Eskom plans hiking tariffs

Treasury officials say the utility's finances are healthy enough for it to raise the R150bn to expand capacity 60 percent in the next five years on its own, through a combination of electricity price hikes and bond issues.

But if Eskom gets the go-ahead from the National Energy Regulator of SA (Nersa) to raise its tariffs 18 percent in fiscal 2008- 09 and another 17 percent the following year, it will further cloud SA's deteriorating inflation outlook, adding to pressure for higher interest rates.

Reserve Bank governor Tito Mboweni has spoken out about the threat rising electricity prices pose to efforts to drive inflation back within the 3 percent-6 percent target range, which has been breached for six months running this year.

'They will just add fuel to the fire,' Mboweni said in Johannesburg last week. Bank officials confirm forecasts that if Eskom's price rises go ahead, inflation would rise by an additional 0.6 of a percentage point -- with the indirect effect much broader. But Eskom's electricity tariffs are by far the world's lowest and without more support from the government, hefty tariff hikes are essential to prevent a costly downgrade to its credit rating -- which has already been tarnished by its ambitious spending plans.

'At this point, Eskom doesn't have much net debt -- but such a massive expansion programme may dent its balance sheet significantly,' said Barnard Jacobs Mellet's Adriana Benedetti. 'Eskom won't be able to keep its credit rating without either the planned tariff increases, a capital injection, or an explicit government guarantee.' BJM believes that Eskom would have to double its tariffs by 2012 to maintain its financial profile and credit rating.

International rating agency Fitch changed its outlook on Eskom's long-term ratings to negative from stable in August, citing among other issues, a possible sharp deterioration in its financial profile if it had to fund its expansion without 'cost-reflective' price increases.

In July Moody's Investor's Service affirmed its A1 rating for Eskom, but lowered its 'baseline credit assessment' to 8 from 7, saying its credit profile was likely to deteriorate for similar reasons.

SA faces years of costly power blackouts as Eskom scrambles to boost generating capacity to meet the demands of faster economic growth.

Official figures last week showed that power consumption climbed 4.5 percent in the year to September while electricity production rose 3,6 percent -- the third consecutive month where demand outpaced generation.

Nersa is considering Eskom's request to nearly treble electricity charges from an initially planned 6,5 percent in the year starting next April and will deliver its verdict on December 21. In a consultation paper published in September, Nersa outlines the issues around the request, saying Eskom may not be able to finance its capital expansion plans without regulatory price intervention. (Business Day)