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

Meeting report

National Union of Metal Workers (NUMSA) submission
Mr Woody Aroun, NUMSA Parliamentary Officer, and Mr Dinga Sikwebu, NUMSA National Education Coordinator, delivered the submission on behalf of NUMSA. They raised issues around ISMO’s dependence on the private sector: The preference of Independent Power Producers (IPPs) in the Bill assumed that the private sector was the only sector capable of fulfilling this role and therefore was the basis of the need to establish an ISMO. The Bill overlooked forms of collective ownership and they said that it should be noted that IPPs could also include a mix of energy parastatals, cooperatives, municipal-owned entities and other forms of community energy enterprises and these forms of collective ownership were excluded from the scope of the Bill. They questioned to what extent the ISMO Bill was contributing to leveling the playing field. They also questioned Clause 25(1)(a) on Special Powers. NUMSA was of the view that such wide-ranging powers could have a negative impact on the rights of people residing in sites with sources of energy and that such action could lead to conflict, particular if the communal land rights of people were affected

Discussion
Mr K Moloto (ANC) asked for elaboration on NUMSA’s preference for a governing council on ISMO rather than a board of directors.

Mr Sikwebu replied that before Eskom was corporatised, NUMSA participated in the Electricity Council which had stakeholders including consumers. It was done away with and they had objected. NUMSA felt that the insistence on a board instead of a council was part of state owned enterprises moving towards being profitable and being financially viable. Being profitable became more important, rather than the level of service and that was the problem. The idea was that the advisory council on electricity was to coordinate policy.

Mr Moloto also asked if NUMSA was saying that Eskom’s mandate should be changed to service provision. How did that affect the financial viability of Eskom; if Eskom should just go to the state if it experienced financial challenges?

Mr Moloto also asked about NUMSA’s problematic view on the involvement of the private sector saying that he had not seen a law that prevented anyone else from participating including the social entities NUMSA was referring to.

Mr Sikwebu said on the issue of the private sector, some said it was ideological. But NUMSA’s feeling was, the Memorandum annexed to the Bill did not make provision for the entry of other forms of ownership into the grid. ISMO seemed to be coming into place to facilitate the private sector entry. This was the underlying assumption of ISMO and NUMSA thought it was wrong. NUMSA had gone high up in government to raise its point, only to be told that there was nothing stopping them from entering as well.

Mr Moloto asked for clarification on the statement that Eskom was the player and the umpire at the same time given that NUMSA stated that it supported the introduction of ISMO.

Mr J Smalle (DA) referred to NUMSA’s argument that the Minister must decide should there be a deadlock between Eskom and ISMO. He asked if NUMSA could not argue that if the shareholder was the same, then they would need to decide.

Mr Sikwebu referred to the question on the Minister and his role in determining the deadlock. He could see that the shareholder was on both sides. But they were concerned about the effect of any financial transactions on the new entity. If, for example, Eskom wanted market value for all its assets, they would be interested to know what the effect might be on ISMO. NUMSA supported any negotiations that were going on.

Mr L Greyling (ID) said, given that NUMSA supported ISMO and it also wanted to see the end state like Eskom, and it was also referring to lack of ownership, he asked what NUMSA’s experience was in terms of the REBID process and what was holding back a collective form of ownership. He knew of one wind farm in Saldanha where there was community ownership but the problem was the generation allowed was only 100MW for small projects which needed to be increased. It was also his vision to see such types of projects increasing but there was a need to identify what challenges there were and do something about them.

Mr Sikwebu said, in terms of experience in REBID, there was an international conference in February looking at renewable energy and what was possible. One of the decisions taken as a union was to look at the next window where cooperatives could be set up as a union to be able to bid. But the constraints were financial and the hurdles there were great and prevented collective initiatives from entering. What he was saying was not just ideological. Some people have said, to let the private sector take the risk, so that public money would not be put there. But at the end of the day, Treasury stood as the guarantor for those projects. So it was just portrayed as private but actually guaranteed by public money. NUMSA said that if government was serious about job creation, poverty alleviation and to help communities, then the initiatives to enter the grid by social and community initiatives should be assisted.

Mr Aroun added that when the Bill was first presented at NEDLAC, there was no mention of other forms of ownership. The Labour submission to NEDLAC itself focused on the vast role played by the private sector and that was their concern. He related their experience when the REFIT model was being shifted to the REBID and the cost of the documents was R15 000 which was way too expensive, though they managed to get it. Upon querying if there was local content, the Science and Technology Department said that there was not much there. They also queried transfer of technology which they felt was not forthcoming.

