Independent System and Market Operator Bill [B9-2012]: public hearings

Energy

14 May 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The public hearings on the Independent System and Market Operator (ISMO) Bill [B9-2012] were attended by four entities and the Department of Energy, which reflected on the existing set up in the electricity sector and how the Department intended to address the structure and other provisions. The  ISMO was independent in the sense that it was autonomous from its key stakeholders on the supply side and on the demand side in relation to the national electricity transmission system or the electricity grid distribution system. The changes the Department was proposing in relation to the set up of ISMO was to have an entity outside of Eskom responsible for planning. The Department had concluded an exercise mapping electricity generation aspiration up to 2030. Beyond that time, functions would be assumed by ISMO which would have a buying function as the Department was currently playing that role amidst much contention and Eskom was on both sides of the equation. It was important to know that the set-up of ISMO was transitional and would not happen overnight.

The Energy Intensive Users of Southern Africa (EIUG) wanted clarification and
clear identification of ISMO customers. Associated ISMO rights and obligations were vital to ISMO viability but were missing from the current bill. A stronger role and responsibility for ISMO in expansion planning was important for ISMO to fulfil its mandate in respect of supply security. Much of the responsibility for the implementation strategy would vest with the ISMO Board – a properly constituted and capacitated Board with appropriate representation of industry experts would maximise the chances of achieving the stated objectives.

Meridian Economics posed several questions such as what problem was Government seeking to address through the establishment of the ISMO, was the ISMO an appropriate response. Six key functions that needed to be considered in the legislative process include, planning, allocation, procurement, wholesale market operations, systems operations and transmission. Meridian Economics clearly stated their preference for the planning function to be allocated to ISMO as capacity and expertise would reside in the ISMO, it will hold demand side and supply side data, accountability for results should be clearly allocated, planning and procurement need to be strongly linked.

Earthlife Africa submitted that the ISMO must be run on a non-profit basis. Anything else represented an effective privatisation of public assets, which Earthlife was opposed to, particularly in the electricity sector. ISMO would need to be incorporated as a state institution, rather than a private or quasi-private sector entity. As the ISMO essentially involved breaking Eskom into two parts, the question would then be if the tariffs granted to Eskom would be broken up too.  Eskom already received revenue from tariffs for transmission, wheeling, and distribution,  In order to prevent double-charging, the National Energy Regulator of South Africa (NERSA) would have to review all the tariffs and unbundle them into generation and transmission components. This was not clear in the Bill. Earthlife Africa referred to Eskom domestic customers saying that Eskom currently supplied about 4 million households with electricity, including Free Basic Electricity (FBE). The Bill was silent on whether the ISMO would take over this function and how it would fund FBE, and the powers it would have to increase FBE in accordance with development and social welfare aims of the country.

The Chamber of Mines envisaged a system where access to the electricity grid was available to all generators of electricity who complied with the required technical criteria.  The Bill in its current form was, however, not totally clear on several important aspects. It was not clear whether ISMO would own the national grid and if it was possible to control the grid without owning it.

Meeting report

Chairperson’s opening remarks.
The
Chairperson  welcomed Members and members of the public to the hearings. He said that the meeting marked the important of an important journey of the Independent System and Market Operator Bill (ISMO). He invited the Department of Energy to present a briefing of the ISMO Bill as presented to Cabinet.

Department of Energy briefing
The Department remarked that the paper presented was not new and the Department was presenting a refresher update on the ISMO entity and issues that it was trying to address. The presentation would then reflect on the existing set up in the electricity sector and how the Department intended to address the structure and other provisions.

ISMO was independent in the sense that it was autonomous from its key stakeholders on the supply side and on the demand side it was in relation to the national electricity transmission system or the electricity grid distribution system. The changes the Department was proposing to the set up of ISMO was to have an entity outside of Eskom responsible for planning. The Department had concluded an exercise mapping electricity generation aspiration up to 2030. Beyond that time, functions would be assumed by ISMO which would have a buying function as the Department was currently playing that role amidst much contention and Eskom was on both sides of the equation. It was important to know that the set- up of ISMO was transitional and would not happen overnight. There were certain risks the Department would deal with in the process of transition and such a process would involve a lot of risks which would be dealt with during that process. ISMO would be a new entity with a board. It would be involved in the wholesale function of the electricity and would be the buyer of the power from electricity generators, in a transparent manner. It would also be involved in a planning capacity through the integrated resources planning process which was aligned with Government policy. In essence, ISMO had the four core functions, which were the buying of power, wholesale, dispatch, and planning functions. It would be 100% state owned as it would not be the privatisation of Eskom but the segregation of functions.

