Independent System and Market Operator [B9-2012]: deliberations on proposed amendments

Energy

18 March 2013
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Meeting Summary

The Committee was provided with the latest Portfolio Committee Amendments to the ISMO Bill (the A-list), plus the ISMO Bill with the amendments incorporated into it. The Committee went through the drafting changes it had proposed in the previous meeting:

▪ In Clause 1 (Definitions) the following definitions were outlined and discussed; ‘dispatch’, ‘market operation’, ‘integrated power system’, ‘system operator’ and ‘transmitter’.
▪ Clause 4 which dealt with the functions of ISMO, minor drafting changes were made. There was discussion around ‘generation licensees’ and whether they should be included or excluded from the Bill. DoE explained that that the thinking was that some of the licensees would not be generation but would be from a trader, therefore ‘generation’ on its own would be excluding traders. A new  4(4) was inserted as a catch-all clause.
▪ Clause 6 (Subsidiaries and accountability) was omitted.
▪ In Clause 11 (Application of Companies Act), minor changes had been made: ‘the Minister’ was substituted with ’the board’ in clause 11(1). The supporting argument was that should the chairperson and acting chairperson not be available, the board needed to appoint the acting executive.
▪ In Clause 13 (Appointment of non-executive members of Board) minor changes were made. Agreement was reached that the board could not be represented geographically; clause 13(3) was then omitted.
▪ In Clause 15 (Disqualification from membership of Board and disclosure), minor changes were made.
▪ In Clause 17 which dealt with procedures at meetings, it was agreed that the ‘seventy per cent’ quorum be changed to a ’fifty per cent plus one’.
▪ There was a lengthy discussion under Clause 18 (Committees of Board) mostly about the audit committee and whether it would be appointed by the shareholder. DoE argued that the King lll Report made mention of the audit committee being appointed by shareholders, who reported to the board. The legal team requested that the matter be flagged and they would get back to the Committee with a proper response.
▪ Minor changes were made to Clause 19 (Delegation of functions by Board), and the ‘seventy-five per cent’ quorum needed for delegation was changed to a ‘two-thirds’ majority.
▪ Two new subclauses were inserted in Clause 20 (Appointment of chief executive officer and chief financial.
▪ In Clause 21 (Conditions of appointment of chief executive officer and chief financial officer) minor changes were made and the phrase the phrase ‘with the concurrence of the Minister, the Minister acting after consultation with the Minister of Finance’ was omitted.
▪ There was a lengthy discussion of Clause 22 (Termination of employment of chief executive officer and chief financial officer). Agreement was reached that the chief executive officer’s term was fixed while the term of the chief financial officer was permanent as long as the chief financial officer stood as a board member. It was noted that an acting CFO and CEO were appointed for a period of six months only. What would be the scenario if a permanent appointment was not made within six months? DoE responded that the “six months” was omitted in the A-list, however there had been agreement that the Minister be allowed to extend the six month period should the need arise. Members urged DoE to explicitly outline this in the Bill.
▪ In Clause 24 (Delegation by chief executive officer or chief financial officer) minor changes were made.
▪ In Clause 35 on powers of entry and inspection, minor changes were made.
▪ Under Clause 37 (Intervention by Minister), there was a lengthy discussion on whether the ‘reasonable period’ in clause 37(2) should be explicitly outlined or left open for the discretion of the Minister. Agreement was reached that a specific timeframe not be allocated and it be left to the Minister to decide on, based on the specific directives at the time. The Minister was however expected to follow a reasonable timeframe. The Parliamentary Law Advisor pointed to ‘loss of confidence on good cause shown’ as a reason for dissolution of the board and asked why DoE had omitted it from the clause. DoE agreed to include this factor.
▪ In Clause 38 (Offences and penalties), a new 38(1) was substituted. However concern was raised that the new wording did not include a provision to enable the administrator to act against officials withholding valuable information. DoE agreed to redraft it so the administrator could take up the matter in a court of law.
▪ In Clause 39 (Regulation and policy) there was discussion on the phrase ‘the splitting of contracts between energy and wheeling’ in 39(4)(b). DoE explained why ‘wheeling’ and ‘energy’ were split and argued that wheeling was the manner in which energy was transported; the clause therefore proposed that the cost of wheeling be split from the cost of power. The transporter would therefore charge for wheeling and not for the power. Currently contracts did not differentiate between wheeling and energy costs. The wheeling costs would remain with Eskom and the energy costs would be with ISMO for customers. A customer would receive a ‘wheeling’ bill and ISMO would issue the ‘energy’ cost. The DoE was asked to redraft the clause as it was not clear.
▪ Under Clause 40 (Transfer of assets, rights, liabilities and obligation) minor changes were made and there was discussion on the reference the clause made to the Labour Relations Act. The Parliamentary Law suggested specific reference be made to section 197 of the Act. The suggestion was adopted.
▪ In Clause 41 (Transfer of functions and deemed validity of licences) minor changes were made.

