IPP Purchase Agreements: Department of Energy & ESKOM update, with DPE Minister & DoE Deputy Minister

Energy

20 June 2017
Chairperson: Mr F Majola (ANC)
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Meeting Summary

The Department of Energy (DoE) and Eskom were expected to present the final process and the date for signing the power purchase agreements with independent power producers (IPPs), but their presentation was simply an update on processes that the they were following. That was not the agenda item, and was found to be unsatisfactory by the Chairperson and Opposition Members of the Committee.

The Committee was told that the low economic growth in South Africa and the subsequent oversupply of electricity had had an impact on the process of electricity supply. The pace and scale of renewable energy would have to be adapted to the lower demand for electricity. Nevertheless, Eskom was willing to sign the agreements. However, it intended to put a cap on the price at which they would buy electricity. The price of electricity had to be controlled because of the impact of the cost of electricity on the economy. The level of participation by black industrialists was a further concern. One of the hold-ups had been the judgment against the tabling of the Regulatory Clearance Authority (RCA) by Eskom following a court ruling. A six-step timeline was presented, showing that all processes should be completed by the end of August 2017. A further step was added at the meeting.

The Minister of Public Enterprises said she believed that once the seven steps had been completed, the signing could take place. However, she took one step back, and said that she was really grateful that there was some agreement on how to take the process forward among the various counterparts. South Africa was a fossil-fuel heavy country, but wanted to move to cleaner and greener renewable energy. It was trying to find a more balanced way of doing so.

The DA was scathing in its response to the presentation, saying that it did not want to hear a “sob story” from Eskom about its balance sheet after years of corruption and mismanagement. Eskom had a legal commitment to sign the agreements with the IPPs. The DA disagreed with the way in which the price of energy was calculated and articulated by the Department of Energy. A public hearing should be held so that experts in the field could hear and perhaps contest the arcane methodology used by the DoE to determine the cost of electricity.

The EFF declared that they would not approve the signing of the agreements unless Eskom or the DoE could give a guarantee that there would be no increase in the cost of electricity to the consumer.

Meeting report

Opening remarks

The Chairperson said he was looking forward to hearing about progress on the signing of the power purchase agreements with Independent Power Producers (IPPs) by Eskom . He had been waiting in anticipation for an update on when the signing would take place.

Ms Lynne Brown, Minister of Public Enterprises, was at the meeting but she handed over to the Deputy Minister of Energy, Ms Thembi Majola, who said that Eskom and the government departments would make a single presentation on the situation to date. Engagements were still to be held with the National Energy Regulator of South Africa (NERSA0 regarding rates, etc, and the Department of Energy (DoE) had to consider the legal judgments, so the meeting was not the final process but simply an update. Various changes had taken place and Eskom was without even an Acting CEO. Unfortunately, National Treasury was not present, although there were important issues that would need its input.

The Chairperson indicated that the Portfolio Committee had requested some clarity as to where the process was at present, and when they could expect it to be resolved. The non-attendance by the National Treasury and the matter of NERSA would be attended to at the end of the meeting. In February, the President had said to the nation that there had to be movement in relation to the IPPs, so he wanted to know how far the process had moved since February.

Resolving IPP procurement impasse

Mr Tseliso Maqubela, Acting Director General (DG): Department of Energy (DoE), introduced the presentation on resolving the IPP procurement impasse on behalf of all parties -- the DoE, the Department of Public Enterprises (DPE) and Eskom . The single presentation was the outcome of a meeting between them, with input from National Treasury. The presenters believed that Eskom was a national asset which needed to be sustainable and protected. The single presentation had been decided upon so that it would be clear where they agreed and disagreed.

A meeting needed to be held with NERSA as the Department of Energy, in particular, wanted to discuss court judgments. They also needed to talk about tariffs. That morning, they had been in contact with NERSA and National Treasury to arrange a meeting later in the week. There had been a change in the demand which would not affect the project, but the pace of it. The cost of energy was another aspect over which they were agonising, as it had an impact on jobs. This would be taken into account in their presentation to the Executive. The meeting was, therefore, more of an update, so his colleagues would be outlining what had been discussed and what the issues were.

The Deputy Minister felt that the team needed to be expanded to include NERSA, so that was an additional step to the six identified. Some changes had taken place at Eskom , and they did not even have an Acting CEO, but the Minister of Public Enterprises was in attendance, and she had hoped that they were all trying to find a way that would not choke the economy, would be sustainable, and which would take into account the current conditions in the country.

