting ceilings and minimum standards for residential and smaller business consumers. Eskom has also been unbundled into the core functions mentioned above, and ‘non-core’ unregulated functions. Eskom Enterprises (EE) has been formed as a wholly owned subsidiary of Eskom, and has taken over all unregulated functions. EE is spearheading Eskom’s thrust into international (and especially African) markets, mainly in the energy and telecommunications sectors. Inside South Africa, Eskom has merged its telecommunications infrastructure and functions with those of other parastatals, and is bidding for the licence for the second fixed line. In Africa, EE has signed a number of contracts for infrastructure development and maintenance, and management and technical services. It is envisaged that over time Eskom will reduce its involvement in the domestic electricity market and migrate to becoming a diversified energy group operating globally and in particular in Africa. While this restructuring has been taking place, Eskom has simultaneously embarked on a national electrification programme. Eskom has spearheaded the programme in the absence of government policy and given its own central location in the electricity industry. It was estimated that in 1990 only 33% of households in South Africa had electricity, and this was heavily skewed towards white households. In rural areas, only 12% of households had electricity. In 1994 the RDP set a target of 2.5 million connections by 2000, with Eskom contributing 1.75 million of these and local government making the rest. Eskom was able to finance all the connections from internal sources,

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given its large reserve fund and its exemption from having to pay taxes. The result was that the number of electrified households rose to 50% of the total by 1995 and 70% at the end of 2000. Rural connections lagged behind, at 20% in 1995 rising to 50% in 2000. This is compared to urban electrification of 76% in 1995 and 84% in 2000. The electrification programme has been brought under the direct control of the NER and the Department of Minerals and Energy since the conversion of Eskom into a company. Taxes and dividends paid by Eskom will be channelled through the Department of Finance to a National Electrification Fund that will continue to subsidise the electrification programme. However, government has given Eskom a few years to prepare itself to operate as a fully-fledged company, and therefore less money will circulate to the electrification fund than Eskom was previously spending on the programme. Eskom will be contracted to implement the electrification programme for the moment. Despite the impressive roll-out of new infrastructure, restructuring of the industry has resulted in a ‘user pays’ approach and rising prices that have undermined the gains of the programme. While more people have access to infrastructure, this has not always translated into sustained access to electricity. In an effort to recover large arrears, Eskom and local councils have embarked on a cutoffs campaign that is currently seeing over 120 000 households a month being cut off. If reconnections are subtracted from this amount, there are still twice as many households losing access to electricity every month because of non-payment as there are new connections being made. In general, non-payment stems from an inability to pay, especially when billed arrears for single households rise to over R30 000 in some cases. Residents feel that bills do not always reflect the actual amount of electricity they used, because they are based on estimates and often found to be wildly incorrect. There is also growing dissatisfaction with corruption, where cut-offs are used as an opportunity for individuals to make a financial profit by charging exorbitant reconnection fees. Cost recovery and cut-off policies are directly related to the pressure on distributors to recoup finances to enable them to convert themselves into profitable entities. The steady increase in the use of prepayment meters is one of the methods used by distributors to try to ensure they are able to get revenue from the population. This technology is targeted in particular at low-income households, who are thereby made to pay up-front for supply or do without. The provision of basic services as a public and social good is thus increasingly subordinated to the provision of services as a profitmaking enterprise. The tariff system is also being restructured to become more cost reflective. In the past, industry and mines cross-subsidised white residential consumers through the price structure. Structural changes will see this apparent imbalance rectified by bringing prices in line with the actual cost of providing the supply to each consumer. A shift to cost reflective pricing will mean that costs for industry and mining will drop, because economies of scale and access to their own distribution infrastructure reduce the actual price of supply to these sectors. On the other hand, prices for residential and small-scale businesses will rise because it costs more to distribute electricity to many small individual consumers who use a comparatively small amount of electricity. It has been estimated that residential tariffs are set to rise by up to 100% before inflation (depending on the type of supply and where in the country they are located), with actual tariff increases rising above inflation in 2000 and 2001 for the first time since 1986. Cost reflective pricing does not take into account the longterm costs of failure to provide a social service to domestic consumers. These include lost opportunities for productive activity, improvements in health and social well-being associated with access to electricity, and environmental benefits of the provision of electricity to all. The government recognises that some kind of cross-subsidisation will be required to support access to electricity for low-income households. However, because it is concerned with improving international economic competitiveness it is opposed to cross-subsidisation from industry and

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mining. Cross-subsidisation from generation and transmission to distribution will also be prevented so that these sectors can stand alone for future privatisation. Instead, existing residential and business consumers will subsidise the supply of electricity to low-income households through a transparent levy. In many instances, this will translate into the poor subsidising the poorer, while the largest and richest are protected from providing any form of subsidy. In response to the cost recovery drive, price increases and cut offs, communities have begun to organise themselves again. A common demand is for the scrapping of all arrears, a flat basic monthly charge with no per unit charge, and the implementation of a lifeline supply set at a meaningful level. The ‘free electricity’ policy promised by the ANC in the lead up to the 2000 local government elections will operate within the constraints the restructuring process imposes. While it offers households 50 kWh/month as a free supply (20 kWh for DA controlled councils), this must be paid for by all small-scale consumers using above that amount. For most households, 50 kWh/month is around 10-15% of very basic monthly use. Many households also provide electricity informally to backyard dwellings, meaning that the monthly use increases substantially. Even very low-income households are therefore likely to use more than the free lifeline, and will therefore be required to pay the full costs of supply. Communities and researchers alike have suggested that the free lifeline should be increased to between 340 and 500 kWh/month, and that the lifeline should be broken down into a supply per person rather than per household. The benefits of access to electricity can only be fully realised if consumption rises substantially. The paper concludes with some thematic considerations of the restructuring process, and suggestions for possible alternative policies that might result in sustainable and tangible benefits for the mass of the population. It appears that restructuring for competition is driven by ideological rather than practical motivations. Internationally, private sector involvement has not benefited domestic users of electricity. The ‘vertical disintegration’ of the industry, and forcing Eskom to operate along business lines geared towards survival in a competitive market environment will result in the undermining of the potential social benefits associated with an expanded electrification programme. This is so because Eskom is withdrawing from the programme in order to improve profits, and because electrification that does take place will be subject to costs being recovered from immediate users. Since electrification and consistent supply of electricity to poor households is not a profitable enterprise, it will be subordinated to more profitable endeavours. The following areas are considered to be the basis for an alternative approach to electricity provision in South Africa:  A fixed monthly charge for poor areas at a rate that people themselves identify as affordable through a process of consultation, with cross-subsidisation within the pricing system to cover additional costs (from high income residential, businesses above a certain size, industry and mining)  Raise the free lifeline to a more meaningful level, and provide a lifeline per person rather than per household to eliminate the bias against larger households. The level of a lifeline should be opened to public discussion.  A moratorium on disconnections, and the reconnection of currently disconnected households, until a guaranteed free basic lifeline policy is in place and functioning  Write off arrears (owed by municipalities and individual consumers)  A uniform tariff system for bulk supply, with municipalities setting end-user tariffs within nationally established limits  Allow municipalities to use surpluses from revenues to subsidise other municipal services, but only after a specified number of new connections have been made by them in their areas, and after all residents are receiving the free lifeline supply 9

   

Increase the equitable share to municipalities to allow them to provide the full range of services required in law The retention of a vertically integrated electricity system with public ownership, with the outlawing of profit making on the provision of basic services Base the financing of construction of new generating capacity on Eskom bonds, under public control End the nuclear programme and divert the resources into supporting the use of renewable energy sources for electricity generation

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1.

The international context of restructuring

A number of arguments are made in favour of privatisation of services previously or currently carried out by the public sector. Proponents argue that competition between private sector companies encourages efficiency and innovation, and that the public sector is inherently more corrupt and inefficient because it is shielded from the consequences of its economic actions. It is also said that privatisation frees public resources for use in the provision of services that cannot adequately be met purely by the market (such as mass education or health care). Contrary to the widely held idea that under neo-liberalism the power of the nation state is being usurped by the power of corporations, the state continues to play a key role in managing and regulating the capitalist system. This role, however, has changed from the earlier role where the state was responsible for constructing and managing a national economic project. Under neoliberalism, the state regulates and manages the local flows of global capital, creates additional avenues for capitalist profit making and retains control of those essential services where profits cannot yet be made. Under neo-liberal globalisation, there is a fusion of the political power of the state with the economic power of corporations, creating a supra-national power that eclipses both individual capitalist corporations and individual nation states but which nevertheless incorporates them in the new configuration. The nation state therefore may very well hold onto services when required, only to relinquish them once they are in the appropriate form for private profit making and the economic conditions are suitable. To prepare for privatisation, state-owned enterprises must be reorganised into a form that can be taken over by the private sector. This means that debts must be paid off, the long-term financial viability of the enterprise must be established, and the potential to make profit must be guaranteed. Tighter financial control and discipline, and the shedding of unprofitable activities become the order of the day. The principle of cost recovery from immediate users becomes paramount. Privatisation has been on the international agenda since the early 1970s as an attempt to relieve the pressures of over-accumulation in the global economy. Over-investment in sectors historically dominated by private capital led to a decline in the rate of profit in these sectors. The opening up of services to private competition and investment previously managed and provided by the public sector allows new areas for profit-making (Cottle, 2000). It therefore simultaneously draws investment out of areas of over-investment and creates new channels for profitable investment. However, privatisation has been selective, dependent on which sectors are most certain to generate profits. Sometimes this has had to be manufactured by reorganising and restructuring services to make them fit into a profit-making framework. The World Bank has been pushing for privatisation of the public sector since the 1980s. A recent document (quoted in Bayliss, 2000; 4) outlines the role the Bank thinks governments should play in the privatisation process. In line with the central role of the state in establishing and regulating markets in favour of capital accumulation, the Bank argues that governments must: a) devise sectoral policies that introduce and maintain competition; b) establish and maintain a sound regulatory framework for the remaining monopolies, public and private; c) maintain transparency in transactions and convince investors that their investments are secure; d) negotiate, monitor, and enforce contracts with private suppliers of management and financing; e) ensure that resources from privatisation sales are put to productive uses; and f) manage the inevitable political and social tensions that arise as enterprise reforms are implemented, especially the critical issues of foreign ownership and labour layoffs.

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More recently, there has been pressure to privatise systems of national service provision to allow for transnational involvement in these service sectors. The World Trade Organisation’s recently concluded negotiating agenda at Doha in 2001 has revived the process of liberalising the service sector through the General Agreement on Trade in Services (GATS). The next round of negotiations is about to commence, and member countries are required to submit their negotiating agendas. The European Commission (EC) has been actively lobbying other countries – especially developing countries – to put service liberalisation on their negotiating agendas. The EC made a request, which it unsuccessfully tried to keep secret, to South Africa and other developing countries on negotiations around GATS. Requests relating to services as a whole included removing limitations on access to credit for service companies with non-resident shareholding of over 25% (EC, 2002; 2). This means service companies are seeking greater domestic sponsorship in order to pay foreign shareholders. On energy services in particular, the EC has requested South Africa to include these services in its negotiating proposal. This includes services related to energy transmission and distribution facilities, the operation of networks not part of the integrated energy system, and wholesale electricity services (EC, 2002; 13-14). This is part of the international pressure being exerted on the South African government to open the electricity sector to competition. It will become apparent below that the South African government approach to state owned enterprises is firmly in line with the World Bank’s approach. Despite protestations to the contrary, the ANC has adopted a home-grown structural adjustment programme that, while the pace and details have been determined by local considerations, remains on track to reorganise the South African economy to meet the interests of the capitalist class. This includes partial restructuring of state assets to privatise what is profitable, and for the state to retain unprofitable activities that are necessary to reproduce the conditions for capital accumulation. The South African state therefore occupies a key role in expanding infrastructure necessary for productive activity, and even provides the infrastructure to upgrade basic services for the population. The latter is in fact necessary in order to retain political legitimacy and for the physical reproduction of the workforce. The clearest indicator of the neo-liberal orientation is the fact that services can only be drawn from this infrastructure if the user is prepared to pay the full costs of supply. This is one of the features differentiating the neo-liberal from the social democratic state. But even as the South African state adopts the prescriptions of the dominant economic line, as Bayliss indicates, the one-solution-fits-all imposition of privatisation fails to meet even the stated objectives of the World Bank and its other proponents. As described above, these include effective regulation, guaranteeing the security of investments and management of the social contradictions arising from restructuring. As part of the latter, proceeds from privatisation should ideally be ploughed into construction of the infrastructure required for productive use (i.e. for capital accumulation). The failure of privatisation is handled by shifting the focus from the impact of actual privatisation as it is experienced in the real world, towards focusing on ways in which to improve governments’ capacities to manage privatisation programmes. Therefore, the debate becomes one about governance and institution building to manage and enforce contracts, and the question of whether privatisation actually has anything to offer the population of countries even if carried out ‘properly’ is sidelined. Together with water supply and telecommunications, electricity provision has been a focus of the privatisation drive globally since the 1970s, gathering pace especially after 1989. Globally, electricity market reforms have concentrated on commercialisation and corporatisation of public utilities, industry restructuring to increase competition, the creation of market trading mechanisms

12

and increased private sector participation (Eberhard, 2001; 10). Corporatisation prepares the ground for privatisation by achieving some ‘convergence in the cost of capital’ for private sector and stateowned utilities, and ‘acceptable rates of return on assets’ (Eberhard, 2001; 10). In Latin America, energy sector reforms have taken the form of outright privatisation, spearheaded by the Chilean dictatorship from 1973-1990. In Asia, the reforms have tended to rely on outsourcing to independent power producers, while retaining the national grid in public hands (TNI, 2002; 4). Multinationals have mainly participated in the generation sub-sector of the electricity industry, with transmission and distribution remaining substantially in public hands. The Californian energy sector was similar in structure to the South African sector for most of the 20th century. In exchange for the right to be the only supplier of electricity to consumers within a specific territory, the utility agreed to the regulation of rates, terms of service and electric power assets by the state (Barker, 2001; 1). The push for deregulation began in the 1980s especially after electricity tariffs began to rise to cover the costs of debts incurred in building nuclear plants. Pressure came from large-scale energy consumers as well as energy companies keen to profit from the provision of electricity. The demand emerged in the context of growing deregulation in other sectors of the US economy – notably in the communication and airline sectors. In 1996, California became the first US state to deregulate electricity supply. The local utilities that formerly had a monopoly agreed to sell their generators and only be distributors. A power pool was established where distributors would purchase electricity like any other commodity. An independent system operator was established to buy last-minute power to balance supply and demand (Barker, 2001; 2). There was no regulation of the system, and power generators and energy marketing firms took advantage by holding back on supplies until there was a desperate demand, and then selling at higher prices (TNI, 2002; 8). The result was that electricity prices in California have risen by 300% since 1996. California Governor Gray Davis said in his State of the State address, “We must face reality: California's deregulation scheme is a colossal and dangerous failure. It has not lowered consumer prices. And it has not increased supply. In fact, it has resulted in sky-rocketing prices, price-gouging and an unreliable supply of electricity. In short, an energy nightmare… We have lost control over our own power. We have surrendered the decisions about where electricity is sold - and for how much - to private companies with only one objective: maximising unheard-of-profits.” (quoted in COSATU, 2001). Deregulation in California resulted in a failure to consider future additions to generation capacity because of intense competition, with little incentive to invest in new power plants. This was one of the causes of rolling blackouts when demand outstripped supply (Business Day, 1 Mar 2002). At the same time, companies are protected from risk because they have been allowed to separate their energy divisions into holding companies, shielding the parent company’s profits should there be problems. Provisions in WTO agreements explicitly allow for the formation of holding companies that protect parent companies from legal responsibility (Barker, 2001; 5). This is precisely what happened to Pacific Gas and Electricity (PG&E), one of California’s largest utility companies, when it was unable to recover costs from consumers. While the electricity division was under bankruptcy proceedings, the parent company was making record profits (Barker, 2001; 3). A poll carried out by the Los Angeles Times in 2001 found that two-thirds of the population polled considered deregulation of the energy sector to be a mistake. One third of those polled blamed the greed of private utilities for the problems, with another 18% saying the problem is deregulation in principle (LA Times, 7 Jan 2001).

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Similar problems have been experienced in New Zealand, where the CBD of the main city Auckland had a complete blackout caused by a failure of the main power feeds run by Mercury, the privatised local power company (Rosenberg & Kelsey, 1999, cited in TNI, 2002; 6). In Brazil, the ‘controlled disintegration’ of the energy system in the early 1990s led to a three-month period of constant blackouts and mandatory power rationing in 2001. This is despite Brazil’s number one position globally in the production of cheap hydroelectric energy (Costa, 2001, cited in TNI, 2002; 7). As part of an agreement with the IMF, the Brazilian government had agreed to a prohibition on state-owned electrical companies making new investments. The result was that Brazil was held captive to natural gas producers, including Enron, Shell and British Gas (TNI, 2002; 7). In short, Brazil gave up its cheap and well-functioning production of hydroelectric power in exchange for the expensive and externally-dependant production of thermoelectricity. The examples sketched above show that the privatisation of electricity had not necessarily led to lower prices, greater efficiency or improved services to consumers. On the contrary, there is significant international evidence to suggest that the effects of privatisation tend to act against the interests of providing a cheap, good quality and consistent service to users of the service. Despite this, as the rest of the paper details, the South African government is intent on following the same path as the privatised sectors in the countries mentioned above. It should be noted that global economic instability since the mid- to late-1990s - verging on recession since mid-2001 - has influenced the pace of privatisation of public services. There may be greater caution being exercised by governments in privatising services, and by multinationals in investing in developing country services, especially where the desired levels of profits are not guaranteed. While there has been plenty of buying and selling of utilities in the global energy sector, most of this is between corporations in the highly industrialised economies of the US and Europe. Acquisitions in the first half of 2002 totalled $55bn, with the biggest transactions involving purchasers from the UK, Germany, Italy and France (Taylor, 2002). But there is less willingness to invest in developing countries. For example, the French government has frozen all spending by the state-owned EDF unrelated to state security and basic public services (Cadoret, 2002). The collapse of energy trader Enron under a cloud of corruption and fraud at the start of 2002 has made investors wary of energy utilities. Other companies such as British Energy, Germany’s RWE and France’s EDF have been experiencing profitability problems since the collapse of Enron. Nevertheless, the process of preparing the sector for eventual privatisation continues, with these problems being seen as temporary setbacks.

2.

Electricity supply in South Africa

2.1

Historical overview

Electricity was first used in South Africa in 1882 in Kimberley. Municipalities were the first to provide electricity, and it was only a decade after the discovery of gold that non-municipal electricity undertakings were created to meet the growing energy needs of the mines. The high cost of electricity prompted plans for the centralisation of electricity supply (Eskom, 1973; 7-8). In 1906 the Victoria Falls Power Company Ltd (shortly after renamed the Victoria Falls & Transvaal Power Company Ltd – the VFP) was created to meet the electricity needs of industry on the Witwatersrand and in Rhodesia. Although originally planned to harness the power of the Zambezi, by 1909 the company relied entirely on the coal deposits of the eastern Transvaal. The centralisation of power resulted in a rapid decline in the price of electricity (Eskom, 1073; 8). The Power Act was passed

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just three days before Union in 1910, and made provision for state expropriation of the VFP after a period of 35 years. Up until the 1920s, electricity supply remained a function of local authorities and private companies, and there was limited regulation. However, as demand grew, supply became fragmented between many suppliers each with their own tariffs and supply standards. The railways in particular motivated for the establishment of a standardised power system. In 1922 the Electricity Act was passed, which established the Electricity Supply Commission (Escom until 1987 when the name changed to Eskom) with the aim of consolidating the electricity supply industry. An Electricity Control Board was set up to regulate Eskom and private undertakings, and would issue licenses for this purpose. Until 1948, Eskom operated in parallel with private companies and municipalities, remaining in a subordinate position in relation to the privately-owned VFP which served the lucrative mining contracts (Fine & Rustomjee, 1996; 137). In 1948, Eskom took over the electricity supply from the VFP, thus achieving an effective monopoly of bulk supply (Veck, 2000; 55). There is a strong interconnection between mining and energy production in the development of the South African economy. Coal mining feeds the electricity sector, with coal being responsible for 80% of the country’s primary energy needs. This domestic market makes it economically viable to produce additional coal, accounting for 20% of South Africa’s exports and one-third of non-gold exports in the mid-1990s. At the same time, electricity is used to power the gold mines and heavy industry to the extent that “on a global scale, the South African economy is uniquely dependent on electricity and is uniquely electricity-intensive” (Fine & Rustomjee, 1996; 8). Deep level mining would have been impossible without electricity. Approximately 43% of electricity output is consumed by mines and the beneficiation of metallic and mineral products (1996; 80). In the period up to apartheid, the ‘English’ mining houses represented by the Transvaal Coal Owners’ Association (TCOA) dominated coal mining. After the National Party came to power in 1948, the coal mines owned by Sanlam (a firm built with Afrikaner capital) were given favourable treatment by the state and the TCOA cartel was eventually forced to admit Afrikaans owned coal mines in the 1950s. But it was only in the 1960s with the construction of new power stations (partly funded by World Bank and other foreign loans) that Afrikaner mining capital became a force in the coal industry. By 1988, Gencor (controlled by Sanlam) had 21% of the coal market – just behind AngloAmerican, and ahead of SA Mutual (Fine & Rustomjee, 1996; 100). In the early 1990s, Gencor was a multinational, with interests in Australia and the UK amongst others (McGregor’s, 1991). Under apartheid, Eskom as the monopoly electricity supplier played a role in strengthening private monopoly capital by purchasing low-grade coal from mines that were tied to particular power stations with a guaranteed profit (Fine & Rustomjee, 1996; 9). This was one of the ways in which state capital fused with private capital under apartheid. According to Fine and Rustomjee (1995; 136), intensive state support to the parastatals from the 1930s onwards was neither a case of a state challenge to private capital nor simply a tool of ‘private enterprise’ but rather provided a growing link between the state and the private sector. Eskom both provided a market to private mining houses, and a cheap supply of electricity to heavy industry and the mines. The utility thus was an integral part of the minerals-energy complex, both as a provider of production inputs and a consumer of industrial and mining outputs (in particular, coal). Growing demand from the mines and the expanding manufacturing sector in the 1950s led to supply shortages, and resulted in a programme for the construction of new power stations. In the process, the apartheid state used the opportunity to open access to Afrikaner-owned coal mines, with Eskom contracting these mines for a portion of its coal supply (Fine & Rustomjee, 1996; 158). Under the National Party, the share of state corporations in gross fixed investment in the South African economy nearly doubled up to 1973. The NP government used the parastatals to strengthen Afrikaner participation in the

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economy, both by appointing Afrikaner businessmen to state economic boards and senior management positions on state industries and public corporations, and by contracting Afrikaner-run businesses to provide inputs and services to the parastatals (O’Meara, 1996; 79). Up until the 1960s, the price of electricity was dependent on the cost of coal and the cost of transporting coal to power stations around the country. This meant that the Western Cape paid much higher prices for electricity because it was furthest from the coalfields of the Eastern Transvaal. There was also a problem of economies of scale because, as long as electricity was supplied by power stations isolated from one another, the cost of upgrading stations was prohibitive beyond a certain size. However, if the generation and distribution system was interconnected, the size of the stations could be increased dramatically (Eskom, 1973; 26). At the same time, it would no longer be necessary to build stations far from the source of coal supply because the electricity could be transmitted. The cost of transmitting electricity was far cheaper than the cost of transporting coal to far-flung stations. For this reason, the national grid was planned at the start of the 1960s and implemented during that and the following decades. The previously fragmented power station supplies were linked via transmission lines to form the grid, with power stations constructed in areas where they were needed. The formation of the grid also allowed for the extension of supply into the Southern African region, and the Electricity Act was amended in 1964 to allow for this. In the 1960s and 1970s electricity was provided to the region – in particular to the illegally occupied South West Africa (now Namibia) and Rhodesia (now Zimbabwe). In 1985 Eskom was providing 100% of Lesotho’s electricity, 80% of Swaziland’s, 60% of Mozambique’s and 40% of Botswana’s (Thede, 1993; 41). This was in line with the change in strategy adopted by the South African government as the regional balance of forces shifted away from it after the victorious national liberation struggles in Mozambique, Angola and Zimbabwe. The formation of the Southern African Development Co-ordinating Committee (SADCC) in 1980 forced the apartheid government to respond to SADCC’s own projects, including in electrification. At the same time, South Africa was seeking a more generalised expansion into the region in an intertwined effort to expand capital accumulation and draw neighbouring countries into a more dependent relationship with it. Postliberation Zimbabwe was at least in part reliant on Eskom for much of its electricity, and this contributed to dampening the ferocity of resistance to apartheid in South Africa. By the 1970s, the disjuncture between Afrikaans and English capital had more or less faded, and the state used Eskom contracts with coal mining companies to consolidate and ‘modernise’ the coal industry. Coal prices were on the decline until 1973 when the energy crisis pushed them up again. This happened at the same time as statutory price controls on coal were loosened. A Commission of Inquiry into Coal Resources set up by the Department of Mines in 1970, and reporting in 1975, recommended that the controlled price of coal should be increased “based on a revised concept of the real value of energy” (Dept of Mines, 1975; 194). In a submission to the Commission, the Chamber of Mines supported an increase in the price of coal “sufficient to make a colliery an attractive commercial proposition” (Dept of Mines, 1975; 199). Although the prices were set at higher levels, controls remained on local market prices. In 1975, with prices at the level of the early 1960s, the coal price had reached a peak (Davis, 1995; 9). This is partly accounted for the rapid expansion of coal output from the mid-1970s, driven by electricity demand, the Sasol plants and exports (Fine & Rustomjee, 1996; 169). Before 1975, coal exports were entirely negligible (Fine & Rustomjee, 1996; 170). But rising world market prices caused by the global energy crisis saw a rapid expansion in coal exports from South Africa, so that by the late 1980s exports accounted for the second largest volume of coal – around a quarter of the total output - behind electricity. At the same time, domestic prices of coal declined in real terms from 1975 all the way into the 1990s (Davis, 1995; 9).

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In South Africa a growing domestic economic crisis became apparent from the early 1970s and worsened in the 1980s. The crisis was partly based on the inability of the apartheid ‘growth model’ to absorb labour surpluses, coupled with growing skill shortages courtesy of the racial barriers set in place by apartheid. Coupled with this was the beginning of renewed mass resistance to apartheid that forced the state to respond by adapting its approach to control. It was also partly the result of the continuing import reliance of the manufacturing sector at a time when productivity in the industrialised countries was slowing thus causing a rise in outputs required by South African manufacturers. There was limited export production apart from the small core of mining conglomerates. The shift in the international finance system in the early 1970s also caused a sudden instability in export earnings which had remained relatively stable so long as the gold price was fixed to the dollar (Gelb, 1991). These factors led the state to adopt a more aggressively exportoriented approach that favoured large-scale corporate activity, particularly in the mineral and energy sectors (Fine & Rustomjee, 1996; 201). The electricity sector is characterised by monopoly vertical integration. Eskom accounts for some 96% of electricity generation, it controls the high voltage transmission grid and it distributes 58.5% of electricity directly to end consumers. A number of the larger local authorities in the big cities have some generating capacity of their own, however this only accounts for 1.5% of total generation. The private sector generates the remaining 2.7% of electricity (see graphs A1 and A2 in appendix). Municipal and other distributors purchase the vast majority of the bulk electricity they redistribute from Eskom (Eberhard, 2001; 1). Under apartheid, electricity provision was divided between Eskom and local authorities. Distributors required licenses, but both Eskom and the local authorities were exempt from this requirement. White local authorities ran large surpluses on electricity and used these to subsidise other municipal services. The Electricity Control Board was ineffectual since both Eskom and local authorities were excluded from its regulatory jurisdiction (Winkler & Mavhungu, 2001; 6). Until 1980, Eskom only provided electricity to mines, industry, railways and harbours and bulk supply to municipalities for distribution to white urban households. The generation expansion programme aimed to meet future needs of these sectors, but Eskom misread the economic situation, and was left with excess capacity from the late 1970s onwards. In 1993 capacity exceeded peak demand by 14 000 MW or 62% (Eberhard & Van Horen, 1995; 49). Apart from the economic miscalculation, Eskom proceeded with the construction of new generating capacity because it feared that financing by external sources would be unavailable if there was a delay, as a result of looming sanctions (Fanaroff, 1992; 5). Eskom found itself caught between escalating operating costs (in particular coal – which saw a rapid increase in prices as a result of the global energy crisis in the 1970s - and transport costs) and loan repayments. In order to recover costs, Eskom started increasing tariffs above inflation, and this caused growing opposition from consumers – in particular mines and industry, who argued that price increases were undermining competitiveness precisely at the time the state was encouraging expansion into global markets. It should be noted that this excess capacity could well have been used to contribute to a comprehensive electrification programme in black residential areas. Nevertheless, Eskom made a political choice and started a farm electrification programme – aimed particularly at border farms in the 1980s. The aim was to maintain a white presence on the farms for security reasons, especially after the victorious national liberation struggle in Zimbabwe in 1980 that sealed the shift in the regional balance of power after the national liberation of Mozambique and Angola in the mid 1970s. The electrification of white farms in the 1980s was subsidised by existing rural consumers and other electricity users (indirectly through Eskom) (Veck, 2000; 126). Non-recovered capital

17

expenditure on rural reticulation lines serving the farming community amounted to 65% on average between 1980 and 1990. If the further subsidy from farmers using less electricity than required to reach break-even point is added, the total subsidy to farmers thus stood at R166,74m in 1989 (Veck, 2000; 141-43). The distribution of electricity was highly unequal, with the white population receiving a high level of service, and the black population receiving very poor service, if any. There was a vast range of tariffs, individually set by Eskom and local authorities according to their own financial requirements. It meant that customers receiving the same service were liable to be paying different amounts for that service. It also meant that customers with poor services might be paying more than others receiving better services. Eskom reached its peak strength in 1985, at which time its investments in the national economy reached 15% of total Gross Domestic Fixed Investment (GDFI) (Eberhard & van Horen, 1995; 30). However, pressures for restructuring were building especially from industry and commerce that felt they were paying too much for electricity as a result of the sharp rise in tariffs in the early 1980s. Government also felt it did not have enough control over investment decisions being made by Eskom, which had led to the construction of excess generating capacity in the 1970s. This inefficiency impacted on economic performance by causing a rise in input costs to industry, and did not necessarily align with the agenda of government. The state therefore implemented a change in policy in 1980s as it sought tighter regulation of Eskom. This resulted in the Electricity Act of 1987, through which the Electricity Control Board (ECB) was established to regulate Eskom activities. The Eskom Act of 1987 was also passed, which retained Eskom as an entity despite repeal of the 1958 Electricity Act to make way for the 1987 Act. 2.2

Financing and foreign borrowing

On its formation, Eskom had been empowered to raise loans to acquire or extend any electricity undertaking, on condition that the Governor-General approved the loans. The government guaranteed foreign loans taken by Eskom, while domestic loans were secured by Eskom’s assets (Veck, 2000; 93). Given the financial powers granted to Eskom, it did not rely on resources from the national fiscus. In the period of start-up the commission relied on advances from the Treasury and until it began generating income from electricity generation and sales, it earned its first income by lending money through investments in the government and Johannesburg stock (Eskom, 1973; 88-89). Until 1950, Eskom relied entirely on loans raised domestically. In 1951, the World Bank granted Eskom the first external loan and this was followed by a number of others from the World Bank and others. Table 1 shows the foreign loans granted to Eskom between 1950 and 1968. The first two World Bank loans were to be used exclusively for the purchase of imported materials, mainly from the UK, and were taken up over a period of 2 years each (Eskom Annual Report, 1952; 18 & 1953; 17). The 1952 US Export-Import Bank loan was used to purchase US power generation equipment that allowed for the construction of the Wilge station, amongst other things (Fine & Rustomjee, 1996; 158). The station was constructed to serve uranium producers (Eskom Annual Report, 1953; 17). The Commonwealth Development Finance loan in 1954 was used for financing capital expenditure on the Rand and Orange Free State Undertaking (Eskom AR, 1954; 20). World Bank loans to Eskom amounted to half of all loans by the Bank to the apartheid state in this period (FiilFlynn, 2001; 8). The power stations built using foreign loans were designed primarily to support mining, large-scale industry and manufacturing, and later to ensure the extension of electricity to white businesses, white farmers, white residents of platteland towns and white suburbs.

