Eskom price deals hit investor confidence

The renegotiation of favourable special pricing agreements between BHP Billiton and Eskom will undermine investor confidence in commercial contracts in South Africa.

The special pricing arrangement involves two contracts agreed on in 1995 and 2001, which essentially see BHP Billiton paying between 20c and 26c for every kilowatt hour used, compared with the 47c that it costs Eskom to produce this power and the 66c at which it sells electricity to other consumers, according to calculations by energy analyst Chris Yelland.

The details of the once-secret agreement emerged after a decision by the Supreme Court of Appeal last month.

Eskom said it submitted a formal application to the National Energy Regulator of South Africa (Nersa) last October.

It argued that due to changed circumstances in South Africa, the special pricing agreements were no longer in the public interest, prejudice the national security of energy supply and the economy and unduly discriminate against and prejudice other customer classes and millions of consumers paying Eskom's standard tariffs.

In its application, Eskom asked Nersa to address the validity of the public concerns and determine whether the special tariffs remain objectively justifiable in the current environment — which the regulator has now set out to do.

Eskom had been trying to renegotiate the contract with BHP Billiton since 2009 — just after South Africa experienced power blackouts costing the economy around R92-billion.

Shareholders and analysts are concerned that a renegotiation of the contracts — that are supposed to run to 2028 — would result in a significant drop in investor confidence in the country that is already struggling to attract foreign investment money.

Shaun Nel from the Energy Intensive Users Group said the renegotiation of the contracts would undermine investor confidence in commercial contract sanctity in South Africa.

In addition, he said the marginal state of the aluminium industry meant that any renegotiation would invariably result in closure of the smelters with its effect on future electricity pricing and jobs.

A report by Econometrix suggests that BHP Billiton directly and indirectly supports 15,000 jobs in Richards Bay.

"The fact that Eskom may now be seen by international investors trying to get out of legal agreements entered into in good faith may have serious adverse consequences for SA as an investor destination at a time when SA needs capital, particularly when one considers that BHP Billiton is not responsible for these agreements which resulted in it receiving electricity at below Eskom's operating cost," said Opportune Investments director Chris Logan.

Except for recent years, the agreement has actually paid off quite well for Eskom and the country, according to Nel.

Eskom spokeswoman Hilary Joffe said that besides the aluminium price arrangements with BHP Billiton there were originally two other commodity-linked special pricing agreements, with BHP Billiton Mozal and Skorpion Zinc, which had already been renegotiated. Other large industrial and mining customers pay what is termed megaflexi rates of between 56c and 58c/kWh.