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

Energy

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

Comments from SALGA concentrated on the definition of customers, clarity of roles relating to the functions of the ISMO, the board and implementation arrangements. SALGA said that the definition of customers and suppliers of ISMO were the same and it needed to be rectified. SALGA proposed that the definition should seek to clarify the customer niche of the ISMO as electricity distributors, as licensed by NERSA and Key Industrial Customers. Though SALGA supported the role of ISMO in planning, it said that the Integrated Resource Plan (IRP) needed to remain a government responsibility to be developed in a consultative manner given it was about making country choices in respect of the energy mix

NERSA’s comments referred to the legislative landscape, the impact of the ISMO Bill on NERSA and further observations. NERSA suggested that Section 34 of Electricity Regulation Act (ERA) would need to be amended in order to align properly with Clause 4(3) of the ISMO Bill. On the impact of ISMO on NERSA, and relating to the licensing regime, dispatch was not provided for as a licence activity in terms of ERA. The ISMO Bill broadened NERSA’s licensing scope which would require additional expertise, appropriate licence conditions and the rules. NERSA proposed that the current transmission licence of Eskom needed to be amended in order to separate the system and operator part. The tariff regime would also need to be determined per business operation in generation, transmission and distribution

Eskom highlighted four key milestones in the transition to ISMO. It included transfer of energy planner and procurement functions depending on appropriate governance being established; transfer of the wholesale function depending on financial and contractual issues being addressed; transfer of system operator depending on adequate system capacity being created; transfer of customers depending on mechanism to manage cross subsidies, loss of customers and financial and contractual matters being addressed.

Professor Eberhard and Mr Joseph Kapika of the University of Cape Town said that the Bill should allocate to the ISMO full responsibility for the preparation and regular updating of the IRP.  Secondly, in addition to the proposed powers of procuring and purchasing of electricity, the ISMO should also be responsible for the initiation and management of the procurement of new power generation capacity (through competitive international tenders and through negotiation of unsolicited bids).

Meeting report

South African Local Government Association (SALGA) submission
Mr Mthobeli Kulisa, SALGA Executive Director: Municipal Infrastructure and Services, said SALGA supported the ISMO Bill. Comments from the Association concentrated on the definition of customers, clarity of roles relating to the functions of the ISMO, the board and implementation arrangements. SALGA said that the definition of customers and suppliers of ISMO were the same and it needed to be rectified. SALGA proposed that the definition should seek to clarify the customer niche of the ISMO as electricity distributors, as licensed by NERSA and Key Industrial Customers. Though SALGA supported the role of ISMO in planning, it said the Integrated Resource Plan needed to remain a government responsibility to be developed in a consultative manner – given it was about making country choices in respect of the energy mix.

SALGA mentioned that major parts of Clause 4(2) in the Bill did not make clear distinction and separation of roles amongst ISMO, NERSA, Transmission Entity and the Distribution entities. Such non-distinction, and the open-ended definition of ISMO customers created a confused role specification for the ISMO system operation and expansion role. On the nature of the board, SALGA supported a primarily competency based board though it was suggested that the Bill should guide the selection so that the members would have diverse stakeholder backgrounds rather than race and geographic diversity. SALGA said that it was particularly important when considering the role of ISMO in respect to the development of the Integrated Resource Plan (IRP). SALGA also requested clarity on why public representatives were excluded. SALGA supported a phased approach in the implementation of the ISMO. It was suggested that one of the areas that needed to be watched carefully was the impact on electricity pricing so that the consumer would not pay twice for the system and market operator capacity. Focused Parliamentary oversight was needed over the implementation. In relation to that, SALGA recommended that on the finalisation of the legislation the Department needed to present an implementation framework to the Committee.

Discussion
Mr J Smalle (DA) asked on Clause 4(h), (i) and (m) did SALGA want to see, with regards to distribution, transmission and planning, that finances for this be ring-fenced such as other projects like the MIG.

Mr Mthobeli said yes, because distribution and transmission should be owned and regulated by one entity to avoid duplication of resources. The distribution of assets should be ring fenced and would need to be managed by distribution companies. ISMO would be the wholesaler that would buy from generators and sell to distributors. It could also be that ISMO may not be the only buyer. The need was for distributors to buy directly from generators in order to spur competition.