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Table 1: Foreign loans to Eskom, 1951-1968 Loan no.* 20 24 28

Date granted 31 Dec 1951 7 Oct 1952

41

28 Aug 1953 26 Feb 1954 late 1958

48

1961

57

1963

59

8 Sept 1966 15 June 1967

30

62

Lender

Amount

World Bank

$30 000 000

Rand value at the time R21 465 000

Interest rate (p.a.) 4%

Export-Import Bank of Washington World Bank

$19 600 000

R14 016 000

4%

$30 000 000

R21 454 000

4.75%

Commonwealth Devt Finance Co. Consortium of Swiss banks acting as agents (foreign bond) World Bank

GBP2 000 000

R4 000 000

5%

Sf50 000 000

R8 275 000

5%

$14 000 000

R10 012 000

5.75%

Germany (foreign bond) World Bank

DM50 000 000

R8 921 000

6.5%

$20 000 000

R14 400 000

6.25%

Kredietbank S.A. $15 000 000 R10 776 000 7% Luxembourgeoise (foreign bond) 72 1968 Consortium of Swiss Sf45 000 000 R7 436 000 7% banks 73 1968 Barclays Bank GBP5 000 000 R8 604 000 6.5% 74 1968 Luxembourg (foreign 15 000 000 R11 012 000 7% bond) Units of Acc 77 1968 Germany (foreign DM100 000 000 R18 034 000 6.5% bond) Total value of foreign loans from 1951 to 1968 R154 409 000 Source: Eskom Annual Reports, various years *Loan numbers frequently changed, so those provided are from the date of issue

Repayment period Half yearly instalments over 17 yrs – 1954/70 Half yearly instalments over 15 yrs – 1956/70 Half yearly instalments over 8.5 yrs – 1955/63 Half yearly instalments over 15 yrs – 1954/68 Annual instalments over 10 yrs – 1965/74 Half yearly instalments over 9 yrs – 1963/71 Annual instalments over 10 yrs – 1971/80 Half yearly instalments over 9 yrs – 1968/76 Annual instalments over 10 yrs – 1968/77 Annual instalments over 4 yrs – 1970/73 Repayable 1973 Annual instalments over 10 yrs – 1969/78 Annual instalments over 10 yrs – 1974/83

After 1970, the information provided in Eskom’s annual reports thins out, but a number of other foreign bond issues and direct loans were made. Table 2 provides a breakdown of total foreign bonds and direct loans issued during the period from 1970 to 1982, according to type of currency which more or less gives and indication of the source of the financing. It is apparent from both tables that the main funders of Eskom under apartheid were the World Bank, banks from Switzerland, Germany and Luxembourg, and the European money market. Until 1971, Eskom was not allowed to make a profit on revenues, and prices were set with the purpose of covering costs and no more. As a result, Eskom did not have to pay taxes. However, following the recommendations of the 1970 Franzsen Commission of Enquiry into Fiscal and Monetary Policy in South Africa, an amendment to the Electricity Act in 1972 allowed Eskom to generate capital from charges for development purposes. In the 1980s, Eskom was responsible for up to 15% of South Africa’s foreign debt (Veck, 2000; 316). However after 1985 as a result of sanctions, no more foreign borrowings were allowed, although some existing foreign loans were extended (Veck, 2000; 99-100).

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Table 2: Foreign bond issues and direct loans, 1970-1982 Loan no.*

Date of issue

Amount

Amount in Rands

Foreign Bond Issues DM100 000 000 R19 582 885 12 000 000 units of R8 626 750 account 584 1971 DM100 000 000 R19 556 077 592 1971 20 000 000 units of R17 035 611 account 598 1971 $20 000 000 R14 303 594 604 1972 DM100 000 000 R25 131 943 607 1973 Sf50 000 000 R8 293 000 610 1973 DM100 000 000 R24 975 000 614 1974 $15 000 000 R10 080 000 $30 000 000 R26 119 000 DM50 000 000 R24 102 000 DM100 000 000 R37 682 000 DM100 000 000 R47 330 000 Sub-total foreign bonds R282 817 860 Long Term Direct Foreign Loans 589 1971 DM10 000 000 R2 054 443 593 1971 DM20 000 000 R3 643 743 596 1971 DM20 000 000 R4 016 436 597 1971 DM40 000 000 R9 437 168 033 1978 $40 000 000 R27 244 000 Sub-total long term direct foreign loans R46 395 790 Short and medium term foreign loans Sf30 000 000 R8 003 000 DM101 500 000 R41 648 000 Sf5 000 000 R2 648 000 Sf4 500 000 R2 191 000 Sf120 000 000 R68 278 000 DM40 000 000 R20 192 000 DM20 000 000 R10 096 000 DM68 500 000 R30 690 000 Sf9 000 000 R4 616 000 DM17 000 000 R7 747 000 DM40 000 000 R18 687 000 Sf9 000 000 R4 644 000 DM60 000 000 R27 641 000 Sf60 000 000 R30 071 000 DM23 000 000 R11 087 000 DM13 144 937 R5 894 000 Sf8 500 000 R4 163 000 Sf9 000 000 R5 230 000 Sf9 000 000 R5 003 000 DM20 000 000 R10 215 000 DM20 000 000 R10 160 000 Sub-total short & medium term foreign loans R328 904 000 Total foreign loans and bonds 1970-82 R658 117 650 Source: Eskom Annual Reports, various years *Loan numbers frequently changed, so those provided are from the date of issue 578 580

1969 or 1970 1969 or 1970

Interest rate (p.a)

Repayment schedule

8.5% 9.25%

1976/85 1971/80

8% 8.25%

1977/86 1972/86

8.5% 6.25% 6.5% 7% 9.25% 10.25% 9% 9.25% 9.5%

1974/86 1972/87 1973/88 1973/88 1974/89 1979/83 1984/87 1987 1990

8% 8.5% 8.5% 8.5% 9.375%

1977/86 1977/86 1977/86 1976/83 1975/90

9% 7.6875% 5% 5.5% 6.25% 8.75% 8% 7.9375% 5% 10.375% 7.7% 4.25% 9.625% 5.5% 8% 9.375% 4.25% 5% 5% 8.75% 8.75%

1982 1983 1980/83 1981/84 1982 1981/84 1984 1983 1983 1983 1982/83 1982 1985 1984 1984/85 1984 1983 1983 1982 1984 1984

The loans were used to build environmentally damaging coal-fired power stations, which were used to provide artificially cheap electricity to large, energy-intensive corporations and white households (including commercial farmers in the 1980s), but not to black residential areas or farm workers. But

20

since these loans were guaranteed by the state it meant that all taxpayers, regardless of whether they benefited from the expansion of infrastructure or not, paid the bill. This is because Eskom was able to hedge itself using forward cover, so it was able to borrow offshore at exactly the same rates as it borrowed locally (Segal, 1996). This meant it did not cost Eskom anything extra to borrow offshore. However, every time the rand depreciated, the Reserve Bank would be exposed because of the forward cover, and hence the taxpayer footed the additional costs incurred. In short, Eskom took loans but, when the rand depreciates, the losses are covered by the public purse. 2.3

Local government and electricity provision under apartheid

Historically, local government has played an important role in supplying electricity, especially to residential and business customers. Although the Electricity Act of 1922 established the requirement that suppliers should have a license to operate, like Eskom, municipalities were exempted from this. This exemption was renewed in the Electricity Act of 1987. The right of local government to build or extend power stations was subject to approval by the Provincial Administrator, although this was usually easily granted. Most of the larger municipalities therefore constructed and operated their own power stations before 1962. However, the 1962 Borckenhagen Commission recommended that in future power generation should be left to Eskom as far as possible, leaving municipalities to undertake retail distribution of electricity. Thus, since 1962 no new major municipal station has been built, and most municipalities have entered into bulk supply agreements with Eskom for their electricity requirements (CAA, 1994; 10). As with everything else in South Africa, the benefits of municipalities supplying electricity have been uneven, exhibiting a dualism based on race. In white municipalities, local government generated surpluses from the provision of electricity and used this to subsidise other municipal services. Therefore, these municipalities were in favour of retaining control over electricity provision, with citizens benefiting from the use of electricity surpluses to gain access to other public services (roads, parks, libraries and so forth). On the other hand, black local authorities (BLAs) were unable to generate enough revenue to support the basic services, much less subsidise other services with surplus revenue. In an attempt to shore up the neo-apartheid reform strategy in the late 1980s, the state developed two mechanisms to try to improve the financial viability of BLAs. The first was the formation of Regional Services Councils (RSCs), with funds from levies on the payrolls and turnover of businesses, to transfer some resources to BLAs to ameliorate the consequences of the racially divided tax base (Swilling et al., 1991; 178-9). RSC levies were used to fund capital projects in the townships, but it was left to the BLAs to raise sufficient revenues to maintain and administer the infrastructure and associated services. The government also sought to meet what it thought would be short-term deficits in the operating budget of the BLAs by providing ‘bridging finance’ until these authorities were financially self-sufficient. However, it soon became apparent that the structural and political framework would not allow for financial self-sufficiency, and ‘non-viability’ bridging finance became a permanent feature of annual provincial budgets (Swilling et al., 1991; 179-80). Apart from their political illegitimacy before 1994, the BLAs found themselves in a position where they had to take responsibility for services without adequate resources. Therefore, these authorities were quite keen to withdraw from provision of these services to largely poor communities with a narrow economic base that were unable to pay for the services. The privatisation of local authorities has been on the agenda since the mid-1980s (Heymans, 1991; 158). However, the pace was slow because of community resistance and non-payment out of an inability to pay, and for political reasons. These have made private sector involvement in service

21

delivery a high-risk venture, with few companies willing to get involved until the payment problems have been sorted out (Heymans, 1991; 159). 2.4

Provision of electricity to black households

Until the late 1970s, virtually no black households were connected to the national grid. The electricity industry was structured to provide electricity to businesses, industry and white residential households. In a few areas, white local authorities supplied the adjacent black townships. In 1973, Bantu Administration Boards were established to take over the supply of services to townships. However, they had limited resources and were unable to fulfil this function (CAA, 1994; 11). In response to growing political upheaval and economic crisis from the mid-1970s, the state attempted a process of managed reform while retaining the core of the apartheid model. Part of this was an attempt to defuse political opposition from the democratic movement by providing tightly controlled political space through the formation of ‘self-government’ both in the homelands and in the urban areas through local authorities. Further, there was an attempt to extend certain basic services to the black population, including electricity. The Electricity Act was only amended in 1980 to allow local community councils to establish electricity services in African townships (SAIRR, 1980; 312). The provision of services continued very slowly, and was constrained by the failure of the state to acknowledge that the entire framework of apartheid had to be dismantled and replaced (O’Meara, 1996; 321). In 1988, 60 African townships had no electricity at all, another 217 townships only had 15% electrification, and in just 13 townships more than 50% of houses had electricity (SAIRR, 1987/88; 219). The electrification of Soweto, of which more is said below, started in 1979 and was a pilot aimed at quelling the political volatility following the 1976 uprising. In the TBVC and ‘self-governing territories’ electricity divisions were established. They purchased bulk supply from Eskom and distributed it themselves. However, in the late 1980s, Eskom took over the distribution of electricity in some of these areas because of their inability to maintain and administer the network (Veck, 2000; 155). Plans to provide electricity to new housing schemes in Port Elizabeth were drawn up in 1980 (SAIRR, 1980; 336). Nevertheless, by 1989 68 out of 89 townships in the Cape province had less than 10% of houses with electricity. In the Free State, 90% of townships had less than 10% electrification, and in Natal the figure was 75% (SAIRR, 1988/89; 214). In 1988, just 4% of formal houses in Khayelitsha had electricity. In Langa, although Eskom reported that 40% of households had access to electricity in 1991, it also showed that no electricity was sold in the township in that year (Eskom Statistical Yearbook, 1992). One of the first privatisation pilots was carried out in Kwanobuhle outside Uitenhage in the Eastern Cape in the late 1980s. A joint venture between Eskom, Volkswagen and DBSA, called Kwanolec, was established to provide a new supply of electricity to township residents. Although the BLA was largely excluded from the project, many residents still felt the project remained too close to the apartheid system (Heymans, 1991; 160). It wasn’t long before Kwanolec decided to switch to prepayment meters to ensure payment for electricity used. By the end of 1989, 1100 prepayment meters had been installed, with Cosatu opposing the use of this technology (SAIRR, 1989/90; 111). In 1991, just 350 households were receiving electricity through the scheme in KwaNobuhle out of an estimated 17 000 dwellings (Eskom Statistical Yearbook, 1992). Thereafter it is difficult to track the success or failure of the project because electrification figures are merged with those of Uitenhage. The Macro-Economic Research Group (MERG) indicated that at the start of 1992, more than 90% of households were electrified in just 6% of African townships in South Africa. In only 20% of

22

townships more than half of the houses were supplied with electricity. In contrast, less than 10% of houses were electrified in 52% of townships (MERG, 1993; 138). The situation in rural areas was far worse, with only 15% of farm worker households, 4% of households in rural dense settlements, and 1% of households in rural scattered settlements having access to electricity in 1992 (Eberhard & van Horen, 1995; 49). 2.4.1

A brief history of electricity provision in Soweto

Prior to the 1982 Black Local Authorities Act (BLAA), Soweto was administered by a series of white authorities1. Until 1973, the authority was the Johannesburg municipality. Then the West Rand Administration Board took over in terms of the Bantu Affairs Administration Act. At the end of the 1970s, about 20% of Soweto houses were electrified, either by the Johannesburg municipality (using the Orlando Power Station, that it owned) or the Roodepoort municipality (for Dobsonville). In 1979, the government planned the Greater Soweto Electrification Project (SEP) as part of the state’s reform efforts. Eskom provided 90% of the bulk supply while local authorities were responsible for distribution. Initially, only houses owned by the West Rand Administration Board (WRAB) would have electricity installed. Other leaseholders and private owners would have to make their own arrangements for the installation of electricity (SAIRR, 1980; 324). Under the BLAA, the Soweto City Council, the Diepmeadow City Council and the Dobsonville City Council took over the administration of the Greater Soweto area. The elections to these councils were widely viewed as illegitimate, with councillors voted in on a 5% turnout in 1983. These city councils took control over the electricity supply, but were required to generate their own income to run the service. A 76% increase in rent was imposed on residents of Soweto in 1981 (SAIRR, 1980; 324). In 1983 this was followed by a monthly levy to cover the costs of loans and interest for the extension of electricity into the township. The levy increased rents by a further 52% for rented accommodation, and 68% for purchased houses (SAIRR, 1983; 289). Residents choosing not to use electricity still had to pay the levy. On the East Rand, levies increased by between 4 and 9 times (SAIRR, 1983; 290). The 1986 rent boycott was triggered by the attempt by the BLAs to recoup the capital costs of electrification by imposing an electricity levy on residents (Swilling et al., 1991; 184). The boycott was broader than just a rent boycott, and was in response to poor services. Although the SEP supplied electricity to 95% of formal dwellings in Soweto by the time of its completion in 1986, maladministration and poor maintenance meant the reticulation system was already crumbling by 1987. In 1988, there was no account management or meter reading and non-payment was partially based on people questioning the accuracy of the bills they were receiving. Residents, organised into civics and seeking an end to the rent boycott with positive outcomes for themselves, formed the Soweto People’s Delegation (SPD) in 1989 to communicate their issues with the government. Demands of the SPD included: - write-off of arrears - upgrading of services - affordable service charges (SPD, 1989b; Planact, 1990a) Throughout this period, there was a ‘dual’ system of electricity supply between Johannesburg and Soweto – with electricity being purchased separately by each. Johannesburg got cheaper electricity 1

The overview of Soweto administration and the electrification project in the following paragraphs are drawn from Veck (Chap 6) unless otherwise specified

23

because of Eskom’s tariff formula (which included charging a rate for peak demand plus an energy charge). Johannesburg has a greater base load (constant demand) because of industry using electricity during the day, and therefore paid a greater proportion of their costs at the cheaper energy rate. This also served to reduce the differential between the base rate and the peak rate, because the base incorporated a large proportion of total consumption. Johannesburg also had its own generating capacity (Kelvin A and B, and Orlando power stations, and five gas turbine generators) and this allowed it to reduce the peak requirements that needed to be purchased from Eskom, thus reducing the peak rate charge levied by Eskom. In addition, because Soweto’s electricity infrastructure is newer, these costs have been incorporated into the tariffs, making them higher than tariffs in Johannesburg where capital costs have already been paid off (Swilling et al., 1991; 184). Finally, richer consumers usually pay for internal reticulation and connection of dwellings up-front through a cash payment. On the other hand, poorer consumers with insufficient resources of their own and no access to credit from financial institutions are unable to pay these upfront costs. The electricity distributors therefore financed the connection costs themselves and recovered the funds from consumers over time through the tariff (Eberhard & Van Horen, 1995; 95). All of this meant that in 1987 users in Soweto were paying 38.6% more than users in Johannesburg (Swilling et al., 1991; 184). This situation was replicated in many areas across the country between white and black local authorities. Apart from the economic logic underlying these differences, they were worsened and entrenched by the social and racial segregation of apartheid (Eberhard & Van Horen, 1995; 96). Where a dual and separate system was not in place, black local authorities were dependent on white local authorities for their supply of electricity (Swilling, et al., 1991; 185). Amongst other things, this gave white local authorities tremendous power over the lives of the black population in adjacent townships. This power was used to full effect in the early 1990s when mainly Conservative Party controlled town councils cut supplies to black townships in response to the boycotting of service payments (see Swilling et al., 1991; 191; SAIRR, 1992; 478). The Greater Soweto Accord was signed in 1990 between the SPD, the Transvaal Provincial Administration (TPA) and the three Soweto councils. There was an agreement to write off electricity arrears in exchange for resumption of payment of an ‘interim service charge’ to prevent cut-offs (the implication being that those who did not pay the interim charge would ‘legitimately’ be cut-off) (Swilling, et al., 1991; 190). RSC funds were diverted from capital development projects to running the deficit on operating costs. The Accord established the framework for local level negotiations in another 40 areas in the Transvaal (Swilling, et al., 1991; 191). The SPD was not able to articulate a more radical approach based on the decommodification of services, and rather focused on the ‘fairness’ and transparency of future payment plans. The leaders therefore did not question the underlying logic of the poor paying for services. Coming for the township elites themselves, these leaders tended to emphasise the creation of formal equality without paying due attention to the structural character of the inability of the poor to access services, even where these services may be present. But for the middle class, the problem is one of lack of availability, not lack of access because they will be able to afford to pay once services are available. It goes without saying that availability of services is necessary. But access to these services is a more fraught question, as will become evident below where it is shown that, although there has been an increase in the availability of infrastructure, this has not translated into access for the majority of the population.

24

2.5

Electricity supply and the environment

The generation of electricity in South Africa relies on the burning of low-grade coal, and this has a detrimental effect on the environment. While industry in particular has benefited from cheap electricity as a competitive advantage, the negative social and environmental effects of the way electricity has been produced in South Africa were not internalised into the cost. Power stations have also tended to be located on the outskirts of towns in areas that were, either at the time or later, zoned for black housing projects. In the major cities of Cape Town, Durban and Johannesburg, power stations are located in black residential areas. This environmental racism means that the effects of the pollution from these stations are directly experienced by black residents, in a stark case of the literal and physical externalisation of the costs of environmental damage. There are a number of environmental issues related to electricity generation, including particulate emissions and the use of water. Over half of South Africa’s yearly load of 280 million tons of carbon dioxide emissions are produced by the electricity industry (Oelsner, 2000; 1). Eskom has attempted to reduce the extent of these problems over the past few years. Longer-term solutions require adopting new more environmentally friendly technologies and a demand management approach (both for inputs into producing electricity, as well as in the use of electricity and energy). The cost of retrofitting a power station with scrubbers to cut down on emissions would add 30% to the price of producing electricity. However, reduced emissions could cut health costs of air pollution by up to 70% (Wackernagel, 1996). On the other hand, the benefits of electricity for residential consumers, who otherwise directly experience the health hazards associated with the use of coal and paraffin for household energy purposes, may outweigh even these negative impacts. The direct and indirect benefits of access to domestic electricity supply have been detailed many times elsewhere, and are not disputed (see, for example, Eberhard & Van Horen, 1995; 72-82; Energy White Paper, section 8.4; Bond, 2000; 51-90; Fiil-Flynn, 2001; 19-22). These benefits are difficult to quantify, but certainly outweigh the short-term costs required to extend and maintain an electricity supply to residential users. For sections of the industry, nuclear power has come to be seen as a potential alternative to the coalfired generation of electricity. Nuclear power for the generation of electricity was first considered in the 1960s, with the construction of the Koeberg nuclear station starting in 1974 (Veck, 2000; 59). The Koeberg station was put into operation in 1984. Faced with increasing international isolation because of apartheid policies, the government of the day oriented its energy strategy towards selfsufficiency. According to the 1998 White Paper on Energy, “massive, skewed and uneconomic investments were made in synthetic fuel plants and in the nuclear fuels chain”, resulting in a nuclear related industry that consumed two-thirds of the DME’s annual budget. Despite absorbing this large portion of the budget, the nuclear industry only generated about 3% of South Africa’s primary energy supply and 5% of electricity in 1997. In line with the general inefficient, ideologically driven, state investment in South Africa under apartheid, the nuclear industry was supported even when this was not economically sound. For example, Eskom contracted the parastatal Atomic Energy Corporation (AEC)2 to supply enriched uranium for the Koeberg nuclear plant even though this could have been more cheaply imported from outside South Africa. The AEC received a price premium worth R40 million a year for enriched uranium (Eberhard & Van Horen, 1995; 31-32). Despite opposition from sections of civil society – most notably the environmental movement and the trade unions – a programme of nuclear energy continues in the post-apartheid era. These opponents have raised some of the dangers associated with nuclear energy, in particular the threat of 2

The AEC was established in terms of the Nuclear Energy Act of 1993 to consolidate all state-funded nuclear activities

25

radiation exposure and long-term waste management problems. From an economic point of view, the cost of production of the Pebble Bed Modular Reactor (PBMR) has become unviable with the sharp decline in the value of the rand. In addition, electricity generated from nuclear power in other countries costs up to 25% more, suggesting reliance on the nuclear programme may well cause a rise in electricity prices (Earthlife Africa, 2001; 2). At the end of 2001, at least 49 civil society organisations and networks representing over 330 000 South Africans had been joined by another 23 regional and international organisations in opposition to a nuclear development path in South Africa (Earthlife Africa, 2002; 12). COSATU (2001) has come out in opposition to the use of nuclear power for electricity generation, arguing that it is dangerous and unnecessary. At the same time, it argues that environmental standards for coal-fired plants should be improved. A resolution was passed at the federation’s 2000 Congress calling for an end to the nuclear expansion programme, and a redirection of resources to alternative energy technologies (Earthlife Africa, 2001; 3). A submission to the Parliamentary Portfolio Committee on Minerals and Energy in 1999 by the Chemical Workers Industrial Union (CWIU), a COSATU affiliate, calls for public participation and transparency in policy making in the industry (CWIU, 1999). There are a number of possible reasons for government’s continuation with the programme. Significant investments have already been sunk in the industry, and government is attempting to get some return from this investment. This is related in particular to the export orientation of the economy, because the PBMR (of which more below) is being designed first and foremost as an export rather than for the generation of electricity domestically. The nuclear generation of electricity for use in South Africa is more of a test to show that the technology does work. However, according to the government’s Energy White Paper, most countries with nuclear generation capacity have either ceased building these plants or have slowed down plans to install additional nuclear power generation capacity. The market for nuclear energy has stagnated, with a growth rate of only 0.7% a year for the past decade. In comparison, renewable energy markets are growing at 25-45% per year (albeit off a small base) (Earthlife Africa, 2001; 3). Eskom has been working on the PBMR since 1993, and therefore has a strong financial interest in keeping the programme going. The utility holds 30% of the PBMR Project and has concluded contracts with the Industrial Development Corporation (25%), and two overseas companies, namely British Nuclear Fuel (22,5%) and Exelon (12,5%), an electricity utility of the United States. In recent times Exelon has decided to pull out of the partnership with effect from the end of 2002. This has struck a blow at the extension of the PBMR project and the R18 billion a year export earnings it was expected to generate (Business Day, 13 Mar 2000). An international task team studying the feasibility of the project handed its report to the South African government in April 2002. The team was unable to come to a conclusion on the financial and economic feasibility of the project, nor on the technical design of the scheme (Business Day, 22 April 2002). A second reason for continuing with the programme is an attempt to shift the base of electricity generation away from the environmentally damaging use of low-grade coal. There has been some consideration of the increased use of alternative and more environmentally friendly fuels to meet future energy demand. The 1998 Energy White Paper states that renewable energy may be the cheapest after the internalisation of environmental and social costs, and that government is committed to supporting the development and application of renewable energy. However, while acknowledging alternative supply-side options such as wind, solar thermal and fuel cell technologies, the Integrated Resource Plan released in early 2002 immediately drops these with the comment that “not all the options met all the criteria for inclusion” (Winkler, 2002). Government

26

has also stated its preparedness to use hydro-electric power to a greater extent, especially from regional neighbours that have existing systems, such as Mozambique, Zambia and the DRC. While this form of power is environmentally far sounder than coal use, it may have negative social effects, in particular where human settlements have been removed with little choice to create dams. The construction of large dams may also have long-term negative ecological effects, including the reduction of fresh water flow thus impacting on sensitive ecosystems, and increasing evaporation (see Davies & Day, 1998). In some circles, nuclear energy is being touted as a renewable and environmentally friendly source of electricity production. However, the Kyoto Protocol (the UN Framework Convention on Climate Change) prohibits the use of nuclear reactors to minimise greenhouse gases (Earthlife Africa, 2002; 3), and rejected the option of nuclear from the Clean Development Mechanism (Earthlife Africa, 2001; 4). The promotion of renewable energy technology (including nuclear energy) received substantially less government funding from 1999/2000 mainly because of the attempt to commercialise the activities of the South African Nuclear Energy Corporation (SANEC)3. Expenditure on this subprogramme was less than 0.5% of the DME budget in 2002/03 (Dept of Finance, 2001; 706). At the same time, DME continued to fund the Corporation to the tune of R135 million, and provided strategic loans of R266 million, in 2002/03 (Dept of Finance, 2001; 709).

3.

Restructuring of the electricity sector and state-owned enterprises

3.1

Policy continuities from late apartheid to post-apartheid

In the early 1980s, the state was faced with a lack of control over Eskom decisions, chronic ‘excess’ capacity in electricity, a high proportion of foreign debt attributable to Eskom, and rapidly rising prices that caused opposition from large-scale users in the early 1980s. These factors led the government to set up a commission of enquiry into Eskom and the electricity sector in 1984. The De Villiers Commission aimed to bring Eskom under tighter government control and insist on it operating on ‘business principles’. The Commission should be understood in the context of a more general withdrawal of the state from productive activities to becoming a ‘night watchman’ state presiding over the commercial activities of other entities operating in a ‘free’ market. The Commission established the need for closer regulation of Eskom’s activities, arguing that Eskom should not forecast and plan on its own without reference to the government. The Electricity Act of 1987, flowing from the recommendations of the Commission, retained the Electricity Control Board (ECB) to exercise control over the electricity industry and to oversee Eskom’s activities. The Eskom Act of 1987 consolidated existing measures applicable to Eskom. It also exempted Eskom from having to apply for a license from the ECB, it simplified loan approval procedures, and abolished Eskom’s reserve and capital development funds (CAA, 1994; 9-10). The 1986 White Paper on Energy Policy set the framework for the marketisation of the electricity sector. It called for the “highest measure of freedom for the operation of market forces”, the involvement of the private sector, a shift to a market-oriented system with a minimum of state

3

SANEC took over from the AEC as a corporatised entity, with government holding all shares, in terms of the Nuclear Energy Act of 1999. The National Nuclear Regulator (established in terms of Act 47 of 1999) regulates its functions and activities.

