Eskom hikes could lead to neglect

There couldn’t be a worse time for Eskom’s leadership struggle; not only for the country as a whole, but for an increasingly unpopular local government in particular.

The distribution of electricity is critical to local government for numerous reasons. First, it has provided a valuable source of revenue to cross-subsidise other services. Second, it provides a strong motivator for ensuring payment — electricity is often cut before the life-giving resource of water, where defaulting consumers do not qualify for indigent support. Third, it represents a major cost in the provision of free basic services.

What is easy to miss is that tinkering with the bulk price of electricity can fundamentally compromise a series of sensitive equilibriums, which are already negatively affected by the recession. More simply put, if electricity becomes too expensive for the average consumer (at the rates suggested, this is highly likely for many households, especially in the current recessionary environment), the risk of default on all municipal payments (rates, electricity and other services) to a municipality increases dramatically.

Further, the potential to crosssubsidise poorer residents with margins made on electricity tariffs levied on wealthier residents is diminished since not only will overall margins from electricity decrease, but the number of residents who are unable to afford electricity will invariably increase. This means a higher electricity bill for municipalities; not only in terms of the already overwhelming tariff hikes, but also in terms of rising numbers of nonpaying consumers.

Unfortunately, knock-on financial pressure from higher electricity costs is already evident in municipal budgets for the next three years, as released by the Treasury last month — not only in terms of higher service charges, but also, given an inability to raise these by the same rate as the bulk costs, in terms of expenditure patterns.

Unsurprisingly, service charges for local government are set to rise 27% between 2008-09 and 2009-10, averaging out to a slightly more palatable 18% between 2008-09 and 2011-12. Horrific for the average ratepayer, yes, but despite these rising service charges, more revenue is needed.

Unable to fully recover the higher cost of bulk electricity, municipalities are being forced to reduce spending on working capital provision as well as repairs and maintenance.

In fact, over the next three years, provision for working capital is cut in the sector by half, while provision for repairs and maintenance — already a key concern given the continuing degradation of economic infrastructure in SA — is also to shrink.

For financiers, this makes the sector a much riskier and far less attractive prospect.

With Eskom’s credibility so shaken by the unforeseen blackouts of a year ago and the current leadership crisis, many may question whether Eskom’s funding calculations are trustworthy, or whether its funding model (using user charges to fund infrastructure) is appropriate. Ironically, with shrinking expenditure on maintenance, the single greatest unintended consequence of Eskom’s price hikes may well prove to be squeezing municipal budgets into the sort of myopic neglect of long-term assets that caused Eskom’s current infrastructural deficit.

In fact, the distribution of electricity at the local level may well become so onerous and destabilising that any remaining opposition to the introduction of Regional Electricity Distributors may dissolve as municipalities cast off what was once the only significant source of profit from local revenue.

It can only be hoped that this rather subtle dimension is a further area for engagement and debate by the National Energy Regulator of SA with the very troubled Eskom.