from bloomberg

South Africa May Reject Power Price Increase to Cap Inflation

By Nasreen Seria and Carli Lourens

June 18 (Bloomberg) -- South Africa's government may refuse to allow Eskom Holdings Ltd. to raise prices 61 percent, which the state-owned power utility is seeking, to limit the impact on inflation, a survey of economists shows.

The National Energy Regulator will approve an increase of about 25 percent this year, according to five economists surveyed by Bloomberg. Eskom wants to double prices over the next year to help fund a $42 billion expansion plan to ease an electricity shortage and pay for higher coal costs. The regulator will announce its decision at 12 p.m. in Pretoria today.

Escalating power costs would drive up the inflation rate, which rose to a five-year high of 10.4 percent in April, adding pressure on the central bank to raise interest rates after 10 increases in two years. Tariff increases of between 25 percent and 30 percent this year will push up inflation by about 1 percentage point, said economist Arthur Kamp at Sanlam Investment Management.

``The economy would struggle'' if Eskom gets a 61 percent increase, said Cape Town-based Kamp. ``It would have a materially large impact on inflation. It makes sense to spread out the increases over a longer period of time.''

Accelerating inflation will crimp consumer spending in Africa's biggest economy, restricting the pace of economic growth to 3.4 percent this year from 5.1 percent in 2007, Kamp estimated.

Economists' forecasts for power tariffs in the Bloomberg survey ranged between 20 percent and 40 percent.

Hurting the Economy

The central bank forecasts that inflation will peak at 12 percent in the third quarter and stay outside the 3 percent to 6 percent target range until 2010. That doesn't take into account any increase in electricity tariffs of more than the 14.2 percent already awarded to Eskom for this year.

``There is no doubt that the price of electricity has to double, but it's a question of how you do that,'' said Kevin Lings, an economist at Stanlib Asset Management in Johannesburg. ``There is a need to ration electricity, but you have to balance that against really hurting the economy.''

Lings expects power tariffs will increase by about 20 percent annually over the next five years.

The Reserve Bank has lifted its benchmark interest rate by 5 percentage points in the past two years and raising electricity tariffs by almost 60 percent would increase the likelihood of higher borrowing costs, said Lings.

Moody's Investors Service said on May 20 it may cut Eskom's A1 local-currency and A2 foreign-currency ratings by several notches because the utility will probably fail to get approval to double power costs. Standard & Poor's has also said it may downgrade Eskom's ratings.

State Investment

Delaying price increases may curb Eskom's ability to borrow, said Portia Molefe, director-general of the Department of Public Enterprises, on May 16.

Eskom will have to seek increased state funding if power tariffs are increased gradually, Finance Director Bongani Nqwababa said on May 23. The utility expects to post a loss of as much as 10 billion rand ($1.24 billion) this year unless the regulator approves the tariff increase, according to its application document.

``The government should indeed support Eskom's capacity investment'' through direct funding, said Johan Rossouw, an economist at Vunani Securities in Cape Town. ``Consumers have already paid for the infrastructure investment through taxes to the government. The government decided not to invest in infrastructure, but to allocate it elsewhere.''

Power Cuts

Eskom, which forced mines to shut for five days in January because it couldn't guarantee supplies, expects shortages to last at least seven years after the government delayed approval of the expansion plans. The government agreed to give Eskom loans of 60 billion rand over five years, and also introduced a 10 percent tax on electricity usage this year to help fund the program.

The regulator also faces mounting political pressure not to grant large price increases. The Congress of South African Trade Unions, which has 1.8 million members, plans to hold a national strike on July 30 to protest the threat to jobs from electricity rationing and increased power charges.

The ruling African National Congress party said on May 27 Eskom should raise prices by 14.8 percent annually over the next five years, while the Chamber of Mines proposed increases of 20 percent.