National Energy Regulator Amendment & Electricity Regulation Second Amendment Draft Bills: briefing

Energy

31 January 2012
Chairperson: Mr S Njikelana (ANC
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Meeting Summary

The Department of Energy briefing looked at the deficiencies of the Acts that led to the proposed amendments and provided an analysis of these.

Notable amendments made to the Electricity Regulation Act included the insertion of a section dealing with the Integrated Resource Plan (IRP). The new section outlined the process for the development of the IRP. The regulator was required to license according to the determination made by the Minister in accordance with the IRP. In terms of determination the proposed amendments included that the Minister was required to determine the buyer, the purchaser and type of technology in accordance with the IRP. In turn the regulator was to license in accordance with the determination.

Proposed amendments for the Independent Power Producer (IPP) programme included a new inserted section outlining the procurement framework. In trading the Minister could develop regulations outlining the different categories of trading. In addition the regulator could be required to license in accordance with the regulations promulgated by the Minister. The regulator on request from the Minster under the amendments could predetermine tariffs for the IPP Programme. In addition the regulator could predetermine licence conditions for bidders bidding under the IPP programme.

In terms of transmission planning, the Transmission Licensee was empowered to develop a transmission plan. The plan could be approved by the regulator after consultation with the Minister and the buyer to ensure alignment with the IRP. About expropriation, the Minister could be empowered to expropriate land for electricity on behalf of a licensee. The costs of the expropriation could be covered by the licensee. The regulator could also provide technical advice to the Minister on expropriation matters.

On amendments to the National Energy Regulator Act, the focus was on the establishment of an independent regulator. In addition the regulator could sit as a tribunal allowing for an independent to contest the decision of the regulator within an independent tribunal. Further amendments included the establishment of a regulatory commission which could provide for a one-full time commissioner with three deputy commissioners each responsible for a specific sector. The final amendment was the creation of an Independent Appeals Board which could be part-time and independent from the regulatory Commissioner.

These amendments were as a result of the major shortcomings of the Act. Most significant was the conflicting relationship between the full-time regulator members and the CEO that was not clearly defined. The objectives of these amendments were summarised. These included the improvement of the decision making process through the establishment of an Appeal Board, improving the governance, accountability of the regulator and the working relations among the regulator members.

Members discussed the issue of misalignment between the National Energy Regulator Act and Electricity Regulation Act and the
Independent System and Market Operator (ISMO) Bill. Members, in response to the presentation on the National Energy Regulator Act, asked about the cost implications of the restructuring and the repositioning of the CEO and how it could mitigate conflicts in the present reporting mechanisms. Members also asked about the role of the subcommittees and the centralised regulation of all energy sources besides piped gas.

In response to the presentation on amendments for the Electricity Regulation Act, they asked questions on the role of the government and regulators and the current electricity dispatch. Members asked for clarification on the buyer and seller and expropriation of land. They also deliberated on alternative funding models to alleviate the burden on the consumers. They emphasised the need to prevent centralisation of power to the Minister and public participation in the legislative process.

Meeting report

Chairperson’s Introductory Remarks
The Chairperson welcomed members from the Department of Energy and
National Energy Regulator of South Africa. He hoped that once the briefing had been done, the process would allow the swift implementation of the amendments. The short coming of the legislative process was that it “choker blocked” Members from engaging in other critical activities such as oversight visits. An example was the ISMO Bill which was slow moving and suggested that the Department should ensure that the legislative process be fairly distributed throughout the year.

Department of Energy Director General introduction
Ms Neliswe Magubane, Director General of the Department of Energy (DoE), commented that the current legislative process was hindering the enactment of the ISMO Bill. The main hindering factor in the certification process by the State Law Advisor had been the delay by NEDLAC in generating the report which was received only last week. DoE was now awaiting the certification; only then could the Bill be deliberated by the Committee. She apologised for the delays but emphasised that various democratic processes were required to be followed.

Ms Magubane commented that the amendments were in line with the performance agreements signed between the Minister and the President in ensuring security of energy supply. They also provided consumers an opportunity to appeal decisions made by the regulator.

Proposed amendments to National Energy Regulator Act:DOE briefing
Mr Manduna Ngobeni, Deputy Director: Electricity Regulation, gave a background to the Act. The Act provided four full-time and five part-time regulator members. The full time regulators were primarily responsible for electricity, piped gas and petroleum pipelines. While the functions of the CEO were that of a full-time official responsible for the day-to-day running of the Regulator cut across all different regulated sectors.

