[miningmx.com] – THE calculation of electricity tariffs is almost a science in its own right. In South Africa there are literally hundreds of different rates – each with its own authority and with its own objectives and costs that have to be covered.
A growing problem is, of course, local authorities that use electricity tariffs as a loophole to create a revenue stream for objectives that have little or nothing to do with electricity. That just shows how the complexity – in many cases totally man-made complexity – is misused to mislead consumers.
Xolani Mkhwanazi, chairman of BHP Billiton in South Africa, said yesterday in an open letter to Business Day that Eskom and its consumers are definitely not being disadvantaged by the tariffs Billiton pays to operate its two huge aluminium smelters, Hillside and Mozal, in South Africa and Mozambique.
(With all the effort and money that Sake24 has spent on this issue and the importance it has for our readers, Mkwanazi really could have sent us a copy of the letter. We would gladly have published it in full.)
Mkwanazi, in fact, said that for many years Billiton paid rates that were higher than the standard rate for electricity for industrial purposes and that Eskom and electricity consumers were never disadvantaged by the rates Billiton paid for its electricity to the smelters.
He also argues that for the duration of the contracts Billiton paid more for electricity than the cost to provide the electricity.
It’s all quite relative. Very relative. Especially if one looks at the mass of rates that are all supposed to cover various cost components.
The contracts between Eskom and Billiton for providing electricity to the two smelters were made known to Sake24 just two weeks ago in terms of the court order by the Court of Appeal in Bloemfontein after a four-year legal battle.
Sake24 is now trying to calculate the impact of these contracts on Eskom and other electricity users from the day they came into effect in July 1995 until now. It’s obviously not the kind of thing you can work out on the back of a cigarette pack.
The calculations show that Mkwanazi is correct to a point – up to 2008 and 2009.
The most general Eskom tariff for industrial users is known as Megaflex. It’s a flexible contract in which users are encouraged to use more electricity outside peak hours, and to use less during peak hours, when the pressure on the national grid is at its highest. In the end, however, the rate paid must correspond with the average industrial tariff.
The preliminary calculations indicate that the rates Billiton paid in the Nineties for the electricity to Hillside do not differ much from the Megaflex rates.
From 2001 to around 2008, it remained the same, but in this period, Eskom kept Megaflex’s rates artificially low – actually, shockingly low.
Most of the time Megaflex was slightly more than the Hillside rates. For two or three years, the rates paid by Hillside were even higher than the Megaflex rate of other electricity consumers.
Even in the period of 2001 to 2008 it looks at this stage as if Eskom suffered a loss of around R1bn in the contracts for Hillside. That’s if the difference between the Megaflex rate and rates that Billiton paid for Hillside is defined as a gain/loss.
The situation worsened dramatically from 2008 and 2009. That was naturally the period when Eskom rates started rising. The total loss from 2001 to 2012 according to our calculation is R10,724bn.
Of that, between R8bn and R9bn was chalked up in the past three years – only on the contracts for Hillside, which formerly included the old Bayside smelter that Billiton, at the time Gencor, bought from the Industrial Development Corporation in the early Nineties.
These are the actual losses of cash flow suffered by Eskom. If you were to project the effect of the Hillside contracts forward, for say the next ten years, it is really an explosion of losses.
The losses increase so sharply that it is inconceivable that Eskom and Billiton can continue with this, but the contracts go on to until 2028. This is simply not sustainable.
Eskom is caught up in a mess; caught up in a contract that can’t be implemented and which Billiton has for years already exploited to the maximum. And according to Mkwanazi’s letter to Business Day, they plan to stick to it for as long as possible.
In the few years following the creation of Billiton and just after the merger between Billiton and BHP, when Brian Gilbertson was the group’s CEO, he visited South Africa after each results announcement to inform institutional shareholders and media representatives about the latest developments in the new company.
He pointed out at virtually every one of the information sessions that Billiton is one of Eskom’s three largest coal suppliers, but also Eskom’s biggest customer. “It’s only logical for us to start generating electricity in South Africa some time or other,’ Gilbertson said at the time.
I believe he knew that the contracts for Hillside were not sustainable and held too much risk to Eskom. When he unexpectedly resigned in 2003 after he lost a corporate battle, those plans were immediately dropped.
“We are a mining company – not a generator of electricity,’ Chip Goodyear, Gilbertson’s successor, said when asked about this.
That the leaders of Eskom and Billiton had not been able to find a solution years ago already, speaks volumes about leadership – no, about the lack of leadership. And until they do so, all South Africans will suffer the consequences of their short-sightedness.