27

control and involvement, and a rational deregulation in energy pricing, marketing and production (CAA, 1994; 12-13). In 1987 the government released a White Paper on Privatisation and Deregulation, setting out a systematic approach to privatisation. In this document, privatisation was defined as ‘a systematic transfer of appropriate functions, activities or property from the public sector where services, production and consumption can be regulated more efficiently by the market than price mechanisms’ (RSA, 1987; 8-9). There are therefore two aspects to privatisation, namely the transfer of public assets to private hands, and the transfer of direct management and planning from the state to private actors in the market. In the face of the intense politicisation of electricity provision, a joint National Energy Council/Eskom workshop held in 1990 called for the depoliticisation and deregulation of the supply industry. It also put forward proposals to adopt a market-oriented approach to distribution and the restructuring of distribution into large distributors that would purchase power from a ‘power broker’ controlled by distributors (CAA, 1994; 15-16). The workshop also recommended the introduction of specific tariffs between generation and transmission, and between transmission and distribution functions (the seeds of ring-fencing), and the need to run supply on business lines (CAA, 1994; 1617). In 1992, the recently unbanned ANC held a national meeting on electricity in Cape Town (Theron, 1992). While the ANC at the time favoured the route of local government carrying out an electrification programme, a number of technical, financial and human resources constraints to this option were highlighted at the meeting (Veck, 2000; 202). Despite a strong distrust of Eskom in the meeting by activists, the National Electrification Forum (NELF) was set up following the meeting, comprising representatives of the DBSA, ANC, DME and Eskom. One of the recommendations coming from the NELF was the establishment of a National Electricity Regulator (NER). Others of significance were the rationalisation of distributors to a small number, the ring-fencing of municipal electricity undertakings, and the retention of current generation and bulk transmission of electricity in Eskom (CAA, 1994; 56). The Macro-Economic Research Group (MERG), initially set up to provide detailed policy proposals to the new democratic government but which was marginalised even before the first democratic elections in 1994, also made a number of recommendations for the electricity industry. These recommendations included that Eskom remain in public ownership, and that user charges should avoid capital costs of connection (MERG, 1993; 123). MERG proposed that the distribution sector needed to be restructured to eliminate ‘rent-seeking’ by white local authorities and to accrue economies of scale in distribution. There was general agreement that the electricity distribution industry (EDI) needed restructuring. The distribution sector was highly fragmented, and also uneven. Eskom, more than 420 municipalities and a handful of private organisations were supplying electricity. More than 120 municipalities had less than 1000 customers in the mid-1990s, and just four municipalities earned 50 percent of the total surpluses being earned by all municipal distributors, according to DME in the 1998 Energy White Paper. There were also wide disparities in tariffs, both between consumer segments and within these segments. In 1993 the World Bank released a report on restructuring the electricity sector in developing countries. Although it was not specific to the South African situation, it had an impact on the environment in which the debates were taking place. The report focused on five areas. First, the role

28

of governments to improve the performance of power sectors. Second, commercialising stateowned power utilities and making them accountable to the standards of capital markets. Third, introducing competition into the sector to improve sector performance. Fourth, making regulation of power market incentive-based and applying regulation transparently by an independent agency. And fifth, using private sector investment, technology, and expertise to develop and reform power sectors (World Bank, 1993). EDI restructuring was also highlighted in the Reconstruction and Development Programme (RDP), the ANC’s election platform for the first democratic elections in 1994. An independent national regulator was proposed to enforce public policy and ensure long-term financial viability for the electricity sector. However, few details on the type of restructuring that was desired, or the restructuring of Eskom in particular were provided. The RDP tended to focus more on delivery targets, and these are detailed in the section on the national electrification programme below. In 1995, through amendments to the Electricity Act of 1987, the National Electricity Regulator (NER) replaced the ineffectual Electricity Control Board (ECB) as the national regulator. It has far greater power than the ECB had, since its regulatory jurisdiction includes Eskom and local authorities. It regulates market access through licensing all producers, transmitters, distributors and sellers of electricity (greater than 5 GWh per annum). In addition, all tariffs have to be approved by the NER (Winkler & Mavhungu, 2001; 6). The NER was tasked with providing strategic direction for the industry as a whole. It attempted to rationalise the distribution industry through the licensing process, but this failed to achieve its objectives. The NELF dissolved in line with suggestions for this to happen after the formation of the NER (ANC, 1994; 33). The NER formed the Electricity Working Group (EWG) in 1995 to further develop proposals to restructure the distribution industry. The EWG report in 1996 made recommendations to Cabinet for rationalising the electricity distribution industry and for changing how the electricity supply industry (ESI) funded its obligations. The unilateral adoption by government of the Growth, Employment and Redistribution (Gear) macro-economic strategy in 1996 reflected a consolidation of the macro-economic policies until that point rather than a fundamental break with previous polices. Gear emphasised growth based on a competitive and outward-oriented economy. The strategy called for sectoral and regional emphases in industrial and infrastructural development, coupled with greater labour market flexibility to ensure a “profitable surge in private investment” (Dept of Finance, 1996; 2). According to Gear, public investment in infrastructure had two aims. The first was “to provide for more adequate and efficient economic infrastructure services in support of industrial and regional development” and the second was to address major backlogs in the provision of municipal and rural services (Dept of Finance, 1996; 5). One of the reasons for providing municipal infrastructure is that it “crowds in private sector investment” and lays the foundations for long-term productivity growth (Dept of Finance, 1996; 6). In essence, then, public investment in infrastructure is geared towards encouraging profitable private activity. A ‘user pays’ cost recovery policy ensures that citizens who use services without making financial gain from it must pay the full price of that service in the same way that those who will use the services to make profits must pay. Gear states that “government is committed to the application of public-private sector partnerships based on cost recovery pricing where this can practically and fairly be effected” (Dept of Finance, 1996; 14). At the same time, it does not define practicality or fairness, leaving the conditions under which cost recovery should be carried out intentionally unclear. It will become apparent that full cost recovery is imposed on individual households to the extent of cutting supplies off to those who have not paid. Meanwhile, industries are offered discounted prices because of their status as large and consistent users.

29

Meanwhile, political differences over whether the Public Enterprises Ministry or the relevant line departments responsible for specific state assets should lead the process of restructuring led to an impasse in 1996. Thrown into the mix were the parastatal bureaucracies themselves, some of which were attempting to push their own agendas with limited government involvement (Soggot, 1996). For a while it appeared that the line departments had the upper hand, but this was relatively shortlived. In the latter half of the 1990s, the DPE definitely exerted greater influence on the direction to be taken. This has been the case particularly since Jeff Radebe took over the portfolio in 1999. Nevertheless, even in the latter years, the parastatals tended to act on their own. Government recognised the legitimacy of a labour complaint that the spirit and intent of the National Framework Agreement (NFA) were in some instances being disregarded by the Board of Directors and senior management of some of the SOEs (DPE, 2001e). In 1996 government and labour concluded negotiations on the NFA on restructuring of state assets (DPE, 1996). The NFA stated that the objectives of restructuring state assets included enhancing the provision of basic services, increasing economic growth and employment, redeploying assets for growth, mobilising and redirecting private sector investment, reducing state debt, enhancing competitiveness and efficiency of state enterprises, and financing for competitiveness. It was “not necessarily geared towards reducing state economic involvement in any economic activity”. The NFA established the principles of labour involvement in policy formulation, the need for restructuring to incorporate black economic empowerment objectives (including for small businesses), with a design to encourage domestic and foreign investors. On ownership it very nebulously stated that “ownership is not the determining factor for efficient operations” – a statement that could just as easily be used to support privatisation as public ownership. The agreement covers information sharing and consultation, but has little power to make decisions unless agreed to by government as one of the parties to the agreement. Meanwhile, the EWG proposals were referred to an inter-ministerial committee that in turn formed an internal government committee. This, the Electricity Restructuring Inter-departmental Committee (ERIC), comprised of Directors-General, senior officials and advisors in the DME, Housing, Public Enterprises, Provincial Affairs and Constitutional Development, Finance, and Trade and Industry. ERIC made three key recommendations4. First, the EDI should be consolidated into 5 independent regional distributors, jointly owned by the municipalities and Eskom. It was suggested that 9 distributors organised along provincial lines would not all be economically viable. All distribution network assets should be passed to the distributors. Municipalities and Eskom would exchange the assets handed over for shares in the regional distributors, thereby allowing them to continue raising funds against their asset base. This structure would favour municipalities with larger asset bases, and marginalise those with small asset bases, especially in the rural areas. The distributors would be registered as companies, but permission from government would be required for them to trade their shares. Second, ERIC recommended that the entire industry (generation, transmission and supply) should move to cost-reflective tariffs (with transparent subsidies if necessary). Funding for electrification and other municipal services should be separate and transparent. Third, it was recommended that a full-time Transformation Team be set up to deal with implementation issues and prepare legislation.

4

Summary of ERIC recommendations in the following paragraphs derive from DME (1996) unless otherwise stated

30

ERIC suggested the opening of the generation sector to competition, and encouraging private sector participation in the industry. The possibility of splitting the transmission sector into high voltage transportation and low voltage transportation (from power sub-station to the consumer) was raised. Both of these areas are natural monopolies and it would be likely, in the medium term at least, that Eskom would retain control over high voltage transmission. Private sector participation in low voltage transmission might be encouraged. The distribution sector usually includes supply functions. Supply is the provision of the services related to electricity. These include customer interfacing, billing, operations and maintenance (O&M), administration and so on. The remaining distribution activities refer to network construction and O&M, and incorporate the electrification programme. According to the ERIC proposal, distributors would be responsible for electrification, but funding would be done nationally. The distribution sector would have to be rationalised, with far fewer distributors operating. It was therefore suggested that a number of Regional Electricity Distributors (REDs) should be established to carry out low voltage transmission and supply functions. The first phase of competition in distribution would be by comparison, where separate distributors could measure their performance against one another while supplying to separate areas. The second phase would then be to give the consumer ‘choice of supply’, meaning that distributors could compete directly with one another in the same geographic space. The aim of EDI restructuring, according to ERIC, was to ensure the meeting of agreed electrification targets, to provide low-cost electricity and to facilitate price equality. Restructuring also aimed to improve the financial health of the industry and to provide better quality and service to consumers. The Committee indicated certain key principles that were to underpin restructuring. These included no forced retrenchments, continued public ownership of the EDI through municipalities and Eskom in the short- to medium-term, with changes only to take place within government’s policy framework for restructuring of state assets. The industry should be self-funded as far as possible, meaning that income would have to be generated from sales. Following the release of the report, government adopted the committee’s recommendations as it’s own position on the restructuring of the EDI. These included the consolidation of the distribution industry into a small number of REDs, and the introduction of cost-reflective tariffs, a nationallyadministered electrification fund and a capped tax for part funding of municipal services (DME, 1997b). The various proposals up to this point were consolidated in the 1998 Energy White Paper. The document outlined the policy objectives of the energy sector. These are:  Increasing access to affordable energy services (which includes a mix of electricity and other energy sources for households);  Improving energy governance;  Stimulating economic development (which is seen to require increased competition in energy markets, government regulation in cases where there is a high risk of market failure, a shift to cost reflective pricing, including quantifiable externalities where possible, transparency in subsidies where these are required, the possibility of energy taxation, but to be used as little as possible, and the creation of an investor-friendly environment);  Managing energy-related environmental impacts;  Securing supply through diversity (increased energy trade, especially in the Southern African region)

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Short-term priorities included the development of a national electrification policy, planning and financing system; the appointment of an authority to oversee the restructuring of the EDI; and the development of the Southern African Power Pool (SAPP). Medium-term priorities included adjusting electricity market structures to achieve effective forms of competition, and establishing regulations promoting a cost-of-supply approach to electricity pricing for non-domestic consumers. The White Paper confirmed the restructuring of the distribution industry into five regional distributors, with transitional processes leading to fully independent REDs. It identified two business forms of REDs that would be acceptable to government – a company established under the Companies Act, or special statutory corporations. Although it stated that government would retain ownership, it did not specifically identify whether this would be national or local government, or both (PWC, 2000b; 4). Licensed privately owned distributors would be allowed to operate alongside existing distributors to distribute their own generated capacity, subject to approval by the NER. The White Paper indicated that the electrification programme would continue, within the available resources of government, with the aim of achieving universal household access to electricity. Funding for electrification and other municipal services would need to be separated and transparent. Related to this was the proposed formation of a National Electrification Fund to be funded from a dedicated electrification levy. To resolve the problem of a fragmented electrification programme, the White Paper proposed the allocation of annual electrification targets to distributors as part of their license conditions. The White Paper also identified the need to shift towards cost reflective pricing. It stated that price signals resulting in economically optimal investments in electricity infrastructure and consumption of electrical energy could be achieved through the use of cost-based electricity tariffs that incorporated capital replacement costs (long-run marginal costs). “Moderately subsidised tariffs” for poor domestic consumers would be provided for equity reasons. However, these subsidies should impact as little as possible on the productive sectors. Lower end tariffs would be structured to subsidise low levels of consumption. But as consumption rises, tariffs will cover full supply costs and then contribute to cross-subsidisation. In the generation sector, the White Paper indicated government’s support for gradual steps towards a competitive electricity market to be taken, and the related restructuring of Eskom into separate transmission and generation companies. Amongst the objectives of ESI restructuring was the encouragement of private sector participation, and the introduction of competition. According to the DME in the White Paper, one of the reasons for restructuring is that the idea that commercial energy sources will become scarce in the future has receded, and this means the state no longer has to protect uneconomic industries. The implications globally are that cross-border energy trade has grown and prices are becoming more cost reflective. There is greater competition in the market, and private sector finance is playing a bigger role. The state is playing a different role. Instead of protecting industries, the state is now facilitating the corporatisation, commercialisation and privatisation of the energy sector. Accordingly, the South African government must follow this logic in order for the economy to remain competitive and to improve efficiency and achieve cost savings. A consortium led by PriceWaterhouseCoopers (PWC) was appointed by government to undertake detailed modelling and planning of restructuring of the distribution industry. In 2000, the resulting Electricity Distribution Industry Restructuring Project released its findings. The first of six of the PWC studies included the objectives of future REDs as being their financial viability as independent businesses, and their potential for competition (PWC, 2000a; 4). The study suggested

32

that fewer than 5 REDs would limit competition and more than 15 would result in loss of economies of scale, and therefore proposed the establishment of a number of REDs somewhere between these two. Each RED should be centred on an urban area of economic activity (PWC, 2000a; 6). Two options for the number and centres of the REDs were proposed, with the option of 6 REDs finally being accepted. In this option, three of the REDs would be centred in Gauteng (Johannesburg, Pretoria and East Rand) expanding outwards to include surrounding provinces lacking a strong economic centre of their own (North-West, Northern Province/Limpopo and Mpumalanga respectively). The second PWC study discussed ownership and governance of the REDs. It proposed that current owners of distribution assets (mainly Eskom and the municipalities) could be compensated for the value of the assets transferred to the REDs through shares or debt instruments (the latter which could potentially be converted to shares at a later point) (PWC, 2000b; 7). An important issue that was considered was the extent to which the disposal of shares would be monitored or controlled, because shareholders might dispose of shares to buyers hostile to the interests of other shareholders. It was suggested that national government could own the shares, either for a transitional period or for a longer period. Government could then issue debt instruments to the distribution asset owners. This would allow national government to control the disposal/future ownership agenda (PWC, 2000b; 9). The argument opposing government ownership was that this would limit the incentives for the REDs to operate efficiently and financially viably. The study suggested a possible compromise of granting shares to the distribution asset owners while giving government veto powers over share disposal. However, this would limit the government’s ability to decide what to do with shares in the future. On governance of the REDs, the PWC study came out in favour of a management board rather than a board made up of stakeholders, because the former would “make for more informed, efficient and commercial management of the businesses” (PWC, 2000b; 13). The purpose of transferring assets to the REDs was identified as enabling REDs to carry out distribution activities by having unfettered use of the necessary assets, and establishing the legal right for REDs to carry out these activities (i.e. through transferring distribution licenses and servitudes). In addition, transferring ownership rights to the RED would provide security to lenders and creditors by allowing them to lay claim on the assets if required (PWC, 2000c; 6). To prevent REDs from taking advantage of their captive market, the fourth of the PWC studies suggested that each RED should be allowed to purchase electricity from where it chooses (once there is competition in the generation sector). But they could only pass on the actual costs of purchase to consumers for a portion (albeit a majority) of the energy sold. The remainder would be charged at a ‘reference energy price’ based on the wholesale market price and regulated by the NER. This would give REDs the incentive to purchase at cheapest possible prices, because they would gain or lose based on the extent to which they could purchase electricity at prices lower or higher than the market-related reference price. In addition, the study proposed that embedded generation above a threshold size should not be transferred to the RED, and that there should be a limit imposed on shareholding in generation plant by REDs (PWC, 2000d; 7). Before a wholesale market has been created, the study suggested that the REDs purchase electricity based on a regulated wholesale electricity tariff (PWC, 2000d; 8). The financial viability of REDs is based on stringent requirements. These include significant price increases for domestic and commercial users, the transfer of electrification funding to central government, the levying of small users’ bills by local government to recoup lost revenues required to fund other municipal services, and significant reductions in operating and wholesale purchasing costs (PWC, 2000e; 12-13). In turn, these are premised on the rapid introduction of competition into

33

the generation sector, and the ring-fencing of the different sectors. Therefore, the proposed form of restructuring of the distribution sector is constructed on the basis of the marketisation of the rest of the electricity industry. As the PWC indicates, the relaxation of any of these imperatives “would cause some or all of the new REDs to fall below the target financial viability criteria” established by PWC itself (PWC, 2000e; 13). Where large customers (those using over 100 GWh a year) are allowed to choose suppliers other than the RED in their area, they would still be required to pay a distribution use of system charge. This would ensure they contributed to the cost of maintaining the distribution network, through which all electricity would run, regardless of supplier (PWC, 2000d; 11). It is apparent from the proposals that the introduction of competition in the retail section aims to provide large-scale users (industry) with greater options, while it is accepted that residential users will fall into a captive market with no choice (PWC, 2000d; 16-17). Government accepted the main conclusions of the reports in May 2001 (Eberhard, 2001; 8). In August 2000 the Ministry for Public Enterprises released a policy framework entitled ‘An Accelerated Agenda Towards the Restructuring of State Owned Enterprises’ (MPE, 2000). In the document, a distinction is made between restructuring and privatisation. Nevertheless, GEAR is quoted to indicate that restructuring refers either to the total sale of an asset, a partial sale to ‘strategic equity partners’ (i.e. private sector corporations), or sale with the government retaining a ‘strategic interest’ (i.e. holding shares in the privatised entity for a time) (MPE, 2000; 13). Therefore, the distinction is more one of extent than of content. The first step in restructuring was to establish holding companies in the generation, transmission and distribution sectors (DME, 1999). In turn, this would require Eskom to ring-fence each of these sectors, with the eventual aim of merging the ring-fenced sectors with external industry actors. The framework on restructuring state-owned enterprises thus outlined plans to ring-fence generation, transmission and distribution into separate corporate entities within Eskom. It stated the need to introduce competition into the generation market through the creation of independent competing generation companies. The idea was that transmission could be opened up to a ‘strategic equity partner’, and distribution would be consolidated into regional distributors in line with proposals already accepted (MPE, 2000; 132). In the interim, an EDI Holding company would be established as a merger between Eskom Distribution Unit and the distribution functions and assets of municipalities (DME, 1999). COSATU (2001) remained in favour of continuing vertical integration of the three sectors under public ownership. The federation accepted the need to rationalise the distribution sector, and indicated its support for a single national distributor which would allow for the allocation of capital and skills where they are needed (2001b; 4). Although there is mention in various places about a new electricity regulation bill from around 1999 onwards, no bill has formally been tabled in Parliament to date. The aim of the proposed bill is to consolidate and update the role and functions of the NER. Despite consistent claims by the DPE that labour and other non-government stakeholders were continuously involved in discussions on restructuring, COSATU argued that this was not the case. Government delayed in convening an agreed upon Restructuring and Transformation Committee, while amendments to the Eskom Act were being tabled in Parliament (COSATU, 1998a; 3). Even though government did consult with labour, they tended to reject labour’s substantive proposals. According to COSATU president, Willie Madisha (2001), meaningful consultation needs to be based on consensus decisions, not on listening and then still going ahead with already formulated plans. COSATU also indicated that while it was negotiating with government on electricity

34

restructuring under the NFA, the NER was moving ahead to implement its own proposals (COSATU, 2001b; 1). Nevertheless, COSATU, together with the other 2 main union federations, agreed with government to extend the NFA in its current form until 2004 (DPE, 2000f). In December 2000 the NER licensed South Africa’s first commercially driven independent power producer. The company, Biomass Energy Ventures, would convert waste from a Mondi paper mill near Durban into energy to power the mill. It was set to supply about 15% of the mill’s requirements. In July 2001, the NER issued a licence to US utility company Allied Energy Systems (AES) to refurbish Kelvin power station and provide power to the Johannesburg Metropolitan Council (Business Day, 15 Dec 2000; 1 Oct 2001). A power purchase agreement was signed between City Power (the electricity utility for the Johannesburg metro) and the Kelvin station to guarantee purchasing and sale of electricity between the two. This was the first substantial independent generator to be licensed. Within weeks of the licensing, around 480 voluntary retrenchments were offered to municipal workers working at the Kelvin power plant (Peter McInnes, pers com). An application to become an independent power producer has also been submitted by Rainbow Millenium Power Company to construct a power station to serve the Richards Bay Industrial Development Zone in KwaZulu-Natal (Lourens, 2002). 3.2

Local government and electricity sector restructuring

As indicated earlier, since the establishment of a regulated electricity sector in the 1920s, local government had the right to distribute and supply electricity in their areas of jurisdiction. Municipalities were exempt from the need to apply for licenses for this function under the Electricity Act. However, there was vast unevenness in the financial condition of the municipalities. According to the Energy White Paper, 120 municipalities had less than 1000 customers each, while over 90 had revenues of less than R1 million per year. 289 municipalities earned less than 1% of total electricity surpluses. On the other hand, just 4 municipalities earned 50% of total surpluses from electricity sales. The Local Government Transition Act of 1993 reaffirmed the right of local authorities to supply electricity within their area of jurisdiction. While they did not have to be involved in the actual supply, it remained their responsibility. No other electricity undertaking was entitled to supply electricity in a municipal area without the consent of the relevant municipality. In the mid 1990s the Electricity Restructuring Inter-departmental Committee (ERIC) suggested that municipalities would continue to play a role in supervising and setting policy in the EDI, but this didn’t necessarily mean they would have to be directly involved in electricity distribution. This was repeated in the White Paper on Energy in 1998. Electricity sales could continue to sponsor other municipal services, but this would have to operate through different mechanisms and become transparent. One suggestion was to allow municipalities to impose an excise tax on electricity that would be shown separately on the bill. The money generated from this could be used to pay for other municipal services. Government would set limits to the tax, and it would be regulated by the NER. The possibility of allowing some categories of consumers to be excluded from this tax was also mentioned. Schedule 4 Part B of the Constitution gives executive authority over electricity reticulation to local government. However, the precise meaning of ‘reticulation’ is not established, leaving this open to interpretation. In addition, the Constitution indicates that local government does not have unlimited authority over this function. National and provincial governments have executive authority to see to the performance of local government, and to regulate the exercise by municipalities of their

35

executive authority (s155 (7)). This may be interpreted as granting national and provincial government the authority to establish and maintain essential national and minimum standards (PWC, 2000b; 23). Chapter 5 of the Local Government Municipal Structures Act of 1998 lays out the division of functions between district and local councils. District councils are given responsibility over bulk supply of electricity, with the provincial MEC dealing with local government affairs having the authority to shift the functions between local and district councils. The Constitution implied a distinction between the role of a service authority and a service provider, with local authorities having the option of contracting an external provider if this would meet the goals of policy more effectively. The 1998 White Paper on Local Government expanded on the role of local government, and established a number of possible options for service delivery, including community-based and private sector delivery mechanisms. Forms included the corporatisation of service delivery units, contracting out, leases and concessions, and transfer of ownership (privatisation). The White Paper did, however, indicate that privatisation of core municipal services, including electricity and water supply are so important to meeting the needs of communities that it would not be desirable that “ownership of associated infrastructure and assets is removed from the public sphere”. It was therefore suggesting that the involvement of the private sector should, at this stage, be limited to outsourcing, leasing or concessions. The White Paper outlined a set of principles on which the option for delivery of services would be selected (section F, part 2). These included:  access to at least a minimum level of services;  providing affordable services (that might include cross-subsidisation or lowering the level of services to that which people can afford);  sustainability (including financial viability and environmentally sound and socially just use of resources); and  competitiveness of local commerce and industry. The White Paper on Municipal Services Partnerships, released in 2000, goes into greater detail on the types of partnerships local government could enter into with CBOs and NGOs, other public sector entities and the private sector. At many points, the White Paper explicitly states that while the government is committed to facilitating the use of MSP arrangements, it does not mean that MSPs are the preferred option for improving service delivery. It is presented as one in a range of options that should be open to municipalities in providing the best service for the lowest possible cost. The White Paper essentially indicates legislative gaps that need to be filled, and makes additional proposals on how to enable municipalities to enter into services partnerships with external entities. The Municipal Infrastructure Investment Unit (MIIU), located in the DBSA, was set up to provide technical and legal support to municipal councils when entering into partnerships. The DPLG’s Project Viability revealed that 230 MSPs had been entered into by March 2002 (DPLG, 2002; 32). The Municipal Systems Act of 2000 reaffirmed that the local council has the responsibility to provide municipal services to the local community. The council has a responsibility to ensure that all members of a local community have access to at least the minimum level of basic municipal services (s73). The Act specifies that municipalities may provide the services themselves through internal mechanisms, may create business units to provide the service or may outsource the service to any other service provider legally able to perform the function (s76). Section 78 of the Act details criteria and processes for the appointment of service providers if the municipality chooses. These include a cost-benefit analysis (including on the environment and human health), the capacity to provide the service, the likely impact on development and jobs, and

36

the views of organised labour. If a municipality decides to contract an external service provider, it must inform the local community of this intention, and communicate the contents of the service delivery agreement to the community (s80 (2)). The municipality must retain control over tariffs. Flying in the face of the authority given to municipalities to decide on who should provide municipal services, the PWC studies suggested that municipalities would need to enter into formal contracts with the relevant RED to provide the necessary services in their area (PWC, 2000b; 13). It appears, then, that the formation of regional distributors may remove control of electricity supply from local councils, contrary to the Constitution and the Municipal Systems Act. In addition, despite increasing competition being the stated reason for creating REDs, municipalities would not have a choice of distributor, since there would be only one RED in each region. The REDs therefore have a captive market. The battle regarding the authority municipalities have to decide on tariffs and service providers erupted in the Cape Town unicity when the NER refused to approve a 1.6% additional increase to fund the supply of a free 20 kWh/month lifeline supply to poor households by the council. The unicity insisted that the mandate in the Constitution and the Municipal Structures Act should be interpreted as meaning local government had the right to set tariffs, and that the national government was only entitled to set general frameworks but not detailed prices (Business Day, 28 Aug 2001). There is also the broader question about whether national government is Constitutionally authorised to impose a distribution structure onto local councils or not. This is likely to remain a point of conflict for some time. For local government, the main concern is covering the recurrent costs of providing municipal services. The Consolidated Municipal Infrastructure Programme (CMIP) and various conditional grants from line departments offer some level of subsidy for infrastructure and bulk supply, mainly to clear away service delivery backlogs. However, municipalities are expected to generate sufficient revenue to cover ongoing administration, and operations and maintenance for the services. As previously noted, these revenues were generated through electricity surpluses in particular for white councils, with black local authorities receiving ‘bridging finance’ from central government. There may be limited grants to municipalities to subsidise some of the costs of providing basic services to low-income households, but these are small and expensive to implement (Fiil-Flynn, 2001; 7). One of the reasons they are difficult to implement is because it relies on a ‘means test’ that is bureaucratic and time consuming, and disliked by many people who find it stigmatising. In a survey in Soweto, not one of the households eligible for service subsidies was receiving them (Fiil-Flynn, 2001; 12). It was inevitable that local government would be affected by the restructuring of the electricity sector, especially since many of the councils relied heavily on electricity revenue to subsidise other services. In 2001, local government received 53.6% of its revenue from utility fees (DPLG, 2001a; 45-46). It proved very difficult for the NER to withdraw licenses from local authorities for this reason, despite most of them not meeting the formal criteria for the granting of licenses. The Energy White Paper showed that government desired to move away from electricity-based crosssubsidisation of municipalities towards a transparent and nationally regulated tax system. However, it planned to do this over time so as to limit the impact on local government finances. In the interim, the White Paper indicated that municipalities would be entitled to continue funding other municipal services through funds generated from electricity sales, but that mechanisms would have to be found to make this transparent. DME suggested that a transfer of R2.4 billion for 5 years would replace the surpluses. However, this has been considered inadequate to cover the lost value

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to local governments (Business Day, 18 June 2001). Thereafter, in order to recoup this lost revenue local government would have to impose a levy of between 6% and 7% on electricity bills (PWC, 2000e; 12). The Energy White Paper indicated that government was prepared to take measures to reduce the impact of this on those who would be unable to carry the burden of an additional tax, or where such taxes would retard economic growth. According to the White Paper, the short-term aim would be to cap revenues that could be derived from electricity surpluses. It is clear that the potential negative impacts on local government finances is one of the major blockages the government is required to resolve if it is to carry through its plans for the creation of the REDs. 3.2.1

Igoli 2002 and electricity corporatisation

The Greater Johannesburg Metropolitan Council (GJMC) was formed by the amalgamation of 11 local authorities after the 1995 local government elections. This resulted in the pooling of all the resources and debts of the previous authorities. The previously flush Johannesburg council, which had managed the ‘whites-only’ areas of the city under apartheid and was insulated from having to provide services to poorer neighbouring authorities, was therefore forced to adopt the service arrears of the formerly black local authorities, which by this time were substantial. In 1997 the amalgamated council was faced with a financial crisis and decided to reorganise service provision to recoup these arrears and ensure greater revenue flows in the future (i.e. develop mechanisms to make sure people paid their bills). The Igoli 2002 restructuring programme in the GJMC has resulted in the corporatisation of Greater Johannesburg’s electricity supply (JCC, 2001). Citing the inefficiency of a large bureaucracy and related lack of incentives, the city council produced the Igoli 2002 plan which, amongst other things, established separate utilities for trading services. These corporatised utilities were also favoured because they allowed services to be managed as distinct companies with their own balance sheets, able to raise capital without regard to the financial position of the council as a whole. The argument is that it will be easier for ring-fenced corporate utilities to raise loans because applications will be assessed in terms of the risks for each service alone, rather than for the whole city (GJMC, 2001). Utilities have thus been established as companies registered in terms of the Companies Act. This was achieved with the formation of City Power through the merging of the electricity distribution functions of Johannesburg, Roodepoort, Midrand, Modderfontein, Randburg and Lenasia in 2001 (Business Day, 29 June 2001). To begin with, the councils will be the only shareholders and will also regulate the utility. The structure allows for the councils to bring other shareholders – i.e. the private sector - on board over time. This is the explicitly stated direction to be followed, with the MD of the utility having the responsibility, amongst other things, to ‘bring in external partners, where appropriate’ (GJMC, 2001). Council regulation will include setting policy frameworks, service standards and tariffs, and approving the utilities’ business plans. Igoli 2002 indicated the likelihood of the electricity utility being a joint venture with Eskom, since both the GJMC and Eskom supply electricity in the GJMC constituency. The joint venture will pool the assets of Eskom and the GJMC, with the medium term possibility of the GJMC buying Eskom out. The jointly owned utility would be structured in such a way that it could be transformed into a RED in line with NER recommendations in future.

