Independent System and Market Operator Bill [B9-2012]: deliberations on public comments

Energy

07 March 2013
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Committee considered the entire Bill with the Department and Working Group on the ISMO Bill and some amendments were suggested. The Chairperson termed the deliberations "fruitful".

Meeting report

The Committee commenced going through the ISMO Bill using the List of Comments compiled from the public submissions as a guide.


Definition
The Chairperson noted that there was no definition for ‘black start capabilities’ in the Bill.

Mr K Moloto (ANC) noted that it was a technological terminology understood by persons in the energy field.

Mr Mark Pickering, Chairperson: Working Group on ISMO Bill and partner at Meridian Economics, replied that it was an electrical engineering term used in the industry mainly to start up current and would be understood by the users of the Bill.

Mr Moloto asked for clarification of item 24 on the List of Comments document.

Mr Pickering replied that all definitions had been aligned.

Clause 2
Mr Moloto asked why the Department had agreed with ESKOM’s submissions on deleting certain parts of the Objects of the Act.

Mr Pickering replied that it was a question of correcting language and aligning the flow of the document.

Clause 3
The Chairperson referred to ‘SOC’ in Clause 3(1)(a), saying not all persons who studied the Bill were acquainted with abbreviations and it was always helpful to define them.


Mr Pickering remarked that the observation was valid and the State Law Adviser was in the best position to advice.


Ms Ntombi Mnyikiso, Senior State Law Adviser, remarked that the abbreviation was derived from the Companies Act.

Mr Maduna Ngobeni, Deputy Director Department of Energy, added that Clause 3 had referenced the Companies Act.


Mr J Selau (ANC) requested that the Department look at the issue and give a proper response at a later date.


Ms Mnyikiso later informed the Committee that Clause 11(3) of the Companies Act provided that the names of all state owned companies must end with the abbreviation ‘SOC’.

Clause 4
Mr Moloto referred to the input by Prof Eberhard under item 44 of the List of Comments and asked for further explanation on the role of ISMO.


Mr Ngobeni responded that the Integrated Resource Plan (IRP) was a policy decision and the government was responsible for decisions on technology suitable for the country with regard to renewability, coal and nuclear content and percentages. The Department consulted with stakeholders and presented the result of this consultation to Cabinet. Some of the decisions Cabinet had to take were technologically sensitive and it was not ideal to entrust this to State Owned Companies, i.e. ISMO in this instance. The Department thus held the view that the modelling should come from the State Owned Company, while government made the final decision.

Mr Moloto referred to Clause 4(1)(b) and asked if the Department still maintained the use of the term ‘transmitter’.


Mr Ngobeni replied that it was a question of usage - ‘licensee’ or ‘transmitter’ could be used. In this context, it was used in terms of the function being carried out. The transmitter was the transmission company.

Mr Moloto suggested that the term be replaced with ‘transmission operator’.

Mr Ngobeni replied that it would cause some measure of confusion.

Mr Moloto asked for the Department’s comments on the suggestions in item 45 and 46 of the List of Comments.


Mr Pickering replied that the responsibility of planning for IRP was the Department’s. Stakeholders were responsible for modelling, and the department for policy formation and publication.

Mr Moloto remarked that it would be helpful if the Department could draw distinctions between the long-term decisions of the government on procurement and procurement by ISMO.

Mr Ngobeni replied that the comments by Prof Eberhard related to long-term procurement. Going forward, it was proposed that ISMO be responsible for procurement and purchase. However, before the procurement process, a determination had to be made on which party was responsible for building - this determination was to be made by the Minister. The separation of these functions was laid out clearly in the New Generation

Capacity Regulations.

The Chairperson requested further explanation on item 46 of the List of Comments.

Mr Ngobeni replied that policy input should be derived from the government; therefore planning was split in two - modelling by ISMO and policy adjustment by the government. Certain issues that bordered on policy formation such as carbon emission must remain within the purview of the government.

The Chairperson referred to Clause 4(2) and asked how the planned expansion had been articulated in relation to systems operations.

