Eskom: How consumers are milked

Johannesburg - Eskom sells 9% of its electricity to BHP Billiton’s two aluminium smelters at less than one-fifth of the tariff paid by other consumers, Beeld reported on Friday.

The preferential tariffs for the two smelters, Hillside in Richards Bay and Mozal in Maputo, enable the two loss-making smelters to be sustained while the rest of the country’s consumers, both household and industrial, pay much higher electricity prices.

Details of the deal emerged from contracts Eskom revealed to Media24 in terms of a court order ratified by the Supreme Court of Appeal last week. BHP Billiton [JSE:BIL] appealed against the original court order, but the appeal was rejected.

At Hillside, Billiton pays for two-thirds of the 1200 megawatts the smelter uses in accordance with a secret formula agreed upon as far back as 1992 and which applies until 2028.

Hillside is paying 22.65 cents per kilowatt hour (kWh) to Eskom this month, and households average of R1.40 per kWh.

It costs Eskom 41 cents per kWh to generate electricity.

The price was calculated for Beeld newspaper by Johan Anderssen, a Cape Town based consulting electrical engineer who has researched the effect of the two aluminium smelters on Eskom’s finances.

Until Thursday, this formula was one of Eskom’s best-kept secrets. It was based entirely on the aluminium price and the exchange rate of the rand against the dollar. No provision was made in the contract for price increases.

It was signed by Alan Morgan, the then executive director of Eskom, who became the parastatal’s CEO in 1996.

A second contract for Hillside was concluded in 2001 because Billiton wanted to expand the factory by a third so it could smelt 750,000 tons of aluminium per year in Richards Bay.

That time Eskom insisted on a small price increase mechanism. Despite this the electricity price for the extended section of Hillside was currently between 12.88 and 32 cents per kWh.

According to the contract, this tariff was approved by national energy regulator Nersa on condition that other consumers should not be disadvantaged by it.

Eskom had been trying since 2009 to renegotiate the contracts for Hillside, but Billiton refused.

Eskom applied to Nersa late last year to review the contracts, but the review was delayed pending the court case brought against Eskom and Billiton by Media24 regarding access to the contracts.

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