Independent System and Market Operator Bill [B9-2012]: Department response to submissions

Meeting report

Independent System and Market Operator Bill: Department of Energy (DOE) response to submissions
Mr Ompi Aphane, DOE Acting Deputy Director General, delivered a presentation covering international trends, countries reviewed, different market models, overview of the Norwegian electricity model, issues about the competitive market. He also covered the background to the ISMO Bill on where it started, the ISMO inter-Ministerial committee (IMC) approval, consultation on ISMO and most importantly, the analysis of comments received from the public.

Mr Aphane said that inputs received were very useful and would improve the quality of the Bill. The presentation focussed on the key issues. The legal team analysed the drafting proposals. Submissions were not advocating for the same position hence it was necessary to balance the conflicting interests. Whilst incorporating the inputs, the interests of the ordinary South African would be taken into account. The majority of the submissions were concerned about the end-state which was not clearly defined in the Bill. The presentation also gave an overview of different models around the world which were the basis for the ISMO.

A world map was displayed which showed the countries which had undergone some kind of reform in their electricity sector. Such countries included Canada, USA, Brazil, Australia, India, China, Japan, Russia, Kazakhstan, Ukraine, and many countries in Europe. The countries considered initialised changes since 1990. South Africa started its reforms in the year 2000.The Department had considered the experience of some countries and also conducted study tours to Norway, the United Kingdom, China, Turkey, and Thailand to study their models. Various Electricity Market Models were considered from Colombia, the Netherlands, United Kingdom, Australia, Argentina, USA and Brazil.

The Department looked in detail at the Norwegian model, extracting lessons from their Generation, Transmission and System Operation, Distribution, how it functioned as an electricity market operator, a regulator, and also how it handled the unregulated part of the sector. Mr Aphane highlighted the journey of the country leading up to the establishment of the ISMO Bill in 2003.

The comments received by the Department during the public consultation process focused on the need for independent transmission lines to minimise connection risks. This matter was debated at intergovernmental level and it was agreed that more work needed to be done before taking a decision. The concept of willing buyer-willing seller needed to be addressed. The need for a stakeholders’ representative on the ISMO board, of which DOE believed government should have the prerogative to appoint members of the board given the government exposure. The generation licence and allocation of MW in terms of the Integrated Resource Planning (IRP), was raised and the Department believed that the issue would need to be addressed under the Electricity Regulation Act. In terms of the bulk electricity supply and network tariffs, the Bill did not address the issue because the regulator was required to approve the tariffs. Any tariff issues would have to be addressed under the Electricity Regulation Act. The public consultations also revealed that the ISMO customers were not clearly defined in the Act and the matter would need to be addressed.

General Comments submitted during the Public Hearings and Department Responses
Planning
Mr Aphane said that a number of submissions indicated that planning for new generation capacity would need to be done by ISMO because government did not have capacity to develop the plan. However other entities preferred planning to remain with government saying that it was a policy consideration that would evolve with time. The Department’s response to the issue held that the current version of the Bill allowed the ISMO to model different scenarios for consideration by the Minister. A plan was made up of the different scenarios to be developed by ISMO and the Minister would only make policy inputs into the Plan which would have been developed by ISMO

Reporting
Some submissions asked why ISMO was reporting to the Department of Energy while Eskom reported to the Department of Public Enterprise (DPE) and given that all State Owned Enterprises (SOEs) were managed by DPE. The Department clarified that ISMO would need to be independent from Eskom and reporting to DPE may compromise such independence. ISMO would serve as adviser to the department on matters pertaining to the required new generation capacity, split in MW between Eskom and the Independent Power Producers (IPP).

End State
Quite a few submissions pointed out that the end state of the ISMO process was not clear. They indicated that the industry could not be restructured in a vacuum and that a vision was needed for the industry before commencing any restructuring. The Department responded that the Multi Market Model was proposed in 2003 and it was later reversed because there was no appetite to sell part of Eskom. The Energy White Paper was clear about the need to restructure the electricity sector and it envisaged competition in electricity generation, ISMO would be part of the restructuring process which would eventually result in competition in electricity generation

Phased in approach
A phased in approach was suggested to ensure minimum disruption to the country’s electricity and ensure security of supply. The department indicated that it supported the phased-in approach. The transfer of functions to ISMO will be addressed though regulations. It was agreed that procurement and planning would need to be transferred first to ISMO but not to an Eskom subsidiary. The two functions had little impact on security of supply. The government also agree with conducting due diligence studies before transferring the wholesale market and the system operation.