There was discussion on whether the Minister of Energy had to consult with the Minister of Finance about asset disposal. Agreement was reached that the Minister of Energy was mandated by the Public Finance Management Act to consult with the Minister of Finance who had the final approval. DoE was asked to check with the Institute of Directors to establish the practice for appointment of the external auditor and the audit committee.
paragraph in clause 4(3)(d).

Meeting report

The Chairperson drew attention to the two new documents. The one was the latest list of proposed amendments to the Bill (the A-list), while the other was the ISMO Bill with these amendments factored in. At the last meeting, after the Committee went through the Bill clause by clause, the Department of Energy (DoE) and the State Law Advisors were asked to compile an A-list with all changes and recommendations. Outstanding matters which had been flagged would attended to during the course of the meeting.

Mr Maduna Ngobeni, DoE Deputy Director: Energy Regulation, suggested that the Bill be looked according to the changes made to it, while the A-list document could be used as a reference document as the need arose. The Bill with the changes incorporated into it was for easy reference. The Bill was not the final document, but was just a skeleton document to indicate the changes made.

Clause 1: Definitions
Mr Ngobeni noted the current definition of ‘ancillary services’ was substituted with a new definition. Those parts in brackets with a bold format were deleted and those parts underlined were the new insertions. The second definition was ‘dispatch’ which had a minor change.

The Chairperson asked if the definition of ‘dispatch’ was the same as the one in the Electricity Regulation Act (ERA).

Mr Ngobeni responded that in the ERA, ‘dispatch’ was not defined, which was why DoE had to insert it into the ISMO Bill. ‘Dispatch’ was therefore defined in such a way that it was aligned with the Grid Code. The Grid Code was a document which was used to guide the electricity sector.

The next new definition inserted was ‘expansion plan’. The current definition of ‘integrated power system’ was substituted with a new one. A new definition of ‘market operation’ was and ‘system operator’ was also redefined. However the definition of ‘system operator’ still needed to be cleaned up. A new definition of ‘transmitter’ was inserted. Some minor changes were noted on page 10.

Clause 4: Functions of ISMO
Mr Ngobeni took the Committee through the changes.

In response to the Chairperson asking why the changes on page 5, line 56 came before that on page 5, line 46, Mr Ngobeni said that it was an error with the order of the lines and it would be changed appropriately.
 
The Chairperson pointed out that it was agreed that ‘generation licensees’ would be omitted from the Bill, however it was included in the new paragraph in clause 4(3)(d).

Mr Ngobeni responded that ‘generation’ would be omitted from the Bill. However the thinking was that some of the licensees would not be generation but would be from a trader, therefore ‘generation’ on its own would be excluding traders. A new subclause was thus inserted as clause 4(4) which was a catch-all clause.

Mr S Radebe (ANC) suggested that ‘megaWatt’ should be changed to ‘MegaWatt’ instead.

Clause 6: Subsidiaries and accountability
Mr Ngobeni stated that the entire clause was rejected.

Clause 11: Applications of Companies Act
Mr Ngobeni stated that in 11(1) ‘the Minister’ was substituted with ‘the board’. The argument supporting this was that the board needed to appoint an acting chairperson and deputy chairperson if both were not available.

Clause 13: Appointments of non-executive members of Board
Mr Ngobeni stated that clause 13(1) was reworked to include ‘interested parties’. In clause 13(3)(a) the phrase  ‘and geographic areas of the Republic’ was omitted. The explanation was that the board could not be geographically represented. In 13(4) the phrase ‘The Minister, and’ was removed. Clause 13(8)(a) was substituted with a new phrase which included ‘six month’.