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4.

Eskom: Preparing for privatisation?

4.1

Commercialisation

Until the 1980s, Eskom was managed by the state at arm’s length. It was empowered to raise its own funds and to make investments as it chose. Although there was a Control Board to oversee these activities, Eskom had greater power than the board and its management more or less made decisions as they wished. However, the miscalculation in the 1970s of future capacity requirements meant that Eskom found itself with increasing interest repayment costs and not enough demand to meet revenue requirements. Eskom’s net interest-bearing debt rose from R5 013 million in 1980 to R17 621 million in 1985, with finance charges increasing from R454 million to R1 922 million between 1980 and 1985 (Van Horen, 1996; 191). As outlined above, Eskom therefore began increasing tariffs to meet the shortfall. The state came under pressure from large-scale industrial and mining users to intervene, and the De Villiers Commission findings saw the state exert greater control over Eskom. From 1986 there was a concerted effort to bring down the debt:equity ratio in preparation for privatisation (Veck, 2000; 110). Debt affects the ability to raise further finance for large capital investments, especially at low cost (Van Horen, 1996; 195). Graph 1 indicates the success of this effort, with the debt:equity ratio dropping from 3:1 in 1985 to just 0,5:1 in 2001. Interest cover shows the amount of times the interest due is covered by operating income. The higher this number the better, since it reduces sensitivity to interest rate changes. Graph 1 shows that interest cover rose from 1.29 in 1985 to over 2 after 2000. Graph 1: Eskom interest cover and debt:equity ratio Eskom financial indicators, 1985-2001 3.50 3.00

Ratio

2.50 2.00 1.50 1.00 0.50

2001

2000

99

98

97

96

95

94

93

92

91

90

89

88

87

86

85

0.00

Year Interest cover

Debt:equity ratio

Source: van Horen, 1996; Eskom annual reports; McGregor's Who Owns Whom 2002

Graph 2 reveals that in current terms, Eskom debt continued to increase until 1993 when it reached a peak of R28 billion and thereafter started declining. It dropped sharply in 2001, when debt stood at just R16.7 billion or less than 60% of what it had been eight years earlier5. Net finance charges 5

A figure for net interest bearing debt (net liabilities) is not provided in Eskom annual reports. I therefore calculated net liabilities by working backwards from the debt:equity ratio (net interest bearing liabilities divided by accumulated reserves), multiplying reserves by the debt:equity ratio to find net liabilities. In 2001, Eskom provided figures for net liabilities, and this was identical with the figure derived from the calculations just mentioned.

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(interest repayments less interest accrued) also started gradually declining from around 1998. If inflation is taken into account, the decline would be even more dramatic. These tangibly show the extent to which Eskom has shifted itself onto a more financially sustainable path. It is noteworthy that this was achieved while the utility remained in public ownership, and suggests that there is no necessary connection between financial unsustainability and public ownership. At the same time, it indicates a tightening fiscal control that would prevent additional debt being incurred to carry out necessary domestic electrification programmes. Graph 2: Eskom debt and interest repayments Eskom debt & interest repayments 1980-2001

30000

25000

R'000

20000

15000

10000

5000

2001

99

2000

98

97

96

95

94

93

92

91

90

89

88

87

86

85

84

83

82

81

1980

0

Year

Net liabilities

Finance charges

Source: van Horen, 1996 (up to 1994); Eskom annual reports (from 1995) Net liabilities = net interest-bearing debt

Graph 3 indicates Eskom’s profitability from 1980 to 2000. It shows that net income rose rapidly from 1990, peaking in 1997 when it began to drop quickly to R1 759 million in 2000. This drop in net income is related to a slow growth in electricity sales due to a sluggish economy, and the result of higher operating expenditure especially as a result of ‘separation packages’ which saw the utility reducing its workforce through voluntary retrenchments from 1998 (FM Top Companies, 2000; 275). In 2001, Eskom showed the first increase in net income since a very small increase in 1997. Return on assets (net operating income before finance charges divided by total assets) showed a gradual and stable increase from 1985 to 1996, when it began to decline quite sharply. However, it picked up again from 2000 and was at 10.1% at 2001. It should be noted that this return is measured before inflation. According to Eskom CEO Thulani Gcabashe, there is pressure to increase these rates of return substantially, into the region of 18-20% (Business Day, 12 Mar 2002). Although Eskom’s profits have been declining in recent years, the company is regarded within government and industry as the star parastatal performer. It is one of the world’s lowest cost power producers (at least for industry) and it has never had to turn to government for funds or other financial assistance (Business Day, 6 Apr 2000).

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Graph 3: Eskom profitability indicators, 1980-2000

14.0

3000

12.0

2500

10.0

2000

8.0

1500

6.0

1000

4.0

500

2.0

0

0.0

2000

98

96

94

92

90

88

86

84

82

%

3500

1980

R million

Eskom profitability indicators, 1980-2000

Year Net income

Return on assets (%)*

Source: van Horen, 1996; Eskom annual reports; McGregor's Who Owns Whom 2002 *Net operating income (i.e. before finance charges) divided by total assets

The Eskom Amendment Act of 1998 vested ownership of Eskom's equity in the state, repealed Eskom's tax-exempt status, and mandated the public enterprises minister to act to incorporate Eskom as a limited liability company with share capital. Until this point, Eskom did not have share capital and equity consisted of accumulated reserves through retained earnings from the sale of electricity. These reserves acted as cover for foreign debt. At the time, COSATU (1998a; 3) had raised the concern that the amendment bill was being tabled prior to the release of the Green Paper on Energy Policy, thus pre-empting full discussion on the future shape of the sector. The Act had the effect of loosening state control of Eskom because individual directors were no longer compelled to report to Parliament, and privatisation would be easy because government could simply sell its shares if it wished (COSATU, NUM & NUMSA, 1998). When the Bill was passed, COSATU abandoned the approach of challenging corporatisation in principle, since this was seen as a lost battle. The union federation therefore shifted its focus to trying to avoiding the negative consequences of corporatisation (COSATU, 2000; 2). The amendments prepared the ground for the Eskom Conversion Act 13 of 2001. This Act converted Eskom into a company (Eskom Holdings Limited) in accordance with the Companies Act. A Board of Directors replaces the Electricity Council and the Management Board, and the government will be the sole shareholder (previously the owner). The newly established board includes the chief operating officer of UK energy trader and electricity generator and retailer Innogy, and the president of telecommunications group Ericsson (Chalmers, 2002c).The date of conversion was set at March 2002. The aim of the Act is to bring Eskom in line with a business governance model that is internationally understood and which will ‘facilitate Eskom’s entry into global markets’ (Eskom annual report, 2001; 20). Government also stated that Eskom should be placed in the legal position where it is able to list on the stock exchange in the future if it so wishes (Eberhard, 2001; 9). Control of the corporatised entity would be managed through the negotiation of ‘shareholder compacts’ between utility management and government as the shareholder. However, these compacts “will be reassessed when outside bodies acquire equity” (DPE, 2001f).

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4.2

Destruction of jobs

The expansion of generation capacity, and the extension of the electrification programme into ‘white’ rural areas in the 1980s, resulted in a sharp increase in workers in the electricity industry. Figures for workers in the electricity sector as a whole (Eskom and local authorities) show that whites benefited most from this increase in employment, with a 227% increase in the number of white workers between 1970 and mid-1985. In 1970, African workers were already greater in number than white workers in the sector, constituting 61.7% of the workforce in 1970. The number of African workers also rose substantially in the period up to 1985. However, after the surge in employment, African workers as a percentage of the total workforce fell to 54.6% in mid 1985. In contrast, white workers increased as a percentage of the total workforce from 35.4% in 1970 to 38.9% in 1985 (CSS, 1986; 49). In 1970, white workers earned more than 6 times the average wages of African workers in the electricity sector. The wage gap remained high in mid 1985, although average wages for white workers dropped to 3.5 times those of black workers (CSS, 1986; 209). Entrenchment of whites in supervisory and management jobs can partly account for this, but there was also certainly an element of wage discrimination even for the same jobs performed. Unfortunately, statistical data on numbers and average wages of workers in the electricity sector are conflated with data for the gas and water supply sectors in the 1990s (SSA, 1995; 2.172 & 4.43), and so no meaningful comparison can be made. Graph 4 indicates the number of employees in Eskom from 1960 to the end of 2001. It shows the rapid increase in employment as Eskom expanded from the early 1970s until the mid-1980s. Soon after the 1984 De Villiers Commission recommendations were adopted by Eskom, a rapid decline in the workforce is apparent. This reached a brief plateau during the period of negotiations for political democracy in the early to mid-1990s. After 1996 – the year when GEAR was introduced and proposals for the restructuring of the electricity sector began firming up – the descent continued. By the end of 2001, the workforce was well below half the number of the 1985 peak, standing at just 29 969 employees. The reduction in the workforce was partly achieved through a process of ‘natural attrition’ where workers who left were not replaced, and ‘voluntary’ retrenchment (FM Top Companies, 1996; 288). Also, as Eskom unbundled, workers were transferred to the separate units. With outsourcing or privatisation, these workers were no longer considered to be Eskom employees. Three unions organise the majority of Eskom’s workforce. Black workers are organised through the Cosatu-affiliated National Union of Mineworkers (Num) and National Union of Metalworkers (Numsa). Num is the largest union at Eskom, with an estimated 10-14 000 workers. Numsa has around 5 800 workers. Most of the black workers organised into these two unions are in the semiskilled categories, although they are making some inroads into the skilled categories as more black workers are trained to perform skilled jobs. The conservative Mynwerker’s Unie-Solidarity (MWU) organised white workers in Eskom since the 1960s, and continues to do so today. It has an estimated 8 000 members, mainly in the skilled categories. The main issue for the MWU-Solidarity is opposition to affirmative action. The unions have lost membership as the workforce has declined. The Cosatu affiliates continue to organise workers in Rotek and Eskom Enterprises (see below), but these workers are no longer able to participate in the collective bargaining structures since they are outsourced. According to Osborne Galeni, Numsa’s national organiser, the process of retrenchments was handled in a fairly consultative way in the late 1980s and early 1990s. For this reason, there was little overt conflict between the unions and Eskom around the retrenchments. However, with the change in management to black empowerment management, the process is becoming increasingly conflictual

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(personal communications, 27 Sept 2002). Galeni indicates that the goal of transformation from the 1980s were fundamentally about using Eskom as a publicly-owned vehicle for delivery of basic services to the black population and to drive equitable economic development. However, the new management is looking to reverse these goals. It is obstructionist and transformation structures of the past are no longer functioning in any meaningful way. Graph 4: Eskom employment, 1960-2001

98

2000

96

94

92

90

88

86

84

82

80

78

76

74

72

70

68

66

64

62

70000 65000 60000 55000 50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0

1960

Number of workers

Eskom employment, 1960-2001

Year

Source: Eskom Statistical Yearbook 1996; Eskom Annual Reports 1999 & 2001

The employment losses should not be surprising, given that the International Labour Office (ILO) has already recognised that ‘employment losses almost always accompany adjustments in the public utilities, both under privatisation and under restructuring schemes’ (1998 study cited in TNI, 2002; 18). In 2001, the South African government also acknowledged that changing operational requirements resulting from restructuring could lead to significant job losses (DPE, 2001e). In exchange for short-term job losses, the Ministry for Public Enterprises suggests that these may be offset for labour ‘as a group’ by the ‘appreciation in the value of shares acquired in the restructured enterprises’ and ‘improved economic conditions that permit re-absorption into the job market’ (MPE, 2000; 39). Therefore, retrenched workers will lose, but those who remain might benefit from having shares in the restructured company. The retrenched workers will then be able to find new jobs one fine day when job-creating growth finally begins. 4.3

Ring-fencing of regulated activities

In response to the recommendations of the De Villiers Commission, in 1986 Eskom was reorganised into self-contained Strategic Business Units, and distribution was reorganised into regions. In the late 1980s, the government began the process of preparing Eskom for possible privatisation. However, mass opposition to this resulted in it being shelved, especially after 1990. In the first few years after its unbanning in 1990, the ANC had threatened nationalisation if Eskom was unable to carry out electrification programme. However, this was dropped soon thereafter as the party adjusted to the compromises required to govern within a rampantly neo-liberal capitalist framework. Throughout the 1990s, Eskom began to restructure in response to the solidifying proposals regarding restructuring of the industry as a whole. This primarily involved the ring-fencing of the three sectors into corporate entities with the eventual aim of these becoming entirely separate from

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Eskom. This internal reorganisation is fairly well advanced at present. At the behest of the NER, in 1999 Eskom ring-fenced its generation, transmission and distribution sectors into separate units. The aim was to make each financially self-sufficient and to gain an understanding of the costs involved in each as a stand-alone sector. This reorganisation is the first step in a process of unbundling, delinking the sectors from one another financially and operationally. Generation As discussed above, the aim of splitting Eskom into separate units was to introduce private sector involvement in generation sector, either by unbundling Eskom’s generation assets, or by introducing the private sector in new generation requirements. Since Eskom occupies 95% of the generation sector, the plan is to split Eskom’s 24 power stations into different generation holding companies to ensure competition. From January 2001, Eskom’s power stations were organisationally restructured into five separate entities. The Arnot, Hendrina, Kriel and Matla stations are in the first group of power stations; Duvha, Majuba and Kendal in the second; Lethabo, Matimba and Tutuka in the third; nuclear power plant Koeberg in the fourth; and Simunye in the fifth (Business Day, 3 Apr 2001). To begin with, these companies would operate independently of, and in competition with, one another, and be fully owned by the state (DPE, 2000b). These entities form the basis for competing privatised companies in the future, with the state retaining a portion of generating capacity (Eberhard, 2001; 19). There has been a particular policy focus on involving specific sections of the private sector, viz. black economic empowerment and foreign investors. One of the primary objectives of restructuring is to “promote economic empowerment” (DPE, 2000b), i.e. to create economic space for accumulation by the black elite. In 2001, the Public Enterprises Minister announced the planned recommissioning of 10% of Eskom’s capacity with a black empowerment focus, and the intended sale of up to 30% of Eskom’s generation capacity in two tranches. This followed a statement by Minerals and Energy Minister Pumzile Mlambo-Ngcuka that 10% of Eskom's generation capacity would be sold to black economic empowerment companies by 2004 (Business Day, 12 July 2001). According to Eskom CEO Thulani Gcabashe, Eskom’s share in the power generation market is expected to decline from 95% to around 50% in the next few years (Business Day, 2 Apr 2001). A number of foreign multinationals are preparing to enter the South African market when liberalisation does take place. International Power (UK), Cinergy and AES (US), and EDF (France) were all preparing to occupy the newly opening space in the South African electricity sector (Business Day, 9 May 2001). EDF was the second largest power company in the world in 2001, rated both in sales and generation capacity (Eskom AR, 2001; 135). In addition, AES and EDF ranked second and fourth respectively in investments in energy companies in Southern countries between 1990 and 2000, with AES taking over much of the liberalised markets of Eastern Europe, Asia and Africa (TNI, 2002; 11). Eskom suggested that, while it agreed that around 30% of Eskom’s capacity should be taken by competitors – in particular by black empowerment companies – this could be achieved by recommissioning three of Eskom’s mothballed plants. These plants – collectively known as the Simunye power stations and comprising the Komati, Grootvlei and Camden stations – were set aside by Eskom because of overcapacity. As additional capacity is required, these stations could be brought on-line again through the sale, outsourcing or concessioning to black empowerment companies. This would also allow these companies to participate without having to attract large sums of capital to build their own plant (Business Day, 1 Oct 2001). However according to consultants BusinessMap, these plants carry substantially higher risk than other generating assets

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and therefore, according to them, bringing black empowerment companies in on the basis suggested by Eskom may not be the best route to follow (Business Day, 16 Oct 2001). The 30% disposal by Eskom is merely a step in the direction of greater privatisation of the utility. While there has been consideration of the immediate introduction of a private partner directly into Eskom as it stands, government states that it wants to create a competitive environment before this happens. This is based on the fear that privatisation of Eskom in the current industry structure could lead to a private monopoly (Eberhard, 2001; 16). So the idea is to create a competitive environment first, and only then to move ahead with initial partial privatisation. Transmission A ring-fenced Transmission unit has also been established within Eskom, with the aim of eventually forming a separate company. Currently, the transmission sector is being restructured to create a wires and system operator business, as well as an independent system operator (Eskom AR, 2001; 26). The medium-term aim is to have a state-owned transmission company (not owned by Eskom), with the possibility of outsourcing of sections of transmission (DME, 2000c). The long-term vision is that a power exchange, or energy trading market, would operate in the transmission sector. The fine details of the operation of such a market are still being debated. An energy trading market would theoretically allow non-discriminatory access to the grid. Power is purchased from a number of generators and put into the pool. There will be one price in the market that includes a capacity and an energy element. Generators place their bids hourly for the following day and scheduling is done from the cheapest to the most expensive. Once expected demand and reserve requirements are met, the market is closed for the day. The price paid for the last unit to be scheduled becomes the pool price. Generators are not obligated to supply, and may withhold electricity if they do not feel the price is reasonable. The system is driven by competition, and thus generators are unlikely to share information regarding costs with one another. Those who benefit the most will be those who are able to produce electricity at the lowest rate and sell at a rate closest to the ‘marginal rate’ (the price of the last unit scheduled) (ESI Southern Africa, No 4, 1997; 4043). Distributors will purchase power from the pool, based on the marginal price plus a transmission cost. The transmission cost includes the cost of losses in transporting the electricity to the distribution points of buyers. This means that buyers closer to power stations will pay less because of the lower losses associated with long-distance transmission. In another version being contemplated, trading through the pool is voluntary not mandatory. In this system, bilateral contracts are concluded between individual generators and individual suppliers and/or customers Eberhard, 2001). Within Eskom, an internal power pool has been in operation since the mid-1990s. It is the prototype for a broader South African pool in the future, which may be integrated with the Southern African Power Pool (SAPP), already in operation at a regional level. South Africa currently imports slightly more power from the SAPP than it exports to the pool. Nevertheless, the regional pool remains a small part of electricity trading in South Africa, with South African imports amounting to no more than 2.8% of the total electricity pool in South Africa (NER, 2000; 2). Eskom generates around 85% of electricity produced in Southern Africa, and so entirely dominates the regional market.

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Distribution Eskom Distribution unit is also being separated from Eskom and ring-fenced (Eskom AR, 2001; 53). The first phase of the transition to the regional distributors is the formation of a holding company, EDI Holdings, which will house the distribution functions of Eskom and the large municipalities (Business Day, 17 July 2001). However, because Eskom’s assets were built up on the basis of foreign loans, any restructuring will have to be approved by the overseas institutions (Loxton, 1997). This puts the entire process in the hands of large global lending institutions, which favour deregulation and liberalisation of the energy sector. According to Nelisiwe Magubane, electricity chief director at DME, regional distributors are to be phased in over a period of two to four years (Chalmers, 2002b). This means the completion of the establishment of the REDs between 2004 and 2006. At the end of the electricity sector restructuring process, Eskom is likely to play a very negligible role in the direct distribution of electricity to end-users. In late 2001, the Minister of Public Enterprises announced the ring-fencing of Eskom’s distribution business as a separate EDI holdings company (Business Day, 12 July 2001). In accordance with policy, the assets would be redistributed into the REDs on their establishment. The question of whether Eskom or national government (as Eskom’s sole shareholder) would hold the shares in the REDs remained open pending the restructuring of Eskom itself (PWC, 2000b; 10-11). However, the ‘emerging view’ was that shares should be held by national government because Eskom shareholding “would be inconsistent with vertical disaggregation which has become a feature of international electricity supply industry restructuring” (PWC, 2000f; 5). In the light of the failure to attract investors, however, the government has been forced to reconsider the timing of privatisation. Recently the national treasury raised concerns about the costs of establishing corporatised entities in the distribution sector. The treasury estimates it will cost R600m over three years to form EDI Holdings and the regional distributors. Finance Minister Trevor Manuel also questioned the sustainability of the entity (Chalmers, 2002c). However, statements in late September 2002 indicated that the process of establishing the holding company would be proceeding. According to the logic of corporatisation and privatisation, the process will eventually arrive at a point where low voltage distribution (the wires leading up to and into the building) would be separated from the supply of an electricity service. It is envisaged that the retail supply would eventually be opened to market competition, allowing customers to choose who they buy electricity from (although it will still be distributed to the building by a monopoly distributor). However, this part of the privatisation process is not expected to be carried out before 2010 (Winkler & Mavhungu, 2001; 4). Government anticipated that Eskom would make up any capacity lost in the domestic market through the acquisition of generation capacity in Africa (Business Day, 13 Sept 2001). The restructuring will thus lead to a reduction of Eskom’s involvement in the local electricity supply industry, and a greater emphasis on global activities that can generate foreign exchange. A recent newspaper article describes the transformation Eskom is required to undergo as being a transformation from ‘an efficient South African monopoly into a diversified global company capable of competing with the most efficient producers in the world’ (Business Day, 29 Nov 2000). This sums up the direction that Eskom will be expected to take in the next few years. At the same time, government recognises that the market on its own will not fulfil the developmental needs of the population, and Eskom is likely to retain its central role in electricity supply until somewhere around 2010, when it is expected that an electrification programme will be

46

complete. According to DME Minister Mlambo-Ngcuka, “we are not desperate to raise money. Our priority is to look at the role that electricity can play in poverty alleviation and ensure that we contain any upward pressure on prices” (quoted in Business Day, 13 Sept 2001). But in the meantime the corporatisation and partial unbundling of Eskom, the introduction of greater private sector involvement in the industry, and cost-reflective tariffs in anticipation of full marketisation continues. 4.4

Eskom Enterprises: the unbundling of non-regulated functions

Ring-fencing of regulated activities was only half of the restructuring process inside Eskom. In 1999 Eskom Enterprises (EE) was formed by the unbundling of Eskom into core and non-core areas, with EE taking over the latter. Non-core areas included support services (such as telecommunications, engineering and transport), research into nuclear technology, and energy related activities outside South Africa’s borders. EE was formed as a wholly owned subsidiary of Eskom and took the form of a company governed by the Companies Act of 1973. Therefore it was required to pay taxes and dividends like any other company. EE’s mission is to lead the global expansion of Eskom activities. There is a technological convergence between power generation and distribution, information technology and telephony. Cables and wires can be used to distribute power, data, voice and video. This has resulted in a shift into telecommunications, by EE as the non-regulated subsidiary of Eskom, both in South Africa and in the rest of the continent. These activities include the installation of fibre-optic cable in Nigeria, and between Arnot in South Africa and Mozambique. Towards the end of 2000, EE made its first acquisition in the telecommunications sector, buying a controlling stake in Telkom Lesotho together with Econet Wireless International and Telkom Mauritius. Eskom Enterprises has a 35% share of the consortium, valued at US$7m. The consortium will also be granted a license to operate a second cellular network in Lesotho (Business Day, 10 Nov 2000). This was followed by a successful consortium bid, with EE as technical partner, to purchase 49% of Telkom Kenya (Business Day, 2 Feb 2001). Eskom, through EE, has also moved to take advantage of its transmission infrastructure in South Africa by entering into a partnership with Transtel (Transnet’s communications subsidiary) and Denel’s communications unit to prepare to compete for South Africa’s second fixed-line license (Business Day, 18 Feb 2000). The Financial Mail (8 Mar 2002) reported that Eskom Enterprises was attaching fibre-optic cable to Eskom power lines long before final decisions on a second phone operator were made. A second fixed line phone operator was expected to begin operating in May 2002 when Telkom’s monopoly ceased, but this was recently pushed back to the end of 2002. EE is reported to be pushing very hard for the immediate liberalisation of the domestic telecommunications sector (Business Day, 2 May 2002). In September 2001 the Telecommunications Amendment Bill was passed in Parliament, making provision for an unspecified percentage of the second national operator to be set aside for Eskom Enterprises and Transtel (Business Day, 10 Sept 2001). Along with the PBMR, retrofitting fibre-optic cable to its transmission network is one of Eskom’s two largest projects (Phasiwe, 2002). The three parastatals have communications networks that can be adapted relatively quickly and cheaply to telephone use. Part of the broader restructuring of state assets included the integration of similar functions between different enterprises. A new company – arivia.com - was formed in 2001 out of the three parastatals’ consolidated telecoms and information technology networks. Shareholding is based on the value contributed by each partner, with Eskom holding 45% of the

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shares (ESI Africa, No 1 2001). The aim is for the company to serve the IT and telecoms needs of the shareholding companies, plus other arms of government and the private sector. EE is also viewed as being Eskom’s vehicle to expand into Africa. According to Eskom chair Reuel Khoza, the formation of EE to spearhead Eskom’s involvement in Africa is the first phase of expansion into other parts of the globe (Business Day, 10 Nov 2000). All acquisitions by Eskom in Africa are to be made through EE. The company made an equity investment in the privatising Uganda Electricity Board in 2000. In 2002 it put in a concession bid to manage the Uganda Electricity Generation Company, asking for a 12% return on investment. Its bid competitors withdrew and it is certain that Eskom will win the concession (Wakabi, 2002). EE has also established a presence in Mali, Ghana, Tanzania, Democratic Republic of Congo, Angola, Zambia, Mozambique and Botswana. The company was also in talks with Egypt, Morocco, Tunisia and Libya in 2000 (Business Day, 9 Mar 2000). Projects under way included a R100m agreement to supply water and electricity in Gambia and the formation of a consortium with EDF and Saur International to bid for 51% of Cameroon's Sonel. Eskom is also doing consultancy work in Zanzibar (Business Day, 10 Aug 2000). In Libya Eskom Enterprises has concluded an alliance agreement with the country's power utility, Gecol. The plan is to refurbish, operate and maintain Gecol's facilities in Libya and elsewhere in Africa (Business Day, 12 Sept 2000). Towards the end of 2000, Eskom signed a collaboration pact with Nigeria’s National Electricity Power Authority (NEPA) covering generation and operations; electro-mechanical repairs; transmission; and rehabilitate, operate and transfer (ROT) schemes (Business Day, 17 Oct 2000). A related thrust into Africa is the planned provision of energy services to South African companies moving into the rest of Africa (Business Day, 29 Nov 2000). Eskom has made other agreements in Gambia, Mozambique, Uganda, Cameroon and Swaziland (Business Day, 25 Jan 2001). In July 2001, EE was awarded a 15-year operation and maintenance contract for the new Manantali hydro station in Mali and its associated high voltage transmission system. EE is also engaged in consulting and management contracts in Malawi (Business Day, 8 Nov 2001). In 2002, EE CEO Jan de Beer revealed the company’s long term goal, saying “the group is involved in projects to unite the continent's electricity grids and is working towards ultimately linking electricity routes between Africa, Europe and the Middle East” (Business Day, 12 Mar 2002). With the focus of partial privatisation on the domestic generation sector at present, Eskom has shifted its attention to building up its transmission sector. Using Eskom Enterprises as the vehicle, the focus is turning towards connecting inter-country transmission grids across Africa. Already plans worth R6bn have been developed to extend transmission lines along a western corridor and an eastern corridor. The western corridor will link Angola, DRC, Namibia and South Africa, while the east will link Mozambique, Zimbabwe, Zambia and Tanzania. Eskom will fund 60% of the project, with remaining funds coming from the DBSA and the Industrial Development Corporation (IDC) (Rose, 2002). Despite the apparent co-operation underlying the SAPP, in 2000 Eskom was looking to bid for the Zimbabwean Electricity Supply Authority’s power stations as repayment for outstanding debt owed by Zesa to Eskom. South Africa also threatened Zimbabwe with electricity cut-offs if the debts were not at least reduced. If the outstanding amount started to increase, ‘supply would be interruptible again, as was the case from January 27 to April 1 2000’ according to SA Public Enterprises Minister Jeff Radebe (Business Day, 26 Apr 2000). Once Zesa had managed to pay off the debts, Eskom put the money into a special account to be used in feasibility studies in support of the privatisation of the Zimbabwean utility (Business Day, 27 Mar 2001). In 2001, Eskom signed a

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contract with Zesa to manage, operate and maintain the Hwange power station (Business Day, 8 Nov 2001). At the start of 2002, a disagreement broke out between Mozambique and Eskom regarding fair prices to pay for electricity produced by the Cahora Bassa hydro-electric scheme. Power generated by the scheme is transmitted through Eskom’s South African network and then resold to Mozambique at inflated prices. According to Carlos Viega Anjos, chair of the board of the Cahora Bassa dam's operating company Hidroelectrica de Cahora Bassa (HCB), Eskom was buying electricity in rands at very low prices and then reselling it in US dollars. Eskom was selling the electricity back to Mozambique's electricity company, EDM, for use in the southern provinces of Maputo and Gaza (Business Day, 18 Jan 2002). Renamo, backed by the apartheid-era South African government, had destroyed about half of Mozambique’s own transmission lines in the 1980s. Landmines also made it impossible to use large sections of the network (Gebhardt, 1996b). Despite the historical injustice, Eskom insists that it should not pay more for electricity from Mozambique than it would cost to produce it in South Africa. Therefore the Mozambiquean-owned company is being forced to compete with its giant counterpart in South Africa. Eskom’s stated strategic intervention with regard to the SAPP is to reposition the SAPP ‘in line with global trends of liberalising and introducing competition into electricity markets’ (Eskom annual report, 2001; 18). Rotek Industries, EE’s engineering and construction division, accounts for up to half of the organisation's turnover. Rotek was established in 1989 when the assets and operations of Eskom's central maintenance services were transferred to an independent holding company. This allowed Eskom to ‘contract out’ its power system maintenance. Rotek provides services that include heavy electrical and mechanical repairs and refurbishment, infrastructure development, property management and transport projects. Rotek has been involved in projects in Africa as well as Australia and South East Asia (Business Day, 1 Mar 2001). One of the target areas in Africa is maintenance of infrastructure that was constructed in the heyday of post-colonial developmentalism on the continent. Much of this infrastructure is in decline. The privatisation of Rotek was started with the announcement of the full disposal of Rotek Vehicle Services in 2002 (DPE, 2002a). The message of an EE advertising campaign is that Eskom no longer a South African-based utility which focuses on the generation, transmission and distribution of power. Eskom is in the process of becoming a diversified energy group with interests in, among others, telecommunications, information technology and engineering (Business Day, 2 Feb 2001). The approach is clearly in line with the export-oriented economy being built on the basis of Gear and Nepad – using South African resources built up under apartheid to capture and profit from markets globally and in Africa in particular. It is also based on diversification of economic activities to reduce the impact on profitability of future competition in the local electricity supply industry.

5.

