A BRIEF HISTORY OF ESKOM – 1923-2015

A BRIEF HISTORY OF ESKOM – 1923-2015

Sandra Van Niekerk | Why Eskom Is In a Mess and What to Do About It

This article is a brief excerpt of "A BRIEF HISTORY OF ESKOM - 1923-2015" by Sandra van Niekerk from the "Why Eskom Is In a Mess And What To Do About It: A Companion to Eskom Transformed" Booklet. To read the article in full CLICK HERE

In order to fully understand the problems facing Eskom and the electricity system today, it is important to understand the history of how electricity developed in South Africa, who was responsible and why it was developed; what changes were made and when, and in whose interests. Once we have this full picture, we can better understand what we need to do to transform the current system in order to meet basic social needs.

1.Beginnings of Escom

Escom (Electricity Supply Commission) was established in 1923 in terms of the Electricity Act (No 42 of 1922). Also established in terms of this Act was the Electricity Control Board (ECB) which controlled and licenced the electricity supply and set tariffs.

Before 1923, electricity in South Africa was generated by a large number of different bodies, including 40 municipalities and 18 private companies. The two largest companies were the Rand Mines Power Supply Company and the Victoria Falls and Transvaal Power Company. But industry, mining and transport increasingly needed a reliable and cheap source of electricity as they grew and consolidated their position in the economy. The railways in particular were looking for abundant, reliable and cheap electricity to power their electric-powered trains, and their need was a strong impetus for Escom’s formation.

So Escom’s main purpose was to ensure delivery of cheap electricity to the railways and  mines. But its mandate was framed in terms of providing a public service, and supplying electricity ‘in the public interest’ (Gentle 2009: 50). Escom played a central role in driving the development of the South African capitalist economy, and made possible cheap power for the growing mining, transport and manufacturing sectors. White South Africans also benefitted from this cheap electricity, receiving a good quality, cheap service to residential areas during the apartheid years.

In these early years, there was no requirement for Escom to operate at a profit, and it was exempt from paying taxes, but there was a strong emphasis on it operating independently from government and parliament. It was required to finance its operational costs out of revenue generated by the sale of electricity. It also used this revenue to pay off the loans it raised to finance capital expenditure. Escom was only able to access money from the national fiscus through an Act of Parliament.

As  Escom grew, it gradually took over the private, independent power stations until, by 1948, it was a vertically integrated state utility, responsible for generation, transmission and distribution (although with local government continuing to play a key role in relation to distribution ). As a producer of cheap electricity for mining, industry and the railways, it became a key driver of the Minerals-Energy Complex (MEC) and large-scale private monopoly capital.

2.From Escom to Eskom

In the 1970s, Escom was borrowing more on the foreign market to fund its new build programme, but the size of this programme was making it increasingly difficult to fund the loans through tariff increases. As a result, the government passed a new law that allowed Escom to set up a Capital Development Fund. Escom was able to retain its earnings and put any excess into this fund. As this fund built up, Escom was able to draw on it to fund its ongoing new build programme.

Developments in the international economy, such as the global energy crisis in the early 1970s, started putting pressure on Escom’s costs, with the result that the price of electricity started going up in the mid-1970s. At the same time, there was increasing pressure on the supply of electricity, so Escom continued with its massive build programme. There was another motivation as well – at a time of international sanctions against apartheid South Africa, the government was determined to build South Africa’s self-sufficiency, including energy self-sufficiency.^[1] The new build programme included Koeberg (South Africa’s only nuclear plant), as well as new coal-fired plants.

In order to pay for this programme, electricity tariffs again went up in the early 1980s. These price increases hit the South African economy hard at a time when it was already under increasing strain. There was a great deal of public anger towards Escom and the increases.

In 1984 the government was forced to set up the de Villiers Commission to investigate the situation at Escom. This was done to appease the public and to review Escom’s operating and planning processes. As a result of the de Villiers Commission recommendations, and to mark a new stage in the development of the state utility, Escom underwent a name change, and from 1987 was known as Eskom. This was among a raft of changes proposed by the Commission, which were consolidated in two pieces of legislation – amendments to the 1922 Act (Electricity Amendment Act of 1985) and the Eskom Act of 1987.

Apart from the name change, other changes brought about by the de Villiers Commission included:

• The scrapping of the electricity control board and its replacement by the Electricity Council.  The council would be in control of policy and planning. For the first time this included private capital being directly involved in decision making processes in the state.
• The Electricity Council appointing a management board – effectively setting up a two-tier structure of governance.
• Eskom started to operate on a commercial basis and no longer being governed by the principle of operating as a not-for-profit entity.
• Stopping the capital development fund (this had happened in 1985).
• Setting a national tariff, which meant municipalities would no longer set their own tariffs.
• Eskom falling under the Ministry of Public Enterprises, rather than the Ministry of Minerals and Energy Affairs. Overall energy policy, however, was still determined by the Ministry of Minerals and Energy Affairs.
• Separating out non-regulated activities of Eskom and consolidating them into Eskom Enterprises.