Clause 15: Disqualification from membership of Board and disclosure
Mr Ngobeni noted in 15(1) that ‘may’ was substituted with ‘must’. Other minor changes were also made.

Clause 17: Procedures at meetings
On the issue of the quorum, in 17(2) ‘seventy percent’ was substituted with ‘fifty per cent plus one’.

Clause 18: Committees of Board
The phrase ‘with the concurrence of the Minister’ was omitted. A new insertion to the clause was made, ‘Risk Committee’ was added to clause 18(d). Clause 18(4) was omitted.

Mr S Mayathula (ANC) asked if in the previous meeting no reference was made to the ‘Audit Committee’ being appointed by the shareholders.

Mr Ngobeni responded that the King lll Report made mention of the audit committee being appointed by the shareholders. The point was flagged for Members to think about.

Mr Mayathula stated that the King lll Report in its context would not apply to the matter at hand, unless the Minister was considered as the shareholder in this regard.

The Chairperson asked that the legal advisors comment on whether the appointment of the audit committee in the King lll Report supposes that the Minister, as the shareholder, appoint the audit committee.

Mr K Moloto (ANC) stated that there would be no harm in leaving the clause as it was and that it be an agreed practice between the Minister and the board. The Minister would have to indicate approval of the board committees appointed. He assumed the provisions in the Companies Act would prevail in this case.

Adv Ntuthuzelo Vanara, Parliamentary Legal Advisor, asked that the legal team be given some time to look into the issue further and get back to the Committee.

The Chairperson agreed to Adv Vanara’s request.

Mr L Greyling (ID) asked if the audit committee had to be a separate committee from the board or if it comprised of the board.

Clause 19: Delegation of functions by Board
Mr Ngobeni noted the ‘seventy-five per cent’ majority had been substituted with ‘two thirds’ majority for a board resolution.

Mr Mayathula said the King lll Report stated that the audit committee would report back to both the shareholder and the board and asked that the legal team keep that in mind.

Clause 20: Appointment of chief executive officer and chief financial officer
Mr Ngobeni stated 20(1) was substituted with a new clause. In 20(2) a new clause was inserted, which included the phrase ‘and consider the applications received’.

Clause 21: Conditions of appointment of chief executive officer and chief financial officer
In clause 21(2) ‘and chief financial officer’ was omitted. In 21(6) the phrase ‘with the concurrence of the Minister, the Minister acting after consultation with the Minister of Finance’ was omitted.

Clause 22: Termination of employment of chief executive officer and chief financial officer
A new phrase was added: ‘in the case of a chief executive officer’. This was to ensure that the chief executive officer was subject to this and not the chief financial officer.

The Chairperson asked if Members were happy that the termination of the chief executive officer’s employment was with the concurrence of the Minister.

Ms Orateng Motsoai, Legal Counsel, Department of Public Enterprises (DPE), asked if in clause 21(6), the words ‘in line with the remuneration guidelines’ be added. Remuneration guidelines needed to be followed when board members were remunerated.

Mr Moloto agreed with this suggestion.

Ms Motsoai asked to liaise with the state law advisors to get the proper wording inserted into the clause.

Mr Moloto stated that the matter was not resolved because DPE was not present in the meeting where the matter of the remuneration of the chief executive officer and chief financial officer was discussed. He asked about the terms of the chief financial officer and chief executive officer and if they had fixed terms.

Ms Motsoai responded that the term of the chief executive officers was limited; however the term of the chief financial officer did not have a fixed term and was permanent members of the board.

Mr Mayathula asked if the chief financial officer was a lifelong member of the board.

The Chairperson responded that the chief financial officer was a member of the board for as long as he or she was employed.

Mr Mayathula drew attention to the fact that the acting chief financial officer and acting chief executive officer were appointed for a period of six months. He asked what would be the scenario if no permanent appointment was made within that six month period.

The Chairperson said Mr Mayathula’s query was one of the issues flagged in the previous meeting. DoE was asked to resolve this matter in a speedy manner.

