1. Response to the Eskom Revenue Application for the Multi Year Price Determination for the period 2010/11 to 2012/13 (MYPD 2) Presentation by Business Unity South Africa to the National Energy Regulator South Africa (NERSA) Midrand On 21 January 2010 Embargoed until 13:00

2. Introduction Prevailing economic conditions Impact of the tariff increases on the economy Policy certainty to encourage private sector participation BUSA proposals on tariffs and funding of Eskom Conclusion Contents

3. Contextualising the application within the current economic conditions Significance of contextualising the Eskom application within the prevailing economic conditions. Negative economic growth in 2009 –1.9% GDP expected in 2009 Projected growth of 2% in 2010 respectively. Rising unemployment with a further million people losing employment in 2009. Unfavourable business conditions Collapse in private sector demand and confidence. Significant decline in private sectors driven fixed capital formation expected to continue in 2010. Deterioration in government finances Lower revenue due to declining tax revenue Widening government deficit Increased public borrowing programme These economic realities necessitate a strategic approach to the discussion on Eskom Tariff Application.

4. 35% price increase would lead to CPI rising by 1.2%. Pass through effects will also affect food prices and other input costs in the economy. Inevitably leading to higher interest rates that otherwise would have been. Available data also suggests GDP reduction of between 0.5- 1% depending on firm level responses. Limitation of household buying power further curtails demand driven economic growth Greatest impact felt at firm level performance where a 35% increase will increase costs significantly, thus forcing firms to consider drastic cost cutting initiatives for survival. Impact of the 35% increase on the economy

5. Costing the impact of the 35% increase on the economy A leading gold mining company would pay an additional R300 Million per annum based on the 35 % increase. The impact is similar in other leading industrials which are the backbone of the economy. A basic calculation based on Eskom Annual Financial Statements suggest that the tariff increase would raised an additional R18.2 Billion for the utility for the first year. The cost to the economy far exceed this amount, with deadwieght loss up to R80 Billion expected due to reduction of corporate profits, employment and negative impact VAT and corporate tax receipts. On a worst case scenario the impact on employment could be up to 200 000 job losses across sectors. Overall a 35% increase in tariffs could delay economic recovery from the recession

6. Energy security in economic development Energy security is integral to economic development for South Africa. Government as the policymaker must play the lead role in determining energy policy that will encourage private sector investment and development. This will enable the achievement of economic development goals. Approach must consider strategic issues which are important to ensuring security of supply and the sustainability of the electrical generation & distribution simultaneously with the consideration of the pricing matters. Finalisation of the Integrated Resource Plan is expected to provide details of South Africa’s energy plan. Finalisation of Integrated Energy Modelling and integrated energymaster plan now crucial.

7. Improving the regulatory environment – unfinished business A strategic discussion on the appropriate regulation of the electricity market is critical as part of the discussion on long-term challenges. Progress must be made towards the signing of any PPA’s which will indicate that the enabling environment for IPP’s is now conducive. Clear policy directive on renewable energy, co-generation and non-Eskom coal and gas based generation. The resolution of issues pertaining to DSM funding and the efficient management of the process are important. A decision on the implementation of the Energy Conservation Scheme including; Power Conservation Programme (PCP), the Energy Trading Scheme and the Energy Growth Management Scheme. Augmentation of the funding for the National Solar Water Heater scheme

8. Funding Principles BUSA proposes a National Consensus between Government, Organised Industry and Labour, and Eskom on future Capex funding policy. BUSA proposes lower increases in terms of a short term strategy and a longer term electricity price path during which the EPP can be implemented, and which is considered to be viable for all of the parties concerned BUSA’s view is that the Shareholder should provide further equity injections, to support its investment in Eskom through the current expansion. BUSA believes that the above combined with a clear cost management approach will enable Eskom to access debt from the capital markets.

9. BUSA Proposal A pricing path of progressive increases of 25%, 25%, 22.5%, 12.5% & 10% still has the effect of nearly doubling prices over five years. Additional government guarantees of R27 Billion over five years can unlock additional R10 Billion per annum borrowing. This opportunity must be explored. For Eskom to purchase as much power by way of imports and to enable IPP’s, and Cogeneration options. For the state to agree to cover the costs of and boost the DSM programmes with the Environmental Levy, in order to curtail demand. The Levy to form part of revenues if applied to Environmental improvements.

10. BUSA proposal BUSA projections show that a series of price increases such as to bring the average tariff to a level where the Long Run Marginal Cost is reached can be achieved within a five year period. At this average electricity price level Eskom will be able to raise its own capital and without regular Shareholder contribution. The long term Debt/Equity ratio which is recommended by BUSA for Eskom is between 100% and 200%. At the higher end of the ration range some of the debt may need to be subordinated.

11. BUSA proposal Eskom’s expenditure growth in the Existing Business is high. BUSA financial model shows that if expenditure growth (outside of maintenance) could be reduced by 1% p.a. without affecting security of supply, this could generate savings of R5.6b in the period up to the end of March 2015. The challenge to the Regulator is to maintain an oversight of Eskom’s activities which ensures that public monies are well spent. To this end a detailed interrogation of the budgeted and actual expenditure is required. Industrial Development Policy for electricity is desperately needed to assist competitiveness of domestic industry. This is particularly necessary in so far as electricity costs are concerned for labour intensive industries and export oriented/import replacement industries.

12. Conclusion Energy security integral to post crisis economic recovery efforts Requirement for greater policy certainty on DSM and energy efficiency Finalisation and implementation of policy on IPP and Cogeneration Finalisation of IRP and work on Integrated Energy Master plan urgent. Proper review of funding models – must strike a balance betweentariffs, debt and shareholder injection.