The Chairperson remarked that the NUMSA submission was short but was raising very profound issues and some of the issues were not really relating to the Bill. He said that there was a need to look at the matters raised as a project operation shake-up of electricity supply.

The Chairperson referred to NUMSA’s critical view of the current practice of privatisation on page 2 of its submission. He asked about their concerns and to elaborate on any experiences they had drawn from other countries, also in terms of failures.

Mr Sikwebu referred to Clause 2 of the Bill which said that ISMO would be a trader of electricity to ISMO customers which they understood as selling to customers. Then, they had looked at the clause on definitions and looked at areas which included suppliers who were generators and who could sell. It was important to split up the two functions.

The Chairperson asked if NUMSA was implying that there should be a redefinition of service providers in the Bill. He asked for further elaboration on NUMSA’s definition of customers and future contracts with key customers.

Mr Sikwebu said that NUMSA wanted to know what the jurisdiction of ISMO was in relation to the contracts Eskom was holding with big consumers, governed by confidential contracts and tariffs, as ISMO was referred to as the trader of electricity to customers. NUMSA wanted to be clear if ISMO would take over the contracts of Eskom as they wanted to see a uniform system.

In looking at a level playing field, NUMSA’s study looked at different models of systems operators and they had identified deep and shallow operators. Deep operators would own transmission and therefore owned the grid. NUMSA supported the phased approach but as far as the level playing field was concerned, the country had not gone deep enough in terms of the operator that owned the grid.

Mr Aroun referred to a United Nations Environment Programme (UNEP) report on electricity reform and the social environmental challenges. One of the studies they conducted was in India whose process was almost a duplicate of what was happening in South Africa. The policy makers in India felt that they had been sidelined by the banks who were using their powers for influence. They felt that conditionalities imposed by the banks were a problem. The experience held some lessons for Africa in looking at the private producers who would come in on the basis of making investments – and when they could not make such investments, used local capital. He cautioned that such experiences would need to be taken into account by the Department.

In relation to the level playing field, the existing contracts with Eskom and the Energy Intensive Users Group would need to be addressed.

In relation to the piecemeal manner of policy, Mr Aroun said that there was a need for policy coherence for better coordination as there was a rush.

Southern African Faith Communities Environment Institute (SAFCEI) submission
Ms Liz McDaid said SAFCEI saw the need for physical transmission infrastructure to be transferred to ISMO and for this to be specified within the ISMO legislation. SAFCEI’s contention was that leaving transmission within the ambit of Eskom was a conflict of interest, as Eskom would naturally plan to locate the transmission infrastructure where it would benefit its own generation, rather than in the interests of IPPs for example. There was a need for greater oversight and public participation of ISMO plans and operations given its significant economic importance. There was also a need for greater understanding of the accountability and governance mechanisms between the Minister of Public Enterprises and the Minister of Energy in the governance of ISMO. It was also SAFCEI contention that the functions of ISMO could be served as well through the creation of a state institution, and it failed to understand the rationale for the creation of a corporate structure, rather than a state institution.

Discussion
Mr Greyling said that he did not think any new generation plant would be able to compete with the blended tariffs. Also he did not think it was a problem for the big energy users to have contracts with IPPs.

Ms McDaid said that her response was framed around the interests of the ordinary citizen and of the poor in how the Bill would provide opportunities for them in terms of access.

In reference to the question about blending and new generation competing, she said that it was right at the moment, but in going into the future and building new generation, new coal powered stations would never be built at the price of the old ones. Nuclear energy was very expensive. In looking at the price of technology, depending on what the business was, it may be that in the future, electricity could be cheaper than the blended price.

Mr Greyling continued that there was need to find a compromise between ISMO and the Department and that the plans would need to be informed by a set of national priorities which set the framework. The worries should rather be that the priorities and assumptions that would be put in the model were set by ISMO.

Ms McDaid referred to the issue of the carbon tax and climate change and what influence it would have on the electricity price. One could not make the assumption that the blended price would be cheaper for a longer time.

In terms of technical planning, Ms McDaid said that it was her understanding that the technical guys would be under ISMO. They would have the skills to do the planning and modeling would be done in ISMO and fed into the Department as part of overarching planning. Perhaps there was a need to unpack how planning worked and who would be responsible for what. At the moment, Eskom was doing everything which was supply driven and only focused on electricity and not on solar water heaters and others.

In terms of consumers, SAFCEI was concerned about everyone along the distribution and selling chain adding on their bit to the price of electricity and the effect it would have on the consumers. SAFCEI would like to see ISMO not making any returns.

Ms N Mathibela (ANC) asked if ISMO would be buying from Eskom or if it was the other way around. She asked about the power stations that would be built and what the country would be doing with its natural resources.