In relation to ISMO functions, in terms of the Electricity Regulation Act (No. 4 of 2006), trading had been defined. ISMO would have to get a licence from the National Energy Regulator of South Africa (NERSA). In terms of sustaining itself ISMO would be supported by various funding options including loans and guarantees from Government whose support would be required particularly in the initial stages before it would become attractive to the market. ISMO in terms of provision of the law would be required to pay interest. ISMO would go through the traditional Public Finance Management Act requirements to submit business plans and approval, and to report on their performance. Provisions would be made for minimum requirements in terms of the business plan, the financial plan, and costs. There has been a very long process to deliberate over the introduction of ISMO and it has taken time for it to be tabled. There were many engagements with different stakeholders. It has also been through the National  Economic Development and Labour Council (NEDLAC) process. Comments were received that there was a need for an independent transmission line body to deal with issues but a lot more work would be required before getting to that stage. There was also the issue of willing buyer and willing seller. There was a sense that given supply shortages, one should be able to have the ability to introduce new generation capacity and give it to anyone who would be willing to buy it. ISMO could play a role, but the full answer could not be found in the ISMO framework. In terms of the Board, there had been a question around the constitution of the board whether it should be competency or stakeholder based. There was also the issue of allocation of megawatts in terms of the Integrated Resource Plan (IRP) and licensing of generators.

Discussion
Mr K Moloto (ANC) requested clarity on the planning function  in relation to the powers of the Minister as it was said that ISMO was responsible for planning but the Bill said something else. He also asked for clarity on the issue of the expansion of transmission lines and how it worked in practice particularly, who would give permission to Eskom to invest in transmission lines, if the Minister could play that role.

The Department responded that ISMO was a transitional process. There was an existing regulatory framework covered by the Electricity Regulation Act which made provision for powers of the Minister. NERSA was required by law to implement that. There was a requirement for an Integrated Resource Plan and a process had been conducted. It was in the implementation of the policy framework by Government where the answer was. The planning function would be undertaken by ISMO as opposed to the Government itself, but within the Government policy framework. The transmission issue was literally a black box. There was demand, supply and there was a need to generate power and connect them to the users. There was a transition that would need to happen from what was there to what was needed to make it efficient.

Energy Intensive Users of Southern Africa (EIUG)
Mr Mike Russow, EIUG Chairman, affirmed EIUG's support for the ISMO Bill. It would
help facilitate the introduction of higher efficiencies in capital and operations. It would provide a major step forward in levelling the playing field. It would also put the country in line with what was happening elsewhere in the world. He reminded the meeting that  ISMO was not a destination, but rather a vehicle to a more efficient industry. It was evolutionary rather than revolutionary in its approach. He asked however if ISMO was going to achieve what the country set out to do.

EIUG’s comments aimed at clarification and certainty.
It was noted that ISMO represented an evolutionary rather than a revolutionary approach to manage risks. However, in order to achieve the ISMO objectives, the following were noted: clear identification of ISMO customers and associated ISMO rights and obligations was vital to ISMO viability but was missing from the current bill. A stronger role and responsibility for ISMO in expansion planning was important for ISMO to fulfil its mandate in respect of supply security. Much responsibility for implementation strategy would vest with the ISMO Board – a properly constituted and capacitated Board with appropriate representation of industry experts would maximise chances of achieving the stated objectives.

In addition to other aspects identified in the EIUG submission, properly spelt out transitional provisions and associated timeframes were important to the successful entry into the institutionalisation and operational phases of ISMO development

Discussion
Mr Moloto queried Clause 33(2)(b)(ii), if EIUG’s reference might lead to a situation where the consumers would be burdened with increased costs to meet the deficit.  He also asked if the court would not encroach on the powers of NERSA. He also asked for further clarification on the statements around the staging of board members.

