Why splitting Eskom into three separate entities is a terrible idea

Whether or not André de Ruyter is right about Eskom corruption, the State Capture report confirms the general problem, as do numerous other instances of failing state-owned enterprises and branches of government. 

What I want to focus on here is the plan to split Eskom into separate companies handling distribution, transmission and generation. De Ruyter offered this idea to the government before being offered the CEO job and it had been floating around before his time. This is one plan that he backed that is still on the agenda, and it’s an awful idea. 

First, terminology. Transmission is long-range power transmission over very high-voltage lines — up to hundreds of thousands of volts — which is more efficient than lower voltage. Distribution is closer to home, where the voltage starts getting stepped down until it is in the range of 220–240V.

In Eskom’s last annual report, the breakdown of maintenance costs is R13.4-billion for generation, R0.8-billion for transmission and R3.6-billion for distribution.

Long-range high-voltage lines are generally pretty reliable and do not need a lot of maintenance, as these numbers show: it amounts to less than 5% of Eskom’s 2021-2022 maintenance budget. Distribution is about 20% of the maintenance budget.

Looked at in terms of Eskom’s total costs, maintaining transmission is only 0.5% of the overall operating cost; maintaining distribution is only 2%. The problem that arises if you split these into separate entities is that the maintenance budget for the transmission and distribution operations becomes a large fraction of their operating budget, so there is a temptation to skimp.  

For Eskom, maintaining the transmission part of the grid is only 0.5% of operating costs, so skimping on it would make hardly any difference to the bottom line. Distribution maintenance is a bigger cost but even so, if a separate company handled it, maintenance would be the main operating cost with the same incentive to cut corners and save money. 

If distribution is neglected, because it requires more maintenance, this is likely to be spotted sooner and dealt with before it gets too severe. Municipal supply includes some of the distribution network, so the better-run municipalities could pressure the distribution company to perform. How this will work for municipalities that don’t pay their bills is another huge question. 

Failures of maintenance of the long-haul network — transmission — are more likely to have large-scale consequences because each long-haul line covers a large number of consumers. If the transmission company saves a good fraction of its operating costs by neglecting maintenance, what will it lose if a significant part of the grid goes out? Pure economic rationality says it still scores if any penalties incurred are less than the saving on maintenance. The generation utility, on the other hand, for 0.5% of its operating cost, can minimise the odds of losing the ability to transmit power for long enough to lose big money.

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