He explained that the Act allowed the regulator to establish different sub committees for the purpose of executing the mandate of the regulator. Furthermore the subcommittees could be chaired by one regulator member or any other designated person. Decisions taken by the committee would be regarded as a decision of the regulator and would be binding for the delegated functions.

The structure of the National Energy Regulator was outlined. Thereafter an analysis of the shortcomings of the Act was given, most notable of which were the conflicting roles between the full-time regulator members and the CEO which were not clearly defined, with no clear reporting mechanisms between the full-time regulator members and the CEO. This resulted in conflict between the CEO and the full-time regulator members. In addition the Act allowed the regulator to sit as a tribunal which was in conflict with the constitution. He emphasised the importance of allowing the tribunal to be independent from the regulator to allow stakeholders to appeal against decisions of the regulator.

A summary of the objectives and the reasons for the amendments was provided. These included the need to improve the credibility of the decision-making process through the establishment of an appeals board. In addition to this, was the need to improve the governance and accountability of the regulator and finally to improve the working relations among the regulator members.

The following proposed amendments were noted:
▪ the establishment of an independent regulator, which was critical in attracting private investment in the energy space and in ensuring regulatory certainty.
▪ a tribunal which would allow for an independent to contest the decision of the regulator within an independent tribunal.
▪ the establishment of a regulatory commission which would provide for a one-full time commissioner with three deputy commissioners each responsible for a specific sector.
▪ the creation of an Independent Appeals Board which would be part-time and independent from the regulatory Commissioner.

 Mr Ngobeni concluded that the energy sector required to be carefully regulated in order to stimulate private sector participation. He added that the current challenges facing the energy sector required an effective governance structure and regulatory framework. This process had been set in motion with the publication of the Amendment Act in the Government Gazette for public comment on December 2011. This was due to close on 10 February 2012. The Bill was to be submitted to NEDLAC for consultation before tabling in Parliament.

Discussion
Mr D Ross (DA) commented that the restructuring of the regulator to make it more independent and the provision of an appeals mechanism were welcome developments.

Ms Magubane appreciated the comment made by Mr Ross.

Mr E Lucas (IFP) asked about the cost implications of the new restructuring.

Ms Magubane replied the intention was to ensure minimal costs in the restructuring of the regulators while at the same time maximising on the outcome. The full-time regulators could be maintained.

Mr K Moloto (ANC) asked about the repositioning of the CEO after the restructuring. How could the previous conflicts in the reporting mechanisms be avoided?

Ms Magubane replied that there was to be a separate Commission and Appeals Board. The CEO who became the Commissioner replaced the Chairperson and the four part- time members who could be relegated to being deputy Commissioners. The current full-time regulators had been advised in their contracts that the current legislation was likely to be changed, consequently impacting the reporting line.

The Chairperson asked why the Regulator focused mainly on piped gas and not on other forms of energy.

Ms Magubane replied that these were the anomalies in the current legislation that the DoE sought to address.

The Chairperson asked for clarification on how the role of the Sub-Committees and the status of their decisions, previously equivalent to that of the regulator, had been rectified.

Ms Magubane commented that this status was only awarded when the sub committees had been delegated to make the decisions. Nonetheless this matter was to be further rectified.

The Chairperson commented that the major reasons for the amendments were not only to facilitate private sector participation but also to safeguard the interests of the consumer.

Proposed amendments to Electricity Regulation Act: DOE briefing
Ms Magubane gave a brief summary to some of the problems of the Act under the following headings: regulation, energy regulator, Intergrated Resource Plan (IRP), determination, new generation regulations, electricity dispatch, trading and expropriation. With regard to regulation the Act ensured proper service delivery in a monopoly environment with Eskom as the sole provider. This regulation was necessary in protecting captive customers by ensuring that the service provider charged justifiable tariffs. It also provided a discussion platform for both the consumer and the service provider.

In terms of the energy regulator, the Act regulated electricity, petroleum pipelines and piped gas. It was also a custodian of the Electricity Regulation Act, Piped Gas Act and Petroleum Pipelines Act. With regard to the Integrated Resource Plan (IRP), the Act provided for the development of the IRP by the national sphere of Government under section 34(3) which required the regulator to license according to the IRP.

