JOHANNESBURG (miningweekly.com) – South Africa's power utility Eskom confirmed on Tuesday that it was pushing ahead with plans to renegotiate commodity-linked electricity tariffs with resources groups, such as BHP Billiton, whose aluminium smelter investments in South Africa and Mozambique were premised on access to low-cost power.

Speaking at the release of the State-owned enterprise's tariff application for the period 2010 to 2013, CEO Jacob Maroga also acknowledged that a number of resources had been developed on the basis of South Africa's competitive power prices and that it was going to be an economic challenge to make the "painful, yet unavoidable" transition to far higher tariffs.

The actual price application for adjustments of 45% a year over three years, had not taken into account a possible change to commodity-linked power contracts Eskom has with resources groups, such as BHP Billiton, Maroga revealed.

However, both government and Eskom had highlighted these as a problem, with the utility's record loss of R9,7-billion for the year ended March 31, 2009, underpinned primarily by fair value losses on "embedded derivatives" arising from these contracts.

The 30-year to 40-year agreements were signed in the 1980s, when Eskom still enjoyed a substantial surplus of production. The tariffs, which Maroga said "looked good at the time", rose and fell in tandem with the aluminium price, adjusted for the rand/dollar exchange rate.

Government had indicated that it wanted the contracts to be renegotiated and Maroga said that was in the process of initiating discussions with BHP Billiton on the matter.

Eskom's key arguments was that, in light of new accounting rules, together with the fact that the standard tariff was now far higher than it had been under the initial assumptions, and that South Africa was no longer power flush, a new arrangement was required.

"[These contracts] are a big problem, because now our financial statements are becoming so volatile," Maroga outlined, stressing that "we want to change that and we are talking to BHP Billiton to say that we want a discussion on that, to remove the volatility".

He stressed, though, that there was no direct relationship between the volatility in its financial statements, and the recent swings running into billion of rands, and the value of the underlying contracts. Neither, he averred, was it directly proportional to any possible penalty that could arise should it seek early termination of the agreements.

However, much of South Africa's industrial capacity has been built on the country's previous regime of competitive power tariffs and any major change to the agreements could further accelerate the trend of deindustrialisation.

It was also far from clear whether or not resources groups could demand payment from Eskom should it wish to terminate legally binding contracts prematurely.

However, Maroga stressed that, "having power into the future" would also serve the interests of its resources customers. "Because in the end, if you have cheap tariffs, but you don't have power, it's a problem."

"So the economy has to adjust . . . as many economies around the world are [having to adjust] to the same challenges," Maroga concluded.

To subscribe to Mining Weekly's print magazine email subscriptions@creamermedia.co.za or buy now.