Mr Ngobeni responded that there was a need to further address the expansion element in the sub-clause. Clause 4(1)(b) referred to the expansion plan - a rearrangement of the clause could be considered. Expansion plans referred to transmission.

The Chairperson asked for further explanation on items 47, 48, 49 and 50 of the List of Comments.

Mr Moloto remarked that all issues regarding transmission should be addressed by the previous resolution of the Committee.

Mr Moloto referred to Clause(4)(1)(b) and the suggestion under item 51 of the List of Comments and noted that there was no definition of the term ‘transmitter’.

Mr Ngobeni noted that there was no definition of the term in the Bill. This would be inserted.

Mr Moloto further asked who had the final say on this issue.

Mr Ngobeni replied that under the arrangement in the Bill it was ESKOM because they owned the assets; however, decisions must be taken in consultation with ISMO, since ISMO was responsible for the procurement. The regulator also had input and oversight over the process - where ESKOM acted contrary, the regulator would not pay.

The Chairperson asked for further explanation on the Department’s suggested action under item 51 of the List of Comments.

Mr Ngobeni replied that the suggested actions were small amendments to the Bill in its current state, mainly related to referencing relevant Clauses of the Bill to the Electricity Regulation Act (the Act); ISMO will be registered in accordance with the Act and will be required to comply with provisions of the Act.

Mr Ngobeni remarked that the suggestion under item 52 of the List of Comments was a non-issue as neither the Public Finance Management Act (PFMA) nor Companies Act were violated by ISMO provisions.

Mr Moloto replied that this could be addressed at a later stage in the deliberations.

Mr Moloto referred to the suggestion in item 54 of the List of Comments and stated that it was a commonly used phrase and hence unnecessary to define.

Mr Ngobeni remarked with reference to Clause 4(2)(p) and the suggestion in item 56 of the List of Comments, that it was important to differentiate between issues related to ISMO as an entity and issues related to the regulator. The Act regulated all players in the industry, including ISMO. This was same for the suggestion on item 58 with regard to discrimination - issues on discrimination cut across the whole value chain and was regulated by the regulator.

Mr Ngobeni remarked with reference to item 59 on the List of Comments that the trading regulation licensed generators outside of South Africa.

Mr Ngobeni stated with regard to the suggestion under item 61 on the List of Comments that it had become necessary to address the issue of the system operator in the Bill. ISMO must be an entity and cast as such and not interchangeably referred to as ‘system operator’. This did not change the functions of ISMO; it was merely a question of reference terminology.

Mr Ngobeni in reference to the suggestion in item 62 of the List of Comments remarked that a process occurred before the Purchase Agreement was concluded; this was a regulatory matter and the new Generation Regulatory Agreement provided that where power was purchased from a foreign country, a Memorandum of Understanding must be executed at both government and departmental levels. Deciding which countries to purchase power from was a Cabinet decision. Further, different arguments existed with regard to the desirable solution on interruption of power in times of shortage - the solution lay in redrafting the Bill to provide for flexibility and developing regulations as the situation evolved. This should actually be a regulatory issue because rationing and load shedding had cost implications for the state and should only be used as a last resort.

Mr Ngobeni remarked with relation to the suggestion on ISMO tariffs being subject to the National Energy Regulator of South Africa’s (NERSA) approval (see item 66 of List of Comments) that the willing buyer/seller tariffs will not be approved, but all Power Purchase Agreements (PPAs) will be approved. However, NERSA had to be kept in view of all transactions.

Mr Moloto asked which entity was responsible for applying for tariffs - ISMO or the generator?

Mr Ngobeni responded that ISMO applied for wholesale tariffs, distributors applied for distribution tariffs, and generators for generation tariffs. For Independent Power Producers (IPPs), tariffs were applied for at procurement phase and the regulator considered this and set the final tariffs. The case was slightly different with ESKOM because the regulator considered as a whole the business plan and approved tariffs.

The Chairperson asked if in other words it was a regulatory issue.

Mr Ngobeni responded in the affirmative.

Mr Ngobeni referred to the suggestion in item 70 of the List of Comments and remarked that government would continue to have oversight on ISMO and there was always room for public consultation.

