Electricity and Rates hikes prohibitive on South African Property Sector

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The recent proposed electricity increases by the State-owned power utility Eskom could cripple businesses, lead to job losses and higher food prices. The recent proposed electricity increases by the State-owned power utility Eskom could cripple businesses, lead to job losses and higher food prices.

The recent proposed electricity increases by the State-owned power utility Eskom could cripple businesses, lead to job losses and higher food prices.

Commercial Property sector is already facing increased operating costs owing to spiralling electricity costs, municipal rates and other service charges, which are outstripping income growth and pushing cost ratios to unattractive levels.

"For homeowners in particular, who cannot pass on any part of these costs, the future looks even bleaker. Moreover, the economy in general is hurting as these imposts are pushing up inflation to the edges of the SA Reserve Bank’s upper target of 6%," Pam Golding Properties said in a statement.

Eskom’s latest bombshell was not unexpected, but it is no less painful for that. The electricity supplier has applied to the National Energy Regulator (Nersa) for a 16% a year increase for the next five years, which means the cost of electricity, will more than double from the current Eskom charge of 61 cents kw/h today to 128 cents kw/h in 2017. As it is, tariffs have already risen by more than 200% over the past five years, according to Electricity Intensive Users Group (EUIG).

Nersa will make a decision in February and increases will kick in in April for Eskom customers and in July for electricity supplied through municipalities. Economist Mike Schussler avers that if Nersa accepts Eskom’s latest request, the increase between 2002 and June 2017 – the end of the current five-year period – would equal 580%.

What is not often realised, or debated, is that Eskom’s price increases are only the tip of the power supply iceberg. On top of Eskom’s charge, municipalities – which distribute almost half the country’s electricity – add their levies. These can be eye-openers. An example is my own monthly electricity bill from Cape Town Municipality; the tariff ranges from R1.13 kw/h to R1.40 kw/h. That’s a very long haul from Eskom’s 61 cents kw/h. But consumers receiving electricity directly from Eskom also suffer from additional charges. These include a daily service charge (roughly R14), daily network charge (R42) and an “environmental“ levy of R10. Most municipalities continue to subsidise power and other charges to poor households. But in the end, someone has to pay the piper.

The EUIG, whose members include the country’s mining and industrial giants, has asked that municipalities’ pricing policies be examined to ensure that they are fair. Trade and Industry Minister Rob Davies have asked for a cap to be imposed on municipalities.

But the silent killer in all this is Value Added Tax. Each time Eskom increases its tariffs, 14% VAT is slapped on top. When the municipalities add their mark-up yet another 14% VAT is added. And so it goes on – compounded, it’s another example of what tax lawyers call “bracket creep”. And, one might ask, where is the added value?

In its submission to Nersa, Eskom says that its tariff increases so far have failed to cover costs. Eskom chief executive Brian Demes rationalises: “If prices are not cost reflective then every unit of electricity is subsidised, either by taxpayers or future users.”

Eskom has included for the first time independent power producers in its submission. In the requested 16%, three per cent is to support the introduction of renewable energy projects. These, mainly solar powered, are projected to supply 896.5 megawatts of the 3 725 MW national target for renewable energy by 2016. This compares with plans for Eskom’s coal-fired power stations at Kusile and Medupi, each of which will have capacity of 4 800 MW. However, the government expects that renewable energy costs will be significantly higher than average Eskom tariffs and any new power stations after Kusile and Medupi.

At least we have some respite before Eskom’s tariff increases are promulgated. We don’t have such a breather with that other inflationary villain – fuel. The latest price hike in August was, at 93 cents/litre, the highest ever single increase and helped spur headline consumer inflation to jump almost 1% from August to September. Petrol now costs R11,85 on the coast and R12,20 inland.

The reason normally given for the variation is that our refineries – other than Sasol – are all situated at the coast. Now eyes are beginning to focus once again on Sasol’s role. The SA Communist Party, for instance, wants Sasol nationalised (again!), claiming that its cost of production is around US$40/barrel and thus, due to our import parity pricing policy which enables Sasol to charge the same as an imported barrel of oil, the company is making huge profits. It should charge much less for its fuel, says the SACP.

Meanwhile, the Competition Commission has charged some of the oil majors operating here with collusion in the market place.

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