The national development plan (NDP) had envisaged at least a 5% annual growth and increased demand for electricity, and so on. This had not been the case. The Department had the challenge to grow the economy, but at the same time to ensure that energy was affordable and that there was access to it. They were committed to making proposals to their principals by the end of the June 2017.

Mr Ompi Aphane, Deputy Director General (DDG): Policy, Planning and Clean Energy, took the meeting through the presentation. He referred to the context and the White Paper on the Energy Policy of South Africa, and the Energy Regulation Act of 2006. He described the projects that had been procured and presented a summary of the problem statement. There were costs that would have to be carried by the South African consumer. The low growth in South Africa and the subsequent oversupply of electricity had had an impact on the process. The pace and scale would have to be adapted to the lower demand for electricity. Nevertheless, Eskom was willing to sign, but it had put a cap of 77 cents on the price at which it would buy electricity. The price of electricity had to be controlled because of the impact of the cost of electricity on the economy.

The level of participation by black Industrialists was a further concern. One of the hold-ups had been the judgment against the tabling of the Regulatory Clearance Authority (RCA) by Eskom following a court hearing. A six-step timeline was presented, showing that all processes could be completed by the end of August 2017. He added a seventh point, which was an engagement with NERSA.

The Chairperson said that the item on the agenda indicated an update on the signing of the Power Purchase Agreement, but the presentation of the DoE was entitled, “Resolving the IPP Procurement Process,” so the presentation did not seem to match the item in the agenda. The steps and dates referring to the signing itself had not been included. He could not see where they were in the process of signing.

Minister Brown said she believed that once the seven steps had been completed, the signing could take place. She wanted to take one step back. She was really grateful that there had been some agreement on how to take the process forward amongst the various counterparts. South Africa was a fossil-fuel heavy country, but wanted to move to cleaner, greener and renewable energy. They were trying to find a more balanced way of doing so. At the end of the seven steps, Eskom would be signing.

Government was committed to signing, but Eskom had to deal with the fact that it cost the company R0.32 a kilowatt to produce power, while the actual cost of renewable energy was R2.14 per kilowatt. Eskom was able to sell that energy for R0.84 per kilowatt. It was about trying to bring about that balance. All of the steps had put all of those issues into the pot. Eskom had already signed Steps One to Three. What still needed to be signed were Steps Four and Five, so it was about signing the last two steps in that cycle.

The Chairperson requested that that point be articulated more clearly. For him, and for members of the public, the overriding question was whether it was going to happen and, if so, when it would happen. He understood from the Minister that all the steps had to be resolved in order to undertake the signing. Difficulty in completing the steps would delay the signing. He called on the Deputy Minister to make comments.

Deputy Minister Majola thanked Minister Brown for clarifying the issue. The Chairperson had raised an important issue. She reiterated that they had to go through the steps mentioned before they could resolve anything so that they knew that all the considerations had been taken into account. In particular, they would have looked at sustainability and cost, as they needed to ensure that it was price neutral as far as Eskom was concerned. She did not want to gallop ahead, and then realise that she should have done things differently. Some of the delays were related to the fact that they all had to sit around a table, as these negotiations would also have an impact on the future. She and her team were ready to listen to the Committee and they would try to respond to the questions.

Discussion

Mr J Esterhuizen (IFP) said that he could not agree that the cost of renewable energy was very high. The cost might have been very high in the beginning, but it had come down considerably. Renewable energy was indisputably the lowest cost energy. Coal was up to 40% higher. The presenters had also complained about NERSA, but NERSA had allowed Eskom to receive 440% price increases since 2008, which the consumer had pay, and that was bad news for the South African economy which relied on the consumer having money to spend. Everyone in the country, including businesses, was trying to use less electricity.

He said that the previous agreements had taken 12 months to sign, but the latest agreement had been under discussion for 23 months. Minister Brown had been noticeably absent from the public debate around renewable energy. She could have instructed Eskom to comply with the law and sign the agreement. The 2010 Integrated Resource Plan (IRP) had over-estimated electricity usage by as much as 30%, and one of the main reasons was the low economic growth caused, in part, by the high electricity tariffs. In the 2006 IRP, the cost of energy had been underestimated. The price of nuclear power had been underestimated, and the long wait in signing the agreement had cost the country R60 billion in further investment.

Mr G Mackay (DA) was surprised by the presentation, as it had been a long outstanding issue and the Chairperson himself had received phone calls from people in the sector who, because of the uncertainty in the industry, were losing their jobs and were not earning an income. There was no consideration of the impact that the delays by Eskom were having on people in the industry and on the lives of South Africans, particularly those in the areas where the projects were located, such as the Northern Cape, which was a poor province.

