The Shocking Truth – ESKOM-Shedding

FMF bird

“The history of Eskom has been a prolonged sick joke, some would call it dark humour” according to Leon Louw, Executive Director of the Free Market Foundation, in an address to the Foundation on “The Shocking Truth” at 17h45 on Thursday, 28 August 2008.

The only fleeting moments during which there have been satisfactory conditions have been when Eskom passed through the thin line of optimality from over charging to under charging and over investing to under investing. Virtually all discourse on the prolonged debacle spanning decades has revolved around the futile endeavour of trying to get an inherently flawed situation to function properly. Everyone holds forth about the need for Eskom, the government and consumers to do their bit, as if a government owned monopoly could be converted miraculously into performing as efficiently as competitors subjected to free competition would be forced to do to stay in business.

One does not have to be an expert on energy to know that what is needed is not better management of Eskom but free competition to which end Eskom should be unbundled into its distinct activities: generating, national grid, distribution, retailing and managing energy markets. Once these functions have been unbundled they should probably be further divided into regions and local governments. Either way, Eskom should be privatised and the energy market deregulated.

Notwithstanding criticisms of South Africa’s “dark farce” the debacle is not Eskom’s fault. Eskom has responded in a largely predictable and appropriate way to the policies to which it has been subjected. For decades it over charged and built up vast capital resources, which were used to build excess capacity, resulting in “moth-balling” of surplus power stations. Then it entered a period of politically correct undercharging, allowed moth-balled power stations to be stripped and vandalised, and plunged the country into the crisis earlier this year. Cape Town in particular did of course have a crisis going back at least a year before that.

Eskom simply did what government protected monopolies do inevitably, which is to operate in ways that misallocate capital and provide sub-optimal services at inappropriate prices.

If Eskom is not to blame, then who is? The answer to that question prior to the establishment of NERSA, the National Energy Regulator, was a succession of ministers responsible for energy policy. They did not allow free competition and private investment. Since its creation, NERSA is largely to blame because it imposed conditions on Eskom that made the crisis virtually inevitable and conditions on would-be competitors which kept or drove them out of the market.

Another fact that has scarcely been mentioned in the discourse is that NERSA’s restrictive licensing system meant that companies with existing surplus capacity have been prohibited from ameliorating the crisis by selling electricity. Tongaat-Hullett power, for instance, has not been allowed to sell electricity from its generators to one of the biggest consumers in the country, the Richards Bay aluminium smelter. Anglo American Platinum mines have not been allowed to supply the electricity needs of nearby Rustenburg. At the informal sector end of the market thousands of people have owned imported generators to supply their own needs and those of neighbours in “townships” and informal settlements. They have been the victims of government inspectors going around confiscating generators and prohibiting electricity sales, even in areas where no Eskom or local government electricity was available.

The electricity crisis can be solved overnight by the simple expedient of raising prices to “market-clearing” rates. The medium-term solution is to allow the free acquisition of private generating capacity and the freedom to trade electricity, using the national grid if necessary, at an appropriate cost. The long-term solution is unbundling, privatisation and deregulation, which can be done by way of a massive black economic empowerment act, preferably by giving Eskom shares to black South Africans or all South Africans. This will bring South Africa in line with world trends. A monolithic energy monopoly such as Eskom is uncommon in the world. Typically energy is supplied by way of separate undertakings or enterprises in accordance with unbundling and in some cases free competition and privatisation are mandatory, such as the European Union. The shock of the recent crisis will hopefully be sufficient to get South Africa into the twenty first century in which electricity is treated like any other product or service which is supplied most efficiently and most affordably under conditions of deregulated and privatised free competition.

For more information please contact:

Leon Louw

Executive Director

Free Market Foundation

Tel: 011 884 0270

Cell: 084 618 0348

Fax: 011 884 5672