Mr Moloto agreed that the issue was a critical matter which had to be resolved. What of the scenario where either the chief financial officer or chief executive officer were incapacitated and the search for a permanent replacement took longer than the six month provision? The board would have to extend the appointment of the acting employee. This would therefore be an act against the law.

Mr Ngobeni replied that, although not included in the A-list, there had been agreement that the Minister be allowed to extend the six-month period should the need arise.

Mr Moloto argued that that exception should be included in the Bill in writing.

Mr Ngobeni replied that the DoE would add a clause to allow the Minister to extend the six-month period when the board had requested it.

Clause 24: Delegation by chief executive officer or chief financial officer
Under clause 24(3) the word ‘and’ was substituted with ‘or’.

Clause 35: Powers of entry and inspection
Under clause 35(3)(b) the word ‘an’ was replaced with ‘a’.

Clause 37: Intervention by Minister
Mr Ngobeni stated that the entire clause was rejected and substituted with a new one. In the previous meeting there had been a lengthy debate about the matter. Hence DoE saw that it was proper to rewrite the entire clause to reflect the discussion that the Committee had. The main point of the debate was why the board and the administrator operated at the same time? There was a need to state that upon the appointment of the administrator, the board would already be dissolved. The board and the administrator could not operate at the same time.

Mr Radebe said that the ‘reasonable period’ in clause 37(2)(c) should be explicitly stated and not be left open ended. A specific timeframe must be included.

Mr Greyling said that the ‘reasonable period’ would depend on what the directive was speaking to. He agreed with Mr Radebe that the time period be specified. However he suggested that the specific time period be left up to the Minister to decide on.

Ms Motsoai said that ‘reasonable period’ was fine and that if a time period was prescribed now, it might be difficult to work with.

Ms N Mathibela (ANC) agreed with Mr Radebe that ‘reasonable period’ be explicitly outlined.

Mr Moloto said that if ISMO did not fulfil a directive from the Minister in time, the board could communicate with the Minister to adjust the timeframe.

Adv Vanara said that for 37(2)(c) the legislature would not be in a position to apply a fixed period in place of ‘reasonable period’. The reasons for this were that the legislature currently did not know the nature of the issue which would prompt the Minister to issue directives. The specific circumstances were not clear. Therefore the legislature could not apply a fixed term. Each circumstance which prompted intervention by the Minister was unique and would therefore require unique timeframes. Discretion with regard to the time frame should be left for the Minister to decide. The Minister was however expected to give reasonable timeframes.

The Chairperson agreed with Adv Vanara that ‘reasonable period’ be left as is in the A-list.

Ms Mathibela said that 37(3)(1) made more sense.

Mr Greyling asked if ‘reasonable period’ allowed for the board to take the Minister to court if unfair directives and timeframes were given by the Minister.

Adv Vanara replied that ‘reasonable period’ allowed the board to take the Minister to court should the need arise.

Ms Ntombi Mnyikiso, State Law Advisor, added that the issue of what was ‘reasonable’ was not one the committee members needed to worry about.

Ms Motsoai referred to the Companies Act and said that the directors were mandated to give a ‘reasonable period’ before any resolution was taken. She suggested that where there was talk about ‘replacing’ members, the language be redrafted to be in line with the Companies Act. Terminology such as ‘rotate’ or ‘remove’ should be used instead.

Mr Greyling suggested that ‘may’ in clause 37(4) (a) be replaced with ‘must’.

Adv Vanara highlighted that clause 37(3)(a) and (b) offered too many opportunities for the board members to be heard by the Minister.

Mr Ngobeni replied that clause 37(3)(a) was referring to opportunities to be heard verbally while clause 37(3)(b) was referring to opportunities for written submissions.

Adv Mnyikiso agreed with Adv Vanara that ‘to be heard’ covered all submissions, whether they were written or verbal and suggested that paragraph (b) be deleted.

The Chairperson said that he was under the impression that the reference to ‘submissions’ in clause 37(3)(b) was to people outside the board who submitted concerns to the Minister.

Mr Moloto argued that 37(3)(a) covered submissions made by those outside the board. The Minister still needed to give ISMO a reasonable opportunity to be heard on that submission.

Adv Vanara supported the suggestion that 37(3)(b) be omitted. He made reference to 37(1)(c) and reminded the Committee that it had taken a conscious decision to delete that clause.

