National Energy Regulator Act and functioning: Department of Energy briefing

NCOP Economic and Business Development

19 October 2009
Chairperson: Mr F Adams (ANC)
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Meeting Summary

The Department of Energy and the National Energy Regulator of South Africa (who arrived late) briefed the Committee on the role of the Regulator and the functioning of the National Energy Regulator Act (the Act). The Department explained that the National Energy Regulator had come into being as it was considered desirable to have a single regulator for gas, electricity and petroleum. At the moment it was focusing on the electricity sector. Some shortcomings had been identified and there would be proposals to address them. The role of NERSA in setting tariffs was briefly outlined.

Members were concerned with whether the Department had any influence over NERSA in regard to rates, and in what circumstances the Department could intervene. The term of office of the Board was questioned, and it was noted that this had been extended. Members questioned how NERSA would receive views of communities, and pointed out that about a quarter of South African homes were without electricity. Members also questioned the different tariffs for electricity, which was explained as a legacy issue, and asked how this was to be addressed. Members asked about solar energy, and the high costs of solar water heaters, suggesting that there was a need to address this. A Member asked whether Eskom should not be privatised, and the experience of overseas countries in this regard was briefly outlined, and also asked about the status of the aluminium smelter at Coega and the proposed nuclear power plants. NERSA clarified that it was only to set the wholesale part of the tariff, and Members asked where they could ascertain recommended increases to check whether municipalities were conforming to these, and debated whether special tariffs should not apply to child-headed households and orphanages. The Department briefly outlined the development of the Integrated Resource Plan, which would define the energy mix over the next twenty years. Members felt that the use of hydro-electric power, even in limited cases, should also be investigated. 

Meeting report

National Energy Regulator Act and functioning of the Regulator: Department of Energy (DOE) briefing
The Chairperson welcomed the delegation from the Department of Energy (DOE)  and said that the Committee was not happy with the fact that the National Energy Regulator of South Africa (NERSA) was not present. If necessary, the Committee would subpoena this body to appear.

Mr Ompi Aphane, Deputy Director General, Department of Energy, addressed the Committee on his presentation (see attached document). He noted that before the National Energy Regulator Act (the Act) was passed there had been a National Electricity Regulator, but it was considered desirable to establish one regulator for gas, electricity and petroleum. He pointed out that none of the members of NERSA represented government. It was thus different from the original regulator, and was independent. He stressed that NERSA regulated the pipeline but not the petrol itself, since the latter was regulated by the Department of Energy. NERSA was more active in the electricity sector at the moment, since the petroleum and gas industry was very limited. Some shortcomings with NERSA had been identified. These would be brought to Parliament at a later stage.

Ms N Ndebele, Department’s representative, added that the NERSA was responsible to set tariffs for the transportation and storage of gas and petroleum.

Discussion
The Chairperson wanted to know if NERSA was functioning well and if all posts were occupied.

Mr B Mnguni (ANC, Free State) wanted to know what influence the Department had over NERSA, especially regarding rates. He also wanted to know what would prompt the Department to intervene in NERSA’s affairs.

Mr Aphane said that an independent evaluation of the regulator had been done three years ago and the outcome had been fairly positive. He reminded Members, however, that the regulator was fairly new then. As far as governance and compliance was concerned, the regulator had performed well. Within the sectors however, it was difficult to pass judgement. With regard to its role as an economic regulator, he said that there was still room for improvement. He commented that the aim was that the regulator should be more regional, so that it could be more responsive. This was not happening yet. End user forums were also supposed to be established according to the Act. This was one of the performance measures set for the regulator.

Mr J Gunda (ID, Northern Cape) wanted to know when the term of the members of NERSA would come to an end, and how the public could participate in the nominating of members. He also pointed out that the majority of South Africans did not read the Government Gazette in which the notification of posts were placed.

Mr Aphane said that the term had expired about three months prior to the meeting, but had been extended. This was because some of the members had been on the old National Electricity Regulator (NER) and some new members had joined, so it was for the sake of continuity that the term was extended. The part-time members’ terms had expired but had been extended to March 2010 as they did not want to end their term in the middle of the Eskom price determination process. With regard to the advertisements for posts, he said that the last posts had been advertised in newspapers in four different languages. There was more however that could be done in this regard.

Mr D Gamede (ANC, KwaZulu-Natal) said that the mandate of the Act seemed very broad. He also wanted to know how the regulator received communities’ views, as many rural communities were still without electricity.