Mr Russow replied that there two key issues relating to financial viability and that was the viability of ISMO and the protection of consumers. The issue EIUG raised with regard to Clause 33 was whether that would not put pressure on consumers and encroach on the powers of NERSA. The two issues would need to be separated and EIUG was saying that ISMO should not be an additional burden to the industry as a whole. In relation to interest charges and loans, there would need to be further clarification that ISMO would not by way of its decisions and deliberations add cost to consumers burden.

Mr J Smalle (DA) said that there was clearly a need for diminishing red tape especially when it came to procurement of services. A lot was also said about management of transmission lines. EIUG argued that greater emphasis should be put in the definitions clause to clear out those wording. He asked if the willing buyer and willing seller should also be addressed under ISMO customers section.

Mr Russow replied that a lot more clarification was needed to so that the red tape would not come about. He said that the Electricity Regulation Act needed to be amended to resolve the issues around willing buyer and willing seller. He informed the meeting that he had spoken to investors and potential investors who preferred the willing buyer willing seller approach.

Mr Moloto asked if staggering the terms of the Board Members as the Bill proposed did not address EIUG’s concerns.

Mr Russow clarified that the emphasis was on the use of the word “may” in the test which meant it may or may not, as there was a need to ensure adequate staging of members.

Meridian Economics: Presentation.
Mr Mark Pickering, Meridian Economics Partner, presented the submission saying that Meridian Economics welcomed the  Government’s policy decision to restructure Eskom through the establishment of the ISMO. It was believed that this was a critical step towards ensuring a stable and effective electricity supply system for the country. The load shedding incidents of recent years clearly demonstrated how critical the performance of the electricity sector was for the health of the country’s economy. This performance would  depend, in general, on how well the sector was governed and, in particular, on the long-term processes which facilitated investment in new generation capacity. Meridian Economics posed several questions such as what problem was Government seeking to address through the establishment of the ISMO - was the ISMO an appropriate response?  Six key functions that needed to be considered in the legislative process included: planning, allocation, procurement, wholesale market operations, systems operations, and transmission. Meridian Economics clearly stated its preference for the planning function to be allocated to ISMO as capacity and expertise would reside in the ISMO. It would hold demand side and supply side data. Accountability for results should be clearly allocated, and planning and procurement needed to be strongly linked. Turning to the last of the six functions, it was noted that the Bill made no provision for the ISMO to take over the transmission function. It was believed that this was a serious oversight which needed to be addressed.

Discussion
Mr Moloto asked how the issue of transmission lines would be transferred to ISMO, and if it would be done without consideration of the asset value. Who should pay for the transfer and the sale of the Eskom assets to ISMO? Secondly, if there was an arrangement where everyone had access to the grid and subject to their complying with the code while NERSA was given the power to determine the fees, how should such an arrangement work out for the users as the power to decide on the use of the grid remained elsewhere?

Mr Pickering said that since ISMO and Eskom were both state owned enterprises, the assets could be transferred without loss of shareholder value as they were transferred from one state owned enterprise to another. It could be done through a shareholder resolution as similar transfers had been done within the Airports Company of South Africa (ACSA) and Transnet. It could be done at a valuation which reflected fair market value but there was no legal or economic impediment to achieving that. He had spent time with regional electricity distributors looking at models for transferring distribution assets between the state owned entities and there were a lot of solutions for achieving that.

In relation to the question of open access and the fee for the transmission network, Mr Pickering suggested that the status quo be maintained where NERSA would sit every three years and contemplate the cost based on the regulated utility, which was Eskom at present with its three licences for distribution, generation, and transmission, and apply the rate of return methodology to determine what was a fair tariff. The same thing would apply to ISMO for its transmission system activities. It would have a regulated tariff and it would charge that tariff to whoever would use the grid. The process he described was a normal regulatory process.

Mr Smalle asked if the pricing structure should be looked at again. It would involve looking at the cost of maintenance of the transmission line. He also asked for some ideas on being a middle man between seller and buyer.