The National Electrification Programme, 1990-2002

A systematic electrification programme was implemented parallel to the restructuring process described above. While there was a lack of a clearly defined government policy or implementation framework for electrification, Eskom took it upon itself to launch an ‘electricity for all’ programme from 1987. It was estimated that only 33% of households had access to electricity in 1990 (van Horen, 1996; 190). In 1992, there was still an estimated backlog of 4.2 million households (57% of the total number of households in South Africa at the time), with an expected growth of around 180

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000 households a year on top of that (CAA, 1994; 31). Thus, only 43% of households had access to electricity in 1992, and this was heavily skewed towards white households. Only 12% of rural households were connected to an electricity supply in 1994, with a range from 5% in dense settlements to 88% in rural institutions (Davis, 1996b; 469 & 471). Early estimates of the expected cost of an electrification programme ranged from R22 billion to R28 billion, depending on the assumptions that were used. Average costs per connection were estimated at between R3 500 and R4 000, with O&M costs ranging from R15-23/month per connection. Bulk supply of electricity was estimated at between 9.5c/kWh and 16.2c/kWh at 1993 prices (Davis, 1995a; 3). However, Davis (1996a; 12-13) suggested that the estimates were too low, and calculated that average costs per connections would vary between R2 800 in Gauteng and R8100 in the Eastern Cape. These also excluded the possibility of capacity upgrades in the future. Given the new political climate, Eskom started a black residential electrification programme in 1987, under the slogan of ‘Electricity for All’. The programme started off slowly, gathering pace until 1995 when Eskom reached its peak of annual connections. Eskom undertook a low-key farm worker household electrification programme parallel to this, where farmers willing to extend their own supplies to farm worker houses received a subsidy to support this. Local councils also began making connections, rising to more than 100 000 connections a year from 1993 (see graph 5). After its formation in 1992, the NELF made recommendations relating to financial models for the electrification programme that were fed into the RDP in 1994. The RDP set an electrification target of 2.5 million household connections by 2000, and the electrification of all schools and clinics as soon as possible. As a contribution to this target, Eskom established its own target of 1.75 million household connections (300 000 a year) on the assumption that municipal distributors would be responsible for the remainder. Graph 5: Eskom and local government connections Eskom & local govt connections, 1991-2001 350000 325000 300000

No. of connections

275000 250000 225000 200000 175000 150000 125000 100000 75000 50000 25000

2001

2000

99

98

97

96

95

94

93

92

1991

0

Year

Eskom direct connections

Local govt connections

Eskom farmworker connections

Source: Eskom Annual Reports and Statistical Yearbook, NER Supply Stats *Data for local govt connections in 2001 not available

The RDP anticipated that the cost of the initial programme would be R12 billion, with a peak annual investment of R2 billion. It suggested that, as far as possible, the programme should be subsidised from within the industry through cross-subsidisation from other electricity users. Capital subsidies would be provided for the electrification of poor households in remote rural areas. It

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called for the creation of a National Electrification Fund, underwritten by a government guarantee, to raise finance from lenders and investors. A national domestic tariff structure with low connection fees was to be established to promote affordability (ANC, 1994; 33). Assistance to local authorities to deal with the backlog in municipal services was to be provided through inter-governmental transfers from national and provincial government (ANC, 1994; 130). From the point of view of productive activity, the RDP called for the extension of electricity to SMMEs (ANC, 1994; 108). Finally, the RDP called for the writing off of arrears and debts of black local authorities (ANC, 1994; 130). Eskom funded municipal connections by refunding R400 of the cost of each new connection. It also made available bulk discounts to municipalities on the basis of their electrification programmes (Davis, 1996; 475). Eskom’s scheme to refund municipal connections was discontinued in 1994 (van Horen, 1996; 190). However, the NER picked up where Eskom had left off, providing a more substantial average subsidy to municipalities of R2 400 per connection. Because of the structure of the industry, with Eskom monopolising all the segments while not being required to pay taxes since it was a part of the state, funds for the electrification programme came from Eskom’s internal resources. This was through a combination of loans raised on the capital markets and a cross-subsidisation by existing users that was built into the pricing structure. In 1997 it was estimated that Eskom was levying grid consumers an average of 4% of the cost of electricity consumption to fund the electrification programme (DME, 1997a). From 1991 to the end of 1996, the electrification programme had made 2.02 million new household connections. Eskom made around two thirds (including around 70 000 indirect farm worker connections - where Eskom subsidised the connections but did not necessarily carry them out itself), and municipalities made the remainder (see graph 5). The average annual connection rate was around 337 000 over the 6 years. The result was that at the end of 1995, just over 50% of all households were electrified. This was unevenly divided between rural and urban, with just 20.6% of rural households connected compared to 76.45% of urban households (NER, 1995; 37). After 1996, Eskom continued under its own steam in the absence of any policy clarity. Because of the way that the industry was structured, government found it difficult to control the electrification programme. It was difficult to see what money was being used, and because Eskom only had the legal authority to electrify areas where it was the distributor, costly rural connections were being made while some urban areas were not being connected. This was especially so since many municipalities were unable to finance or subsidise electrification programmes in their areas of jurisdiction. The 1998 Energy White Paper indicated that there would be a slow-down in the number of connections from 1999. Indeed, 1997 proved to be the peak in the number of household connections made, at just under 500 000, thanks to a spike in the number of connections made by local authorities. Graph 5 shows the decline in the number of connections from 1999, for both Eskom and local authorities. The National Electrification Co-ordinating Committee (NECC) was established in 1999 to advise the Minister on refocusing the electrification programme. This was in the process of being replaced by a stakeholder forum called the National Electrification Advisory Committee (NEAC) at the end of 2001 (Eskom AR, 2001; 64). As part of the refocusing, in 2000 Eskom agreed with government that it would undertake a further 600 000 connections in the following three years. These were to be focused on rural connections, with 71% of connections in 2000 planned to be rural (Business Day,

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17 Aug 2000). As the distances and costs of connecting remaining areas increased, the plan was to shift from connections through the national grid to connections via non-grid and mini-grid hybrid systems (DME, 2002). The target for 2001 was for Eskom to make 200 000 connections, local government another 120 000, with an additional 30 000 non-grid connections to be made, coming to a total of 350 000 for the year. Graph 6: Eskom electrification programme expenditure

2001

2000

99

98

97

96

95

94

93

1200 1100 1000 900 800 700 600 500 400 300 200 100 0

1991/92

R (million)

Eskom electrification programme expenditure, 1991-2001

Year

Source: Davis, 1996; Eskom statistical yearbook, 1996; Eskom annual reports

By the end of 2001, Eskom and local authorities had made a total of just under 4 million household connections (including farm worker connections), at a cost to Eskom of R7.72 billion (graph 6). The percentage of households with access to electricity infrastructure increased to 70.44% at the end of 2000. In urban areas, the percentage of households with electricity infrastructure was 83.99%, with rural areas lagging behind at 50.34% (NER Annual Report 2000/01; 14). Graphs A3 and A4 (in appendix) show the increase in the percentage of households connected for rural and urban areas respectively from 1995 to 2000. By province, the highest percentage of rural households connected was in the Northern Cape, with the lowest percentage in KwaZulu-Natal. For the urban areas, the North West boasted 100% connections, while Gauteng trailed at the back. However, as shown below, access to infrastructure does not necessarily mean access to electricity. It is difficult to provide meaningful figures of actual consumption per connection over the years. Consumption to residential users is not broken down into those with full connections and those with low voltage prepayment systems. Average figures will therefore obscure any potential differences in consumption trends in these two groups. For Eskom, a large proportion of residential consumption is captured under bulk supply to redistributors (municipalities), but this includes street lighting and other municipal functions and using the consumption figures of redistributors will therefore skew average consumption. Based on data on residential consumption from Stats SA and total household connections from the NER, average residential consumption per connection appears to have declined from 492 kWh/month in 1995 to 404 kWh/month in 2000. But this is not unexpected because most of the new residential connections made during this time have not been full 3-phase connections. The cost of connections shows a rise from 1993 to 1996, but then it began dipping so that in 2001 the average cost of connections was the lowest of any time in the electrification programme. Graph 7 shows that Eskom reduced the average cost of connections from around R3400 in 1996 to just

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over R2500 in 2001. Eskom distribution unit executive Joe Matsau said that capital costs in rural areas had fallen by about 50% in the past five years (Business Day, 17 Aug 2000). This may be related to improving technology. But according to the DME, it is also partly the result of ‘cherrypicking’, with distributors undertaking the lowest cost installations through selecting areas that are economically viable to electrify at low cost (DME, 1997a). In 2000, allocations to fund electrification projects were based on ranking projects from those with lowest capital expenditure to those with highest (ESI Africa No 2, 2000; 22). This suggests that municipalities with dispersed residential areas would be less likely to receive funds for electrification. It also tends to encourage municipalities to cut corners by providing lower levels of service in order to access funds. It is anticipated that as the electrification programme enters into the final third of the population requiring electricity, mainly those in sparse rural areas, connections costs are likely to increase (DME, 2002). Graph 7: Eskom average capital costs per connection

2001

2000

99

98

97

96

95

94

93

3750 3500 3250 3000 2750 2500 2250 2000 1750 1500 1250 1000 750 500 250 0

92

R/connection

Eskom capital costs/connection, 1992-2001

Year

Source: Eskom Annual Reports, Davis 1996, Veck 2000

The central government itself set low supply standards. In 1997 the Municipal Infrastructure Investment Framework (MIIF), the government’s planning framework for municipal service delivery, set the basic standard of infrastructure at a 5-8A electrical connection. In many rural areas the funded connection was a 2.5A supply. Government would fund the installation of infrastructure at this level to households with income of less than R800 per month (Fiil-Flynn, 2001; 5). The amperage determines the limits of consumption. A 60A connection, found in formerly ‘whites-only’ residential areas, allows the user to run as many appliances as they wish and permits a number of access points inside the house. In contrast, a 2.5A supply can do little more than run a low wattage light bulb or a hot plate. In fact, this is the main reason for setting infrastructure levels so low – because of a ‘user pays’ policy (see below) in the context of widespread poverty, nothing more than an extremely low level of service is financially sustainable. Graph A5 (in appendix) shows the percentage of electricity sold by Eskom to categories of end user over the past decade. More than 84% of the total sold was to redistributors (bulk supply to municipalities), industry and mines. The redistributors then provide the local distribution and retail services to customers in their areas of jurisdiction. Urban residential consumers only accounted for 4% of total sales by Eskom in 2001. However, this rose from 0.8% in 1990 and 2.5% in 1995, showing the effects of the electrification programme. Also, residential consumers form a large section of the customers served by local authorities. In the GJMC, the council was serving about

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31% of customers (of which 93% were residential) and Eskom was serving the remainder (JCC, 2001). In the Cape Town unicity, Eskom was supplying electricity to about 25% of the households administered by the unicity (Business Day, 28 Aug 2001). In Durban, the metro purchased electricity from Eskom and was supplying 495000 customers (all types) (DMC, 2002). In 2001/02, with the withdrawal of Eskom’s tax-exempt status, responsibility for the national electrification programme was transferred from Eskom to the central government. This was in line with the Energy White Paper, which indicated that financing of the electrification programme would be shifted from an implicit surcharge in the electricity price to the budget. The surcharge would therefore go into the National Revenue Fund controlled by the Department of Finance. In turn, it would be allocated to the National Electrification Fund. It was made explicit that the shift would not affect the overall level of funding of electrification nor the level of the electricity tariff. The Electricity sub-programme of the Energy Management Programme in DME became responsible for strategic and financial management of the Fund, while Eskom was mandated with the execution of the electrification programme (Dept of Finance, 2001; 698). Capital expenditure therefore increased dramatically in the Department’s budget as funds were redirected from Eskom to DME. This happened in two tranches, with R600 million in 2001/02 and a R325 million increase in 2002/03, when capital expenditure on the electrification programme would reach R925 million. The MTEF forecasts a levelling off at around this point with a slight increase in 2004/05 (Dept of Finance, 2001; 706). An electrification fund run by the NER augmented the DME budget in 2001/02, contributing R386 million in that financial year (DME AR 00/01; 42). Public Enterprises Minister Jeff Radebe argued that ‘the government is committed to redeploying revenues derived from the taxation of and dividends from Eskom back into the National Electrification Fund’ (quoted in Business Day, 5 June 2001). Eskom was approved as the business planning and implementation agent for the national electrification programme, and received R446 million from DME in 2001 for this purpose (Eskom AR, 2001; 64). However, this was on condition that the function was ringfenced inside Eskom so that it could be “moved to an appropriate home” as EDI restructuring unfolded (DME AR, 00/01; 42). In 2002/03, conditional grants to local municipalities to carry out the electrification programme were set at R228 million, dropping to R210 million a year for the following two years. Indirect grants for electrification for municipalities made up the rest of the budget, at R722 million in 2002/03 and rising to R740 million per year in the next two years (Dept of Finance, 2001; 719). Conditional grants can only be spent for the purpose identified, and therefore municipalities must spend the funds earmarked for electrification and not something else. In addition to these conditional grants, municipalities receive an equitable share. This share of the national budget may be used at the discretion of the municipality, as long as it falls within the framework of functions and activities assigned to local government in the Constitution and associated legislation. In 2002/03, local governments received a total of R3.85 billion in the equitable share, rising to R5.02 bn and R5.46 bn in the next two years (Division of Revenue Act 2002; Schedule 1). The DPLG also transferred just over R1.65 billion to local government for Consolidated Municipal Infrastructure Programme (CMIP) grants in 2002. The aim of this conditional grant is for municipalities to provide internal bulk, connector and infrastructure services and facilities to low income households (Division of Revenue Act, 2002, Schedule 5). In the outer years of the MTEF, CMIP conditional grants were set to increase to R2.1 bn and R2.37 bn. However, it appears that the only CMIP funds used for electrification were directed towards community lighting. These had been allocated R116 million out of a total of R2 771 million, or just 4.2% of CMIP funding, at the end of September 2000 (Everatt & Zulu, 2000; 35).

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The detailed structure and operation of the National Electrification Fund is not fully clarified. According to the White Paper on Energy, the aim of the fund was to make current subsidisation by the electricity sector transparent and would not aim to raise new funds for electrification. Earlier proposals suggested that the fund be split into a loan fund and a grant fund. The loan fund would provide loans, derived from investors and guaranteed by the government, to distributors to carry out the electrification programme in their area. These loans would have to be repaid using revenue received from consumers as far as possible, otherwise presumably from other sources of municipal revenue. The grant fund would hold transfers from government, donors and an electrification levy, and would be used to provide capital subsidies to distributors so that the tariff charged to customers would be reduced. Where there was a shortfall between revenue received and amounts required to repay loans, the grant fund would top up this shortfall by transferring money into the loan fund for this purpose (Eberhard & Van Horen, 1995; 131). All backlog and new household connections would receive a standard capital subsidy, with differentiation in levels based on geographical region, supply technology and other factors, according to the White Paper on Energy. The Minister of Minerals and Energy will review the subsidy level annually. The success of this structure is dependent on capital flowing into the grant fund (including from levies on consumers) and sufficient revenue from customers. The question remains open as to what proportion of overall funds different customers should contribute. That is, who should the electricity levy apply to, and how much should they pay? And what forms of subsidisation within the pricing structure should be implemented? As we shall see below, the emerging answers to these two questions are: the levy should only apply to users with a conventional (non-prepayment) meter who use less than 100 GWh/year; and prices should be cost reflective, with subsidies coming from outside the price structure.

6.

The impact of restructuring on service delivery

6.1

Bowing at the alter of cost recovery: arrears and non-payment

The principle of cost recovery in its broadest sense is an obvious one, because the physical and administrative costs of providing a service always have to be borne by someone, somewhere, eventually. But neo-liberal cost recovery insists that the direct user of the service must pay the full costs of providing that service to them as an individual. Each individual is therefore responsible for paying the cost of the service to them, regardless of their economic or social circumstances. In this version of cost recovery, there should be no, or only very limited, cross-subsidy from other users. In South Africa, recovering costs directly from those who use the service in proportion to the costs incurred in providing that service to them is complicated by substantial arrears that have been on the books since electrification was first provided to black townships. The arrears are a combination of amounts owing to the bulk supplier (Eskom or the local council) by individuals and businesses, and of losses in the system that must be borne by the bulk purchaser. The neo-liberal principle of cost recovery insists that the users themselves must pay off these arrears. Most of the arrears in the electricity industry are owed to Eskom by local government for bulk supplies. Local government, in turn, has been required to retrieve the arrears from those who apparently have used the electricity. However, because of the inefficient billing system and system losses, it is impossible to identify precisely who owes what, and so the costs are spread out to all consumers, regardless of whether they personally have incurred the costs or not.

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The 1998 Local Government White Paper establishes the principle of cost recovery from users as the basis of municipal revenue generation and sustainable service delivery. At the same time, it recognises that municipalities will require support in clearing away service delivery backlogs through the provision of capital grants from central government. However, arrears are the responsibility of local councils. Arrears are largely the product of the unsustainable delivery system under apartheid. As mentioned earlier, funds were routed to black local authorities via the RSCs and ‘non-viability’ bridging finance. Most of these funds were spent on providing infrastructure, limited and inferior as this was. Management, technical operating and maintenance, and administration were left to the underresourced, politically illegitimate and weak local authorities. They were unable to manage this burden, and the system very quickly failed. People did not receive their bills, infrastructure collapsed, and popular opposition to the imposition of large price increases to try to recover the costs of maintaining and administering the system led to payment boycotts. Arrears mounted, only to be dealt with in ad hoc ways by the central and local authorities. Because electricity supply was a government responsibility, the post-apartheid government could decide to write off the arrears if it wished. This would mean a once-off transfer from the central state to cover the arrears owing to Eskom and local authorities in the form of a grant. The consequence of that would be that the state would have to pay itself (in the form of Eskom and local authorities) the amount of the arrears, and thus lose that money on a once-off basis. While this would stabilise the financial situation of Eskom and the local councils, it would not encourage people to pay for services in the future. Also, paradoxically, the desire to commercialise the operations of Eskom with the possible view to privatising, meant the state may not have been willing to spend additional public resources on the entity. It would not do to get Eskom and local authorities to write the arrears off as bad debts on their own account, because this would undermine the financial strength both of Eskom and the municipalities. Therefore, the arrears would have to be recovered from a source outside the state, and it fell to the consumers to repay. Eskom tried various methods to recover the debts owed by municipalities. In some places, where it was authorised to do so, Eskom took over the distribution infrastructure from municipalities as part repayment of the debt. In 1992 Eskom acquired Soweto’s reticulation network (valued at R206m) which amortised the arrears debt to that value (Veck, 2000; 243). An additional 37 BLAs signed over to Eskom in 1992, with a further 25 doing so in the first 5 months of 1993 (MERG, 1993; 122). By 1993, Eskom was also supplying direct to Alex, Vosloorus and Tsakane, with an eye on Katlehong, Bekkersdal and Lekoa (Veck, 2000; 245). The utility had agreed to take over the supply rights of 113 towns and villages by 1994 (CAA, 1994; 31). In 1996 Eskom took ownership of the assets of other townships that owed more than R500 million in debt. These included more parts of Soweto, as well as Katlehong and Lekoa (Radebe, 1996). Another method Eskom used was to offer the write off some arrears in exchange for a signed guarantee that the municipalities would meet full current payments and repay the remainder of the arrears within a specified time. In 1996 it was reported that the North East Rand metropolitan council (which included Kempton Park) owed about R290-million, largely related to Tembisa township. Springs City Council owed R150-million, mainly related to Kwa-Thema township. An agreement was struck between the council and Eskom on a debt repayment package linked to the writing off of some arrears. The terms involved the council making full monthly payments for the next 70 months (i.e to around the end of May 2002), and the repayment of about R55 million in accumulated debts with interest. In return, Eskom would ‘write-back’ the balance of the debt of R247 million to the end of the 70-month period. It appears that this means the repayment of this

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accumulated debt would become due at that time. Eskom would also withdraw its court application to seize assets belonging to Kempton Park to cover the debt (Radebe, 1996). In 1997, a bulk debt normalisation committee was set up involving Eskom, the South African Local Government Association (SALGA) and several government departments. The committee would intervene before services were cut to defaulting municipalities. Eskom adopted a policy of cutting services to any municipality that did not follow the committee’s recommendations (Business Day, 18 May 2000). The electricity arrears should be placed in the context of total municipal finances. The DPLG’s Project Viability indicated that net municipal expenditure (after charge-outs) stood at R50.78 billion in 2001. Municipalities showed a surplus of around 6%, with about 53.6% of municipal income (before inter-governmental transfers) derived from income from electricity, water, sewerage/sanitation and refuse removal (DPLG, 2001a; 45-46). There is a massive unevenness between municipalities, with the large metros accounting for a far higher proportion of this total than the many rural and small town municipalities. By the same token, the metros also accounted for a far higher proportion of the arrears total. Project Viability reported that a total of R13.65 billion was owed to municipalities at the end of 2001. Electricity debts accounted for 15% of this total (R2.01 billion), behind rates (32%) and water (19%) debts. Total arrears owing to municipalities therefore stood at more than a quarter of yearly expenditure, with electricity arrears equal to 4% of total expenditure. These are significant amounts, although plenty of this debt is current debt and to be expected. Local government, tied into a financial system that forces it to recoup expenses from the population in its area, has turned on residents to pay the arrears. One method of enforcing this repayment is cut-offs. Another method is the imposition of specific forms of technology (especially pre-payment meters) that transfer the management burden to consumers and enforce up-front payment. These are dealt with below. The result of this concerted drive is that people have been forced to repay or accept they will not receive a service. Eskom and local councils adopted similar approaches towards individual customers with debts. In 1995 there was an agreement between Eskom and Soweto civics to write off part of the debt including interest for 60 000 residents, in exchange for the residents signing an agreement on repayment schedules for the remainder of the debt. However, many residents claimed that Eskom had not honoured the write-offs on their bills, and Eskom in turn claimed that not all residents honoured the agreed upon repayment schedules. Some residents also said they did not understand the contents of what they had signed (Fiil-Flynn, 2001; 15). Similar agreements have been made elsewhere too. In Durban, households earning less than R1 500 a month were invited to apply for six months worth of arrears to be written off, on condition that they agreed to pay the remainder over an extended period (Business Day, 22 June 2001). These measures, coupled with a policy of cut offs for households that did not enter into agreements, seemed to bear fruit for the distributors. DME figures indicate that revenue per household connection was greater than operating cost per household connection for 1998 and 1999, suggesting that income had started to exceed expense from 1998 (DME AR 00/01; 93). Eskom chair Reuel Khoza indicated that around two-thirds of individuals were paying electricity bills in 2000, but in some areas like Soweto this remained substantially lower (Business Day, 15 Mar 2000). On one estimate, bad debt by municipalities to Eskom dropped from R1,2 bn in 1995 to R460 m in 1999 and R300m in 2001 (Business Day, 15 Mar 2000; 21 June 2001). Another report indicates that municipalities owed Eskom R316m in 1999 (Business Day, 14 Oct 1999). The DPLG’s Project

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Viability showed that 98 municipalities that submitted data were owing R426 million for bulk electricity at the end of 2001, although this was overwhelmingly current debt (DPLG, 2001a; 40). The apparent drop in bad debt can thus probably be accounted for by the tightening of ‘credit control measures’ (i.e. cut-offs), and agreements on debt repayment that took some of the debt out of the category of bad (i.e. unrecoverable) debt. Bad debts held by municipalities for all services stood at R3.95 billion in 2001, nearly 18% of total disclosed consumer debts (DPLG, 2001a; 39). Nevertheless, other reports indicate that in 2001 Eskom was still owed “well over” R1 billion in unpaid electricity bills. The vast majority of this debt was reported to be from Gauteng, with R700 million from Soweto alone (Business Day, 8 June 2001). If the other figures mentioned above are accepted as true, this suggests that individual users owed the bulk of the debt to Eskom. However, this does not square with a report stating that in 2000 bulk debt owed by municipalities formed 82% of debt to Eskom (Business Day, 18 May 2000). It is apparent from these conflicting reports that the precise state of the debt and who owes it is not known. Nevertheless, whatever the precise amount of the arrears, it is overshadowed by the R3.05 billion municipal surplus reported in 2001 (DPLG, 2001a; 45). This so-called surplus could wipe out the electricity arrears with billions to spare. 6.2

The cut-offs campaign by Eskom and local councils

Cut-offs have been a constant feature of the post-apartheid era as Eskom and municipalities attempt to reduce the massive debts owing to them. Eskom stepped up electricity cut-offs of payment defaulters from the beginning of March 2001. It said at least 131 000 of its Soweto customers were not paying their monthly accounts and they now owed Eskom R900m (Business Day, 2 Mar 2001). According to Public Enterprises Minister Jeff Radebe, the amount owing in the Central region as a whole stood at R1.8 billion at the end of 2001 (DPE, 2001h). Eskom made a decision to cut off supplies to customers more than R5 000 in arrears and whose accounts were more than 120 days overdue (Fiil-Flynn, 2001; 16). On one estimate, the result was that Eskom was cutting off about 20000 residents a month in 2001 (Daniels, 2001a). Table 3 shows the number of electricity disconnections made by local councils at periods for which reports are available. The table shows a substantial rise in the number of electricity disconnections by municipalities from 1996 to 2002. This is a somewhat skewed indication of the reality, since not all municipalities provided the DPLG with data, especially in the first years of the monitoring project. In particular, the Johannesburg metro only submitted data for the first time in the last quarter of 2001 (DPLG, 2001a; 6). However, this suggests that the larger figures rather than the lower are a more accurate reflection of the reality. The December 2001 report is based on information provided by 88% of municipalities and so should substantially although not entirely reflect the actual number of disconnections. The table indicates that in the 3 months from September to December 2001, metro councils made 183 329 electricity disconnections and category B local councils made another 112 991 disconnections (DPLG, 2001a; 30). Added to a very small number made by district councils (since electricity reticulation is not a district council competency), this indicates electricity disconnections at the rate of 98 775 per month! Just over half of this number was reconnected in the same three months, still leaving 48 011 disconnections per month. It should be noted that these are only municipal disconnections and do not include the disconnections made by Eskom. In the three months to March 2002, an average of 90 224 disconnections were made by municipalities. However, there was only an average of 38 691 reconnections per month, leaving a difference of 51 533 households disconnected monthly, on average, by municipalities in the first three months of 2002.

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Table 3: Electricity disconnections by municipalities, 1996-2002 Disconnections Period (3 months Ave monthly Metros Cat B Total (incl district Avg monthly to…) reconnections municipalities councils)* disconnections Oct 1996 66 959 22 320 15 920 Dec 1996 50 037 16 679 11 724 Mar 1997 62 458 20 819 12 057 June 1997 71 937 23 979 14 145 Sept 1997 67 643 22 548 13 932 Dec 1997 61 858 20 619 12 218 Mar 1998 85 148 28 383 15 090 June 1998 90 389 30 130 14 179 Sept 2001 116 306 86 850 203 564 67 855 37 694 Dec 2001 183 329 112 991 296 325 98 775 50 764 Mar 2002 150 599 120 068 270 673 90 224 38 691 Source: DPLG Project Viability reports *Until the 2000 local government elections, different categories were used and figures have therefore been conflated for the period before that

Add to these figures the estimates for Eskom cut-offs of 20 000 per month, and you have a current cut-off rate of around 110-120 000 per month. These are likely to be higher since not all municipalities responded to the DPLG survey, and the Eskom estimate focuses on Soweto. The overall connection target set by government of 350 000 connections a year indicated in section 5 above, translates to an average rate of 29 167 new connections a month. Even if we only recognise the number of disconnections after the number of reconnections are subtracted, and assume the government will meet its new connections target, it still means that there are more households losing access to electricity every month than are gaining access. It should be said that even if households are reconnected at some stage, they still bear the negative consequences of disconnection that might last for months. Table 4 below shows the average disconnections in the three months to March 2002. Even these do not reflect the current reality because some municipalities did not report figures for the first part of that period. Making a conservative estimate of 6 people affected by every disconnection (since connections are made to households, sometimes with a backyard dwelling), over 250 000 people every month are being affected by ongoing disconnections in South Africa. Table 4: Electricity provision going backwards… Average number of disconnections per month by municipalities (Jan 02-Mar 02) Estimated number of disconnections per month by Eskom Total avg monthly disconnections before reconnections and new connections Less average monthly reconnections by municipalities (Jan 2002–Mar 2002) Less avg new connections per month if government’s full targets are reached Total avg monthly disconnections after reconnections and new connections Total number of people affected every month by disconnections (excluding those disconnected and then reconnected) at an avg of 6 people/household

90 224 20 000 110 224 - 38 691 - 29 167 42 366 254 196

A survey conducted amongst residents in Soweto found that 61% of households had experienced electricity cut offs, and that 45% of these had been cut off for more than one month (Fiil-Flynn, 2001; 16). A random, stratified national survey found that 13% of respondents had experienced electricity cut-offs (McDonald, 2002a). It is highly likely that the rate of cut-offs in Soweto would be above the national average, since arrears are concentrated in the country’s largest township. The 1998 Project Viability report bemoaned the fact that municipalities would soon lose electricity distribution rights, because it will remove the ability of municipalities to use electricity disconnections – “the only effective credit control action left to municipalities” (DPLG, 1998; 4).

