Eskom’s major problem

Eskom’s attempt to overhaul its electricity tariff structure is reminiscent of Telkom’s complaints nearly fifteen years ago that it was losing money on every phone line it supplied in the country.

The power utility has submitted its updated retail tariff plan (RTP) to the National Energy Regulator of South Africa, which proposes huge price increases for connecting to the electrical grid.

At the same time, Eskom wants to reduce the per-kilowatt-hour price of electricity and abolish its incline block tariffs, which make units more expensive the more electricity you consume.

The effect of these changes is that poorer and smaller households will see their electricity bills increase substantially.

Households consuming between 200 kWh and 450 kWh per month would see their bills increase by between 22% and 48%, translating to an increase of over R300 per month.

People who have installed rooftop solar generation will also be affected. However, Eskom hasn’t exhibited much sympathy for these customers — despite their substantial contribution to ending load-shedding.

“If you are going to use Eskom on a partial basis and you have to come back when the sun is down, there needs to be a cost and a charge for you to tap into Eskom as a battery,” Eskom CFO Calib Cassim has said.

Eskom’s proposed changes would not only impact its direct customers.

Its RTP also wants to separate municipal tariffs into generation capacity and energy charges. Therefore, municipal customers can expect similar changes.

According to Eskom, the changes are necessary to ensure tariffs are cost-reflective.

Eskom further argues that its split into separate entities for generation, transmission, and distribution has made rationalising its tariffs especially important.

Considering that the RTP proposes a grid capacity fee increase from R225 to R637 for home users, Eskom is essentially saying that it makes around a R400 loss on residential electrical connections.

It then makes up for this loss with the profits from selling electricity to customers.

In 2010, Telkom complained to its industry regulator, the Independent Communications Authority of South Africa (Icasa), about a very similar situation.

Back then, Telkom still had over 4 million copper-based fixed access lines, of which fewer than 700,000 had digital subscriber line (DSL) broadband.

The remainder mostly had their lines for basic telephone services.

Telkom said it took a loss of R144 per month on every phone line.

However, unlike Eskom, its goal was not to argue for a line rental increase. Telkom understood that hiking the basic price of a line would simply drive its customers into the waiting arms of Vodacom and MTN.

Instead, the majority state-owned company used its purported “access line deficit” to try and convince Icasa not to enforce local loop unbundling (LLU).

LLU is a specific regulatory intervention that gives many service providers access to a network operator’s last-mile access network. In this context, “local loop” refers to the final leg of a connection into the end user’s building.

Had Icasa implemented LLU, it would have given Telkom’s competitors more direct wholesale access to the phone lines it supplied to homes and businesses around the country.

Service providers could then theoretically offer their own telephony and broadband services (like ADSL) over those lines to compete against Telkom.

Telkom warned that should Icasa allow this, it would have no choice but to hike line rentals to make up for the profits it would lose — profits that it previously used to defray its access line deficit.

Given the similarities between Telkom’s supposed access line deficit and Eskom’s grid access deficit claims, it is instructive to see how things turned out for South Africa’s former fixed-line monopoly.

While Telkom successfully capsized LLU and reaped the associated profits in the short term, it soon faced competition from upstarts like Vumatel.

Telkom didn’t have much to worry about when Vumatel first broke ground in Parkhurst in 2014. However, the model pioneered in the leafy suburb lit a flame that spread rapidly.

Although Telkom responded with its own fibre-to-the-home rollouts, it initially refused to reduce prices below what it charged on DSL.

It eventually gave in to market pressure and cut its fibre prices, but its fixed-line customer base remained in freefall.

Five years after South Africa first heard about Vumatel, it had overtaken Telkom as the country’s biggest fibre-to-the-home operator, with DSL and copper phone lines rapidly becoming irrelevant.

Despite decades of monopoly advantage, Telkom lost the upper hand to its competitors.

Energy analysts have warned that a far worse fate could await Eskom if it isn’t careful.

Extreme levels of load-shedding between 2020 and 2023 fuelled the mass adoption of rooftop solar and backup batteries by wealthy and middle-class households.

If Eskom insists on pursuing double-digit annual price hikes along with a massive increase in grid connection fees, it could spur people and businesses to go completely off-grid.

This will leave Eskom with fewer paying customers and less revenue, potentially plunging it into a death spiral of ever-increasing prices and a declining client base.

“Eskom focuses on ensuring cost reflectivity by increasing tariffs and revenue rather than by reducing costs and improving performance and efficiency,” the Organisation for Undoing Tax Abuse (Outa) has stated.

Telkom offers another useful comparison in this regard.

Since 1999, when Telkom had over 61,000 employees it has reduced its headcount almost every year. In its most recent financial results, Telkom reported that it had 9,894 staff members.

Eskom, on the other hand, has roughly 10,000 more employees today than twenty years ago — despite not producing more electricity.