The Chairperson probed SALGA to look into their proposal for planning and say if they supported what others have pointed out that ISMO was going to play a subsidiary role in planning, making submissions to the Department instead of playing a core role in planning. He asked SALGA where they expected planning to be located.

Mr Mthobeli said that SALGA believed that planning should be made by government and ISMO would need to provide the technical support. The outcome needed to be led by government. ISMO holding the role of planning would take away dominance of one energy entity that was both the player and the referee (which was Eskom at present). The schedule needed to be done by an independent operator from any entities involved in transmission and distribution.

The Chairperson asked for confirmation if SALGA wanted the board members to come from stakeholder backgrounds in the context of the IRP.

Mr Mthobeli replied SALGA’s experience came from the last round of the IRP which noted the extent the model was questioned. The first proposal indicated that representation was loaded towards certain industry and SALGA felt that it was important that a team that lent support to government needed to be diverse in backgrounds in asking questions and developing solutions that were unbiased.

The Chairperson asked SALGA to expand further on their suggestions for the implementation framework.

Mr Mthobeli said that during the 2008 shortage of energy, the country had experienced the effect of rolling blackouts. Thus it was important not to abruptly introduce ISMO, but to take it step by step as there were things one might not foresee.

Mr Chris Neethling, Member of the SALGA National Executive Council, added that the reason why they raised implementation arrangements was because it may affect consumers through prices. Their view was that a lot of capacity was embedded and ISMO would need to harvest it.

Mr K Moloto (ANC) remarked that it was important to draw a distinction between a nominations committee and a board. It was the nominations committee where the issue of race and geographical area was being mentioned. It was not alluded to where the board was discussed.

Mr Mthobeli agreed with Mr Moloto. It was also important for the nominees to have diverse backgrounds. They would be processing nominations to give to the Minister who needed to take into account the criteria discussed.

Mr L Greyling (ID) noted that SALGA was also struggling with structure. Eskom had mentioned that what was needed was a document to outline the outcome and where the ISMO process was going. The current system was not working, including distribution. There were different views on where planning should rest. He asked SALGA if it did not want to see professional planning sitting in ISMO.

Mr Mthobeli replied that it was important to focus on long term planning. It was also important for planning to remain a government competency, as that was where the data would be.

Mr E Lucas (IFP) asked what was being suggested would mean to the ordinary citizen.

The Chairperson asked why SALGA wanted Clause 16(a) to be tightened.

Mr Mthobeli said that Clause 16(a) talked of board members who must not be present or take part in discussion or decisions on any matter before the board if any family member has an interest in it. The way SALGA saw it was that ISMO would be dealing with the sale of energy and any member of the public that used electricity could be seen to have an indirect interest and it could affect them.

National Energy Regulator of South Africa (NERSA)
Mr Ronald Chauke, HOD Regulatory Reform, said NERSA’s comments referred to the legislative landscape, the ISMO Bill impact on NERSA and further observations. NERSA suggested that Section 34 of the
Electricity Regulation Act (ERA) would need to be amended in order to align properly with Clause 4(3) of the ISMO Bill. On the impact of ISMO on NERSA, and relating to the licensing regime, dispatch was not provided for as a licence activity in terms of ERA. The ISMO Bill broadened NERSA’s licensing scope which would require additional expertise, appropriate licence conditions and rules. NERSA proposed that the current transmission licence of Eskom needed to be amended in order to separate the system and operator part. The tariff regime would also need to be determined per business operation in generation, transmission and distribution. In terms of compliance, monitoring and enforcement, the ISMO Bill would broaden NERSA’s compliance activities to ensure fair, equitable and efficient dispatch, compliance with licensing requirements, and efficient handling of disputes. NERSA observed that in terms of transitional provisions, non licensed activity, namely dispatch, created a regulatory gap as ERA did not provide for it. Until ERA was amended, dispatch would have to be licensed as a trading activity. NERSA therefore proposed that a provision be made in the transitional arrangements.