Mr Pickering explained that there were two parts to the question; the payment for the transmission line would be a regulated tariff. It would be a monopoly service. It would have to be regulated in order to prevent monopoly pricing abuse. It would be hard for new entrants into the market to compete with Eskom which had depreciated all the power stations. The more fundamental issue was that there was no market. There was no way that any investor could arrive in South Africa and say it was going to build a power station and sell power. There were many legal hurdles that need to be overcome before investments could be made, or before the bank would lend money. There was simply no market. The ISMO would have to contribute towards resolving such an issue.

Mr L Greyling (ID) referred to the transmission grid and said that a fee would have to be charged for maintenance and expansion. Considering that some of the renewable energy sites were far away from the grid at present, he asked how decisions about expansion should be made and who would pay for the expansion. In terms of the Integrated Resource Plan (IRP), firm decisions have not been made. South Africa was in a tight situation at present regarding electricity. Big companies wanted to partner with Independent Power Producers (IPPs), independent of Government structure to ensure their energy security. He asked if wheeling through the grid should not be allowed, and how should such be seen in terms of the planning function as some of the extra capacity would fall out of the IRP. It would be a kind of decision taken by a company as opposed to it being stipulated in the IRP.

Mr Pickering explained that the questions around expansion were always hard. In planning public infrastructure, it was always going to be about trade-offs. In building roads, airports, and railways, there would always be the opportunity cost of building something in one place instead of another. It was the reason planning functions were very important and very contested and needed to be governed appropriately and conducted openly and professionally and in an open way and needed to be done regularly while incorporating learning from previous cycles. There was no simple answer. It was a complicated process of looking at available energy resources and looking at the kind of mix the country had and what were all the policies that would need to be taken into account when making such trade-offs. But it was clear that it needed to be done by an independent body that did not have a stake in any of the generation projects that were out there on the map.

In relation to whether wheeling of projects outside of the plan should be allowed for, Mr Pickering said it was not an easy question. SA would face the commitment at the international level at  some point around its carbon emissions. The Government would not be very responsible to allow anyone to build a coal fired power station. Consideration needed to be given to how much of one fuel versus other fuel would be in a mix. There would have to be a policy framework to guide that. He supported the idea within the framework that buyers and sellers could get together and not face insurmountable red tape in licensing processing systems and unfriendly administrative systems in order to strike a deal. For instance, for green project and buyers who wanted to buy green power, there really should be no reason other than normal environmental impact assessment and normal financing consideration to prevent those kinds of deals or bilateral deals being done.

The Chairperson asked how the standard model and the hybrid model differed.

Mr Pickering said that all the models were simplifications of reality and if one went and looked at how Chile applied its system versus how England and Wales did it, vs New Zealand vs Australia, and other countries, they all had different approaches and it was not as if there was a single clear model out there. What would emerge if the hybrid model was implemented effectively was that competition would begin to come, in various ways. So bilateral deals being facilitated by the ISMO would be a form of competition. The next kind of market likely to be seen would be the market for ancillary services such as reactive power, stand by power, black start, and others that the system operator required to balance the system. That would commonly be the beginning of a competitive market. Those would be the kinds of decisions that got taken along the road on the basis of a sound set of operating institutions, which was what South Africa did not have at present.

Mr Greyling said that he heard Mr Pickering on the carbon constraints but perhaps one way of doing it was to say that any company that secured  from a generator would need to procure a certain percentage of clean energy to ensure some of the requirements were met. He asked it that was not one of the ways to deal with the problems. 

Mr Pickering said that the answers to the question would come from the debate around the carbon tax vs the carbon budget approach in which the National Treasury and the National Planning Commission were currently leading the way. The issuing of licences to build power stations was a fairly blunt instrument. It was an absolute instrument. In the policy mix the country would have to decide if it was going to use those blunt instruments or to go for more of the economic instruments such as taxes and the carbon trade. Those decisions still needed to be taken.

Mr Moloto referred to Mr Pickering’s response to his question about the transfer of assets where Mr Pickering referred to the matter as simply transferring assets between the two state owned entities. He said that Eskom’s balance sheet  would be affected if the assets could be transferred without compensation.

