Nersa to decide on BHP’s special deal with Eskom

2013-03-24 10:01

Power utility makes public the contracts it concluded with Anglo-Australian mining multinational

It is now up to the energy regulator to decide whether South Africans would be relieved from a long-term power-supply deal between Eskom and BHP Billiton.

In terms of the deal, the global mining group’s local aluminium smelters were allocated up to 9% of the power utility’s sales at rates below cost.

A four-year legal battle between City Press’ sister publications, Beeld and Sake24, as well as Eskom and BHP Billiton, came to a head this week when the power utility made public the contracts it concluded in 1992 and 2001 with the mining group for the supply of electricity to the energy-hungry Hillside and Mozal smelters, based in Richards Bay and Maputo, respectively.

Based on the formula agreed to determine the price at which Eskom had to supply electricity to the smelters, Hillside only paid about 22.65c per kilowatt hour (kWh) for two-thirds of the 1?200 megawatts it uses, as opposed to R1.40/kWh charged to normal consumers. The deal was concluded in 1992.

The deal was revisited in 2001 for an extension project at the smelter, with a variable rate of between 12.88c/kWh and 32c/kWh.

Eskom’s current cost of supply averages 41c/kWh, implying that South Africa’s households and other businesses have in recent years substantially subsidised the supply of power to BHP’s smelters.

The smelters furthermore account for 5.68% and 9%, respectively, of Eskom’s generation capacity and sales, only slightly less than the cities of Durban and Cape Town.

The prices were calculated for Beeld and Sake24, based on the formula contained in the contracts, by Johan Andersen, an advising electrical engineer from Cape Town. He has done research on the topic for years.

Sake24 specialist reporter Jan de Lange in 2009 requested the information from Eskom under the Promotion of Access to Information Act when the power utility suffered a loss of R9.3?billion. Following the refusal of Eskom and BHP Billiton to divulge the details, De Lange and Sake24 in March 2010 approached the South Gauteng High Court for relief, which ruled in August 2011 that the information be made public.

BHP took the decision on appeal, but it was rejected by the Supreme Court of Appeal in Bloemfontein last week.

In its recent application for a tariff increase to the National Energy Regulator of SA (Nersa), Eskom asked for a review of the supply contracts, which could see certain provisions of the deals set aside.

“The special-pricing agreements link the price smelters’ pay for electricity to the dollar price of aluminium and were entered into in the 1990s when Eskom had surplus capacity,” read an announcement made by Eskom in October.

When approached for comment on whether Eskom would ask Nersa to either increase the tariffs charged to BHP Billiton, or to relieve it in its entirety from the supply deal, spokesperson Hilary Joffe declined to comment.

“We’ve asked the regulator to have the contracts reviewed. More than that, I cannot say,” said Joffe.

BHP Billiton last week said it had for many years paid well above the market rate for power. Spokesperson Lulu Letlape did not want to elaborate on whether the firm disputed Andersen’s calculation. But she did say last week’s statement “is still valid”.

BHP said: “The contracts were entered into on the basis that Eskom’s excess capacity was not going to be absorbed through normal economic growth for many years and that the national utility would continue to ensure there would be sufficient electricity to meet the country’s needs.”

Nersa spokesperson Charles Hlebela said public hearings on the contracts would be held towards the end of next month.

Asked whether Nersa had the authority to change aspects of a commercial contract that was entered into between Eskom and a third party, Hlebela said the regulator first had to acquaint itself with the facts.

“It is difficult at this stage to say what Nersa can do and can’t do. If Eskom is asking for a review, it could mean there are some aspects Nersa could look at.”

A revision of the contracts could be the death knell for the smelters, which operate in an environment where subdued demand is more than catered for from growing supply out of China.

In November, BHP Billiton agreed to pull out of an aluminium project in Guinea, selling its 33% stake to its partners for $1.

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