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Eskom admits BHP smelters caused losses

Jan de Lange | Wed, 21 Apr 2010 13:38

[miningmx.com] -- Eskom’s contracts with BHP Billiton’s two aluminium smelters no longer covered the cost of supplying electricity, over and above the accounting losses on derivatives that arose out of this, Eskom network clients chief officer Erica Johnson said in Parliament.

Eskom has insisted in the past that the contracts merely involved an accounting loss. The “loss on derivatives” amounted to R9.5bn last year, but Johnson left no doubt on Tuesday that there were also actual losses for Eskom.

“Apart from the accounting instability, our cost structure as a business changed fundamentally. The cost of electricity production changed, and it therefore became necessary to renegotiate the contracts so that the cost of providing electricity to them (the smelters) was covered," she said.

"That’s what we mean when we say that the two contracts became onerous. When we can no longer cover the cost of provision, the contract becomes a burden,” Johnson told the portfolio committee.

She was the head of the negotiation team to renegotiate the contracts with BHP Billiton.

An agreement in principle was achieved for the contract with Mozal in Mozambique on 31 March, and a contract will hopefully be signed with Mozal on 27 May, she said.

However, there are still problems with the contract for the provision of electricity to Hillside/Bayside in Richards Bay, Billiton’s largest smelter, which produces about 700,000 tonnes of aluminium per year. It will presumably only be possible to finalise this later in the year, Johnson said.

A contract for the provision of power to Anglo American’s Skorpion zinc smelter in Namibia must also be renegotiated, and this can presumably also only be finalised later. However, the contracts with Billiton are responsible for 95% of Eskom’s losses on derivatives, she said.

The two mining giants are the only clients with whom special agreements were signed. The other 134 energy-intensive consumers pay standard rates, mostly in terms of Eskom’s megaflex contracts.

Dr Gerhard Koornhof, ANC member of the portfolio committee, wanted to know from Johnson and Eskom acting chairman Mpho Makwana who paid for the losses. “You did not cover the costs of provision. That means there must certainly have been cross-subsidising.

“Who paid the difference between 1995, when the contracts were signed, and 31 March, when you agreed on new contracts?” Koornhof asked.

However, his question was not answered, nor were those of committee member Pieter van Dalen, who represents the opposition Democratic Alliance.

Van Dalen quoted from a secret report leaked to him by Eskom personnel in terms of which Eskom is supplying electricity at 12c per kilowatt-hour to Montraco, a partnership company between Eskom, the Swaziland electricity authority and the Mozambique electricity authority to carry the cost of power supplied.

Committee chairman Vytjie Mentor refused to allow Van Dalen’s questions. Makwana said that the total cost of production and provision of electricity in the 2010-2011 financial year was 41,6c per kilowatt-hour. Of this, the generation cost was 24,3c.