Mr Ngobeni in reference to the suggestion in item 71 on the List of Comments remarked that ISMO was the market operator, system operator and procurer and this will be defined and redrafted in the Bill.

Mr Ngobeni in response to the suggestion in item 72 on the List of Comments stated that where it was an IPP, NERSA always had to approve the tariffs.

Mr Ngobeni in response to the suggestion in item 73 on the List of Comments remarked that beyond adherence to the Grid Code, there were certain issues which were covered by International Best Practices and were not contained in the Grid Code, hence the reference to International Best Practices.
The Chairperson agreed with the position of the Department.

Clause 5
Mr Ngobeni in response to the suggestion in item 78 on the List of Comments remarked that there was no need to incorporate the original text as the Memorandum of Incorporation of ISMO would be drafted in accordance with the Companies Act.

Clause 6
Mr Ngobeni in reference to the suggestion in item 80 on the List of Comments remarked that the Clause with relation to subsidiaries in the Bill would be deleted.
Clause 11
Mr Moloto referred the Committee to the provisions of Clause 11 and remarked that it was impractical to provide that the Minister designated an acting Chairperson where either the Chairperson or Deputy Chairperson was unavailable. It was better to provide that where a quorum was formed, members of the Board selected an acting chairperson for the purpose of the duration of the meeting.

Mr Ngobeni agreed with the suggestion.

Ms Mnyikiso remarked that it appeared the Bill contemplated broader functions than meetings; the suggestion by Mr Moloto was well received to the extent that it applied to meetings of the Board only.

Mr Moloto replied that in all State Owned Companies, the Chairpersons functions revolved around conveying meetings and appending signatures to the minutes of meetings.

The Chairperson asked whether there was an expectation by the Bill that the Chairperson performed the functions beyond those contemplated by Mr Moloto.

Mr Ngobeni requested that the Department be given time to re-examine and redraft the Clause.

Clause 12
Mr Ngobeni referred to the suggestion in item 84 of the List of Comments and replied that in principle, it was implied that it was the responsibility of the Board to have overview on staff matters. The Board guided the direction at a strategic level and the CEO was responsible for running the entity.
The Chairperson agreed with the Department’s position and added that Clause 12(d) gave the Board adequate parameters to guide the running of the entity. The clause was adequately balanced as it was.

Clause 13
Mr Moloto referred the Committee to the suggestion in item 86 of the List of Comments and said that it could also be interpreted to mean non-executive directors should not hold too many positions that deterred them from dedicating sufficient time to their duties at ISMO.

Mr Moloto suggested that the provision of Clause 13(3)(a) with regard to broad representation of the geographic areas of the Republic was too restrictive and might encumber the normal functioning of the Board. It was best to leave out this requirement.

Mr Ngobeni responded that some inputs in the Bill such as this were the result of compromise derived from the consultation process.

Mr Moloto replied that while it was understandable that certain provisions in the Bill were the result of compromise, Parliament was not obliged to accept all suggestions.

Mr Ngobeni referred to Clause 13(1) and stated that ‘non-executive’ be deleted from the phrase ‘… as non-executive members…’

Mr Moloto said that deleting ‘non-executive’ would give rise to confusion.

Ms Mnyikiso replied that it might be better to specify that the process applied to non-executive members.

Mr Moloto stated that ‘The Minister and the’ be deleted from the beginning of Clause 13(4).

Clause 15
The Chairperson questioned why the expression ‘may’ instead of ‘shall’ was used in Clause 15(1) of the Bill. Which ‘court’ was referred to under Clause 15(1)(c) of the Bill?

Ms Mnyikiso responded that the use of ‘may’ was to give some measure of discretion to the Minister. Clause 15(1) (c) would be redrafted to read ‘court of law’.

Clause 16
Mr Ngobeni in response to the suggestion in item 90 on the List of Comments remarked that it was not necessary to delete the requirements on fiduciary duties as this was not contrary to the Companies Act.

Ms Mnyikiso added that the inclusion was just for the purpose of emphasis and to avoiding excessive cross-referencing to other legislation in the Bill.

