Finally, something newsworthy on Eskom and electricity prices

The typical quality of conservation around electricity prices in South Africa is so low as to be worthless. Cry after cry about it being “unfair” or “it will drive inflation” or any number of issues, while all the time disregarding that if Eskom doesn’t make money, we pay for it through taxes in any case. It’s become so frustrating and, frankly, boring that I haven’t blogged much about it in a while.

Until I read this article summarising Brian Kantor’s evaluation of the return on assets Eskom is achieving compared to international norms and how low their gearing is becoming compared to international norms for an ultra-low risk business.  Both of these elements work in the same direction.  Higher gearing will result in a higher return on shareholder equity for the same return on assets, and a lower hurdle rate for return on equity will allow for a lower return on assets which will then require less profit to achieve.

The view presented here is that Eskom is trying to make too much money and simply charging too much as a result. I hope this gets a lot more air-time.

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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  1. The reason that NERSA gave on why they only gave 8% (well the bit I heard on the radio this morning) was very plausible. Eskom wanted to bolster its balance sheet so that it could raise its own capital independent of the government credit rating. But since Eskom is 100% owned by Gvt, the balance sheet is Gvt’s anyway. So why do they need to build up reserves at the expense of the electricity consumers? NERSA said “No”.

    1. Sure, and there’s plenty of analysis on that story alone to do, but that doesn’t change the fact that inflation isn’t the reason not to increase the rates. It does raise the real questions of the actual cost of producing electricity, separating that from what is charged and the methods of financing capital programmes. NERSA may actually have a clue, but the typical journalist (and unfortunately citizen) doesn’t think in those terms. “More pay bad.”

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