Discussion
Mr Moloto referred to page 6 of the written submission recommending that Clause 17(2) needed to insert the word "voting" members. As he assumed that all board members had voting rights, he asked NERSA why the need for such an insertion. He asked for further explanation on another suggestion by NERSA for the insertion “and consider the applications received” in Clause 20(2). He asked if NERSA was recommending the removal of ‘concurrent’; plus adding ‘board’ in section 21(1).

NERSA explained that it was in the procedure of meetings that they suggested ‘voting’ be added. The reason for their comment was if there was conflict of interest and there was a quorum of 70% and people with a conflict of interest were excluded, then there would be no quorum. Hence a quorum should not be used in such a case.

The Chairperson asked if NERSA was saying that the appointment of the Chief Financial Officer in Clause 21(1) was subject to the conclusion of an annual performance agreement.

Mr Chauke answered that the submission was not phrased clearly. Only once the appointment has been made, then the performance agreement should be signed.

The NERSA Legal Advisor said that placement of emphasis on ISMO as an entity meant that when ISMO would come into place, NERSA could not regulate. In the instance of ISMO dispatching, then there would be risk left with Eskom. NERSA would not have liability. If there were to be a dispute in generation, it would not be possible to raise it with ISMO, as it was not a licensee but a customer. Hence regulation may not be applicable.

The Chairperson asked where NERSA would locate dispatch and what they thought the ripple effect of cost would be. He also asked what NERSA meant when it said that dispatch was a trading activity.

Mr Chauke said that to do proper licensing in the future, there was a need to make sure that activities that form the core of business related activities come into the market and this was where dispatch would become critical. Dispatch has to be clearly articulated and licensed as a licensing activity. Eskom was doing this function at present. There was a challenge about unintended consequences and what was needed most was to define the activities within ISMO. Dispatch was embedded in the distribution function of Eskom and taking dispatch out of transmission would create a situation between generators and transmission. ISMO would deal with the costs and pass them onto transmission. For a separate line entity to do dispatch fairly and equitably, it would require a lot of experience and expertise that had been hidden and embedded within Eskom which had dominated up to now. If an Independent Power Producer (IPP) were to enter the market and complain that they had not dispatched accordingly, then they would refer to the regulator and they would arbitrate in that dispute. Such would require extra expertise and NERSA would need a few extra people to do that. Benefit for the country would outweigh costs incurred. There would need to be interim arrangements for a situation where the ERA amendment was still in the process of being finalised and the ISMO came into effect. Instead of ending up with unlicensed activity, the proposal would be to license them as a trader and they would be buying and selling electricity.

Mr Moloto asked if NERSA was saying the Bill in Clause 4(2) should assign the powers to interrupt the power supply to ISMO and that currently it did not have this power. He asked what the risk was of not having such a power.

NERSA said that the power was written in the objectives, but not explicitly written into the other parts of the Bill. ISMO was the right place where this power should reside. In terms of system security and integrity, if there was not the right to interrupt electricity, it could open ISMO up to legal claims. Eskom had been challenged in court since 2008 and it had lost the case. It was an important function for the independent system operator to have and should be used. It was an international norm that when the system was in distress, you rather trip the load and keep the system integrity than let it die and restore the system from scratch.

The Chairperson remarked that NERSA was very economic with words during their submission as the written submission was much more detailed. He wished that the additions presented had been as elaborate as they were in the submission.

The Chairperson requested NERSA to provide the Committee with more information on the amendments on the licences. They must also provide further information on activities on transmission and dispatch, and on which institutions dealt with what. The Committee would need more information on the restructuring from ERA and who would shift from where.

Mr Chauke acknowledged the request from the Committee.

ESKOM submission
Mr Mohamed Adam, Division Executive: Regulation and Legal Affairs, said Eskom supported the objectives of the Bill. The private sector had an important role to meet the growing power demand and to keep the lights on. The ISMO Bill could provide improved certainty for all participants with regard to government’s intent with the electricity sector. He emphasized that the critical success factors were in the fields of government, Eskom and during the implementation phase. Eskom called for clarity on the end state the government wanted to achieve with the ISMO Bill. Restructuring could not happen in a vacuum and it needed to be done for a particular purpose and in pursuit of determined objectives.