Clause 17
Mr Moloto remarked that the quorum requirements under Clause 17 might hamper the functions of the Board. Why was the quorum requirement not a simple majority?

Mr Ngobeni responded that the quorum requirements could be reduced to a simple majority.

Mr Moloto suggested that the common practice in private companies was a simple majority. This trend should be adopted.

Ms Mnyikiso remarked that there was a general policy direction from Parliament that quorum requirements in State Owned Companies were to be stricter.

The Chairperson asked what the trend was in Parliament with regard to quorum requirements for State Owned Companies.

Ms Mnyikiso responded that it used to be a 50 plus one requirement. But of recent, Parliamentarians had required a stricter 70% quorum requirement.

Mr Moloto suggested that the Department researched further on what was applicable to other State Owned Companies.

The Chairperson agreeing with Mr Moloto’s suggestion requested that the Department furnished the Committee with details on the trend in other State Owned Companies. Was this the only remedial action to ensure quality contribution from Board members?

Mr Moloto suggested that an alternative remedial action was a yearly board evaluation by shareholders, whereby board members with poor meeting attendance can be voted out.

Ms Mnyikiso advised that with regard to quorum the Committee considered the special circumstances of ISMO and the energy sector to reach a decision.

The Chairperson opined that beyond number of board members in attendance, there should be other creative remedial strategies.

Clause 18
Mr Moloto commented that Clause 18 raised concerns with regard to speedy response of the Minister on nominations to Board Committees. Where there were delays from the Minister, it hampered the smooth operation of the board.

Mr Ngobeni replied that the Clause could be adjusted to give the Minister a time frame within which to respond with objections, if any, otherwise it would be assumed that the nominations were approved.

Ms Mnyikiso questioned what the purpose of involving the Minister in nominations to Board Committees was.

The Chairperson pointed out that the appointment of the board itself was an endorsement from the Minister on the capabilities of members of the board; it should not be necessary for the Minister to have to endorse the decisions of the board on nominations to Board Committees again. Were the Committees made up of board members only?

Ms Mnyikiso responded that Clause 18(2) implied only board members were on the Board Committees.

Mr Moloto disagreed and stated that Clause 18(3) provided that majority of members on the bard committees should be board members, suggesting that the committees could be made up of non-board members. Further, Clause 18(4) particularly provided for non-board members who had the requisite expertise to be appointed on board committees.

Mr Ngobeni conceded that the concurrence of the Minister be expunged from the Clause.

Mr Ngobeni in reference to the suggestion in item 93 on the List of Comments remarked that there was not much for ISMO to consult on.

Mr Moloto agreed with the Department’s position and said that if any party felt disgruntled, they could resort to the courts.

The Chairperson commented that from the objects of ISMO outlined in the Bill, if its functioning was to be effective, it must engage stakeholders.

Mr Ngobeni replied that to include the requirement for consultation in the Bill, it was necessary to consider what issues ISMO should consult upon. If consultation was opened, policy decisions which ISMO was meant to implement would be influenced and this may hamper the proper functioning of ISMO. ISMO does not regulate itself - it followed the rules made by the regulator of the sector. Stakeholders should therefore consult with regulators and not ISMO.

Mr Ngobeni referred to the suggestion in item 94 on the List of Comments and remarked that ISMO remained accountable for any of its delegated duties.

Mr Moloto added that in law, delegation did not absorb from accountability, hence, the position of the department was in order.

Clause 21
Mr Moloto made reference to Clause 21(2)(b) on the tenure of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) of ISMO and questioned whether this was the practice within the public service. Why were they given tenures akin to public officers? Particularly for CFOs, it created a lack of continuity.

Ms Mnyikiso replied in the affirmative; the normal practice was tenures of eight years maximum for CEOs and CFOs.

Mr Ngobeni added that with regard to CEOs, a maximum tenure of eight years was the common practice. The underlying assumption for this practice was that at the beginning of the tenure for each Board, it should be in a position to appoint a CEO it believed could turn around the organisation in line with the Board’s vision.