Mr Pickering agreed with Mr Moloto and clarified that he was not in any way suggesting that the assets be transferred without any thought of Eskom's balance sheet. Restructuring like that was common around the world and could be done here too.

The Chairperson asked which legislation mentioned in the submission needed to be revised. He pointed out the issue of allocation where Meridian Economics preferred a robust approach such as the use of competitive bidding between Eskom and IPPs. He also referred to their observation that feasibility studies were a weak method of performing allocation functions. He asked if NERSA could contribute to the finalisation of the Terms of Reference of the feasibility studies as it was already an independent regulatory body.

Mr Pickering referred back to the IRP and pointed out the eight forms of generation technology. The task of allocation was about deciding which of the projects or technology or programmes should be done by Eskom and which should be done by the private sector. He pointed out that a nuclear programme was always carried out with heavy state involvement. The small renewable energy projects could be beneath Eskom and would fall to the private sector. But, in between, decisions had to be made about whether it would be a private or public investment and the question was how such decisions should be made. He could conduct two studies that might produce contradictory results. It all depended on the assumptions around cost of capital, around efficiency, delays, and interest charges during construction.

Mr Pickering continued that he worked  everyday with the models that valued power projects and they were enormously complex and it was very easy to push the result one way or another. The assumptions one used completely biased the results. So he questioned if feasibility studies would at all be useful in making the allocation decisions. He did not have an answer to this.

Mr Pickering continued that what was needed was certainty more than anything else, but the question was how to get there. There were many ways and Meridian Economics was suggesting a bidding process between Eskom and private investors.

Earthlife Presentation
Mr Tristen Taylor, Earthlife Africa Jhb Project Coordinator, presented Earthlife’s submission that the ISMO should be run on a non-profit basis. Anything else represented an effective privatisation of public assets, which Earthlife was opposed to, particularly in the electricity sector. ISMO would need to be incorporated as a state institution, rather than a private or quasi-private sector entity. In relation to tariffs and ISMO, as the ISMO would essentially be the breaking up of Eskom into two parts, the question would then be if the tariffs granted to Eskom would be broken up too.  Eskom already received revenue from tariffs for transmission, wheeling, distribution,  In order to prevent double-charging, NERSA would have to review all the tariffs and unbundle them into generation and transmission components. This was not clear in the Bill. Mr Taylor referred to  Eskom domestic customers saying that Eskom currently supplied about 4 million households with electricity,including Free Basic Electricity (FBE). The Bill was silent on whether the ISMO would take over this function and how it would fund FBE, and the powers it would have to increase FBE in accordance with the development and social welfare aims of the country. Eskom currently had three Special Purchase Agreements with BHP Billiton and Anglo. The Bill needed to be clear on whether the ISMO would take over these contracts and be empowered to renegotiate these loss-making deals. In relation to access to information, as the ISMO was preforming a public function as part of the State's responsibilities and functions and duties to the citizenry, all the tariffs charged by the ISMO for buying and selling electricity needed to be in the public domain and without confidentiality clauses. Mr Taylor also requested that all employees of the ISMO should disclose all conflicts that they may have and those of their family members. The Bill was silent on the conflicts of interests that partners, children and other relatives may have. Mr Taylor continued that it appeared that Parliament was not legislating overview powers to itself, and thus not fulfilling its oversight of the Executive Branch, including the Department of Energy (DoE) and NERSA. For example, Clause 37 gave the power to the Minister of Energy to intervene in the ISMO, especially under a case of maladministration within the ISMO. This was serious and presenting a report to Parliament within six months was not enough; such a case should trigger an immediate parliamentary committee of enquiry with the power to take corrective action as it would be a failure of the Executive to fulfil the mandate of the public's general will. Given the importance of the electricity sector to the nation, Parliament would need to legislate for its oversight explicitly in this Bill. In reference to the Electricity Regulation Act (ERA), the ISMO Bill was dependent upon the ERA and the National Regulator Act for its operations. Both of these acts were under revision by the DoE, and the draft bills had been defined as unconstitutional by Earthlife. If passed in their current format, the bills would have serious implications for the ISMO Bill, and would undermine many of the efforts of this Bill. Earthlife was worried that the ordering of Bills before the Portfolio Committee was wrong in this regard; as foundational bills, DoE should deal with them before attempting to legislate on the basis of bills set to change within the current year.  Lastly, the ISMO Bill represented an opportunity for the possibility of net metering in terms of microgeneration (below 500kW or 1MW). The ISMO could be empowered through this Bill to set up such a system.