It was essential that the establishment of ISMO should not affect security of supply and this meant that Eskom supported a phased approach based on achievement of certain milestones before progressing to the next phase. Eskom highlighted four key milestones in the transition to ISMO. It include:
▪ transfer of energy planner and procurement functions depending on appropriate governance being established;
▪ transfer of the wholesale function depending on financial and contractual issues being addressed;
▪ transfer of system operator depending on adequate system capacity being created;
▪ transfer of customers depending on mechanism to manage cross subsidies, loss of customers and financial and contractual matters being addressed.

Mr Adam said that Eskom had already taken steps towards ISMO. Eskom has ring fenced identified activities within a separate Eskom division, had started working with the Department of Energy towards establishing an ISMO subsidiary in Eskom Enterprises to perform initial duties of ISMO. He also revealed that Eskom planned to second staff, resources and support services to ISMO. In terms of customers, the Bill would need to clarify if the definition of key industrial customers would be retained. It also needed to determine if ISMO would sell to such customers or only transmission-connected customers. It would also need to determine which municipal distributors ISMO would sell to. In terms of financial sustainability, ISMO would need to consider capitalization, government support framework, loan covenants, manage cross-subsidies in tariff, loss of customers for Eskom and implications, asset values on transfer. Contracts would also have to be separated into energy and network services. The market rules devised by NERSA would need to consider the interaction between contacts and contractual requirements. The Bill may have to provide legal mechanisms for unbundling existing supply contracts and compelling ISMO customers to purchase energy from ISMO. Eskom proposed to delete the Clause dealing with the transfer of employees and to rely on the provisions of the Labour Relations Act. Eskom also proposed that the Bill recognize the framework of the Companies Act and the Public Finance Management Act (PFMA) instead of attempting to selectively restate the applicable provisions in the Bill. In terms of establishment of the ISMO, it was proposed that the Bill allow for ISMO to be established through the take-over by the state of the subsidiary created by Eskom or to allow for the transfer of the subsidiary from Eskom to a company established by the state.

Discussion
Mr Moloto asked why Eskom was concerned about market value of assets to be transferred given that they were only computers and personnel.

Mr Moloto also asked how ISMO’s limited balanced sheet Eskom was concerned about, would affect Eskom say if the power generators would sell to ISMO and then ISMO dispatch to customers. He asked Eskom what the risk would be and if it was the settlement risk it was worried about.

Mr Adam said that when Eskom entered into power purchase agreements to supply power, it entered into contracts and one of the critical issues was the fine balance to get the risks right. Unfortunately, some of the risks were default or regulatory risks. The issue that always came up was who was the counter party. In that range of options, the issue would be to make sure to have proper capitalized entities. If moving to ISMO, then Eskom would support it to be successful. Given that ISMO was a counterpart to Eskom, things would have to move. The initial phase may not have much, but as soon as customers are moved, then changes would come. There could be more customers but the big ones would be all gone. This would be where the levies come from. While all the customers would be there, the subsidies would have to be made from other revenue. Eskom was saying that the levies need to be kept for the country for electrification and to support low income customers.

Mr Moloto also asked about milestones, given that the submission indicated that Eskom did not like timelines and given that they become five to ten years, the end state might never be reached.

Mr Adam explained that Eskom was working towards an implementation plan.

Mr Moloto noted that Eskom was concerned that its creditors might be worried by the loss of key customers. He offered to rephrase Eskom’s concern saying that Eskom was a giant and the Independent Power Producers were small which meant that Eskom would be supplying the key customers, as it was the giant in the midst. He asked how such a scenario would impact on Eskom and why it should be a concern.

Mr Adam said that loss of customers was one of the difficulties facing Eskom and they did not know how customers would be defined. Issues would need to be resolved as the phases start.

Mr Moloto then raised the issue of loan governance, asking Eskom why its creditors should be concerned about its loan governance when it was not restructuring.

Mr Adam replied that as soon as the entity’s risk profile would be changed, lenders look at that entity differently. Whatever plans would be changed, such could be mitigated.

The Chairperson asked what the financial implications of restructuring would be. 

Eskom said that the bottom line was, with the development of the transmission plan, it would have to support the IRP and other decisions made on the load.

Mr Greyling said that one of the blockages would be where the grid would be situated and who would be responsible for the expansion. If the objective of the ISMO Bill was to increase competition, then the actual grid and assets should fall under ISMO. He asked Eskom if it was something that could be migrated overtime with compensation to Eskom. He agreed with Eskom regarding the end state.