Mr Moloto agreed with Adv Vanara.

The Chairperson asked if DoE would reinstate clause 37(1)(c).

Adv Vanara referred to the original Bill and argued that ‘loss of confidence on good cause shown’ was a ground to dissolve the board. The proposed amendments in the A-list did not take into account this factor.

The Chairperson asked if DoE had articulated this factor somewhere in the current Bill.

Mr Moloto referred to clause 37(1)(b) and asked if ‘loss of confidence on good cause shown’ was not covered by the clause above.

Adv Vanara said that if the board did not perform it could be given a directive by the Minister or it could be dissolved. However in both instances, the board still had to be given an opportunity to appear before the Minister. The decision would therefore be a policy decision which the Committee would have to make.

Mr Mayathula suggested that the directive be adopted.

The Chairperson said that a two-stage process had been agreed upon. The Minister would identify certain challenges and issue a directive, then if no progress was made and the ISMO board was still failing, the Minister would dissolve the board. He reiterated Adv Vanara’s concern that the ‘loss of confidence on good cause shown’ factor which had appeared in the original Bill was now omitted. Loss of confidence was another ground for the dissolution of the board.

Mr Moloto supported Adv Vanara’s argument that ‘loss of confidence on good cause shown’ should be one of the grounds for the dismissal of the board.

Ms Mnyikiso responded that the clause would be reintroduced.

The Chairperson referred to 37(3) and asked if that did not cover all grounds for the dissolution of the board.

Adv Vanara replied that there would be instances where the directive issued by the Minister may not be desirable; therefore clause 37(3) on its own would not be desirable.

Ms Mnyikiso added that the Minister should be empowered to dissolve the board on good cause shown.

The Chairperson asked if the Minister may dissolve the board without first issuing a directive to the board. He suggested that the legal advisors get back to the Committee on this.

Mr Ngobeni said that clause 37 needed to be restructured to include the sections omitted from the original Bill. Clauses 37(1)(c) and 37(3)(b) had been omitted. In 37(8) ‘subclause 5’ was replaced with ‘subclause 7’.

Clause 38: Offence and penalties
Mr Ngobeni said that 38(1)(b) had been substituted with new wording and 38(1)(c) was omitted.

Mr Mayathula did not think it was feasible to remove the phrase ‘or when required by the administrator as contemplated in section 37(4)’.

Adv Vanara agreed with Mr Mayathula that the provision would enable the administrator to conduct successful investigations when the administrator was obstructed by officials withholding valuable information. Thus in the event of officials withholding information, the administrator could take the matter to a court of law.

Mr Ngobeni responded that it was an omission from the DoE’s side and would be reinstated.

Ms Mnyikiso added that with the inclusion of that phrase, the entire clause would had to be redrafted as it would be awarding too much power to the administrator.

The Chairperson noted the concern and added that the DoE draft it with the requisite restructuring.

Clause 39: Regulations and policy
Mr Ngobeni said that the phrase ‘and its subsidiaries’ was omitted from 39(2) and 39(3) was substituted with new wording. The new clause was a result of the agreement reached at the last meeting that a clause for consultation with members of the public and the tabling of regulations to Parliament be included.

The Chairperson raised a point of clarity on 39(4)(b) on the phrase ‘the splitting of contracts between energy and wheeling’. He asked if ‘wheeling’ was not referring to electricity and what the DoE meant by ‘energy’.

Mr Ngobeni responded that the DoE had split ‘wheeling’ and ‘energy’. Wheeling was the manner in which energy was transported; the clause therefore proposed that the cost of wheeling be split from the cost of power. The transporter would therefore charge for wheeling and not for power. Currently contracts did not differentiate between the costs of wheeling and that of energy. The wheeling costs would therefore remain with Eskom and the energy costs would be with ISMO for customers. A customer would receive a ‘wheeling’ bill and ISMO would issue the ‘energy’ cost.

Mr Greyling asked if the wheeling cost was not the one to be charged by ISMO.

The Chairperson added that the way in which the phrase was drafted was not clear. He asked if ‘wheeling’ was explained anywhere in the Bill or in an Act. New terms of such significance needed to have a common understanding.