Procurement
Some submissions also proposed that the procurement for new generation capacity needed to remain with ISMO also due to the motivation that it was a complex procedure and that the government did not have the capacity to run it. The Department maintained that ISMO would conduct the procurement of new generation capacity. It was also proposed that the IRP needed to be flexible enough to allow for building of power outside the plan because any person with a cheaper option should be allowed to build outside of the IRP. Some commented that innovation needed to be encouraged and the Department said that the point needed to be addressed under the ERA amendment with the caution that building of new generation capacity needed to be controlled to avoid excess capacity. The proposed amendment under ERA required the Minister to issue a determination for such power.


Transparency
Transparency was called for by some entities in relation to the allocation of MW between Eskom and Independent Power Producers (IPPs). The Department responded that the allocation of MW was a policy issue and required Cabinet approval. The decision as to whether Eskom or IPP is to be outlined in the regulations. It was also raised that the role of the regulator in new generation capacity needed to be clarified as it was not clear in the procurement programme. It was suggested that the regulator needed to play an oversight role in the development of the IRP. The issue of licensing of an IPP under the IPP procurement programme was proposed, though the Department said that it was an Electricity Regulation Act (ERA) issue. The ERA Act was under amendment.

Transmission & Distribution
Independence of Transmission
Some entities proposed that the transmission lines ownership needed to be independent as Eskom may not grant the necessary access to the transmission line. It was also suggested that the building of the transmission lines needed to accommodate all future potential generators including IPPs. The Department acknowledged that it was a valid concern but remarked that the financial impact associated with the transfer of lines would need to be addressed accordingly. The matter was still under discussion at the intergovernmental level for recommendation.

Transmission Regulation
The regulation of the transmission network and who would be doing it was also a matter of contention. Entities said that Eskom was conflicted because it owned both the generation and the transmission network and that it might be tempted to give preference to its own generators in terms of access to the transmission network. The Department responded that the regulator would remain responsible for the regulation of the transmission network in terms of the Electricity Regulation Act (ERA), to be amended accordingly. In response to the point raised that ISMO needed to be a non profit entity to minimise the cost to the consumer, the Department said that the ISMO functions were performed by Eskom and was part of the tariff already.

Grid Monopoly
Concerns were raised about the grid monopoly, raising challenges relating to connection in both transmission and the distribution network as well as those relating to wheeling charges. The Department said that transmission and distribution would remain a monopoly and would need to be regulated properly but a transmitter must not necessarily be involved in generation. The National Energy Regulator Act was being amended to ensure effectiveness of the regulator in regulating the energy sector including wheeling.

Open Access
Open access to the transmission and the distribution network, was suggested to address the need for wheeling for own use. It was also raised that there was lack of clarity about willing buyer willing seller. The Department said that it was an Electricity Regulation Act issue and the Act was in the process of being amended.

Customers
One of the major concerns raised at the public hearings was that the Bill was silent about the ISMO customers, saying that the definition of customers may have an impact on the market structure and affect the revenue for electricity distribution. The Department indicated that wholesale access to electricity would be phased in over time and that the detailed phased in approach would form part of the regulations to be done in consultation with affected stakeholders.

Large Customers
It was requested that clarity was needed on the large customers who had long term contracts with Eskom due to lack of definition for ISMO customers, the fact that Eskom might be selling electricity to certain customers at low cost and complications relating to the transfer of the long term contracts to ISMO. The Department explained that it was important to conduct due diligence studies before defining ISMO customers and that to allow all large customers into the electricity wholesale, all distributors needed to be in a position to separate energy cost from network cost. It might be necessary to keep on adjusting the definition over time depending on the readiness of the sector to allow more customers access to the electricity wholesale. Therefore, it would be appropriate to address such ISMO customers through regulations

Cross Subsidies
A mechanism to manage cross-subsidies was proposed, motivated by the notion that large customers were subsidising certain customers within the value chain and that Eskom was presently managing the subsidies. The Department responded that cross subsidies were better managed by ISMO than a generator, and that all customers should be given similar treatment despite their location on the electricity network

Financial sustainability
Some entities queried if ISMO would require government support before signing long term contracts. The Department said that they had engaged the National Treasury on the matter and they were comfortable with providing support to ISMO. Financial due diligence would be conducted to minimise the impact on Eskom.

