Eskom wants 67% tariff increase

Ethel Hazelhurst, Business Report, Johannesburg, 19 March 2008
Top economist blames ‘destructive’ state intervention - Inflation expected to rise 4.7 percentage points

Johannesburg - A request by power utility Eskom for a net 67.2 percent increase in tariffs this year highlighted how “destructive” government intervention in the economy could be, Azar Jammine, the chief economist at Econometrix, said yesterday.

And Dennis Dykes, Nedbank’s group chief economist, said if the correct decisions about Eskom were not made swiftly, economic losses would mount over the next four years and would equal a cumulative R377 billion by 2012.

He called for “imaginative solutions on the supply side” and a “drastic” change to the regulatory regime Eskom yesterday asked the National Electricity Regulator of SA (Nersa) for further hikes of 50 percent in each of the two following years.

In addition to the 14.2 percent hike Nersa has already approved, Eskom has now said it needs a 53 percent supplementary increase this year to combat rising coal prices and the costs of demand-side management, or energy efficiency, projects.

According to Jammine, Eskom’s desperate straits are the direct result of earlier decisions by the government and the parastatal to market electricity at artificially low prices – a decision Jammine describes as “folly”.

“They decided to base prices on the historic cost of power stations and to market South Africa as a low electricity-cost destination for investment,” he said. “This led to the establishment of three aluminium smelters between 1995 and 2003, which consume nearly 10 percent of the country’s electricity supply.”

He said: “I hope this sends a powerful message to the government about the problems that arise when governments make decisions without thinking things through.”

Ultimately a massive hike in prices will have a dramatic effect on economic growth.

Jammine calculated this year’s increase, if granted, would add 4.7 percentage points to producer inflation, which was 10.4 percent in January.

“By suddenly raising the inflation rate, you are taking disposable income out of people’s pockets,” he said.

Consumption is already slowing, given successive interest rate hikes and fuel price increases over the past two years.

There will also be an effect on businesses, which will be forced to absorb some of the increase which, in turn, will
erode profits and their contributions to overall growth.

Higher inflation would drastically reduce the country’s growth potential.

Jammine said it would take an econometric model to determine the ultimate effect of higher inflation on gross domestic product, but it would be significant.


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