Part 1 Revenue Application: Multi-Year Price Determination ... - Eskom

Overview of Multi-Year Price Determination
2013/14–2017/18 (MYPD 3)
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Businesses that can pass on the electricity price increases to their customers will do so,
while price-takers will not be able to. This practice, coupled with the direct impact of an
increased electricity price on the CPI, will inevitably push up South Africa‟s inflation rate.
This will put pressure on interest rates, which in turn will limit consumption, investment
spending and job creation. Economic growth will, in the short term, almost certainly be
stifled. However, as electricity supply becomes less constrained and electricity price
increases level out, the country‟s expanded production ability will reinvigorate the economy,
stimulating consumption, inviting investment and creating jobs.
4.3 Impact on inflation
Electricity currently accounts for 1.6% of the CPI basket. CPI is a tool for measuring changes
in the price of a set of consumer goods and services. Because of its relatively low weight in
the basket, a 16% electricity price increase for 2013/14 would translate to a direct increase
of about 0.3 percentage points in the CPI.
However, the basket of goods making up the CPI is reweighted every five years to reflect
changing patterns of expenditure. It is likely that electricity will be given a greater weight in
the 2013 CPI basket reweighting to reflect the effect of the price increases over the past five
years. The National Treasury estimates this reweighting could result in electricity price
increases contributing to a CPI increase of between 0.7 and 1 percentage points.
Electricity price increases will also have a pronounced secondary effect on inflation. As
noted earlier, those companies that can pass on electricity price increases to customers will
do so, resulting in potentially severe “second round” effects.
4.4 Impact on investment
South Africa needs to carefully consider what kind of economy it would like to have. As the
2011 Pan African Investment and Research Services study pointed out, electricity prices
affect the structure of the economy. An optimal price cannot be determined without a view on
the kind of economy that would best serve the country.
Eskom believes that cost-reflective tariffs achieved through a predictable medium-term price
path, as proposed in this application, will attract future investment in industries and