Asset Transfer
In terms of assets transfer, it was proposed that the ISMO Bill needed to guide the Minister in the event that the Eskom board and ISMO did not agree. Furthermore, the market value could be used as a guide to the Minister in making a ruling in this regard. The Department said that it would be dangerous to stipulate the evaluation method in the Bill, as it would be important for the state to consider all the different options for compensating Eskom for the transfer of assets

Human Resources
It was raised by some entities that the transfer of employees needed to be in accordance with the Labour Relations Act as well. The Department said that the Clause would be revised and that Clause 40 would refer to the Labour Relations Act.

Governance
ISMO Board
In terms of the ISMO Board, it was raised that the Memorandum of Incorporation (MOI) was over prescriptive. Some of the provisions needed to be in the MOI and not in the legislation. It was pointed out that Clause 26(1) constrained the delegation function by the board. Why appointment of staff was the responsibility of the CEO only? The Department acknowledged the concerns and said that the Clause would be revised accordingly.

Electricity Council
A proposal was put forward for the need for an Electricity Council to play an advisory role to the department, in order to involve stakeholders in the development of electricity policies and legislation. The Department indicated that they have noted the proposal.

Sequencing of Bills & other documents
Some submissions said that the amendment to the ERA and the National Energy Regulator Act (NERA) and the reference to the ISMO Bill was unconstitutional. ERA was under amendment. Some of the definitions in ISMO assume that ERA amendments would be adopted by Parliament. It was proposed that the ISMO Bill and the related amendment bills needed to be dealt with simultaneously. The Department said that the definitions would be reviewed and that ISMO definitions must not refer to proposed definitions under ERA.

NERSA Consultation Paper
It was also raised that the Bill did not refer to the consultation paper published by the regulator on wheeling charges, with submissions saying that there was a need for third party access rules and guidelines that would allow for wheeling arrangements. The Department explained that wheeling was a regulatory issue and it was not the function of ISMO. The regulator developed the consultation paper under the ERA

A number of definitions would also be looked at and revised.

Discussion
Mr K Moloto (ANC) referred to a submission from Meridian Economics where Mr Pickering argued that the role of ISMO was weak in Clause 4(1)(b). He asked whether the transmission operator and owner who was Eskom, would be doing the planning in terms of the Integrated Resource Plan (IRP) or was it something they had to do in the corporate plan when they received the directive.

Mr Aphane of the Department of Energy said that their reading of the Meridian Economics submission was premised on the Transmission System Operator (TSO) paradigm moving into the direction that assumed transmission would be part of ISMO and the planning around transmission expansion would therefore be done by the same entity. The Department’s approach was based on flexibility to separate transmission but doing it through a separate legislation and it was not contemplated through the ISMO.

Mr Moloto asked Treasury about Clause 40(3) saying that he agreed with the exemption of ISMO from tax and duties, but there were different spheres of government and if all spheres would be exempted from those taxes. He asked what the normal practice was for National Department and SOEs, if they would also be exempted from paying municipal taxes.

Ms Lena Mangondo, Director: Corporate Law, National Treasury, explained that the rationale for Clause 40(3) was when ISMO would be established it would have no assets and the clause would only apply in initial transfer and liabilities. As long as ISMO had no assets, there would no increase in the cost of transfer.

Mr Moloto asked the Department of Energy if they were they comfortable with the consultation paper released by NERSA on wheeling, asking if it would address some concerns raised through various submissions.

Mr Aphane said that a discussion paper on wheeling had been issued by NERSA which would work irrespective of structure of entities to be established. The Department was aware of it and believed it was appropriate. There might even be wheeling outside of the country.