Discussion
Mr Moloto asked why Earthlife had declared unconstitutional the two draft bills referred to in paragraph 9 of its submission.

Mr Taylor explained that there was a lengthy legal argument as to why and he would send the documents explaining it to the Committee. Earthlife had informed the Department about it and it was its hope that there would be a revision accordingly. The point Earthlife was putting across was that if the two bills changed, then ISMO would also need to change. Its main concern was that the two bills changed the structure and how tariffs were regulated. He said that he was not sure how to deal with the issue but was hoping that the Members might be able to put their minds together and come up with a solution.

Mr Moloto further asked if the Promotion of Access to Information Act (PAIA) was not enough to empower anyone to seek information if they felt that their rights were being infringed.

Mr Taylor clarified that it was hard to get information out of entities as they saw PAIA as violating their commercial secrets. The buying and selling of electricity needed to be regulated specifically in the Bill as in theory everyone could say they had commercial secrets. Entities and people could use existing legal loopholes to close down on any independent oversight, yet it was a public function. The ISMO Bill presented an opportunity to rectify that and to ensure that there would be free and open information in the sector that would benefit everyone.

Mr Moloto also remarked if it was not too prescriptive to write in detail what was expected off the staff in relation to disclosure of conflict. Could not ISMO come up with its own documents to guide staff?

Mr Taylor responded that Clause 15(3)(a)(ii) particularly provided for the issue of disclosure of conflict of interest. The point made was that, it was not good enough as someone in the board could have a partner who was running an electricity generating business.  Earthlife was simply requesting to expand the definition in order to close that little loophole.

Mr Moloto asked if it was also not enough for Earthlife to channel its concerns about Parliamentary Powers through the normal process whereby entities appeared in front of Parliament to make submissions on their corporate plans and annual reports. He also remarked that Mr Taylor had raised a very important issue about why BHP Billiton should be getting special electricity tariffs and would like to know what would be the transitional arrangement when ISMO would take over.

Mr Taylor explained that the discussion was around an issue that underpinned the entire economy and if something went wrong, everything would be affected. If there was maladministration for example of the ISMO, it would have a ripple effect for the entire economy and as it stood at present, six months was given to make a report. A lot could happen in six months and pressure would exist and the problem would have backdated to quite a while. The purpose of Earthlife's comment was to request for checks and balances to put in place so that if something went wrong, anyone who had the power could check the situation immediately and start the process of enquiry. Such would also ensure that there would be protection.

Mr Greyling agreed with Mr Moloto about the BHP Billiton point. His said that his feeling at the time when the contract was being negotiated was that South Africa should no longer be selling electricity that was not regulated according to tariffs. He suggested that a way to deal with it was to bring the issue under the tariff books and give the company a choice on which tariff they wanted to use. He asked Mr Taylor for confirmation if this was not a solution that could be considered.

Mr Taylor asked why BHP Billiton got special treatment and if there was a list of tariffs, why it was not available to everyone else, as that would make it a free operating system in which businesses can go to and if they could not compete, then it was their problem.

Mr Greyling further probed Mr Taylor on how he saw the ISMO Bill encroaching on the issue of distribution in relation to free basic electricity as the ISMO Bill was vague on the issue as distribution really belonged to the municipalities, and there was a R40 billion backlog in infrastructure. He also asked for Earthlife’s view on free basic electricity and how it should be dealt with.