Mr Adam explained that the issue of end state was a difficult one. The key principle was to have security of supply and it would need to link without economic and industrial policies. The country would need to move towards a vibrant electricity industry that would be self sustaining and had the capacity to go into the future. Then it would depend on the economy the country would want and what structure best supported the achievement of that.

Ms N Mathibela (ANC) referred to paragraph 4b on page 3 of the submission on the mechanism instituted to manage cross subsidies between customer groups. She asked if what Eskom was saying was that all the people who were helped by Eskom, could no longer rely on Eskom.

Mr Moloto asked what Eskom wanted to do with exclusive rural levies if people would continue to pay for the network charge. He asked if the network charge for the transformers to recover money incurred, was the cost for installation of transformers or for the use of transmission network.

Mr Mongezi Ntsokolo, Group Executive Eskom: Transmission, said that transmission was governed by a licence from NERSA and performance needed to comply with supply. Eskom reported to NERSA quarterly on how it was performing. There was a need to ensure there would be free basic electricity and to connect all customers to the grid. Standards would not change.


Professor Anton Eberhard & Joseph Kabika (University of Cape Town) submission
Mr Joseph Kabika presented, saying the Bill was most welcome. It should be enacted as soon as possible and ISMO should be established.  However, there were two fundamental areas where the Bill should be strengthened. Firstly, the Bill should allocate to ISMO full responsibility for the preparation and regular updating of the IRP.  Secondly, in addition to the proposed powers of procuring and purchasing of electricity, the ISMO should also be responsible for the initiation and management of the procurement of new power generation capacity (through competitive international tenders and through negotiation of unsolicited bids). At present, both of these functions and powers resided with the Minister of Energy. However, it would be more sustainable if these professional and operational functions and capacities were located and built within ISMO – while the Minister retained a role of oversight and intervention under specified conditions. These issues were also dealt with in the proposed amendments to the Electricity Regulation Act and hence amendments in the two Bills need to be synchronized.

Discussion
Mr Moloto pointed out that the submission had raised issues similar to those raised by Meridian Economics. He asked who would pay for the transfer of assets from Eskom to ISMO. He asked what role NERSA should play in relation to access to transmission by IPPs. He asked for clarification on the view that ISMO should not  be the  exclusive single buyer.

Mr Kapika said that no matter which way the issue was seen, Eskom would have to be compensated and that Government would have to pay for the transfer of assets. As far as access to transmission and the role NERSA should play, Mr Kapika said that a lot of level playing field issues had to do with perception issues as well. The fact that Eskom owned a significant amount of power system did create an environment to invest in the sector. It was important to give assurance to investors that there was a level playing field. If Eskom retained their assets, there needed to be a regime to keep that assurance and the IPP have access to the transmission network.

In relation to ISMO not being the single exclusive buyer, Mr Kapika said that Eskom prices would always be lower because of the blending effect. But if there would be competition to provide electricity elsewhere, it could create an environment for competition and therefore the price could come down. For a person who uses electricity, there was worry about two things, price and security of supply.

Mr Greyling asked if the reason that the presenter was saying to wheel through the grid was so that a company could be secured of having a certain supply, so that if it wanted a contract with a certain IPP, then it would have guarantee for that power.

Mr Greyling also asked what the presenter thought was a way of ensuring that policy in energy mix was incorporated into ISMO.

Mr Kapika replied that the planning issue was a competency issue and that the Ministry should have a non-operation role giving policy guidance, what the energy mix would be and what the assumptions would be going towards deriving the plan.

Mr Greyling said that IPPs had 2% of the capacity and there was a blockage there, although Eskom said they would sign up many IPPs. He asked if the presenter knew where the problem was, if it was transmission access or if it was because the Ministry had not designated what would be IPP and what would be Eskom.

Mr Kapika said that experience showed that in order to attract IPPs, there was a need to have a policy enabling environment. He would not suggest that there was one area alone that would open it up, but a package of measures and instruments, whole areas of planning, initiation of procurement, allocation. It would be better done when it would be explicitly stated what Eskom would and would not bill fairly early.

The meeting was adjourned.

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