Under Determination, she noted that the Minister was required to make a determination under section 34 of the Act. The Minister could determine the buyer, seller and the type of energy to be used in generating electricity.

With regard to the section on the new generation regulations, the Act outlined the process for developing the IRP. It also provided the linkages between the determination and IRP which was not clearly outlined in the Act. It also outlined the procurement framework for new generation capacity.

With regard to electricity dispatch, the Act did not provide for licensing of dispatch which was critical for IPP participation. The regulator currently covered dispatch under the Transmission licence.

With regard to trading, regarded as buying or selling of power, the Act was too broad and needed to be streamlined.

In terms of expropriation, the Act provided for the Minister of Public Works to expropriate land for electricity infrastructure. However the process was quite cumbersome. The Minister was required to provide recommendations to the Minister of Public Works on requested expropriation by a licensee.

The proposed amendments to the Electricity Regulation Act (ERA) were outlined. Ms Magubane explained a new section for the development of the IRP. The regulator was required to license according to the determination made by the Minister in accordance with the IRP.

In terms of determination, the proposed amendments included that the Minister was required to determine the buyer, the purchaser and type of technology in accordance with the IRP. In turn the regulator was to license in accordance with the determination.

Under the IPP programme, a newly inserted section would outline the procurement framework. The regulator could be required to align its licensing with the procurement framework.

With regard to trading, the Minister could develop regulations outlining the different categories of trading. In addition the regulator could be required to license in accordance with the regulations promulgated by the Minister. The regulator on request from the Minster, under the amendments, could predetermine tariffs for the IPP Programme. In addition the regulator could predetermine licence conditions for bidders bidding under the IPP programme.

In terms of transmission planning, the Transmission Licensee was empowered to develop a transmission plan. The plan could be approved by the regulator after consultation with the Minister and the buyer, to ensure alignment with the IRP.

With regard to expropriation, the Minister could be empowered to expropriate land for electricity on behalf of a licensee. The costs of the expropriation would be covered by the licensee. The regulator could also provide technical advice to the Minister on expropriation matters.

In conclusion the proposed amendments would expedite the establishment of new generation capacity, provide alignment between the buyer, procurer and the regulator and provide more clarity in certain sections of the Act to avoid misinterpretation. The Bill had been published in the Government Gazette for public comments in December 2011 with the closing date scheduled for 17 February 2012. The Bill was to be submitted to the NEDLAC before tabling before Parliament.

Discussion
Mr Moloto sought clarification on the current electricity dispatch order.

Ms Magubane replied that the regulator licence was based on Eskom’s structure listed as generation, transmissions and distribution. Under the ISMO, the proposal was for the separation of transmission and distribution which could allow for transparency in the dispatch mechanism.

Mr Moloto asked whether section 34(3) which required the regulator to license according to the IRP, was what was currently taking place or a proposed amendment.

Ms Magubane replied that under the ISMO Bill regulator duties were to be based on the licence conditions which could be used as a way of monitoring the licence regulation. Furthermore the regulator licensing in terms of the IRP was guided and dependent on the type of economic development that was currently taking place in other words the new growth path of the country. Predictions could be made over time to determine the demand of energy required and the best suitable supplier, whether Eskom or the private sector. These predictions could guide the Regulator in the issuing of licences. The information would be soon taken to Cabinet and published indicating the portions to be done by Eskom and along with the private sector.

Mr Moloto asked for clarification on who, according to the Act, was the buyer and the seller.

Ms Magubane replied that in the current structure the Minister determined who should be the buyer. However, in future ISMO could be designated as the buyer.

Mr J Selau (ANC) sought clarification on the term “determination” which noted that the regulator was required to license according to the determination made by the Minister in accordance with the IRP.

Ms Magubane replied that the Minister determined – based on the information provided by the predictions on the amount of energy required and the best source of supply.

Mr Selau asked about the roles of the DoE and the Regulator in terms of regulation.

Ms Magubane noted that the whole of the energy sector needed to be regulated centrally by the Regulator. However this provision was not allowed within the present legislative regime.

Mr Selau commented that under the section on transmission planning, too much detail was in the Act. What was required was to provide a principle statement and not the details of buyer, IRP and regulator. These details should be placed in the regulations.

Ms Magubane agreed that the issue of transmission planning needed to be regulated and consideration would be made to have it removed from the primary Act.