Mr Taylor said that Earthlife would like to see net electric metering as a function of ISMO. This was electricity generation of under 1megawatt, hence small scale generation. If solar panels were put on the house, and the household produced 100kw and gave it to the grid, then that household got the credit in return. This was an opportunity for the many citizens to play an active role in meeting power generation

Mr Taylor continued that distribution was a very complicated issue as it was the terrain of the municipalities and it was constitutionally regulated, so there was little that could be done about it because of the Constitution. It was the reason he processed his remarks around the domestic users of Eskom because when he read the Bill and looked at free basic electricity, there was no mention of the domestic users in the Bill. It was all about the big guys. If ISMO was going to happen, it would take over the customers of Eskom and therefore also take over the obligation to provide free basic electricity, the power to provide it and to cross subsidise it. It was not clear at this stage if ISMO had the power to cross subsidise it. Free basic electricity was something that needed to be legislated for as it was a critical issue to everyone in the country. He informed the meeting that they had done a study in the communities of Gauteng and they had found that the 50kw free electricity given to households was used up in one week and then they resorted to other dirty means of energy.

Mr Smalle said that, given that Earthlife argued that ISMO should operate as a non-profit entity, and knowing that there would be capital developments and certain maintenance as well as projects, if Earthlife was suggesting that ISMO should just cover the cost of such and where the costs would come from.

Mr Taylor said that capital requirements could be considered as part of operational costs and that the tariff could adjusted according to the need. The ISMO should be looked at like a hospital or a university as it would there to provide a public good function not necessarily to make money. In fact it might be of benefit for ISMO to operate at a loss as the remainder of the costs could be made up elsewhere.

Chamber of Mines Presentation.
Mr Dick Kruger, Deputy Head: Techno-Economics,  delivered the presentation. The Chamber envisaged a system where access to the electricity grid was available to all generators of electricity who complied with the required technical criteria. A system operator was needed to ensure that the supply and demand for electricity was balanced with and adequate reserve margin to allow for unplanned outages. A market operator was needed to ensure that consumers who were not contracted to specific generators obtained an adequate supply. In such an arrangement it should be possible for any generator to supply electricity to a specific contracted consumer or customers through the system. The Bill in its current form was, however, not totally clear on several important aspects. It was not clear whether ISMO would own the national grid. It was   possible to control the grid without owning it, but ISMO could only be truly independent if the ownership and maintenance of the transmission grid was independent of any electricity generator. In terms of buying electricity, NERSA had no jurisdiction over generators of electricity outside South Africa; there could, therefore, be no generation licensees outside the borders of South Africa. The Chamber also asked about the criteria  for exempting generators from selling to ISMO. The Chamber was concerned that the Bill in  its  current wording would preclude independent generators from using the national transmission power system to convey electricity to their direct customers in terms of bilateral agreements. It was accordingly recommended that the Bill be amended to clarify the uncertainties and to provide explicitly for independent generators to sell electricity directly to contracted customers. In terms of selling electricity the Chamber asked what the criteria would be for identifying ISMO customers and which entity would formulate those criteria. Furthermore, the Chamber queried how the large industrial customers currently supplied directly by Eskom would be affected. It was recommended that the relevant clauses be amended to indicate criteria for ISMO customers and to clarify the impact on current direct Eskom customers.  In terms of powers of entry and inspection the Chamber recommended that the purpose of the provision be reworded. The Chamber also recommended that Clause 40 be reworded to indicate which assets were to be transferred from Eskom to ISMO as it was not clear. It was also recommended that the Department be defined as the Department of Energy.

Discussion
Mr Moloto asked for clarification on why the Chamber was concerned about generating power for its own use. He also asked for further clarification on the Chamber’s comments on the need to clarify Clause 35(1).

Mr Kruger explained the Chamber's position through an example whereby if there were two different companies in the same mining group and one had an excess of coal that it burned to generate electricity, it would send that electricity into the grid for other users and hence a licence would be needed. The preferred user would have to pay the price for it.

Mr Greyling asked why the Chamber was concerned about securing electricity from outside the country if it was not willing to have regional power generation.

Mr Kruger said that this was purely an issue of semantics and probably just needed a comma to fix it.

Mr Greyling asked the Chairperson how the Committee should address the concern raised by different Members  on the amendments on other bills having an impact on the ISMO Bill.

The Chairperson explained that he had already conferred with legal services on what needed to be done and the Department would also need to be consulted.

The meeting was adjourned.

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