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The indiscriminate cutting off of electricity supplies to paying and non-paying residents alike was evident in the cutting off of the entire town of Randfontein on the West Rand in the middle of winter in 2000. Traffic lights, lung machines and domestic appliances suddenly ceased to function for the entire town because the council owed a debt to Eskom. According to Eskom spokesperson Mbuso Zondi, “This was a sound business decision and it is simply part of our credit control measures” (quoted in Graham, 2000). In the rural town of Fort Beaufort in the Eastern Cape, the local council cut electricity supplies to 10 schools that hadn’t paid their bills. This drew the ire of the provincial education minister, who threatened to purchase directly from Eskom (Sunday Times, 27 June 1999). According to GJMC policy on disconnections, “when any charges due to the council for or in connection with electricity supplied are in arrear, the council may at any time without notice disconnect the supply to the electrical installation concerned or any part thereof until such charges together with the reconnection charge determined by the council are fully paid” (City Power, 2001a). Presumably, it is this strategy of cut-offs that Eskom CEO Thulani Gcabashe is referring to when he soothes investors fears by stating that Eskom has ‘made adequate provisions against the possibility of non-payment’ (Eskom annual report, 2001; 24). The result of policies on electricity provision showed in declining use of electricity despite an increase in the number of connections. According to Statistics South Africa (SSA, 2001; 78-80), the government’s official statistical service, households using electricity for lighting increased from 63.5% in 1995 to 69.8% in 1999. However, households using electricity for cooking declined from 55.4% to 53% from 1995 to 1999, and households using electricity for heating dropped from 53.8% in 1995 to just 48% in 1999. Stats SA highlights the link between decreasing usage and the increasing price of electricity (SSA, 2001; 90). Thus, even where electricity infrastructure has been made available through the programme, households continue to use other sources of fuel for energy. These are often more expensive and less convenient, such as candles, paraffin, batteries, and gas. In the urban areas, especially those near the coalfields, the continued use of coal in the household has severe negative health impacts. The same goes for the use of paraffin, where burns and poisoning are rife. In the rural areas, wood continues to be the major source of fuel, and this has implications for long term availability of this source as well as negative health effects in the home of burning wood. These additional costs are not included in a standard economic cost-benefit analysis. 6.3

Prepayment meters

The use of prepayment meters is one of the ways that distributors have tried to ensure they recoup their costs from consumers. From the beginning of electricity supply to African townships in the late 1980s, Eskom was ‘experimenting’ with the use of prepayment meters for new connections (SAIRR, 1988/89; 214). It was partly a response to the successful payment boycott in Soweto, with Eskom claiming that the prepayment devices would eliminate the need for local authorities to collect tariffs from consumers. It would also allow for “immediate budgetary control over electricity use”. Finally, the prepayment meters were being used “to prevent African households from running up large arrears in electricity charges which they could then not afford to pay” (SAIRR, 1988/89; 214). In October 1989, the Soweto City Council installed prepayment meters in Protea South in Soweto in order to break the boycott of rent and service charges. The council planned to extend the system if it proved to be successful in Protea South (SAIRR, 1989/90; 111). In 1994, there were 350 000 prepayment meters in use (Pickering, 1994; 21). This technology became the preferred technology for new connections, to the extent that new connections through the electrification programme were often referred to as prepayment connections. Prepayment meters have increasingly been used as credit control systems, forcing poorer consumers to go without

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electricity when they cannot afford to pay for it. Households that were previously fully connected were invited to migrate to the prepayment system. At first this was voluntary and at no charge to themselves, but increasingly households were under duress and were being made to pay for the conversion themselves (AIDC workshop, 30 July 2002). In Cape Town, those consistently running into arrears on credit meters are given pre-payment meters and charged an additional 14% a unit until their debt is paid off (Kindra, 2001b). The result is that by 2001, around 2 million people served directly by Eskom were on prepaid meter systems (Business Day, 13 June 2001). As restructuring of the electricity industry progresses, there has been an assumption of a direct relationship between customers with pre-payment meters, and those who should receive the lifeline supply. This is similar to the water supply sector where there is a conflation between those using communal standpipes and those requiring a free lifeline. This approach allows service providers to claim to be providing poor households with free services merely by exempting these households from certain levies or costs. In the case of electricity, the suggestion is that local government could recoup its costs by imposing a levy on ‘conventional credit’ domestic consumers but not on ‘electrification’ customers, who are assumed to be using pre-payment meters (PWC, 2000e; 7). This suggestion not only reduces subsidisation of poor households to the non-imposition of an additional levy, it also establishes the idea that newly electrified low-income households will automatically receive pre-payment meters. The costs of installing prepayment meters are charged to the prospective customer up front in a connection fee. Table 5 below indicates the different connection fees charged by Eskom for prepayment meters depending on the level of service. It shows that there is no connection charge for a 2.5A connection, but this rises to a minimum R2 500 fee for a full 3-phase connection. The Homelight tariff (for low usage residential connections) has no monthly charge, but the medium and high usage residential tariffs include a basic monthly charge for services and network costs for prepaid meters. Prepayment tariffs may vary depending on a number of factors including network costs, voltage, the average amount to be used, distance from the station supplying the power and others, according to Nokululeko Hlela at Eskom Customer Services (personal communications, 25 Sept 2002). Because connection fees are paid up front, the meter itself belongs to the customer. This means that the customer is responsible for operation and maintenance of the meter, with Eskom field services taking responsibility for network maintenance (Hlela, personal communications, 25 Sept 2002). In organised communities, prepayment meters are opposed, despite Eskom’s claim that there is widespread popularity for the technology because it allows households to budget. Prepaid meters bring the principle of ring-fencing down to the household level. In the past, where people used to pay a flat rate for services, a faulty supply would not necessarily be the end of the world, because neighbours could give water while the fault was remedied. But with pre-payment meters, that kind of basic solidarity is a thing of the past, because each household must now pay for every drop of water. So if you want to give your neighbour water, you either have to pay for it or enter into a business relationship with your neighbour and charge them for it (Pape, 2000). However, many communities are confronted with the choice of accepting prepayment meters or not receiving electricity at all. This is especially the case since new connections are increasingly only available in the form of prepayment meters. While the middle class still has a choice of type of meter, poorer households are not being offered the same choice. In informal settlements or even where RDP houses or larger, more established houses are constructed but in poorer areas (like in the townships), prepayment meters are being imposed as the only option.

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The prepayment meters have also been used as a reason for not providing a free electricity supply. This is because the technology installed by Eskom to date is unable to distinguish between blocks of supply. According to Eskom, existing prepayment technology cannot accommodate tariffs with a basic charge and an energy charge. Therefore, customers have to sign a debit order to pay the monthly fixed charge to Eskom (Eskom, 2001b; 22). This creates problems when the first block is to be provided for free with the next block being paid for. It also makes a rising block tariff impossible for households connected via a prepayment meter. Various options have been proposed regarding the adaptation of prepayment meters to accommodate an inclining block tariff. Pickering (1994; 25-27) shows four options, although each has major problems associated with it. Ballantyne (2002) outlines an automated meter management system with bi-directional communications. However, any of these options would still require the replacement of all existing prepayment meters at an estimated cost in 1994 of R300/unit (Pickering, 1994; 21). Prepayment meters are being imposed to help municipalities and Eskom to resolve their own financial crises. The technology forces households to pay for services or not receive services at all, and therefore places the burden on households to cut themselves off when they cannot afford to pay for the service. 6.4

Community responses to ‘user pays’ cost recovery policies

Communities have not just sat back in the face of this cost recovery approach by Eskom and municipalities. In Soweto and elsewhere communities have responded that poor billing systems and unserviced meters are a major source of the problem. Project Viability reported that 56 local councils and 37 district councils never read electricity meters (DPLG, 2001a; 30). People are receiving bills for amounts that they have not used and therefore refuse to pay these amounts. A case study of Soweto shows that 30% of respondents owed more than R10 000 in electricity arrears, another 10% owe between R6 000 and R10 000, and 25% owe between R2000 and R6 000. Over 57% of the arrears are more than 3 years old (Fiil-Flynn, 2001; 14-15). The government’s Project Viability report for December 2001 showed that, of all municipal services debts, 66% were over 90 days old (DPLG, 2001a; 38). Complaints about poor service and unfair billing mirror similar complaints in the 1980s and which resulted in the rent boycott. The 1989 Brand Report on Soweto’s finances had argued that, apart from the political factors that underlay non-payment, lack of reliability of service and inaccuracies in accounts rendered were also significant causes of non-payment for services (Heymans, 1991; 159). Soweto residents say Eskom's meters are either not working or unserviced. These problems have been recognised by the Public Enterprises Minister, who said, “the fact is that a significant amount of the bill in Soweto is inaccurate. The current bill is based on estimations of the previous consumption by a particular customer, which defines the parameters of the debt owed to Eskom”. He concluded, “some of the debt is neither repayable nor collectable” (DPE, 2001h). Residents are also unhappy about the high reconnection fees charged and the fact that Eskom uses “aggressive” outsourced companies that earn R70 a household a disconnection - an incentive to cut off supply. No notification is given that supply will be cut off, and residents are not given time to rectify problems. Eskom disconnects entire blocks at a time by removing circuit breakers, penalising those who do pay their bills along with those who don't. Other residents complain they receive two bills a month, one from the local council and another from Eskom's head office, creating confusion. There are also claims of rampant bribery between many Eskom officials and residents (Daniels, 2001a). A survey in Soweto found that, for half of households that had been

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offered an illegal reconnection after being cut off, the offer was made by the person who had disconnected the supply (Fiil-Flynn, 2001; 22). Evidence of continuing corruption at the local level in Soweto was revealed in a 1996 report by the Independent Mediation Services of South Africa (Imssa). All 56 allegations of corruption and incompetence promoted by union claims into Eskom’s Soweto division were found to be true. The inquiry recommended disciplinary action against nine division managers (Duffy, 1996). One of the corrupt practices was a contract to install 117 000 meters in Soweto when Eskom took over distribution in the township in 1995. 22 000 meters that had already been installed were included in the budget. Security and meter installation contracts were given to companies set up by former Eskom employees (Duffy, 1996). At the end of 2001, corruption was still rife, with Radebe explicitly naming Eskom contractors as being part of the problem (DPE, 2001h). Privatisation is partially based on the notion that the public sector is run by self-interested bureaucrats. But Bayliss (2000; 14) makes the point that it is these exact bureaucrats who are expected to carry out the privatisation programme as if they are neutral. The corruption exposed at Eskom indicates that this is not the case. Indeed, the awarding of concessions and contracts is one of the main sources of corruption in government-business relations (Hall, 1999). There is a hoary old argument in South Africa regarding the reasons for non-payment. On the one hand, there are those who argue that the boycotts of the 1980s established a ‘culture of entitlement’ where people expect to get services for free. It focuses attention on poorer households, even though businesses often have the largest arrears. For example, around one third of the R2.1 billion owed to the Cape Town city council for services is from businesses, with many owing more than R100 000 (Cape Argus, 26 Feb 2002, quoted in McDonald, 2002a). Although only 17 councils responded to a Project Viability question on the type of debtor, 51% of outstanding debts to municipalities were owed by businesses (DPLG, 2001a; 37). The argument emanates mainly from government and service providers, with a view to encouraging (or, failing that, forcing) people to pay for the services they receive as far as they are able. This was the basis of the Masakhane Campaign of the mid-1990s. Government does recognise that some people cannot pay the full costs of services. According to this viewpoint, these people should be identified and given support to receive a basic level of services. If they use more than the basic subsidised level, they should pay the full costs of the extra usage. There should be no subsidies for those households that can afford to pay (identified through an indigence test). In the mid-1990s, households earning less than R800 per month were considered indigent and therefore eligible for support. This figure rises with inflation over the years, with the household minimum living level in 2001 standing at R1 100 per month. In 1998, 40% of households in Soweto had an income of less than R1 000 per month, and 50% had an income of less than R1 500 per month (Fiil-Flynn, 2001; 12). MIIF planning was based on projections of just 20% of households falling into the category of indigent (Bond, 2000; 55). On the other hand are those who assert that the main reason for non-payment is an inability to pay, compounded by heavy arrears debts which pushes households into a long-term debt trap. The number of unemployed is rising, social grants are increasing at a rate below inflation, and a significant portion of income in both rural and urban areas comes from old age pensions. This suggests an impermanent main income stream, especially if state pensions are restructured out of existence in future. In this context, even households earning above the ‘indigent level’ are faced with severe resource constraints, and are forced to choose between basic services. In a random, stratified national survey conducted in collaboration with the HSRC in 2001, 17% of respondents said they had to make choices between basic services and other essential goods such as food and clothing. Another 18% said they were unable to pay for basic services no matter what they did

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(McDonald, 2002a). It hardly needs saying that low-income households are most seriously affected by this problem. Despite these pressures, households in the Soweto survey attempted to pay something towards electricity bills each month (Fiil-Flynn, 2001; 13). The DPLG’s Project Viability reports that 52% of debtors are paying regularly (DPLG, 2001a; 30). But if they are unable to pay the full bill, the arrears begin to mount up. Although Radebe acknowledged that “the residents of Soweto have legitimate grievances against estimated bills and service delivery standards. They have a right to organise themselves and call for a redress of these grievances”, in the same breath he accused those of organising around these issues of being “opportunistic” and having a “criminal agenda” (DPE, 2001h). And despite his own recognition that accounts were inaccurate and that corrupt contractors were cutting electricity off and forcing people to pay high reconnection fees, he only offered residents a one month ‘amnesty’ to apply for reconnection into the Eskom system. He threatened that any resident who had not done so after one month would be prosecuted. He also announced that 100% of pensioners’ arrears and 50% of arrears of other residents would be set aside in a suspense account. Regardless of the accuracy or not of the arrears, residents would have to repay 50% of arrears in their name. The ‘suspense account’ also suggests that the full arrears will re-emerge at a later stage. The government will criminalise opposition to cut-offs and when the opposition has been destroyed, bring the arrears back. Radebe indicated that one of the key aims of the Service Delivery Framework (which is presented as improving the efficiency of service delivery to the population) was “an improvement in the payment levels” to Eskom (DPE, 2001h). In the face of this, a number of demands arising from community organisations (Ngwane, 2001; 13) have been advanced, including:  Concessions for pensioners, disabled and the unemployed;  Scrapping of all arrears;  Moratorium on cut-offs until government clarifies the promise of free basic services for all;  Introduction of a proper billing system and evaluation of old and faulty Eskom meters;  Proper consultation by Eskom and government with the community on decisions affecting the community;  Eskom employees to wear tags identifying who they are, to prevent bribery and extortion;  An end to privatisation of electricity generation, distribution and supply. The cut-offs are directly connected to the process of corporatisation of Eskom. This is because, in preparing for private sector involvement and competition, Eskom has to sort out its bad debts and deal with costly illegal connections since these undermine its profitability.

7.

The impact of restructuring on costs, pricing and tariffs

7.1

Overview of tariff design

Orthodox tariff design follows the supply side technique based on the use of long run marginal costing (LRMC), which supposedly allows for the incorporation of future costs of maintaining supply into the tariff system (Pickering, 1993; 4). Nevertheless, LRMC based tariffs tend to ignore costs or benefits not usually included in economic assessments, such as social and environmental factors. For example, what natural resources are being used up in order to produce the electricity, or what are the basic needs of the population and are they able to afford to pay for the supply of electricity?

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The following components go into the tariff:  An energy charge, based on the units consumed  A basic charge (to be unbundled into a service charge and a network charge, see below), which is a fixed monthly charge regardless of use. It contributes towards Eskom’s fixed costs, such as capital costs, meter reading, billing and maintenance  A connection fee, which covers some of the initial costs of providing the supply  A monthly rental to cover some of the capital costs (this is being phased out and the costs incorporated into network charges)  A transmission percentage surcharge is added based on distance from Johannesburg  A demand charge, payable on every unit of maximum demand each month, measured in half hourly or hourly periods. This charge is mainly for big users. Other costs and charges are also built around the tariffs. These include a levy to fund the electrification programme, a guaranteed return for distributors, and future capital costs. One of the functions of the NER is to regulate tariffs in the industry. Given the corporatisation of Eskom, an element that is incorporated into tariffs is a determination of a ‘reasonable’ rate of return for the utility. Linked to this is consideration of business risk, which is built into the tariff. For example, while in 2000 the NER accepted a real return on assets of 4.2% for Eskom, it agreed to a 5.2% overall average price increase to allow Eskom to cushion itself against risks including nonpayment, according to then CEO Xolani Mkhwanazi (Business Day, 7 Nov 2000). The formation of a deregulated power market is linked to a shift away from regulated tariffs towards market related prices. However, ‘market-related’ prices are themselves regulated, because the national regulator determines what a reasonable rate of return is and then allows for tariffs to be set to achieve this. According to PWC, regional distributors should also earn reasonable rates of return on capital employed based on “returns that could be earned if that capital was employed in a business with a similar risk profile” (PWC, 2000e; 4). A return on equity of 19.6% has been indicated by PWC as “the returns that private sector investors are likely to require from distribution industry businesses in South Africa”. PWC goes on to say that “the effect of this higher cost of capital is to increase the required return on distribution assets and hence the price of the distribution service” (PWC, 2000e; 18). In plain English, this means that in order to make profits that meet a level acceptable to the private sector, the price charged for distributing electricity must rise. Tariffs are also being restructured to make a clear distinction between what is being paid for transmission and what is being paid for the service, in line with the separation of low voltage distribution and supply. Eskom now includes a ‘transmission surcharge’ when constructing tariffs to cover the costs of transmission. Prices are ‘normalised’ and then the transmission surcharge of up to 3% (depending on the distance of the supplying sub-station from the Gauteng/Mpumalanga highveld, the location of most of the generators) is added. In future, tariffs will be unbundled into energy and network components, in order to make a clear distinction between costs of the energy itself and the costs of transmission of the energy. However, this will only be completed with the introduction of the REDs (Eskom, 2001a; 5). The network charges will be based on the customer’s required capacity and the distance from the source substation (Eskom, 2001a; 24). Capital costs will be built into the network charge. Lower voltages are associated with higher delivery costs, and these will also be built into the network charge (Eskom, 2001a; 25). The splitting of the tariff into these two components prepares the ground for separate entities to receive their portion of the tariff in an unbundled and competitive industry structure.

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Tariffs will also be further broken down into customer service charges and administration charges, based on the size of the customer, into 4 categories. These will reflect the costs of customer services, and metering and billing services. Larger users will benefit from this and numerous small users (residential users) will pay more because it costs more to bill many individuals than it does to bill and meter relatively few large users. For small rural customers, the high rate energy block will be eliminated and replaced with a basic energy charge. The implications of this are that consumers who use below the average will pay more, while those who use above the average will benefit (Eskom, 2001a; 17). 7.2

Recent trends in electricity tariffs

As indicated above, the distribution system has been fragmented amongst many suppliers in South Africa. This resulted in more than 1 000 different tariffs, each designed according to the financial needs of the particular distributor. One of the key aims of distribution sector restructuring was to achieve some kind of uniform tariff system that ensured people were paying the same amount for the same service. However, in practice tariff uniformity has meant all tariffs rising to the highest level rather than an averaging out or trending to the lower level. In 1999, Soweto residents experienced three increases in one year to bring tariffs in line with other areas supplied by Eskom. The result was that Soweto residents saw their tariffs increase from 18,77 cents per unit to 27,6 cents per unit in the space of a year – an increase of 47% (Mothibeli, 1999). In 1992, Eskom implemented a voluntary performance compact on request of the Cabinet, covering the period from 1992 to 1996. Amongst other things, Eskom undertook to reduce the price of electricity in real terms by 20% over the 5 years, and further the aim of electrification without subsidising from other consumer classes (CAA, 1994; 20). It made a further undertaking in 1994 as part of its ‘RDP commitments’ to reduce the real price of electricity by 15% over the period 1995 to 2000 (Van Horen, 1996; 193). The average price of electricity declined quite precipitously from 1985 when the de Villiers commission recommendations were implemented (Davis, 1995; 9). However, as shown below, this average reduction – although achieved – hides variations in price changes for different users, with some categories of users even experiencing increases while Eskom was still able to claim that average increases had been brought down by 15% in real terms. ERIC recommended the setting of cost-reflective tariffs for each consumer segment and by region. This means that the tariff for mines should reflect the real cost of providing that electricity, and likewise for the domestic and commercial sectors. But since mines use very high volumes, the cost declines because of economies of scale. Therefore, domestic users end up paying the highest tariffs using this system. ERIC suggested a constant electricity levy to fund the expansion of the electrification programme. This could either be tacked onto the tariff (so consumers would pay) or be absorbed by Eskom through a reduction in its transmission and generation profits). The levy would then be eliminated once electrification was completed. As mentioned earlier, in 1997 it was estimated that Eskom was levying grid consumers an average of 4% of the cost of electricity consumption to fund the electrification programme (DME, 1997a). One of the reasons for the comparatively cheap price of electricity in South Africa in recent years is that no new plant has had to be built for the past 2 decades. However, estimates suggest that new plant will be required in 2010, with a four year lead-time for construction. This means that new

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plant will have to be built from 2006. Costs are therefore set to rise from 2002 onwards. One of the unresolved issues with regard to privatisation is whether Eskom should build new plant or whether the extension of generating capacity should be carried out by the private sector as part of the process of opening the generation sector to competition. At present, the NER is not including future capital costs when working out tariffs because it is uncertain whether Eskom or the private sector will build new capacity from 2006. COSATU is in favour of the funding of construction of new plant through Eskom bonds, to take advantage of its relatively low financing costs. Graph 8: Actual electricity prices by end user category, 1980-2001 Actual Eskom electricity prices, by customer category, 19802001

35 30

c/kWh

25 20 15 10 5

00

98

96

94

92

90

88

86

84

82

80

0 Year

Redistributors

Residential

Commercial*

Industrial

Mining

Rural/agric*

Source: Eskom annual reports, Eskom Statistical Yearbook, 1996 *Prior to 1988, commercial and farming were included under industrial

Eskom has a number of different tariff types for different categories and sizes of users. Table 5 below shows that rural and residential average tariffs are significantly higher than other tariffs. The table is presented in visual form in graph 8. Until 1997, commercial tariffs were close to the tariffs charged to residential and rural consumers but then began dropping behind. A dramatic decrease of nearly 21% in 2001 meant that commercial tariffs started becoming comparable to those of industry and mining in that year. Redistributors purchase electricity from Eskom at around the same price per unit as mines and industry. This is a bulk supply that is then distributed to consumers, so an additional tariff is put on the supply before it reaches the consumer. It should be noted that the prices here are prices charged by Eskom. About half of residential consumers receive a supply from Eskom, with the other half receiving it from municipalities (the redistributors). At present, municipalities retain the authority to set their own tariffs within the framework of NER policies. This results in an extremely wide range of tariffs and it is thus difficult to provide an indication of local government tariffs. Nevertheless, for the sake of comparison, average tariffs across all municipalities have been supplied for 2001. The comparison indicates that average residential tariffs charged by municipalities are significantly were lower than those charged by Eskom, and tariffs for commercial and industrial users were higher. Complaints had been heard from industry and commercial consumers that they were being forced to pay monopoly prices set by local authorities. This is one of the driving forces behind the restructuring of the tariff system and the distribution sector – choice of supplier for large-scale users.

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Table 5: Actual prices charged by Eskom to selected consumer categories (c/kWh), 1988-2001 Year Redistributors Residential Commercial Industrial Mining Rural/agric 1988 6.12 11.86 10.91 5.88 6.03 11.67 1989 6.69 12.32 11.22 6.47 6.67 12.60 1990 7.65 14.51 12.8 7.33 7.59 14.49 1991 8.25 15.78 14.28 7.78 8.13 15.86 1992 8.98 15.27 15.57 8.17 8.79 17.14 1993 9.49 12.68 16.46 8.35 9.52 19.84 1994 10.18 16.76 17.43 8.91 10.11 21.13 1995 10.77 18.15 18.65 10.40 10.62 21.99 1996 11.14 19.45 19.49 10.10 11.02 23.39 1997 11.41 21.33 20.23 10.78 11.66 24.66 1998 11.63 22.74 18.85 11.02 12.22 26.42 1999 11.85 25.36 22.27 10.56 12.61 26.58 2000 12.20 27.70 22.64 11.94 12.91 28.88 2001 12.91 30.90 17.95 11.56 13.35 26.85 LG 2001 -19.40 24.00 17.60* * n/a Source: Eskom annual reports, Eskom Statistical Yearbook 1996; local government tariffs – PWC, 2000e *For local government, mining is incorporated into industrial

Graphs A6 and A7 (in appendix) showed that the bulk of electricity is sold to industry, mining and redistributors. Industry and mining accounted for 44% of total electricity sold – or 80 587 GWh in 2001. A very small increase in the tariffs to these two sectors could contribute substantially to a reduction in tariffs for residential and rural customers. For example, a 2c/kWh increase on currently extremely cheap electricity prices for these two groups could generate around R1.6 billion a year, which could be used to cross subsidise other users. There are also a number of special deals and tariffs applied by Eskom for particular users. The utility has entered into a number of long-term commodity-linked agreements, especially with energy-intensive producers in the aluminium and ferrochrome industries. The agreements vary from 5 to 20 years, and link the price of electricity to the international price of the commodity. In the last few years, these agreements constituted between 7.6% and 12.7% of Eskom’s total sales. Eskom received revenue from these agreements to the value of around 92% of the amount that would have been generated from a standard tariff. Eskom considered the lower revenue to be adequately offset by the size of the sales and the interruptibility of the supply (Eskom AR, 2001; 112). In 1996 Eskom introduced a ‘time of use’ tariff to encourage the use of power in off-peak times. As the name suggests this tariff charges different rates depending on when the electricity is being used. It encourages consumption in off-peak and standard periods, both during the year (off peak is between September and May when it warms up) and daily6. The reduction of peak hour demands on the supply system can lead to a reduction in operating costs. A conversion surcharge was attached to the new tariff, but was to be phased out over 5 years. Many municipalities converted to the time of use tariff but did not offer customers a similar opportunity. In the meantime, Eskom has reneged on the agreement to phase out the surcharge because they miscalculated the revenue losses caused by a large shift to the tariff. At the end of 2000, almost half of Eskom’s total load was on time of use tariffs. The NER allowed Eskom to continue with the surcharge, but it will apply only to new connections. This means large-scale industries benefit because their surcharges were worked down virtually to zero since 1996 (Business Day, 16 Nov 2000). Consumers who want to take advantage

6

Off peak is the whole Sunday, Saturdays from 8 pm to 7 am and midday to 6 pm, and during the week from 10 pm to 6 am. Peak times are from 7-10 am and 6-8 pm during the week. Standard times are the remainder (Eskom, 2001b; 10)

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of the tariff will now have to pay the surcharge. The surcharge was reimposed to offset the effects of “lower than needed” price increases (Eskom, 2001a; 4). The tariffs in table 6 are selected from a wider range to indicate the costs for residential and business users. Each of the tariffs have a number of detailed additions to them, based on the amount used, the time the electricity is used, peak demand and a range of other factors. There are also separate tariffs for prepayment supplies (Eskom, 2001b; 22). Table 6: Selected Eskom tariffs and charges, 2001 Tariff Ruraflex

Who for? 3-phase supplies fed off rural reticulation networks

Connection fee Greater of R2543,86 (ex VAT) or 5% of project cost

Basic charge R379,37/month (up to 50 KVA) R421,53/month (over 50 KVA)

Megaflex

Users with supplies of more than 1 MVA, who can adapt their time of use

Greater of R2543,86 (ex VAT) or 5% of project cost

R70,14/month

Landrate

Farmers & rural businesses

Single phase min R1300 3 phase (conventional meter) min R2600 3 phase (prepaid) min R2950

Homelight

Low usage residential (urban and dense rural) Medium to high usage residential

2.5A no charge 20A min R150 60A min R1000 Plus capital costs over R2451 Single phase min R1000 3 phase (conventinal meter) min R2100 3 phase (prepaid) min R2500

R97,05 to R278,81/month (depending on tariff line) 0

Homepower

R47,34/month

Energy charge High demand (Jun-Aug) Peak 58,79 c/kWh Standard 17,72 c/kWh Off-peak 10,31 c/kWh Low demand (Sept-May) Peak 42,11 c/kWh Standard 15,89 c/kWh Off-peak 9,22 c/kWh High demand (Jun-Aug) Peak 35,4 c/kWh Standard 14,85 c/kWh Off-peak 8,52 c/kWh Low demand (Sept-May) Peak 23,83 c/kWh Standard 13,33 c/kWh Off-peak 7,66 c/kWh First 500 kWh 38,12 c/kWh > 500 kWh - 22,05 c/kWh

2.5A 37,76 c/kWh 20A 37,76 c/kWh 60A 42,47 c/kWh 25,74 c/kWh

Source: Eskom, 2001b

Graph 9 shows the inflation rate in South Africa’s metropolitan areas and Eskom’s electricity tariff increases from 1980 to 20027. The graph reveals that Eskom’s tariff increases generally remained below inflation until 1999, at which point the two began to be more or less the same. Graph A8 (in appendix) shows there is a general declining trend in the size of annual increases, more or less in line with a decline in inflation. Residential and commercial customers experienced the wildest fluctuations in increases, with residential customers experiencing above inflation increases since 2000. Price stability has decreased since around 1990 with greater fluctuations evident in the period since then. Above inflation increases for most categories of consumers were experienced in 1982 and 1983, and again in 1986. Residential customers experienced more than half of all the above inflation increases (by consumer category) after 1990.

7

It should be noted that the inflation rate in metropolitan areas is generally lower than that in other areas (including other urban areas), and also that inflation is higher for low-income households than it is for high-income households (Stats SA, 2002)

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Graph 9: Eskom tariff increases and CPI, 1980-2002 Inflation and Eskom tariff increases, 1980-2002

25

% increase

20 15 10 5

2002*

00

98

96

94

92

90

88

86

84

82

1980

0

Year CPI (Inflation)

Eskom tariff increases

Source: CPI – SSA (2002) Annual Inflation on a Monthly Basis Electricity tariff increases - 1980-89 Veck (2000); 1990-2002 Eskom (2001, 2002)

It is important to understand that Eskom’s tariffs apply only to those consumers who are directly served by Eskom. This excludes a significant portion of customers served by municipalities. The Eskom increases apply to bulk supply provided to Eskom. The municipalities then make their own tariff increases, based on the increase in the wholesale price they have to buy the bulk electricity from Eskom and other factors. So it is likely that consumers receiving a supply from municipalities will experience further increases. Another noteworthy development is that from 1995, Eskom’s tariffs begin to rise consistently year on year, after a sustained and substantial decline since 1985. The earlier decrease in tariffs is significantly related to the decline in inflation during the period 1986-1996. In 1999 and 2000, Eskom proposed tariff hikes above inflation but has been prevented from doing so by the NER. The NER’s rejection of the above-inflation increases was based on the argument that energy plays a big role in inflation, and keeping increases below inflation contributes to the government’s efforts at inflation targeting (Business Day, 7 Nov 2000). However, in 2000 electricity tariff increases were higher than the official rate of inflation for the first time since 1986. In 2002 again, electricity tariff increases have been higher than inflation to date. The NER has given explicit support to aboveinflation tariff increases over the next few years in order to fund investment in new capacity (Business Day, 10 May 2001; Eskom AR, 2001; 36). 7.3

Cost reflectivity, structural increases and tariff restructuring

Recent changes in tariffs indicate a gradual move towards ‘cost reflectivity’ and away from regulated price increases. In keeping with this, a structural increase in prices to small customers of 3% prior to the usual annual price increases has been suggested (Eskom, 2001a; 17). The aim of this is to reduce and eventually eliminate subsidies and incorporate these amounts into the tariffs charged directly to customers. The point is to achieve ‘market-related returns sufficient to attract new investors into the industry’ (Eskom AR, 2001; 56). Eskom is adjusting its prices so that restructuring has a limited effect on its own revenue. But the utility acknowledges that “individual customers could experience significant changes in their price of electricity” (Eskom, 2001a; 4). In particular, those who previously had subsidised tariffs will experience increases “well above the average” (Eskom, 2001a; 7).