Mr Moloto said that he agreed with the approach used in the transfer of assets but was uncomfortable with the major issue of regulation. He had heard the view from the Department that it could not specify methodology. The principle was whether there would be compensation.

Mr Aphane replied that the principles had been established for the transfer of assets but the law was not clear on how much would be paid . There would be regulations and there was a fundamental principle around compensation.

Mr S Radebe (ANC) remarked that in looking at the international models the Department had explored, and looking at the phased approach of South Africa, he asked what the mixed position should be that would give SA a better approach so that it would not copy other countries.

Mr Aphane replied that it was right that the country could not copy the international ones, but they had given examples of successful markets and how they differed. The Department also needed to understand why countries made different choices and what the differences were between their circumstances and South Africa’s.

Mr Radebe asked for clarity in Clause 2(2)(d) relating to practice and maintenance of the system, trying to check what the role of Eskom and ISMO would be in maintaining the system.

Mr Aphane explained that keeping the lights on would no longer be Eskom’s responsibility but ISMO’s. The provision around maintenance was to ensure system integrity.

Mr Radebe asked what would be done if the expertise for the board could not be found, if anybody would just be appointed?

The Department said that they had proposed a board of experts not stakeholders and they had outlined the type of expertise. The process in appointment and how it worked was fairly standard in public service.

Mr Radebe asked about the possibilities of checking other bills relating to ISMO to deal with issues arising simultaneously.

The Department said that it was important to create clarity and to ensure certainty especially in making the transition. It was not suggesting to share responsibilities but the point was to ensure that it was as clear as possible who would be doing what.

Mr L Greyling (ID) was curious that no other African countries were included as they had done very interesting things. He asked how many countries that were looked at, had generation and transmission together.

The Department said that they had looked at some African countries but pointed out that the differences between them and SA were much greater than the similarities. They had also not managed to attract the big investments like the ones SA was looking at.

Mr Greyling pointed out that there was a big debate in terms of not just having a separate function but that of ownership of assets. Eskom was saying that the transfer would affect its books but it was also said in some of the submissions that there was a way of doing it as an accounting exercise.

Mr Aphane said that Mr Greyling was correct that there were a number of instruments that could be used to transfer assets but the question was how to choose the instrument that would not adversely affect Eskom. A due diligence process would be needed.

Mr Greyling asked why wheeling could not be looked upon as a regulatory issue. He asked why should it be put in the ERA as an amendment.

He asked again about planning and where it should be, if it should be with the Government or with ISMO or if there should be a compromise. He said that the Minister and the Department had a prerogative to set the framework and would need a far more responsive mechanism.

Mr Greyling said that the IRP needed to be flexible as excess capacity could be dealt with in terms of a contract with IPPs.

The Department said that the Government still had a priority to make policy and to see it through in the power sector and at the same time creating ISMO to do that. ISMO could play a role in the development of the IRP. The Department would look at it again.

Mr E Lucas (IFP) was concerned about the Eskom transmission lines and asked if charging for transmission, would not affect the market, making ISMO unable to compete. He also asked how short supply could be supplemented.

The Department said that in going forward, one must get a sense of electricity demand in SA at aggregate level to avoid a situation where someone would build another power station parallel those built by Eskom such as Medupi and Kusile, which were based on demand.

Ms Mathibela queried Clause 47(5)(b) asking, if a person were to be transferred, what would happen to the money that Eskom owed. She asked if it was necessary to put the transfer of customers into the Bill.

Mr Aphane replied that there would need to be recognition in the law that there would be assets that would need to be transferred but it had not been defined to such an extent and how it would unfold.

Mr J Smalle (DA) asked about the types of IPPs that would be allowed onto the grid and the percentage of how the policy would be determined. He pointed to the need to understand when ISMO would be in a situation when there would not be enough reserve margin and others could just pop in. He suggested if ISMO should not be looking at percentages of what would be coal, and what would be green and to allow for movement within that for the Department to make the policy and allow limits.

The Department said that the percentages changed all the time and it would be clumsy to put it in the law. The Bill in discussion was about establishing an entity and that ISMO would trade buying from generators and selling to the market. ISMO would not be building technology. The Department emphasised that they would not want to put percentages into legislation.

The meeting was adjourned.