Mr Aphane replied that it was important that communities knew where to go when there were problems with power. He added that 24% of homes in South Africa were without electricity. To these homes, NERSA was irrelevant. Electrification, however, was a legal imperative for license holders.

Ms Elizabeth Marabwa, Director: Petroleum, Coal and Gas Policy, Department of Energy, agreed that the Act was broad but pointed out that the regulator was also bound by the Electricity Act, the Gas Act and the Pipelines Act. These had specific provisions by which the regulator had to abide. Accessibility, affordability and development of infrastructure were also addressed in the Act. It also had to be amenable to the disadvantaged communities.

Ms E van Lingen (DA, Eastern Cape) commented on the fact that there were different tariffs for electricity. For example, mining had a different rate to households. She wanted to know who determined these rates.

Mr Aphane replied that the issue around tariffs was a legacy issue. The minerals cluster was targeted in the past for development. This cluster had therefore enjoyed low tariffs. Industrial policy in the past had marketed the country with low energy costs. In the domestic sector there were almost 2 000 different tariffs or cost structures. At present the Department was in the process of tariff rationalisation so that it was in line with government policy. It was not easy, however, to change this as it had been around for a long time.

At this stage the Chair welcomed the delegates from NERSA who had arrived late.

Mr Gamede asked how the previously disadvantaged communities had benefited from the regulator as some still did not have electricity.

Mr S Montsitsi (ANC, Gauteng) wanted to know whether solar energy was also in the mandate of the regulator. He also enquired whether the provision of electricity to new mining developments was a problem as this could impede development.

Mr Aphane said that the supply of electricity to new mines had been a problem in the previous year but that it was not a problem at the moment.

Ms van Lingen said that the price increases by Eskom were linked with operational costs, as it was not running effectively. She asked whether Eskom could not be privatised. She felt that Eskom had failed in the Coega project, as it had failed to develop the wind farm and the aluminium smelter. She also wanted to know what the status was of the planned nuclear power plants.

Mr Aphane explained that in the past, industrial policy had been to encourage energy intensive industry development. This had attracted lots of mining activity, as the reserve margins had been bigger. The processing of minerals was encouraged and the aluminium smelter was therefore planned. Now that reserve margins were small, the idea was not feasible anymore. Aluminium smelters used very modern technology and if the smelter had been built, it would have created less than 1 000 jobs. The issue around nuclear plants would be addressed in the Department’s Integrated Plan.

Mr Gunda said that should Eskom be granted the increase it was requesting, households that were spending R360 per month on electricity would be spending R1 200 in three years time. This was unacceptable. He suggested that expertise be used that would help to develop solar and hydro electric power. He added that it seemed that NERSA was not regulating Eskom but rather that Eskom was controlling NERSA. He also raised the issue of the CEO of Eskom receiving a large bonus.

Ms Masesi Koto, Head of Department: Legal, NERSA, referred to Eskom’s application and said that with development, electricity had become a right. The needs and means however were not balanced, and there had been discussions around commissioning of stations to try to meet the needs. The public would have the opportunity to comment on the applications. NERSA would be having public hearings to discuss the application. She explained that Eskom usually asked for a three year increase so that planning could be done. The problem came, however, when Eskom applied for another increase in the middle of the three year cycle. She added that NERSA would have to give reasons for its decision. She added that the NERSA did not have a mandate to determine the bonus of the CEO of Eskom.

Mr Aphane added that NERSA’s mandate was only to set the wholesale part of the tariff. For example, the average wholesale price of electricity was 23 cents per unit at present, but consumers in Musina paid 82 cents. This was because the last leg of the regulatory function was not in place. Government policy was to cushion the poor. It was therefore incorrect to say that the 45% increase that Eskom was seeking would be paid by the public. At present, domestic users accounted for 20% of the electricity used, while industry used 80%. It was in the commercial and industrial sector where the increase should be felt, and domestic users should have an inflation-adjusted increase. The Department was trying to cushion the 20%. Industry should therefore bear the brunt of the 45% increase. He added that the electricity was still 40% cheaper than competing countries. The problem arose when municipalities increased their prices to the end users. The Department wanted to apply cross-subsidisation, and business was in favour of doing this.

Ms M Dikgale (ANC, Limpopo) asked whether child-headed households or orphanages could not get a special electricity tariff.

The Chairperson added that the Act stated that NERSA was to take decisions that were in the best interests of the public. He was concerned that it was not doing this at present. He suggested that perhaps it should build the tariff into tax for businesses.