As far as natural resources were concerned, Ms McDaid said that the country would want to use them and they included the sun, the wind, the tides which were all under utilized. Someone would need to do an analysis and say where the best electricity would come from and one that would deliver the most jobs, provide reliable electricity, ensuring the greatest number of people have access. It would need to be the right mix, right structure, either decentralized, having cooperatives or local ownership.

An ANC member remarked that the involvement of government should not be questioned as ISMO would be a State Owned Enterprise and government would therefore have a role to play. In terms of Clause 10(4) a person should stay on in the position based on performance not sustainability.

In terms of stakeholders, Ms McDaid asked what would happen if there was a conflict. The Department of Public Enterprises was running entities on behalf of the state to make money. They were looking at ISMO to facilitate access to the grid and to give people electricity. In terms of management and performance agreements, they were good ideas. But it would be better to reword the phrase and say that the contract could be renewed, if the performance would be good.

Mr Smalle asked if there should not be a clear distinction between board and personnel. He also asked about the concerns about the exemption of certain condition that could be a blanket on what other ministers could do. He asked if SAFCEI would want to see the exemption apply only to transfer of assets from Eskom to ISMO at that stage to stop there, and making sure that the playing field was on an equal footing.

In relation to board time frames, Ms McDaid remarked that there would need to be continuity hence the working would need to be modified accordingly. In terms of the level playing fields and what could go wrong, the issue would be about who decided who would have access to the grid.

Mr Smalle referred to SAFCEI’s submission which said that the Bill’s provision was not supplying information in a transparent manner and then it said it had been addressed but it was not enough. He asked what still needed to be added to ensure proper accountability and that energy supply would be secured.

Ms McDaid replied there was a need for active citizenry and transparency was needed. As mentioned in earlier submissions, there was a need for a systems operator to produce public information on a regular basis so one could see what was going on. Transparency was needed as well as access to ensure a level playing field as all the big players held all the cards. She referred to the case related by NUMSA that they had been expected to pay R15 000 for documents to enter a bidding process.

The Chairperson pointed out that in an earlier SAFCEI submission, it was raised that ISMO needed to come under the Minister of Public Enterprise mandate. The last page of the Bill acknowledged that the Department of Public Enterprises had been consulted and they were supposed to make a submission.

Ms McDaid said that in relation to State Owned Enterprises, she had become aware of different types of schedules under which companies fall in the Public Finance Management Act. She indicated that perhaps the distinction would be for ISMO to not make a profit.

The Chairperson referred to the statement that there was a contention against Eskom saying that the State may fail to provide electricity to customers. He asked for proof of that.

Ms McDaid referred to the Integrated Resource Plan (IRP) analysis slide explaining that Eskom had indicated that the way to look at demand was to look at historical demand and then ask historical customers what projects they had, or those they had in the pipeline, then build according to that. Hence what the country was responding to was the key industrial customer interest into the future. Expansion would be based on that and it was quite risky as, if the price would go up, they could give up and go elsewhere.

Ms McDaid continued that in the 1970s, SA built too much capacity resulting in the special deals. The concern was about who was driving demand. An analysis advisory committee was put in place who were mostly big industrial players – who were driving the demand and they wanted the state to build plants. She informed the Committee that she could provide the analysis they had made in terms of that.

Ms McDaid said that how the country would do its planning was the critical link to the issue raised earlier. If one could buy electricity from the Eskom blended price, or the ISMO blended price or have its own power plant, then the big players who asked for the special price might pull out if they chose the cheapest option which might be their own power plant. It would be the SA consumer who would have to pay for that.

The Chairperson said that he has taken the point that planning would need to be a subset of energy but the IRP process had been triggered and there was need to support that process with confidence.

Ms McDaid said that Eskom did have a saving campaign on the demand side. Efficiency planning only came in when they had run out of power. There was a need to look at the best use of electricity. But the question was if the best use of electricity in building new generation was the correct way to do it.

The Chairperson asked how Parliament could increase oversight.

Ms McDaid said that she was not sure if Parliament had input into the IRP. In looking at the assumptions and the policy framework that guided the process, she asked if the role of Parliament was just like any member of the public. Her understanding was that Members of Parliament had the role to process and take into account the need to develop the economy in a certain way.

In relation to public participation on planning and procurement, the Chairperson asked Ms McDaid how participation should proceed given that procurement had certain standards.

Ms McDaid said that stakeholders on the board was a good idea, but if NUMSA had raised a point about having an electricity council, then perhaps the country could take it further and have an energy council who could be an advisory body to strengthen policy development.

Ms McDaid concluded that she would share the documents she had been referring to in her submission with the Committee.

The meeting was adjourned.