Rationale for restructuring and regulation of a ‘low priced’ public utility: a case study of Eskom in South Africa

Article type: Research Article

Authors: Eberhard, Anton | Mtepa, Msafiri

Affiliations: Professor and Director, Infrastructure Industries Reform and Regulation Management Programme, Graduate School of Business, University of Cape Town, South Africa

Note: [] Graduate student, Graduate School of Business, University of Cape Town, South Africa

Abstract: Eskom in South Africa provides an interesting case study to test the prevailing orthodoxy on electricity market reform. Eskom is the seventh largest electricity utility in the world. It is a publicly owned, vertically integrated monopoly, with the cheapest prices globally. Is there any rationale for independent regulation of Eskom or for embarking on a reform of the South African electricity market? The paper gives a snapshot view that Eskom's current prices can be misleading. Low current prices do not necessarily mean that Eskom is operationally or allocatively efficient. Eskom's electricity prices are low primarily because Eskom did not have to invest in new generation plant for many years. Much of the debt it incurred during the large expansion programme in the 1970s and 1980s has been amortized. Eskom's short-run marginal costs are also low, primarily because its primary energy costs are well below international levels. Lower costs have also been maintained though improved labour productivity and technical performance—although contradictory trends are observed which make it hard to benchmark Eskom's operational efficiency against international best practice. Eskom's historical investment record has been poor. The analysis in this paper reveals the significant misallocation of capital by Eskom's decision-makers and the massively wasteful overcapacity in the generation plant. The impact on prices has been profound. Eskom has not always had competitive prices. In real terms, they were nearly double the current levels in the late 1970s and 1980s and will have to rise in the future as capacity runs out and new investments have to be made in generation. Furthermore, the long-term price trend reveals that current electricity prices, in real terms, are no lower than they were in the early 1950s and early 1970s. The question then has to be asked, whether Eskom has been able to harvest the potential efficiency gains that should have been possible from the application of new technology? These insights provoke the question of whether Eskom has operated within a governance and regulatory environment that has provided sufficient incentives for improved performance. Low price, publicly owned utilities may not appear to require independent regulation or restructuring. However, this case study of Eskom in South Africa demonstrates the importance of a thorough historical understanding of utility performance in order to expose possible inefficiencies. The test for new and re-regulated electricity markets is whether they can encourage efficient investment and operational behaviour to secure electricity supply at the lowest possible cost.

DOI: 10.3233/IJR-120030

Journal: International Journal of Regulation and Governance, vol. 3, no. 2, pp. 77-102, 2003