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The Municipal Systems Act of 2000 instructs municipalities to set tariffs that reflect the cost of providing the service, with consumers charged according to the amount they use. However, poor households should have access at least to basic services through a combination of tariffs that only reflect O&M costs, special lifeline tariffs for low levels of use or a basic level of service, and any other direct or indirect method of subsidisation from other sources (s74). Table 7 indicates increases in selected tariffs if they are to become cost reflective, and the actual ‘structural’ increases as a step in that direction. The so-called ‘structural’ increases are tariff rebalancing increases after cross-subsidisation, and are added on top of annual price increases. Table 7: Selected tariffs and ‘cost reflectivity’, 2002 Tariff Ruraflex Landrate Homelight Homepower Megaflex Source: Eskom, 2001a; 20

% price change for ‘cost reflectivity’ 96.22% 88.31% 51.15% 0.17% -10.06%

Actual % ‘structural’ increase 5.81% 4.71% 2.17% 2.86% 0.07%

The result of the shift to cost reflective pricing will be “significant price increases (around 50%) for domestic (conventional credit) customers” (PWC, 2000e; 12). In some REDs, prices for domestic users are expected to rise by over 100% before inflation by 2010. Prices for the proposed RED 2 (most of the Eastern Cape and Free State, and parts of the Northern Cape) in particular are expected to rise higher than anywhere else. On the other end of the scale, prices in RED 5 (East Rand and Mpumalanga) are expected to experience the lowest increases (PWC, 2000e; 14). These have been determined by PWC to be the ‘correct’ prices for domestic users. In addition, PWC suggests that tariffs for users with pre-paid meters be capped at 30 c/kWh, rising with inflation. This is just under 3 times higher than the tariffs suggested for large-scale users (PWC, 2000e; 12). Eskom suggests that the above ‘cost reflective’ increases should be phased in over time, but also recognises that it may result in unaffordable tariffs for some users. The NER has regulated the increases and requested Eskom to move towards more cost reflective rates, while ensuring the continued affordability of electricity. New tariff structures were expected to be implemented from the start of 2002, but delays in getting NER approval has meant they will be implemented from July 2002 (Eskom, 2002; 1). Tariff increases in the future are uncertain, as they are linked to the restructuring of the distribution sector. Eskom makes it clear that the increases in Table 6 are only average increases. In reality, low voltage customers, those with poor load factors and those using electricity during Eskom’s peak times will experience increases significantly above these averages (Eskom, 2001a; 20). All of these refer to poorer households who cannot afford to use more electricity, and who mainly use it for cooking or lighting – precisely during Eskom’s peak period (see above). ‘Cost reflective’ pricing does not take into account the social benefits of providing electricity to households on a universal basis, because this is not easily quantified. It also fails to take full regard of the impact on the environment of particular generation and distribution choices, except insofar as these are measurable in monetary terms. Therefore, the choices that are made are based on a narrow concept of cost reflection that only takes into account the immediately apparent economic costs of the physical generation and transfer of electricity, and the administration and management of the

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associated services. The longer-term opportunity and direct costs associated with failure to provide a healthy environment conducive to the strengthening and invigoration of human beings are not built into the conception of cost reflective pricing being followed at present. 7.4

The reorientation of cross-subsidisation

Cross-subsidisation has been built into the electricity industry since it was first regulated. In particular, white domestic consumers were cross-subsidised by businesses and industries located in their supply regions, and commercial farmers were subsidised by other users when they connected in the 1980s. In some white municipalities, cross-subsidisation generated sufficient surpluses to allow for the subsidisation of other municipal services. Electricity surpluses were a significant source of finance for many of these municipalities. The extent of cross-subsidisation of electricity supply to white households and for other municipal services stood at around R1.8 billion a year (Fiil-Flynn, 2001; 6). Meanwhile, most black households did not even receive electricity, and in the few places where they did, white consumers and businesses were protected from having to subsidise them. The much vaunted internal cross-subsidies were insufficient to provide low income black households with a basic supply of electricity. As indicated above, an attempt was made by the state to transfer responsibility for recovering costs to the black local authorities, with the consequent rise in social and political conflict. In the late apartheid period, an attempt was made to transfer some resources, derived from a levy on business payrolls and turnover, to BLAs through the Regional Services Councils (RSCs), while retaining racially segregated municipalities (Swilling et al., 1991; 177-79). With the gathering economic crisis in the 1980s, and rising tariffs by Eskom in order to recover the capital costs of the excess generating capacity it had built in the 1970s, the state came under pressure from industry and commerce to reduce input costs. For electricity, this meant protecting these sectors from continuing to subsidise domestic users, and thus a shift to tariffs reflecting the ‘true’ costs of supplying electricity as defined by industry. In 1984 the de Villiers Commission recommended the prohibition of inter-sectoral cross-subsidisation (Veck, 2000; 107). One effect of this was to pre-empt a black household electrification programme because the stakeholders refused to cross-subsidise. There are various different types of cross-subsidisation: - between the generation, transmission and distribution sectors - between user categories (industry, commercial, residential, mining) - within user categories (bigger users vs smaller users, high income vs low income) - from other sectors of the economy or the national fiscus Given Eskom’s vertically integrated monopoly, there was significant cross-subsidisation between the sectors of the electricity industry. Eskom was able to subsidise distribution from surpluses gained in the generation and transmission sectors. These were ‘hidden’ subsidies in that they were not clearly identified, demarcated or targeted. Rather, they were ad hoc subsidies dependent on what surpluses were available and how Eskom chose to use the surpluses. As already mentioned, cross-subsidisation between user categories was built into the pricing and tariff system, with white residential consumers being cross-subsidised to some extent by the other consumer categories. Despite lower per unit tariffs for industry, Eskom argues that residents have been subsidised by large users. According to Peter Adams, Eskom's communications manager in 1999, “Industry pays too much and residences are paying too little” (quoted in West, 1999). The

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logic behind this is that it is much cheaper to supply industry because of economies of scale than it is to supply millions of individual residential users. Following this logic, in its 1999 annual report, Eskom stated that “the results of tariff restructuring will be the reduction of prices for high voltage supplies and the increase of prices for subsidised rural and residential customers.” There was an unevenness of the types of cross-subsidisation within end-user categories. In some places low-income users subsidised high-income users, while in others it was the reverse, depending on the type of tariff. For example, a two-part tariff (a basic monthly charge plus a per unit energy charge) or a declining block tariff (where per unit costs would decrease as consumption increased) would result in low-income users subsidising high-income users. On the other hand, a flat-rate (straight-line) tariff charging for per unit energy consumption but not a basic monthly charge, and an inclining or progressive block tariff, both would result in high-income consumers subsidising low-income consumers. All of these tariffs were applied somewhere in the country, at the discretion of the distributor. The post-apartheid government recognised the need to subsidise low-income households that would otherwise be unable to afford the costs of electricity. Although the 1998 Local Government White Paper raised the possibility of cross-subsidisation, but only at a local level, government came out against heavy cross-subsidisation between consumer categories. The Energy White Paper stated that “cross-subsidies should have a minimal impact on the price of electricity to consumers in the productive sector of the economy”. The PWC study on distribution industry restructuring proposed that within the REDs there should be a separation between distribution (wires), the ‘captive market’ (local government and residential consumers) and the ‘contestable market’ (large-scale industrial users), with no cross-subsidisation between these activities (PWC, 2000d; 16). Related to this, the study suggested that the gap between actual revenue recovered from households to which electricity is supplied but is not economically viable, and the actual costs of supply, should be borne by an additional levy. This levy will be imposed on existing ‘conventional credit’ customers (residential, industrial and agricultural) but specifically excluding large-scale customers using over 100 GWh/year (PWC, 2000e; 8). The revenue from the levy would go to local government to cover the shortfall from providing infrastructure and services to low-income households. A further levy on the same customers, ranging from 0% in the East Rand/Mpumalanga RED to 14% in the Free State/Eastern Cape RED was also envisaged to pay the costs of continuing the national electrification programme (PWC, 2000e, 15). This shows that an expected additional levy of up to 20% will be imposed on existing small-scale customers. This will be in addition to increases aimed to achieve more cost reflective pricing. It is apparent here that large-scale users will be protected from cross-subsidising either the electrification programme or O&M costs for lowincome domestic users. With the formation of REDs, cross-subsidisation of O&M will occur only within the region. ERIC considered the possibility of cross-regional subsidisation in order to ensure that regional electrification targets would be met, even in those areas where distributors might be unable to fund their own targets. However, the REDs have been constructed with the intention of ensuring each of them is financially viable as a stand-alone entity. The result is that prices in REDs where there are many low-income domestic consumers and few industrial and commercial users will increase to reflect the cost of supply. While these regions may receive a greater share of the electrification fund because of the greater number of low-income households they need to connect, they will be required to cover the O&M and distribution costs from internally generated revenue. Because of the small economic base, this means prices will increase for domestic users. This is evident in the models provided by PWC, where the Eastern Cape, Free State and parts of the Northern Cape will

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experience significant price increases while the industrial heartland of the East Rand and Mpumalanga will experience a decrease in prices (PWC, 2000e; 14). This limitation on the possibilities of cross-subsidisation within regions is mirrored at the municipal level, where many municipalities have a small economic base and will therefore be unable to generate sufficient income to support low-income households. It is clear that regions will be required to cross-subsidise internally, meaning that small-scale customers in poorer regions will bear greater additional costs than in richer regions. The NER’s framework for electricity pricing, the Wholesale Electricity Pricing System (WEPS) is designed to eliminate cross-subsidisation between the generation, transmission and distribution sectors. It establishes a wholesale (bulk) price matching the true costs of generating and transmitting the electricity. Large-scale consumers will be allowed to purchase electricity direct from the generator. Their resources will therefore not flow through the regional distributor, thereby preventing the possible use of these resources to cross-subsidise domestic supply and the extension of the electrification programme (apart from a capped transmission levy). The impact of tariff increases therefore hits smaller businesses and residential consumers harder than large-scale industry. In contrast, big industrial users tend to have special pricing deals with Eskom, often linked to commodity prices (Business Day, 7 Nov 2001). This means they may not always pay the true cost of supply in the short term, although in the long term the average they pay should be about level with ‘true’ cost of supply (measured in narrow economic terms, as briefly discussed above). The NER will also require Eskom to apply for separate price increases in generation, transmission and distribution. The deliberate intention is to stamp out cross-subsidisation between these three ring-fenced sectors (Business Day, 7 Nov 2001; PWC, 2000e). Therefore, Eskom will be unable to take advantage of economies of scale of efficiencies in generation to cross-subsidise the distribution of electricity. Cross-subsidisation will be phased out over a period rather than immediately stopped, to limit the impact on price increases. COSATU (2001b; 3) supports cross-subsidisation by business, arguing that since industry and mining use 80% of total supply, the tariff increase required to cross-subsidise domestic use would be relatively small compared to the benefits for households. The union federation also supports the notion of regional cross-subsidisation so wealthier regions can support poorer regions. Related to this, COSATU called for the accelerated implementation of the lifeline block tariff model, as well as increasing levels of electrification to allow for full household use and home-based basic economic activities. A growing demand in communities actively engaged on the question of electricity supply is for a flat rate. This should not be confused with the straight-line tariff (also known as the flat rate tariff), in which unit costs of supply are charged at the same rate regardless of the amount used, and no monthly basic charge is levied. The flat rate demand in a number of communities, on the contrary, is for a flat basic monthly charge and no energy charge. This varies from a monthly charge of R10 for all services in Chatsworth and other communities around Durban to R50 flat charge for electricity only in Soweto. Trevor Ngwane of the Soweto Electricity Crisis Committee (SECC) indicates that this is a short-term demand while a more equitable system is put in place (quoted in Fiil-Flynn, 2001; 28).

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Table 8: Summary of actual and potential tariff increases resulting from restructuring Type of increase Inflation linked

Amount of increase Annual rate of inflation

‘Rate of return’

??

Transmission surcharge Customer services, metering & billing Tariff uniformity

Up to 3%

Electrification programme levy Investment in new capacity Cost reflectivity

47% increase in Soweto in 1999 4% ?? 0.17% - 96.22%

‘Basic services’ levy

0%-14%

Local government levy

6%-7%

Comments Tend to hit poorer consumers harder than richer consumers because the poor spend more of their income on energy To ensure a ‘reasonable’ rate of return for capital (i.e. profit) Depending on distance from Jhb/Mpumalanga

Source of info

Higher for small consumers because it costs more to bill many individual consumers Trend towards higher rather than average or lower tariffs Cost of electrification programme charged to existing residential users Expected new capacity requirements to be funded through increased tariffs Depending on type of service, with rural users experiencing greatest average increases and largescale users experiencing a decrease in tariffs Actual increases in 2001 varied from 0.07% for big users to 5.81% for rural users Low voltage customers will experience greater increases To cover shortfall of providing services and infrastructure to low-income households. To be borne by ‘conventional credit’ residential, industrial and agricultural customers, excluding large-scale users. Size of levy dependent on area of distribution. To recover shortfalls resulting from limitations on local government using electricity surpluses to crosssubsidise other municipal services

Eskom 2001a

NER PWC 2000e PWC 2000e

Mothibeli 1999 DME 1997a Eskom AR 2001 Eskom 2001a

PWC 2000e

PWC 2000e

An argument raised by industry (and government) is that making them subsidise domestic use will eliminate the competitive advantage they have over foreign competitors in the production of export commodities. It is based on this logic that Eskom has recently committed to investing R1.2 billion to strengthen the transmission grid for the energy-intensive factories and facilities at the new Coega port (DPE, 2002a). However, COSATU (2001b) questions the logic of this as a growth path for the country. The union federation suggests that more employment (at a lower rate of income, but for a wider spread of the population) may be generated by providing infrastructure to allow people to engage in home-based economic activities, than through mega-projects like Alusaf. The latter rely on cheap electricity but are capital intensive and the wealth is not widely distributed in the population. Unless located in a strategy to ensure downstream development, cheaper energy for big users will only reinforce the path of capital-intensive, labour-shedding growth. There are a number of complexities involved in the establishment of a progressive block tariff as a method of achieving cross-subsidisation. These essentially revolve around the level at which the first block rises to before tariffs begin to match true costs, and the extent to which a free lifeline should be universal or targeted. Eskom and the government are of the opinion that tariffs should be set on the basis of the requirements of households formally connected to the grid. However, because of the housing shortage in black residential areas, many people live in informal backyard structures and rely on the infrastructure of the formal structure. If a lifeline tariff is designed on the basis of essential needs of a single household, informal dwellers relying on a supply from formal stand owners may cause electricity usage to increase above the first block, therefore causing prices to increase for both households. These are often amongst the poorest households and most in need of

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assistance. This suggests that the first block should be set higher than required to cover the most basic needs of a household only. Such an approach would have the additional benefit of allowing low-income households to access electricity for productive use. One suggestion on how to deal with the level of a basic lifeline supply is to set it on a ‘per person’ rather than ‘per household’ basis, thereby eliminating the bias against informal dwellings or larger households. The argument against this is that it results in subsidisation of middle income households, and threatens the long-term financial viability of the electricity sector as a whole. However, this argument is only valid if it is assumed that all income for subsidisation must necessarily come from within the electricity sector. If the sector were to be subsidised from external sources, this problem would evaporate. The question then is whether a reasonable supply of electricity to low- and medium-income households is a more important choice than other activities currently funded by the national fiscus. An additional consideration is whether the supply of electricity to these households may have a greater or lesser impact on long-term, evenly balanced economic growth than the financing of other activities. Ultimately it must be said that the debate on tariff structures tends to shift the debate away from a political towards a technicist approach. By engaging in the debate at this level, the political issues of a level of service that improves the standard of living for the poorest sections of the population are superseded by technical issues focusing on the financial viability of the electricity sector. Therefore it should be questioned whether it is tactically the best approach to concentrate on the detail of delivery mechanisms, or whether it serves a greater purpose to focus on the political demands of grassroots movements, even if these are apparently unsustainable from the point of view of capitalist accumulation. 7.5

The ‘free electricity’ policy

The ANC’s manifesto for the 2000 local government elections stated that in all ANC councils a free basic supply of energy would be provided. It promised to provide all residents with a free basic amount of water, electricity and other municipal services, so “that every family in the distribution system will always have at least some basic amount of services” (ANC, 2000). In July 2001, the DME indicated that a free basic electricity supply of 50 kWh/month would be provided to households with existing electricity connections. It was expected that this would result in a subsidy of R180 per year per household. For those using solar power, a subsidy of R40/month would be provided. Paraffin would be zero-rated to save those households from paying VAT. However, the free supply of electricity would only be provided to households earning less than R800 per month. The DME explicitly stated that “‘better-off’ citizens will continue to pay for municipal services rendered to them” (DME, 2001b). More recently, the free supply has been narrowed down to only those who are prepared to pay the full costs of consumption above the free lifeline, and who are not in arrears. The lifeline will therefore exclude the very people it was meant to help i.e. those households unable to pay for electricity. In some areas, an indigent policy has been suggested to ensure the targeting of the lifeline to the poorest households who really need it. The alternative is to provide everyone with a lifeline and then recover costs from those who don’t really need it via cross-subsidisation. This has a number of advantages over an indigent policy. First, an indigent policy has connotations that suggest inferiority. As a result, in many cases people do not participate because they feel uncomfortable being branded as ‘indigent’. Second, a universal lifeline with cross-subsidisation is far easier to administer than an indigent policy. A block tariff system on monthly bills to larger users is administratively much simpler than a bureaucratic process of identifying which households are poor

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enough to qualify, including countless procedures for verifying the information they have provided and regularly updating this information so that the ‘non-indigent’ don’t unfairly benefit. Third, the universal provision of a free lifeline means that no households will slip through the cracks because they may not have had the information required to apply, or for other reasons were unable to. It also allows for variations in status without having to constantly go through procedures for inclusion or exclusion. As the Durban metro has found with water supply, it is actually cheaper to provide a basic service for free across the board than to bill and administer tens of thousands of small users. Only once consumption passes a certain point is it worth billing the consumer. Finally, a universal lifeline policy establishes the principle that basic services are a necessity to all, and should be provided for free. The mechanism used to recover the costs incurred in providing the service is a separate issue. The Basic Income Grant may be one such mechanism, and its use should be debated alongside other methods. It seems, however, that free services should operate parallel to a basic income grant rather than the grant being used to pay for services – otherwise there is little point in giving with one hand merely to take away with the other. The free lifeline policy is not applicable to Eskom (Chalmers, 2002a). Municipalities who purchase bulk supplies from Eskom are to take responsibility for providing the free service to citizens. Eskom has thus not factored in the cost of free electricity in its retail pricing plan for 2002. It states that, where free electricity is provided and the costs are not recovered from the national fiscus, other consumers will pay for it through a transparent levy (Eskom, 2001a; 4). Eskom suggested that tariffs should be raised by 4% to cover the shortfall. It was unclear whether additional costs for free electricity will be charged to other residential consumers rather than other categories of consumers (Eskom, 2001a; 6), or whether the costs of free electricity would be distributed throughout all the tariffs (Eskom, 2001a; 18). However, the PWC proposals put forward a clear argument for making all conventionally (i.e. non-prepayment) connected users pay additional costs of maintaining the system. Large-scale consumers using over 100 GWh/year were explicitly excluded from this (PWC, 2000e; 8). Meanwhile, according to the 2002 DME budget, a policy framework for providing free basic electricity services to the poor is only anticipated to be ready by 2003/4 (Dept of Finance, 2001; 698). Table 9 below indicates the amount of power required to run selected household appliances. To work out how many kWh the appliances use, the wattage must be multiplied by the length of time the appliance is used. The table can be used to provide a sense of how far 50 kWh per household will go each month. For example, using an electric kettle for 15 minutes a day would use 18 kWh a month (2400 W x 0.25 hr x 30 days). Leslie (2000; 39-40) indicates that minimal cooking on a twoplate cooker and minimal lighting with a 60 W globe would use 140 kWh/month, and therefore this should be the lowest level at which a free lifeline supply should be set. This is based on 2 globes being used for 5 hours a day and a hotplate being used for 2 hours a day. Using electricity for cooking and lighting will have the greatest social and health benefits, because these are the two functions where alternative energy supplies are the dirtiest and most hazardous (coal and paraffin). In addition, time saved by using electricity instead of wood or coal for cooking can be freed up for productive activities of the choice of household members, and in particular women. Lighting increases safety, allows for educational or other activities after dark, and decreases health risks associated with the use of paraffin. Electricity for media, which should be part of a broader strategy to empower the population by providing access to information, would only require another 6 kWh/household/month for people to use the television for 2 hours a day.

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Table 9: Amount of electricity used by selected appliances Appliance Video recorder Light bulb (60 W) Television (70 cm colour) Food mixer Hi-Fi 30 watt speakers Home computer Refrigerator (no freezer) Pool pump Source: Eskom, 2002; 2

Wattage 35 60 100 150 180 180 250 750

Appliance Iron Toaster (pop up) Microwave oven Heater : 2 bars Two plate hotplate Lawn-mower Kettle Geyser

Wattage 1 000 1 100 1 300 1 300 2 000 2 000 2 400 3 000

In Cape Town communities organising around service delivery at present, the impression is that the free lifeline supply of 50 kWh lasts approximately 4 days for basic use, and therefore a free monthly supply should be increased to around 340 kWh (Anna Weekes, 28/5/02, pers com). This is based on minimal requirements for cooking (including refrigeration), lighting and heating. A survey in Soweto found that the promised 50 kWh amounts to an average of 10% of electricity consumption for households in Soweto (Fiil-Flynn, 2001; 2). This suggests that a free lifeline should stand at around 500 kWh/household/month. Eskom itself estimated that the average monthly electricity consumption in a low-income household is around 644 kWh (Eskom, 1996 cited in Fiil-Flynn, 2001; 25). COSATU (2001b; 3) is in favour of a supply of electricity to households that can support the use of basic equipment including productive machinery that can stimulate home-based employment. The low levels of supply (5-8A) set out in the MIIF also mitigate against the use of electricity for productive purposes, because this level does not permit the use of machinery and appliances that may be required to engage in sustained economic activity (Bond, 2000; 60). In the early 1990s, Eskom calculated its initial tariffs for newly connected customers on the basis of an average monthly consumption of 350 kWh (DME, 1997a). But in the mid-1990s, average consumption levels of newly connected households was only in the region of 80 kWh/month (van Horen, 1996; 198), only expected to rise to 138 kWH/month after 5 years (DME, 1887a). The rate of return on this level of consumption is too low to be financially viable, and therefore consumption levels need to rise. An increase in consumption levels is therefore of value both to the consumer and to the supplier. There are two main reasons for continuing low consumption levels. The first is that, based on the policy of full cost recovery, poorer households are unable to use more electricity. The solution to this is to uncover mechanisms that can ensure that these households are able to receive enough electricity to raise their consumption levels. Hence the debate about tariff structure and lifeline supplies. The second reason for low consumption is that people may not be able to afford the cost of appliances required to increase electricity use. A suggestion that has some support from electricity suppliers is the provision of a ‘starter pack’ when households are connected, providing the household with a hot plate or a kettle for free. Eskom investigated such an option in 1999. Even in situations where the consumer chose to sell or trade the appliance, it would still benefit the electricity sector because the appliance would presumably still be in use somewhere. Such an approach is financially viable, representing a fraction of a percent of annual expenditure in the supply sector, and also has long term benefits for the sector by increasing consumption levels and thus reducing per unit costs of supply (Leslie, 2000; 69).

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8.

Analysis of electricity sector restructuring

There is little reason for privatisation apart from a once-off windfall from Eskom’s disposal, and an ideologically driven argument for limited state involvement in productive activities. The absence of market competition in the generation and distribution sectors in particular is seen as a problem in and of itself. According to Radebe, Public Enterprises Minister, “the reform of the electricity supply industry is driven primarily by the need to introduce competition in this sector”, with Eskom restructuring a necessary preparatory step towards this goal (DPE, 2000b). In turn, competition and the introduction of the private sector are said to be beneficial because they improve efficiency and enhance innovation. However, greater competition will not necessarily improve efficiency, because financial efficiency has already improved dramatically since the 1980s while Eskom has remained in public ownership. Standard & Poor, the global credit rating bureau, has stated that Eskom’s vertical integration is a key factor in improving its credit standing (Business Day, 18 Sept 2000). Rather than being inefficient, Eskom has been able to spend over R1 billion a year on an electrification programme that has extended infrastructure to people previously denied access. Ongoing subsidies (both for connection costs and an amount for O&M, especially for poorer households) generated from within the sector allowed people to actually use the infrastructure, even if at a lower than expected rate because of limited ability to pay. The apparent unsustainability of this model is based on the notion that the accumulated arrears have to be subsidised using resources that should be going into further electrification. But even from a narrow financial definition of ‘sustainability’, forcing poor households to pay unsupportable arrears and ‘market’ prices for electricity exacerbates unsustainability. This is because households stop using electricity, and then no income at all is forthcoming and nor are any of the social benefits realised. It should be recognised that the provision of infrastructure is a social good, and so is the use of that infrastructure. Wherever possible, these should be financially supported by wealthy households and businesses. Where the ability to fund infrastructure and ongoing basic use of services from these sources reaches limits, additional subsidies should be provided by the public purse. It is unsustainable to provide infrastructure and then prevent people from using it because they cannot afford to pay. On a broader level, the provision of electricity is a sector that is not conducive to competition, because transmission is a natural monopoly, as is distribution. This is because it is economically unviable to have two sets of competing grids or two or more power lines going to a single household, which would be required if consumers were really to be able to choose between two or more service providers. In addition, the massive sunk costs of building up generation capacity and establishing a national grid, and the benefits of economies of scale, mean that if there was competition, the existing monopoly built up using state resources would be left with ‘stranded assets’. These are the hugely expensive generating stations that were built in a previous era, and where they were constructed on the basis that the costs would be amortized in steadily expanding usage. But in the face of competition, these assets would be rendered useless, or would continually produce too much electricity. In the long term, this would damage the industry as a whole and lead to higher prices (Kuttner, 1996; 272-73). For these reasons, there is a strong likelihood that the public monopoly would be replaced by a private monopoly because of necessary economies of scale and the benefits of vertical integration in electricity supply. This is especially the case at the local level because, although there may be competition in the market as a whole, it is likely that only one company would supply to a specific

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locality. In Europe and elsewhere, despite government’s stated aim of unbundling for the purpose of achieving greater competition, multinationals have entered into cartel agreements or engaged in acquisitions and mergers to retain the monopolistic or oligopolistic nature of the industry (TNI, 2002; 11). At present, there is no government policy on the extent to which the private sector would be able to integrate vertically in the future (Eberhard, 2001; 24). Nevertheless, the DPE has suggested that as the system develops, generation companies should not be allowed to “gain control of the transformation and distribution part of the industry as this could lead to abuse of market power” (DPE, 2000b). Despite claims that the private sector will be more efficient than the public sector in providing services, a recent empirical study of production costs of energy companies in 14 countries revealed there was no significant correlation between efficiency and private sector involvement (Pollit, cited in TNI, 2002; 5). Internationally, retail competition – where independent power producers sell directly to consumers – has started with allowing large companies to choose their supplier, only later extending the choice to all consumers (Eberhard, 2001; 12). This has two effects. First, it allows independent producers to ‘cherry pick’ the most lucrative customers while neglecting those sectors more difficult to profit from. Indeed, proposals for restructuring of distribution into ‘captive market’ retail activities and ‘contestable market’ retail activities are specifically designed to allow large-scale (‘contestable market’) consumers to choose their supplier. By implication, the private sector would be incorporated into the industry to provide alternatives to the large-scale consumers whom it is easier and cheaper to supply, without having to take the responsibility for the less lucrative supply to residential and small commercial users. Second, it forces the abandonment of cross-subsidisation between the large consumers and residential consumers because different companies/utilities are supplying them. The responsibility for generating sufficient income to sustain supplies to residential and other small-scale users is left to someone else, without the benefit of cross-subsidisation from large-scale users. Another argument put forward for involvement of the private sector is that it will bring resources to the table and thus release public money for other activities (MPE, 2000; 33-36). However, independent producers will not invest in new plant unless they are sure of a profitable return. In other countries, independent companies have demanded a power purchase agreement (PPA) from the utility managing the power pool. The PPA guarantees that the utility will purchase most or all the power from the independently run plant at a pre-determined price (often in foreign currency). Since government may underwrite guarantees made by the utility, this essentially means the government is assisting the independent producer to raise money (Bayliss & Hall, 2000; 3). In some countries, the independent power companies have required the setting up of an escrow account (where an agreed amount of government revenue is put into a foreign exchange account as a guarantee in case of non-payment or delayed payment). In India, Enron reached an agreement with the Maharashtra state electricity board that it would retain all the monies in the escrow account if not paid within 5 days of the date of payment. The company would be entitled to keep the money until the full bill had been paid (Bayliss & Hall, 2000; 4). More generally, in the decade before its collapse Enron received US$7 billion of public money to extend its global reach (TNI, 2002; 13). Most stakeholders agree that the sector has sufficient resources internally to continue with an electrification programme and to continue supplying electricity in a sustainable manner. This may be contingent on some kind of restructuring – in particular the reorganisation of the distribution sector and the standardisation of the tariff structure. But the concept in government is that restructuring necessarily must lead towards the creation of a competitive market (COSATU, 2001b). The NER is particularly keen on the creation of competition, arguing that government should work towards creating an electricity market, encourage private sector participation in the