Eskom Enterprises, acting like a private company, took on electricity contracts in other parts of Africa, as well as in the telecommunications and information technology sector. But these did not go well, and by 2004 Eskom had retreated back into a focus on domestic electricity “in line with the government’s greater emphasis on using state-owned enterprises for development”. (Greenberg 2009: 73)

Another important development was that the different components of Eskom – generation, transmission and distribution – began to pay tariffs to each other. This served to bring market relations into the electricity sector. (Greenberg 74)

The process of corporatising Eskom started with the shift from Escom to Eskom, and it culminated in the Eskom Conversion Act No 13 of 2001, which made Eskom subject to the Companies Act (no 61 of 1973). While Escom was charged with operating “in the public interest”, the 1987 Act spoke about Eskom needing “to provide the system by which the electricity needs of the consumer may be satisfied in the most cost-effective manner, subject to resource constraints and the national interest.” (Gentle 2009: 50).Thus the 1987 shift from Escom to Eskom represents a key moment in the shift from a public entity to a commercial entity operating along market-based lines. Gentle argues that the change in name “marks a radical rupture in the nature of South African capitalism and its mode of accumulation….. [It was] a change from a form of Keynesian racial capitalism, in which the state secured the conditions necessary for accumulation for the capitalist class as a whole based on cheap black labour power, cheap energy and regulated capitals, to a neoliberal state attempting to open up new arenas for commodification.”^[2]

3.Ongoing corporatisation of Eskom after 1994

The corporatisation process continued and was deepened in the 1990s after the ending of apartheid and the coming to power of the ANC government in 1994. Growth, employment and redistribution (GEAR), the macroeconomic policy that the government adopted in 1996, consolidated the neoliberal orientation of the government, which impacted heavily on the future direction of Eskom.

In 1994 Eskom had a “spare” capacity of 31%, and electricity in South Africa was among the cheapest in the world. The cheap electricity was made possible because Eskom was no longer involved in a new build programme, and because it was accessing cheap coal through long-term supply contracts.

Big multinationals took advantage of the cheap electricity to negotiate even cheaper contracts with Eskom. In particular, aluminium and ferrochrome smelter companies, like BHP Billiton, entered into special pricing agreements, called Embedded Derivative Contracts, that guaranteed particularly cheap electricity for periods of up to 25 years. The terms of these contracts were kept secret for many years by Eskom. It was eventually forced to reveal some of the details after an Access to Information court case ruled against it. While some of these contracts actually stretched back to the apartheid years, some of them had only been concluded in 2003.

In 1995 the Electricity Control Board (ECB) was replaced by the National Energy Regulator of South Africa (NERSA). NERSA had regulatory jurisdiction over Eskom and local authorities: it regulated market access by licencing producers, transmitters, distributors and sellers of electricity, and it approved all tariffs.

The Electricity White Paper was released in 1998. It spoke about the unbundling of Eskom, which was one of the state utilities that the government planned to privatise. It envisaged 30% of electricity generation coming from the private sector. Unbundling was seen as a necessary part of the plan since it would break Eskom up into different entities, which would then face competition from other market operators.

The plan for a restructured electricity sector called for the establishment of six Regional Electricity Distributors (REDs) which would consolidate the distribution function previously carried out by a combination of Eskom and municipalities. The REDs would fall under a new entity to be established – Eskom Holdings. Also falling under Eskom Holdings would be a separate Transmission Utility, which would be initially state owned but possibly later privatised; and system operator.

The Eskom Amendment Act of 1998 started the formal, legal process of corporatising Eskom in the lead up to full unbundling and privatisation. In terms of this legislation, the State became the sole owner of Eskom’s equity, its tax-exempt status was repealed, and the Minister of Public Enterprises was mandated to incorporate it as a limited liability company with share capital.

The process of corporatisation was completed in 2001 with the passing of the Eskom Conversion Act (no 13 of 2001). In terms of this Act, Eskom was converted, in 2002, from a statutory body into a company under the Companies Act (no 61) of 1973, with the ultimate goal of listing on the stock exchange. As a company, Eskom was required to pay taxes and dividends to the state. The nature of the Eskom board also shifted. It was no longer a two-tier structure, with a management board and an Electricity Council. It became a single board of directors which consisted mostly of representatives of big business, a few academics and one Department of Public Enterprises (DPE) representative (Greenberg p77). The role of stakeholders in the Electricity Council was done away with.

The practical implication of this corporatisation was the ringfencing of the three units – generation, transmission and distribution. The aim was for the private sector to be generating 30% of electricity by 2004, and for Eskom to strengthen its financial viability by taking on contracts in other countries in Africa through Eskom Enterprises.

Eventually the plans to set up the REDs and to fully privatise Eskom were shelved. This was partly because of stiff opposition to privatisation from the unions, and partly because of a waning international appetite for privatisation. The South African Local Government Association (SALGA), which represented municipalities across the country, also strongly resisted the moves to set up the REDs. One of their major concerns with the proposal was the loss of income it represented – municipalities are heavily dependent on the sale of electricity as a source of income.

The process of reforms had started in 1987, and had gone through a number of iterations, not least because of the first democratic elections bringing the ANC to power. The end result was a corporatised Eskom, with plans to increase competition in the generation sector through bringing in Independent Power Producers (IPPs).

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