Mr Ngobeni responded that DoE would reword the phrase to try and simplify it. In response to Mr Greyling, he argued that there were two parts to wheeling; the supply side and the demand side. The demand side were the consumers of energy, while the supply side was comprised of Independent Power Producers (IPPs). The pricing policy explained how to treat the costs related to transmission, and outlined that there should be a 50/50 contribution towards transmission; the generator should contribute towards building the transmission. The infrastructure would not be owned by ISMO, it would be owned by Eskom. Who owned the infrastructure would not be involved in the sales of the energy; they would only be involved in the use of the energy.

The Chairperson suggested that the wording used in the phrase be redrafted.

Clause 40: Transfer of assets, rights, liabilities and obligations
Mr Ngobeni said that in 40(1)(a) the phrase ‘on the effective date and’ be omitted and the ‘out’ in 40(1)(a)(i) be substituted with ‘in’.

Mr Mayathula asked why DoE used ‘Eskom’ and ‘Eskom Holdings’ interchangeably and whether there was any significance in which one was used.

The Chairperson asked that DoE be consistent in its use of words.

Mr Ngobeni said that 40(2) was omitted and asked that DoE go and have another look at the clause to rework it in a way that did not need the omission of the entire clause. Clause 40(9)(a-e) was substituted with clause 40(9) as Members had agreed that there was no need to outline what was stipulated in the Labour Relations Act (LRA). The clause was redrafted to only make reference to the Act.

Adv Vanara said that discussion around 40(9) related to employees who were currently employed by Eskom and wanted to join ISMO. There was specific reference to section 197 of the Labour Relations Act which dealt with the transfer of employees. He asked why section 197 was not specifically referred to in the Bill.

Mr Ngobeni replied that reference was made to the whole Labour Relations Act, and DoE exercised caution in highlighting one section so as to suggest that the rest of the Act was of no relevance. However should need be, specific reference to section 197 of the Act would be made.

Adv Vanara argued that specific reference needed to be made to section 197 of the LRA. Thus anyone reading the clause understand Parliament had section 197 in mind when drafting the clause.

Clause 41: Transfer of functions and deemed validity of licences
Mr Ngobeni said that in 41(1) and (2) were omitted and a new 41(1) and 41(2) were added. Clause 41(4) was omitted and a new clause was inserted.

Adv Vanara added that the ‘of’ in the phrase should be omitted and ‘to ISMO’ moved to the end.

The Chairperson asked if the members agreed with the rewording.

Clause 31: Funds and Assets
Mr Mayathula referred to 31(3) and asked why the Minister of Energy was not included.

The Chairperson agreed that reference to the Minister of Finance could not be in isolation from the Minister of Energy.

Ms Motsoai agreed with Mr Mayathula and referred to section 54 of the Public Finance Management Act which stated that approval had to come from the executive authority, in consultation with the Minister of Finance.

The Chairperson reiterated that even though the executive authority approved transfers, the Minister of Finance needed to be consulted.

Mr Moloto said that clause 31(3) should be reworded to outline that the Minister of Energy would consult the Minster of Finance, however, the Minister of Finance had final approval.

The Chairperson asked if there was any legal guidance on how to articulate this matter.

Ms Mathibela asked if the Minister was not covered by ‘the shareholder’.

The Chairperson agreed with Ms Mathibela and asked what DoE meant by ‘shareholder contribution’.

Mr Ngobeni responded that clause 31(c) made reference to ‘shareholder’ and this was a reference to the Minister of Energy.

Ms Motsoai added that as far as the audit committees was concerned, in section 94 of the Companies Act the board members appointed the audit committee at the Annual General Meeting. With regard to remuneration of the chief financial officer and chief executive officer in clause 21(6), remuneration of the chief executive officer and chief financial officers was determined by the board in accordance with the remuneration guidelines approved by Cabinet for state owned companies.

Mr Moloto suggested that DoE check with the Institute of Directors to find out what the practice was around the appointment of the external auditor and the audit committee.

The Chairperson noted the suggestion and said that the DoE would clean up the issues which were discussed in preparation for the next meeting.

The meeting was adjourned.

Apologies: Mr J Smalle (DA), Ms B Ferguson (COPE)

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