1. Submission to NERSA on Revised Eskom MYPD2 Chemical and Allied Industries Association January 2010

2. Key issues Revised application Revised application Focus on issues within NERSA mandate Focus on issues within NERSA mandate Approach to energy consumption by chemical industry Approach to energy consumption by chemical industry Impact of proposed increase on sector Impact of proposed increase on sector Impact of proposed increase on households Impact of proposed increase on households Collaboration with Eskom Collaboration with Eskom

3. Case studies Case studies Chlorine production: Chlorine production: – Electricity raw material: 30% of input costs – No possibility to cut the input without loss of production – Full cost recovery from customers will result in an increase in domestic water supply of 15% Fertilizer production Fertilizer production – 10% increase in fixed costs – Competition with imports constrains potential to pass on increase – Overall cost cutting to offset increase likely to result in job losses – 15-20% reduction in operating profit which in turn will lead to review of investment decisions

4. Households Households Strength of consumer demand direct impact on industry Strength of consumer demand direct impact on industry Disproportionate impact on households Disproportionate impact on households More people under the poverty and ultra poverty line More people under the poverty and ultra poverty line Undermines policy to extend electricity access Undermines policy to extend electricity access Eskom analysis in line with findings Eskom analysis in line with findings

5. Genesis Findings

6. Big Picture Big Picture Eskom approach to the MYPD2 Eskom approach to the MYPD2 – Determine funding (cash flow) requirements for operations and new capacity build and then justify tariff escalation to meet these More appropriate approach More appropriate approach – Determine true cost of supplying electricity from Eskom models through robust analysis and then isolate the funding gap – Determine if some of the immediate funding gap can be addressed through long-term project delays (given demand slump) and/or non-Eskom supply – Determine the extent to which alternative funding mechanisms are feasible and what portion of the funding gap they can address Conclusion Conclusion – Funding gap can be met through means other than loading tariffs – Lower sustainable tariffs remain possible without introducing further supply risks

7. Tariff proposals Revised tariffs represent high-end estimates given information asymmetry and scope for further efficiency savings Revised tariffs represent high-end estimates given information asymmetry and scope for further efficiency savings IHC provides a more objective and verifiable proxy for replacement cost than MEA IHC provides a more objective and verifiable proxy for replacement cost than MEA Eskom’s WACC estimate is too generous - our review suggests Eskom’s real pre-tax WACC is closer to 8.0%. Eskom’s WACC estimate is too generous - our review suggests Eskom’s real pre-tax WACC is closer to 8.0%. Operating costs increases for existing businesses should be at least limited to inflation, maybe better Operating costs increases for existing businesses should be at least limited to inflation, maybe better DSM costs and shadow road tolls should not automatically be included in tariffs DSM costs and shadow road tolls should not automatically be included in tariffs Smoothing option equates to a 25% p.a. increase for MYPD 2 period Smoothing option equates to a 25% p.a. increase for MYPD 2 period

8. Capacity and Capex requirements Funding gap emerges from ambitious capex programme Funding gap emerges from ambitious capex programme We agree with Eskom’s revised application that capex on Coal 3 and nuclear are not required in this MYPD period We agree with Eskom’s revised application that capex on Coal 3 and nuclear are not required in this MYPD period – Crunch in next two years after which new capacity will result in excess availability of supply – Incorporating DSM/Price effect into demand estimates reveals more excess supply Delaying this capex to the next period does not introduce serious supply shortfall risks Delaying this capex to the next period does not introduce serious supply shortfall risks Delaying the capex does provide scope to find alternative funding for these large projects other than increases in tariffs Delaying the capex does provide scope to find alternative funding for these large projects other than increases in tariffs

9. Addressing the funding gap Funding gap much smaller and only emerges in FY 2011/12 Funding gap much smaller and only emerges in FY 2011/12 More scope for new loans and significant amounts already raised since November (e.g. Export Credit Agency, African Development Bank, World Bank and French Banks) More scope for new loans and significant amounts already raised since November (e.g. Export Credit Agency, African Development Bank, World Bank and French Banks) Time available permits raising funding through the sale of power stations to private sector Time available permits raising funding through the sale of power stations to private sector – Full sale of existing or new generation is in line with government policy on IPPs We are confident the funding gap can be addressed through available funding mechanisms and not through higher tariffs We are confident the funding gap can be addressed through available funding mechanisms and not through higher tariffs R'mFY 2009/10FY 2010/11FY 2011/12FY 2012/13FY 2013/14FY 2014/15 Cumulative cash surplus/(deficit) 20 455 8 018 -9 854 -28 776 -30 604 -40 362

10. Request to NERSA Request to NERSA Application of regulatory accounting principles in a rigorous fashion Application of regulatory accounting principles in a rigorous fashion Decisions should impose onus on Eskom to improve efficiency of generation; address challenges of bad debt and theft Decisions should impose onus on Eskom to improve efficiency of generation; address challenges of bad debt and theft Guidance to municipalities on consequential increases and cushioning the poor Guidance to municipalities on consequential increases and cushioning the poor Critical policy areas where Nersa is involved need to be actioned urgently Critical policy areas where Nersa is involved need to be actioned urgently

11. Conclusions Conclusions CAIA is committed to: CAIA is committed to: – aggressively encouraging a range of DSM initiatives amongst its members – working with Eskom and other stakeholders to mitigate risks associated with a lower increase Ultimately: decision is how to balance the risk of poor security of supply against the risk of significant negative socio economic impact. Ultimately: decision is how to balance the risk of poor security of supply against the risk of significant negative socio economic impact.