Mr Selau enquired if the amendments made on expropriation would not find resistance from the Department of Public Works.

Mr Moloto asked what was new about the issue of land expropriation, considering that the issue had been a long standing one.

Ms Magubane replied that DPW did not have any objections on expropriation. However what was emerging was a new trend in which sellers of the land were hiking the land prices once they establish that Eskom or the municipality had interest in the land. This had to be overcome as electricity customers deserved fair value for the land as these costs could translate into an increase in tariffs. In the event of a deadlock over the price of the land, the licensee and the owner of the land appointed an independent arbitrator to determine the price of the land. It was therefore imperative in such cases to follow a proper legislative channel.

Mr Ross asked whether the new amendments were centralising power to the Minister. He added that in such a case, this could inhibit the entry of the private actors, preventing private participation which was so desperately required.

Ms Magubane reiterated that the intention of the new amendments was not to centralise power to the Minister. Prior to this new legislation, existed the Electricity Act which emphasised Eskom as being the supplier of last resort. However, the inclusion of the private sector as a competitor required changes to be made with Government being given responsibility of security of supply. Consequently, this required that the Minister be empowered through legislation to carry out this mandate.

Mr Ross noted that while the Minister was responsible for security of supply, DoE also had to consult other stakeholders on the legislation to determine their standpoint.

Mr Ross noted that while he appreciated the appeals mechanisms, prices had to be right the first time. The Act had a clause on the cost of replacement of assets in determining the price. The Act under the tariff principles stated that an efficient licensee was to recover its full cost through licence activity and also be allowed to have a margin of profit. In this regard the return of assets in the summary presented by NERSA noted that the amount was increasing exponentially over the years with an estimated amount of R33 billion for 2012/13. He added that this clause needed to be revised so as to protect consumers.

Mr Ross added that the pricing issue was as a result of Eskom having a shortfall of R90 billion to fund its Eskom expansion program which required this to be offset through tariffs. This was hugely problematic as current generations were paying future generation costs. He suggested the adoption of funding models that alleviated this burden on consumers. Consultation was required with the “financial people” to make this part of the bigger fiscal plan. The ideal was a situation where customers were paying for consumption and not capital expenditure. It was also important to ensure the independence of the Regulator in regulating the demands made by Eskom.

Mr Selau commented that he was concerned about NEDLAC in terms of electricity distribution. In the current situation Eskom sold the electricity to municipalities which in turn sold to communities with an added margin. The municipality in most cases used the supply of electricity to force communities into paying their rates and taxes. He asked how DoE could assist in ensuring that a common approach was used in which Eskom supplied the electricity directly to the people.

Ms Magubane reiterated that a meeting with the Fiscal Managers was also important when discussing issues of distribution which was not an electricity matter but a financial one. This involved the fiscal regime of local Government. DoE required the assistance of the financial regime of municipalities in paving a way forward.

The Chairperson asked if after the implementation of the Integrated Electricity Planning, further amendments could be made to cater for it.

The Chairperson commented that issues of distribution had been omitted in the amendments.

The Chairperson commented on the reported fears in the media of misalignment between ISMO, NERA and ERA.

Ms Magubane replied that it was for that reason that the three pieces of legislature had been considered together. When the ISMO Bill eventually came to the Committee, Members would be able to identify this alignment. The intention had been to have the legislation tabled in Parliament at the same time. Unfortunately the legislative process could not permit this. However the legislative process allowed for the pieces of legislation to be considered in the same year.

Mr Motau asked what mechanisms had been put in place to remove ISMO from Eskom ensuring that it truly became independent.

Ms Magubane replied that only in legislation could this be determined and a deadline provided. DoE was working with Eskom to ensure that it did not set unrealistic time frames. In addition DoE requested Eskom to work on a risk assessment matrix to ensure that all possible risks were mitigated.

The Chairperson pointed out that the Committee would be engaged in a complex process and required to come up with a creative way of handling these pieces of legislation, ensuring they aligned. He noted that a solution should be provided by persuading NEDLAC to give priority to this.

The Chairperson emphasised public participation of various stakeholders in the legislative process.

The Chairperson commented that the Committee had to make oversight visits to ensure that Eskom was making headway in ensuring that the ISMO became independent.

The meeting was adjourned.

[Apologies were given for Ms B Tinto (ANC), Mr S Radebe (ANC) and Ms N Mathibela (ANC).]

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