Ms Koto added that free electricity was not for businesses and agriculture. She explained that municipalities had to apply to NERSA for tariffs. There were different rates for households, business and agriculture. She pointed out that, according to the Constitution; electricity was not a basic human right, as was something like water. In instances of child-headed households, there would need to be an agreement between the household and the municipality.

Mr Mnguni wanted to know what factors would be taken into account, should NERSA grant Eskom the increase it was requesting. This was important because of the effect it would have on the growth of the country.

Mr Gamede wanted to know how NERSA compensated people who had no electricity.

Mr Gunda asked NERSA what control it had over municipalities since they tended to put up electricity charges by the same margin that Eskom used. He also asked whether there was any regulation for industries.

Mr Aphane said that, according to the Constitution, one of the functions of municipalities was to provide electricity and gas reticulation. They used this as one of their main sources of revenue. Municipalities were difficult to regulate. He added that it was not correct to say that industries paid less for electricity compared to domestic users. The absolute cost to industry should not be looked at. The cost of supply of industries was less than that for the domestic user, because less infrastructure was needed. Industry, however, cross subsidised the domestic user.

Ms Koto added that the Act did not give NERSA the mandate to regulate industries.

Ms S Chen (DA, Gauteng) wanted to know where communities could go for advice about alternative forms of energy.

Mr Aphane said that by the end of October 2009, the Department would publish the Integrated Resource Plan, which would show what the energy mix for the next twenty years would be. This would be driven by Government policy. South Africa had amongst the highest solar radiation in the world and solar energy would therefore be part of the energy mix. The Integrated Resource Plan would spell out how this would be used in the future. The mix would include solar, landfill gas, biomass and small hydro-electric power. Incentives would be given for the building of small generators as renewable sources of energy. On 5 November 2009 the Minster would be hosting a conference on solar energy.
 
Ms van Lingen said that it was not possible for households to plan three years in advance. She said that she still wanted to know why Eskom could not be privatised. She emphasised that the increase would not be used for infrastructure. Municipalities were still charging high tariffs. She wanted to know how members could check if the tariffs that municipalities were charging were approved by NERSA.

Mr Aphane replied that privatisation of electricity production was not easy. The models in the EU had not worked. The electricity market was very difficult, since electricity could not be stored. These countries were now going back to regulating the market.

Mr Aphane added that the three year plan gave industries some amount of certainty. It did not necessarily apply to domestic users. He added that the municipalities could add a surcharge to the cost of electricity, as long as it complied with the legislation.

Mr K Sinclair (ANC, Northern Cape) asked how the different rates were applied. He also wanted to know who was on the board of NERSA. He pointed out that solar geysers were much more expensive that normal ones. This situation had to change so that it would be possible for consumers to change over to solar power.

Mr Aphane explained that Eskom had a special rate for agriculture, as these customers were not normally linked to a municipality and got their electricity direct from Eskom.

Mr S Montsitsi (ANC – Gauteng) asked if there was any other agency that was dealing with solar energy. He also felt that hydro-electric power should be considered. The maintenance costs of coal power stations were very high and he wondered if NERSA could not influence Eskom to use alternatives.

Mr Aphane replied that hydro-electric power was not feasible as South Africa was basically a desert country. Such power could therefore not be used on a big scale.

The Chairperson commented that Eskom’s production, operational, distribution and maintenance costs had to be taken into account when considering the tariff increase. He wanted to know how this would affect the price hike. He pointed out that with the last price increase, there had been a public outcry, yet NERSA had granted the increase. It would seem, therefore, that the public’s views were not taken into account. He reiterated that the Act stated that the decisions taken had to be in the public’s interest.

Mr Aphane said that the NERSA Act also noted that the utility was entitled to have a fair rate of return on investment. A balance therefore had to be sought between this and the public interest. If Eskom were to go bankrupt, NERSA could be held responsible.

Mr Sinclair said that he still felt that hydro-electric power should be looked at, as water could be re-used. Perhaps small generators could be used to assist farms. He also felt it was a problem to give cheaper electricity to industries.

Mr Aphane said that a study had been done on the viability of hydro-electricity on the Orange River.

The Chairperson indicated that the Department of Energy would be addressing the Committee on 10 November 2009, on the strategic plan. This issue could then be dealt with then.

Ms van Lingen inquired where Members could check if the tariffs that municipalities were charging had been approved.

Ms Koto replied that members could check on the NERSA website or contact them on 012 401 4600.

The meeting was adjourned.


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