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industry, and introduce competition, especially in the generation sector (NER, 2001). Even Eskom’s CE Thulani Gcabashe has voiced concern on this, saying that Eskom welcomed competition, but did not believe government should introduce ‘competition for competition's sake. Eskom has the lowest electricity price in the world, and excellent technical performance when benchmarked against the rest of the world. We need clear objectives as to why we are going this route.’ (quoted in Business Day, 2 Apr 2001). While the creation of space for black involvement in the economy is not a problem in principle, the issue is whether the benefits of a vertically integrated service supply structure should be broken up merely to achieve this goal. It is quite possible that the breaking up of the vertically integrated structure will benefit economic elites at the expense of the poorest sections of the population, who will be forced to pay higher prices for services. In addition, opening the distribution sector to market competition for the sake of it will lead to the electrification programme being undermined. This is because electricity provision to poor households is not immediately profitable, and the supplier does not attain many of the benefits of the programme, as these are broader societal benefits. Related to this is the concern that environmental benefits will also be lost in a competitive industry because private companies will not invest in programmes that have no commercial return (Winkler & Mavhungu, 2001; 7). The sectoral approach to delivery in the name of greater efficiency causes the literal ‘disintegration’ of municipal service delivery. Instead of an integrated service delivery authority, citizens are faced with a range of different bureaucracies for each service. The creation of regional distributors in the electricity sector also removes the service from democratic control and accountability, first by removing it from the control of elected local government, and second by withdrawing it from the immediate constituency occupied by citizens. This is true at the metropolitan level too, where a model of segmentation of services run by corporate entities is the order of the day (Swilling, 1996). COSATU argues that the restructuring of the supply industry is being taken from models that may be applicable in highly industrialised countries, but not relevant in developing countries. This is because the competitive model in industrialised countries is situated in the context of full access to electricity for most people in the population. In South Africa, as in other developing countries, there is limited access to begin with, and the competitive model will not change this. Operating on business principles means Eskom tries to maximise the profits it gets from what it sells. Since one of its functions is the selling of electricity, it will try to increase the amount of electricity it sells and the price it sells it for. The electrification programme is useful to Eskom because it increases the possible amount of electricity it can sell. But from a business point of view, the recovery of the costs of installing new connections, plus an additional return better than can be achieved by investing somewhere else is required for this to be considered a success. Success, then, is not measured by the number of people who have a consistent, unbroken supply of electricity, but by the revenues accruing to Eskom at the end of each financial year. This has been taken to its logical conclusion in 2002, when Eskom announced it would no longer be sharing the costs for new connections (Eskom, 2001a; 6). The terms ‘equity’ and ‘fairness’ have been appropriated by large-scale industry to refer to an abstract ‘fairness’ in treatment rather than social redress. For high level consumers, equity is used to refer to everyone paying the same per unit of electricity, and the ‘real’ cost of supply. For lowincome consumers, on the other hand, equity is more likely to refer to cross-subsidisation that at

81

least partially redresses past inequities. When Eskom or the government refers to fairness and equity, therefore, it is important to understand the context and the audience they are talking to. The shift to Eskom having to pay taxes and dividends means the industry’s collective ability to fund its obligations is diminished, because Eskom will be unable to commit to the kinds of tariff reductions it had agreed to prior to becoming a company. The rest of the industry would be partially reliant on transmission tariff reductions from Eskom in order to reduce their own costs and therefore raise funds for further electrification. This concern was raised in the ERIC report (DME, 1996). Related to this, Eskom will be unable to fund the electrification programme to the extent to which it has in the past if it has to pay taxes and dividends. The need to pay taxes and dividends is also likely to lead to price rises (Eberhard, 2001; 6). Government says the conversion of Eskom into a tax paying entity will not affect the electrification programme because the money derived from taxes will be used to continue to fund the programme. However, an agreement between Eskom and government allows Eskom to report a loss until 2004, and use the surpluses - that would previously have gone into the electrification programme – to position itself for competition (COSATU, 2001b; 8). The DME (1997a) has acknowledged that “if Eskom pays taxes and dividends, then there is a possibility that less funds will be available from this source for electrification. Electrification funds may then have to flow through the fiscus. Other governmental priorities may include a further reduction in electrification funding.” Indeed, the first year of Eskom’s tax paying status saw the amount provided for electrification decline to R600 million from R1 billion the year previously. Pressure is being exerted on Eskom to improve return on assets to above the current 10.9%. According to Gcabashe, international market-related returns come in closer to 18% to 20% and management is expected to focus on improving returns (Business Day, 12 Mar 2002). Eskom is therefore driven to withdraw from its electrification programme in preparation for competition. In this way, the social and developmental aspects of electricity provision have been ditched in anticipation of the cut-throat world of profits and income generation. Where the private sector gets involved, rates of return required to ensure investment are likely to be higher than would be required if Eskom were to continue carrying out the programme under public ownership. Although this might increase public sector borrowing, it could reduce costs by up to 25% compared to private sector supply (COSATU, 2001b; 4). The ability of Eskom to continue with a programme of electrification has become more dependent on the state of the economy and the extent to which there is a growth in the demand for electricity, especially from mines and industry. Special deals with big industry which link electricity tariffs to commodity prices mean that if the economy falls into a recession, Eskom bears part of the burden. In turn this means it will be forced to reduce its electrification activities to ensure profitability and shareholder returns at the end of each year. Cost reflective pricing is related to the restructuring in that it is preparing the ground for separation of different functions in the industry that can be outsourced or sold off. But it also serves to create an electricity market, completing the transformation of electricity from a basic need into a commodity that can be bought and sold. It is apparent from the above that the restructuring of the electricity supply industry, and of Eskom in particular, is being driven by government’s desire to create space in the industry for foreign involvement and black economic empowerment. This agenda is being advanced under cover of the introduction of competition into the industry. However, this competition extends only as far as the

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tendering process, after which successful companies will operate virtual monopolies in specific niches carved out for them by the state. The core motivation for restructuring (corporate and black elite accumulation in the energy sector) has a knock-on effect on tariffs and pricing, as indicated above. Cross-subsidisation is being withdrawn because it is said it distorts the reflection of the true costs in each sector of the supply industry. As a result, tariffs are rising because distribution has historically been cross-subsidised by the transmission and generation sectors. This has been possible because of the vertically integrated nature of the supply industry under public ownership. The introduction of competition and the private sector in generation will only be successful if this sector is ring-fenced and does not continue to cross-subsidise distribution, because the motive of private sector involvement is profit, and cross-subsidisation reduces profits. Following from this, Eskom is forced to recoup arrears owing to it because these arrears are reducing the pool of profits distributed across all sectors, which remain under Eskom control. Recovering arrears and ensuring payment for services will allow Eskom to increase its profits and thus enable the more rapid ring-fencing of the different sectors. While ring-fencing may make sense from a purely financial point of view (using resources generated from a service to reproduce that service), it fails to take account of those services that may not generate sufficient income from revenue to do this (e.g. public libraries). The logic of ring-fencing means that only those services that can cover their full costs from their own revenues will continue. Other services will be limited to provision to those who can afford to pay the full cost of providing the service, regardless of the social desirability of having universal access to the service (Pape, 2000). The struggle by communities against arrears repayments (which is a political and not a technical issue) and for the provision of free lifeline services for all constitutes a threat to the successful restructuring and eventual privatisation of sections of Eskom. It also poses a challenge to elitist black economic empowerment programmes and the extension of corporate globalisation into South Africa’s energy sector.

9.

Elements of a more appropriate strategy for providing electricity

A number of areas for consideration drawn from the information presented above are suggested below. These areas might form the basis for an alternative approach to the provision of electricity in South Africa in the future. 

    

A fixed monthly charge for poor areas at a rate that people themselves identify as affordable through a process of consultation, with cross-subsidisation within the pricing system to cover additional costs (from high income residential, businesses above a certain size, industry and mining) Raise the free lifeline to a more meaningful level, and provide a lifeline per person rather than per household to eliminate the bias against larger households. The level of a lifeline should be opened to public discussion. A moratorium on disconnections, and the reconnection of currently disconnected households, until a guaranteed free basic lifeline policy is in place and functioning Write off arrears (owed by municipalities and individual consumers) A uniform tariff system for bulk supply, with municipalities setting end-user tariffs within nationally established limits Allow municipalities to use surpluses from revenues to subsidise other municipal services, but only after a specified number of new connections have been made by them in their areas, and after all residents are receiving the free lifeline supply 83

   

Increase the equitable share to municipalities to allow them to provide the full range of services required in law The retention of a vertically integrated electricity system with public ownership, with the outlawing of profit making on the provision of basic services Base the financing of construction of new generating capacity on Eskom bonds, under public control End the nuclear programme and divert the resources into supporting the use of renewable energy sources for electricity generation

Key web-sites to visit: Department of Minerals & Energy (www.dme.gov.za) Department of Public Enterprises (www.dpe.gov.za) Eskom (www.eskom.co.za) Eskom Enterprises (www.eskomenterprises.co.za) National Electricity Regulator (www.ner.org.za) Anti-Privatisation Forum (Jhb) (www.cosatu.org.za/samwu/apf.htm) Congress of South African Trade Unions (www.cosatu.org.za) Energy for Development Research Centre (www.edrc.uct.ac.za) Minerals & Energy Policy Centre (www.mepc.org.za) Municipal Services Project (http://qsilver.queensu.ca/~mspadmin/)

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Appendix

Graph A1: Electricity produced by generator

1995

92

89

86

83

82

81

80

79

78

77

76

75

73

71

69

67

65

200000 180000 160000 140000 120000 100000 80000 60000 40000 20000 0

1964

Production (GWh)

Electricity produced by various undertakings, 1964-95

Year

Eskom

Local auth

Mines own

Manuf own

SATS & other own

Source: CSS/SSA Census of electricity, gas & steam, 1986 & 1995 From 1989, including TBVC

Graph A2: Percentage of electricity produced by generator

Year

Eskom

Local auth

Manuf own

SATS & other own

Mines own

Source: CSS/SSA Census of electricity, gas & steam, 1986 & 1995 From 1989, including TBVC

85

1995

92

89

86

83

82

81

80

79

78

77

76

75

73

71

69

67

65

100 90 80 70 60 50 40 30 20 10 0

1964

Percentage

% electricity produced by undertaking, 1964-95

Graph A3: Cumulative percentage of rural households connected % of rural households electrified (cumulative), 1995-2000

90 80

Percent

70 60 50 40 30 20 10 0 1995

1997

1998

1999

2000

Year

E Cape

F State

Gau

KZN

Mpum

N West

N West

N Cape

Limpopo

W Cape

Source: NER Electricity Supply Stats, Annual Report

Graph A4: Cumulative percentage of urban households connected

Percent

% of urban households electrified (cumulative), 1995-2000

100 90 80 70 60 50 40 30 20 10 0 1995

1997

1998

1999

2000

Year E Cape

F State

Gau

KZN

Mpum

N West

N Cape

Limpopo

W Cape

Source: NER Electricity Supply Stats, Annual Report

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Graph A5: Eskom electricity sales by end user category Eskom electricity sales, 1990-2001 100% 90% 80% 70%

% sales

60% 50% 40% 30% 20% 10% 0% 90

91

92

93

94

95

96

97

98

99

00

01

Year

Redistributors

Residential

Commercial

Industrial

Mining

Rural/agric

Traction

Other

Source: Derived from Eskom annual reports, Eskom Statistical Yearbook, 1996

Graph A6: Electricity consumed by end user category Electricity consumed in SA, 1964-2001

Electricity consumed (GWh)

200000 180000 160000 140000 120000 100000 80000 60000 40000

2001

99

97

95

89

83

81

79

77

75

71

67

0

1964

20000

Year

Mining

SATS

Domestic

Manuf & comm

Other*

Source: CSS/SSA Census of electricity, gas & steam, 1986 & 1995 *Other: Rand Water, regional water supply commissions, govt From 1989, including TBVC From 1996, figures not disaggregated (source: SSA Generation & consumption of electricity, 2001)

87

Graph A7: Percentage electricity consumed by end user category

92

1995

89

86

83

82

81

80

79

78

77

76

75

73

71

69

67

65

55 50 45 40 35 30 25 20 15 10 5 0

1964

%

Sectoral consumption as percentage of total electricity consumption, 1964-95

Year Mining

SATS

Domestic

Manuf & comm

Other*

Source: CSS/SSA Census of electricity, gas & steam, 1986 & 1995 *Other: Rand Water, regional water supply commissions, govt From 1989, including TBVC

Graph A8: Percentage yearly electricity price change by end user category Yearly electricity price change (%) 40 30

% change

20 10 0 -10 -20

Year Redistributors

Residential

Commercial*

Mining

Rural/agric*

CPI (Inflation)

Industrial

Source: Derived from Eskom annual reports, Eskom Statistical Yearbook, 1996 *Prior to 1988, commercial and farming were included under industrial

88

01

99

97

95

93

91

89

87

85

83

81

-30

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Costa, N. (2001) ‘IMF and Energy Pirates Made Brazil’s Electricity Crisis, ‘California Style’’, Executive Intelligence Review, (28) 27. Cottle, E. (2000) ‘Water for Profit’, Land & Rural Digest, No 15 (Nov/Dec 2000) Daniels. G. (2001a) ‘Soweto power cuts to be challenged’, Mail & Guardian, 6 Apr 2001 __________ (2001b) ‘Electricity crisis deepens’, Mail & Guardian, 8 June 2001 __________ (2001c) ‘Privatisation will hit consumers hard’, Mail & Guardian, 29 June 2001 __________ (2000) ‘Labour, government to meet on state asset sales’, Mail & Guardian, 30 June 2000 Davies, B. & Day, J. (1998) Vanishing Waters. UCT Press, Cape Town Davis, M. (1996a) ‘The financial impacts of electrification on the electricity distribution industry’. MEPC/EDRC Electrification Planning Project, report to Dept of Minerals and Energy, January 1996 __________ (1996b) ‘South Africa’s electrification programme: Progress to date and key issues’, in Development Southern Africa, Vol 13, No 3, pp.469-483 __________ (1995) ‘The Institutional Framework for Electrification Planning’. MEPC/EDRC Electrification Planning Project, report to Dept of Minerals and Energy, September 1995 Dept of Finance (2001) 2002 Estimates of National Expenditure: Vote 30 - Minerals and Energy. Dept of Finance, Pretoria __________ (1996) Growth, Employment and Redistribution: A Macro-Economic Strategy. Dept of Finance, Pretoria Dept of Minerals and Energy (DME) (2002) Parliamentary Media Briefing, 15 Feb 2002 __________ (2001a) Budget vote speech delivered by Deputy Minister Shabangu, National Assembly, 8 May 2001 __________ (2001b) ‘Minister Mlambo-Ngcuka Kick-Starts Provision of 50kWh/Month to the Poor in the Identified Areas’, media release, 2 July 2001 __________ (2000a) Budget vote speech delivered by Minister Mlambo-Ngcuka, National Assembly, 11 May 2000 __________ (2000b) ‘Transforming the Electricity Industry in South Africa’, media release, 27 June 2000 __________ (2000c) Minister’s address to Forum on Transformation of the Electricity Industry in South Africa, 27 June 2000

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__________ (1999) Statement by the Minister at the Parliamentary Press Briefing, 26 Aug 1999 __________ (1998) White Paper on the Energy Policy of the Republic of South Africa. DME, Pretoria __________ (1997a) ‘Re-appraisal of the national electrification programme and the formulation of a national electrification strategy’ (www.dme.gov.za/energy/RE-APPRAISAL.htm) __________ (1997b) ‘Restructuring of the electricity distribution industry’ (www.dme.gov.za/ energy/restructuring_of_the_electricity.htm) __________ (1996) Meeting South Africa's electricity distribution challenges (www.dme.gov.za/ energy/directorate-challenges.htm) Dept of Mines (1975) Report of the Commission of Inquiry into the Coal Resources of the Republic of South Africa (Petrick Commission). RP 63/1975. Government of the RSA, Pretoria Dept of Provincial and Local Government (DPLG) (2002) ‘Quarterly Monitoring of Municipal Finances and Related Activities. Summary of Questionnaires for Quarter Ended 31 March 2002’, DPLG, Pretoria __________ (2001a) ‘Quarterly Monitoring of Municipal Finances and Related Activities. Summary of Questionnaires for Quarter Ended 31 December 2001’, DPLG, Pretoria __________ (2001b) ‘Quarterly Monitoring of Municipal Finances and Related Activities. Summary of Questionnaires for Quarter Ended 30 September 2001’, DPLG, Pretoria __________ (1998) ‘Project Viability – June 1998’ (www.local.gov.za/DCD/dcdlibrary/pro/ pvindex6_98.html)

Dept of Public Enterprises (DPE) (2002a) Budget vote speech delivered by Minister Radebe, National Assembly, 16 May 2002 __________ (2002b) Minister’s speech at the presentation of Eskom's 2001 financial results, 6 March 2002 __________ (2001a) Media briefing by Minister Radebe, 13 Feb 2001 __________ (2001b) ‘Announcement of Eskom's successful RDP commitments’, press release, 16 Mar 2001 __________ (2001c) Minister’s speech at launch of new state-owned IT company ‘arivia.kom’, 27 Mar 2001 __________ (2001d) Minister’s comment at the release of Eskom's 2000 Annual Results, Cape Town, 5 Apr 2001 __________ (2001e) ‘Radebe reaffirms government's commitment to National Framework Agreement’, press release, 2 May 2001

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__________ (2001f) Budget vote speech delivered by Minister Radebe, National Assembly, 1 June 2001 __________ (2001g) Minister’s speech at the tabling of the Eskom Conversion Bill, National Council of Provinces, 20 June 2001 __________ (2001h) Speech by Minister Radebe at workshop on the Service Delivery Framework, Megawatt Park Conference Room, 30 Nov 2001 __________ (2000a) Parliamentary media briefing, 9 Feb 2000 __________ (2000b) Minister’s statement on the restructuring of Eskom, Eskom Conference Centre, 4 Apr 2000 __________ (2000c) Budget vote speech delivered by Minister Radebe, National Assembly, 14 Apr 2000 __________ (2000d) Minister’s speech to Privatisation Africa 2000 Conference, Sandton, South Africa, 16 May 2000 __________ (2000e) Minister’s presentation at the launch of the Policy Framework: An Accelerated Agenda Towards the Restructuring of State Owned Enterprises, Pretoria, 10 August 2000 __________ (2000f) Parliamentary media briefing on progress in the restructuring of state owned enterprises, Cape Town, 14 September 2000 __________ (1999a) Key note address by Minister Radebe delivered by live video-conference link to the workshop on restructuring of the electricity industry, Second Britain-South Africa Partnership Week, Michealangelo Hotel, Rosebank, Johannesburg, 1 Sept 1999 __________ (1999b) Minister’s address delivered to the official welcoming ceremony, Megawatt Park, Monday, 13 September 1999 __________ (1999c) Press briefing on the strategic IMCC lekgotla on the restructuring of state assets, Union Buildings, Pretoria, 7 December 1999 Dept of Public Enterprises and Dept of Communications (1999) Media statement on restructuring of state assets, 16 July 1999 Duffy, A. (1996) ‘Eskom scam uncovered’, Mail & Guardian, 8 Nov 1996 Durban Metropolitan Council (DMC) (2002) ‘Durban Metro Electricity: Who are We?’ (www.durban.gov.za/electricity/index.html) Earthlife Africa (2002) ‘Information Pack for Activists Training in Energy Issues’, Earthlife Africa, Johannesburg. __________ (2001a) ‘Nuclear Energy Costs the Earth’, Earthlife Africa, Johannesburg

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__________ (2001b) ‘Other Energy-Related Developments’ (mimeo, Earthlife Africa, Johannesburg) Eberhard, A. (2001) ‘Competition and Regulation in the Electricity Supply Industry in South Africa’. Paper presented to the Trade and Industrial Policy Strategies 2001 Annual Forum, Misty Hills, Muldersdrift Eberhard, A. & van Horen, C. (1995) Poverty and Power: Energy and the South African State. UCT Press and Pluto Press, Cape Town Econolec (1989?) ‘Summary of discussions with Eskom’ (mimeo, Planact archives, Wits University Historical Papers Library) Eskom (2002) ‘Eskom’s electricity tariffs and charges January-June 2002’ (www.eskom.co.za/ tariffs) __________ (2001a) Eskom’s retail pricing plan 2002 (revision 1, July 2001). Eskom, Megawatt Park __________ (2001b) ‘Eskom Tariffs and Charges for 2001’ (www.eskom.co.za/tariffs) __________ (1996) An Analysis of the Implications of Supply Capacity Limitations in Low Income Residential Areas. Eskom, Megawatt Park __________ (1973) Golden Jubilee 1.2.23-1.3.73. Eskom, Johannesburg European Commission (EC) (2002) ‘GATS 2000 - Request from the EC and its Member States (hereinafter the EC) to South Africa’ Ad Hoc 133 Committee Services, 6 Mar 2002 Eveleth, A. (1998) ‘Electricity subsidy to save millions’, Mail & Guardian, 25 Sept 1998 Everatt, D. & Zulu, S. (2001) ‘Analysing rural development programmes in South Africa 19942000’, Development Update, Vol 3 No 4 Fanaroff, B. (1992) ‘Trade Unions and Electrification’, paper presented at ANC National Meeting on Electrification, 6-7 Feb 1992 Fiil-Flynn, M. (2001) ‘The Electricity Crisis in Soweto’, Municipal Services Project Occasional Paper No 4. MSP, Johannesburg Financial Mail (1999) ‘Eskom Enterprises: Light for the dark continent’. Financial Mail Corporate Report, 10 Sept 1999 Fine, B. & Rustomjee, Z. (1996) The Political Economy of South Africa: From Minerals-Energy Complex to Industrialisation. Hurst & Company, London Gebhardt, M. (1996a) ‘Eskom equity fears’, Mail & Guardian, 6 Dec 1996 __________ (1996b) ‘Switching on to Cahora Bassa’, Mail & Guardian, 20 Dec 1996

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Gelb, S. (1991) ‘South Africa’s economic crisis: an overview’, in S. Gelb (ed) South Africa’s Economic Crisis. David Philip, Cape Town Graham, S. (2000) ‘Eskom pulls the plug on Randfontein’ (Independent On-Line, 20 June 2000) Greater Johannesburg Metropolitan Council (GJMC) (2001) ‘Igoli 2002 Programme A: Public Utilities’ (www.igoli.gov.za/public_utilities.htm) Hall, D. (1999) ‘Privatisation, multinationals and corruption’, Development in Practice, 9 (5), pp. 539-556 Heymans, C. (1991) ‘Privatization and municipal reform’, in M. Swilling, R. Humphries & K. Shubane (eds) Johannesburg City Council (2001) ‘Electricity supply in Johannesburg’ (www.goafrica.co.za/ joburg/services/citypower1.stm)

ka’Nkosi, S. (1998) ‘AC is much cheaper than DC’, Mail & Guardian, 22 May 1998 Kindra, J. (2001a) ‘Poor price for the family silver’, Mail & Guardian, 9 Feb 2001 __________ (2001b) ‘Crisis as Eskom faces R1bn in electricity arrears’, Mail & Guardian, 28 Sept 2001 Kirk, P. (2000) ‘Minister targets Eskom’, Mail & Guardian, 6 Oct 2000 Kuttner, R. (1996) Everything for Sale: The Virtues and Limits of Markets. Alfred A. Knopf, New York Leslie, G. (2000) ‘Social Pricing of Electricity in Johannesburg’, unpublished Masters research report. Faculty of Management, University of Witwatersrand, Johannesburg Lourens, C. (2002) ‘Power stations prepares for higher demand’, Business Day, 27 Aug 2002, p.20 Loxton, L. (1997) ‘New plan to electrify South Africa’, Mail & Guardian, 15 Aug 1997 Macro-economic Research Group (MERG) (1993) Making Democracy Work: A Framework for Macroeconomic Policy in South Africa. Centre for Development Studies, Cape Town Madisha, W. (2001) ‘The truth about privatisation’, article prepared for Business Times, 23 Aug 2001 (www.cosatu.org.za) Malherbe, S. & Segal, N. (2001) Corporate Governance in South Africa’. Paper presented to the Trade and Industrial Policy Strategies 2001 Annual Forum, Misty Hills, Muldersdrift McDonald, D. (2002a) ‘The Bell Tolls for Thee: Cost Recovery, Cutoffs and the Affordability of Municipal Services in South Africa’, Municipal Services Project Special Report (http://qsilver.queensu.ca/~mspadmin/pages/Project_Publications/Reports/bell.htm)

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__________ (2002b) ‘You Get What You Can Pay For: Cost Recovery and the Crisis of Service Delivery in South Africa’, Alternatives, Vol 28 No 3 McGregor (2002) McGregor’s Who Owns Whom 2002, 22nd edition. Who Owns Whom, Johannesburg __________ (1991) McGregor’s Who Owns Whom 1991, 11th edition. Juta, Johannesburg McRae, I. & Messerschmidt, L. (1988) ‘The Privatisation of Eskom’ (mimeo, Planact archives, Wits University Historical Papers Library) Ministry for Public Enterprises (MPE) (2000) An Accelerated Agenda Towards the Restructuring of State Owned Enterprises – Policy Framework. MPE, Pretoria __________ (1999) ‘Public Enterprises Review, 1994-1999’ (www.dpe.gov.za/docs/overview94-9901.html)

__________ (1996) ‘National Framework Agreement (NFA) on the Restructuring of State Assets’, (www.polity.org.za/govdocs/misc/framework.html) Mothibeli, T. (1999) ‘Electricity price hike for Soweto’, Star, 15 July 1999 Moya, E. (2002) ‘British Energy share price plunges 65%’, Business Day, 10 Sept 2002, p.25 National Electricity Regulator (NER) (2001) ‘The Electricity Supply Industry in South Africa’ (www.ner.org.za/publications) __________ (2000) ‘Electricity Supply Statistics in South Africa, 2000’ (www.ner.org.za/ publications) __________ (1998) ‘Electricity Supply Statistics in South Africa, 1998’ (www.ner.org.za/ publications) __________ (1995) ‘Electricity Supply Statistics in South Africa, 1995’ (www.ner.org.za/ publications) National Union of Mineworkers (NUM) (1998) ‘Energy Into the Future (1st draft)’, report from energy policy workshop, October 1998 Ngwane, T. (2001) ‘Electricity cut-offs continue relentlessly in Soweto’, Debate, No 5 (Mar 2001) Oelsner, H. (2000) ‘Can Renewable Energy Replace Koeberg Nuclear Power?’ (mimeo, Oelsner Group, Darling) O’Meara, D. (1996) Forty Lost Years: The apartheid state and the politics of the National Party, 1948-1994. Ravan Press, Randburg Pape, J. (2000) ‘Keeping the poor out’, Sowetan, 18 Oct 2000, p. 10

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Phasiwe, K. (2002) ‘Eskom puts energy into regional strength’ (mimeo, 22 Apr 2002) Pickering, M. (1993) ‘The Inclining Block Tariff: Some preliminary thoughts on electricty tariff design criteria’ (draft mimeo, EDRC, University of Cape Town) Pickering, M. & Steyn, G. (1996) ‘The Electricity Scenarios and their implications for Various Electricity Supply Industry Stakeholders’. MEPC/EDRC Electricity Scenarios Project research report, February 1996 Planact (1991) ‘Electricity and the Financing of Local Government: Present and Future’ (mimeo, Planact archives, Wits University Historical Papers Library) __________ (1990a) ‘Overview and Evaluation of the Soweto Project 1988/89’ (mimeo, Planact archives, Wits University Historical Papers Library) __________ (1990b) ‘SPD evaluation’ (mimeo, Planact archives, Wits University Historical Papers Library) __________ (1989a) ‘The Brand Report: A Summary and Assessment’ (mimeo, Planact archives, Wits University Historical Papers Library) __________ (1989b) ‘Notes on how the Johannesburg Electricity Department (JED) is structured and how it could participate in the normalisation of the electricity supply in Soweto’ (mimeo, Planact archives, Wits University Historical Papers Library) __________ (1989b) ‘Report on the factors that influence the cost of electricity to the domestic consumer in Soweto’ (mimeo, Planact archives, Wits University Historical Papers Library) Pollit, M. (1995) Ownership and Performance in Electrical Utilities: The International Evidence on Privatization and Efficiency. Oxford University Press, Oxford PriceWaterhouseCoopers (PWC) (2000a) ‘Regional Electricity Distributor Definition’, Electricity Distribution Restructuring Project, Working Paper 1 __________ (2000b) ‘Ownership, Governance & Legal Status’, Electricity Distribution Restructuring Project, Working Paper 2 __________ (2000c) ‘Asset Valuation and Transfer Principles’, Electricity Distribution Restructuring Project, Working Paper 3 __________ (2000d) ‘Commercial and Regulatory Arrangements’, Electricity Distribution Restructuring Project, Working Paper 4 __________ (2000e) ‘Tariffs, levies and Financial Transition Strategies’, Electricity Distribution Restructuring Project, Working Paper 5 __________ (2000f) ‘Organisation and human resources’, Electricity Distribution Restructuring Project, Working Paper 6

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Soweto People’s Delegation (SPD) (1989a) ‘Objections to the proposed amendment of by-laws relating to electricity tariffs and service charges’ (mimeo, Planact archives, Wits University Historical Papers Library) __________ (1989b) ‘An assessment of Eskom’s proposals for resolving problems related to the supply of electricity to Soweto’ (mimeo, Planact archives, Wits University Historical Papers Library) __________ (1989c) Speech delivered by SPD to IDASA conference in Johannesburg (mimeo, Planact archives, Wits University Historical Papers Library) Statistics South Africa (SSA) (2002) ‘Annual Inflation on a Monthly Basis, 1975-2002’ (www.statssa.gov.za/Products/Reports)

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Winkler, H. (2002) ‘Comments on Integrated Resource Plan’ (mimeo, 16 Apr 2002) Winkler, H. & Mavhungu, J. (2001) ‘Green power, public benefits and electricity industry restructuring’, report prepared for the Sustainable Energy and Climate Change Partnership. EDRC, Cape Town World Bank (1993) ‘Power supply in developing countries: will reform work? Proceedings of a roundtable’. Industry and Energy Department Working Paper, Report No 17638. World Bank, Washington DC Annual reports and statistical overviews Dept of Minerals and Energy Eskom National Electricity Regulator Acts and policies White Paper on Privatisation and Deregulation, 1987 Eskom Act 40 of 1987 Electricity Act 41 of 1987 (plus regulations and amendments in 1989, 1994 and 1995) Nuclear Energy Act 131 of 1993 Local Government Transition Act 209 of 1993 Constitution of the Republic of South Africa Act 108 of 1996 White Paper on Local Government, 1998 White Paper on Energy Policy, 1998 Local Government: Municipal Structures Act 117 of 1998 Nuclear Energy Act 46 of 1999 National Nuclear Regulator Act 47 of 1999 Local Government: Municipal Systems Act 32 of 2000 White Paper on Municipal Services Partnerships, 2000 Division of Revenue Act 1 of 2001 Eskom Conversion Act 13 of 2001 Division of Revenue Act 5 of 2002 (plus schedules) Financial Mail Top Companies ‘Public Sector Corporations: Profitability rising under debt and capex burdens’ (30 June 1995) ‘Public Sector Corporations: Huge capex plans as growth continues’ (28 June 1996) ‘Feature Company – Eskom: Walking the political and operational tightrope’ (28 June 1996) ‘Public Sector Corporations: It has been a watershed year for public corporations’ (27 June 1997) ‘Public Sector Corporations: Pain and gain with changing of the guard’ (26 June 1998) ‘Public Sector Corporations: Watching the public-sector scorecard’ (25 June 1999) ‘Eskom – Delivering affordable power for the people’ (25 June 1999) ‘Public Sector Corporations: It’s a difficult balancing act’ (30 June 2000) Newspapers and magazines Business Day ESI Africa Independent On Line Mail & Guardian

Business Report Financial Mail Los Angeles Times Sunday Times

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