Mr Moloto said that this explained why most public entities in the country were in dire straits - while the change of CEO every eight years was understandable, the change of CFOs was unnecessary and encouraged a lack of continuity in transformation agendas. Mr Moloto requested that the Department investigated the practice more with regard to State Owned Companies.

Mr Moloto requested that the Department investigated the requirement that the Minister consulted with the Minister of Finance to consult on the remuneration package of CEOs. If this was not the regular practice why introduce it in the Bill?

Clause 26
Mr Ngobeni in reference to the suggestion in item 96 of the List of Comments responded that with regard to employee matters, it was implied that labour laws applied, hence unnecessary to expressly state this.

Clause 32
Mr Ngobeni in reference to the suggestion in item 102 of the List of Comments remarked that customers though supplied by ISMO, were physically connected to ESKOM. This was a matter for discussion in future legislation.

Clause 33
Mr Moloto referred to Clause 33(b)(i) and (ii) and said that where ISMO defaulted on debts, the government must make good on the debt. Clause 30 provided that ISMO could not be put under liquidation. Why should lenders have the right to determine electricity tariffs of consumers through the courts in a bid to settle debts owed them by ISMO? The arrangement was absurd.

Mr Ngobeni replied that the concerns were noted.
The Chairperson questioned what the intention of Clause 33 was.

Mr Ngobeni remarked that the Clause was akin to a ‘letter of comfort’ and an attempt to guarantee that ISMO’s borrowers were ensured that their monies would be paid.

Clause 35
Mr Ngobeni explained that with regard to the provision on inspection in Clause 35 of the Bill, there were concerns that it was a duplication of roles with the regulator. The Department’s position was that given the significance of ISMO, it was important it had assurances that it could do this, hence the provision.

Clause 38
Mr Moloto expressed concern with regard to the provisions of Clause 38(1)(c); where the Board was dissolved and an administrator appointed, there was a possibility that an employee could be penalised for refusing to comply with the unreasonable directives of an administrator.

Ms Mnyikiso added that the concerns expressed by Mr Moloto were valid - it was necessary to qualify the powers given to the administrator.

Clause 39
Mr Moloto referred to the provision on developing regulations under Clause 39 and asked what the usual practice was for developing legislation. Was the responsible Minister in each sector obliged to always consult? If not, why did the Bill make provisions for mandatory consultation?

Ms Mnyikiso responded that it depended on policy and the technicality in each field. Some were silent on consultation requirements, others made it mandatory.

Mr Moloto said that there was no harm in consultation as long as it was not a lengthy process.


Clause 40
Mr Moloto suggested that details with regard to the transfer of assets should not be included in the Bill because the Shareholders actions could not be predicted; the burden of this should be left to discussions between the Department, National Treasury and the Department of Public Enterprises.


The Chairperson asked where the Department intended to capture details on the transfer.

Mr Ngobeni replied that perhaps it could be captured in the Regulations. The department intended to provide different options for Cabinet to consider the impact on ESKOM and the national balance sheet and thereby effect in the regulations.

Mr Ngobeni referred to the suggestion in item 124 of the List of Comments and remarked that in reality, ISMO was not taking over any subsidiaries from ESKOM because no subsidiaries existed for a takeover.

Clause 41
Mr Moloto remarked that the concern that there were no timelines for transition of ISMO and hence it would be a long drawn out process was misplaced; the provision for the Minister to spearhead the process addressed this concern.

Mr Ngobeni in response to the suggestions in item 133 of the List of Comments remarked that not all details of a contract should be made available in the public space. Certain information was company proprietary and should be left as that.

Chapter 5
Mr Ngobeni in reference to the concerns highlighted in item 135 of the List of Comments, remarked that it was not necessary to link ISMO to an ESKOM subsidiary.

The Chairperson asked if it had been clarified that ring-fencing implied setting up of subsidiaries.

Mr Ngobeni replied that the comment had highlighted that it was important ISMO ring fenced and then graduated to a subsidiary. The Department while not opposed to ring fencing was of the view that ESKOM may ring fence with the purpose of transferring them to ISMO.

The Chairperson thanked all in attendance for fruitful deliberations.

The meeting was adjourned.

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