The situation was nothing but wholesale capitulation to Eskom . The Committee was having to hear a sob story from Eskom , which was one of the worst managed entities in the history of the country, and where there was corruption and huge state capture issues. Eskom’s balance sheet was the results of years and years of mismanagement. It had nothing to do with the IPP program. Eskom’s  dire straits had nothing to do with the IPPs, and to say so was blatantly misleading the public. The Deputy Minister was suggesting that the IPP programme may have to slow down and change pace, but the reality was that it had been in process since 1998 when the White Paper had first been introduced. It had been updated several times since then. Eskom could not say that it was not aware of the changes coming to the industry. Management at Eskom had not kept up with policy changes. As far as he was concerned, the policy excuse was not acceptable.

The Committee needed an investigation into Eskom. NERSA had turned down multiple requests from Eskom for price increases on the basis that Eskom was not efficient and mismanaged. The fault kept returning to Eskom, and Eskom was making its bad management the problem of renewable energy. It was a blatant abuse of Eskom’s monopoly position. It was not acceptable to him or the DA. Eskom complained about its woeful balance sheet, but wanted to procure nuclear power -- one of the most expensive forms of energy. It was clear that renewable energy was far, far cheaper then nuclear energy. The previous year, Mr Koko and the former CEO had tried to ‘bad mouth’ renewable energy, whereas Eskom could have had a conversation about when renewable energy would be available, how it affected its ability to generate energy at specific times, and so on. The presentation on the day was so simplified that it was just a nonsense presentation.

Mr Mackay took issue with the Minister’s conversation around the price of blended electricity. He spoke under correction, but he did not believe that the price of R0.32 per kilowatt was correct. It was an over-simplification of Eskom’s costs, as the life of many of its power stations was coming to an end, which implied huge capital investment that would push up the static blended price of electricity. The price was therefore misleading, especially as the price of renewable energy was coming down all the time. How would the price of blended electricity be affected by nuclear power? He was adamant that the Minister was wholly disingenuous and was misleading the public.

There was a legal opinion which said Eskom did not get to determine energy policy. That was a fact in law. Eskom was working counter to the competitive bid process in South Africa by setting a figure above which they would not accept bids, and Mr Mackay doubted its legitimacy. Energy planning had to be determined by the Department of Energy. If the matter was not resolved soon, he would encourage renewable energy producers to go to court, and Eskom would lose. The renewable energy industry in the country, which had received acclaim worldwide, was faced with catastrophe.

He asked the Department of Energy if it was going to seek legal clarity on Section 34 determinations issued by the Minister on renewables. The previous Minister had committed to Eskom to 14 000 Megawatts in terms of renewable capacity that had to occur in terms of her determination. Was the DoE going to challenge the determination, to have it reduced? Everyone in the room required some certainty in that regard. Mr Ophane had referred to the changes in the ownership structure and black Industrialists’ involvement. Black ownership was set at 40% in the sector, which was one of the best in the country. Where did Mr Ophane expect that figure to go to? 51%? 55%? What was the upward level of that figure?

Much of the participation in the programme would come from foreign direct investment, and there needed to be clarity on what type of ownership structure would be in place for IPPs going forward. When could the Committee expect the IRP document? It had been highly critical of nuclear energy and somewhat supportive of renewable energy. Was the Department trying to change the impact by delaying the release of the document? The IRP draft document had said that South Africa would not need nuclear energy until 2032 and that renewable energy should be promoted. Could he have an answer to a simple question: when would Power Purchase Agreements with IPPs be signed? Was it Eskom’s game to use the intergovernmental framework to force National Treasury to pay the full liabilities of the IPPs? He did not think it necessary. Eskom had never shown any interest in the impact of high prices on the consumer. Eskom was the company that had asked for a 27% increase in the price of electricity.

Mr M Dlamini (EFF) pointed out that the State of Nation Address (SoNA) could be ignored, as that had come from someone with no integrity. The two Departments had said that they had clarity on the issue, but they had come to the meeting and there was confusion. As long as they were told that the IPPs were expensive, the EFF would never agree with them. That should have been the clarity between the departments, so that the Committee got proper answers on the issue.

They had given a lot of figures, and all that he was interested in was the affordability. At the end of the day it was Eskom that charged the consumers. The Department messed up everything that they wanted to, and eventually it was the citizens of the country who had to pay. They were the ones that the EFF was interested in. If the consumers could not afford electricity, Eskom just switched off their supply. That disrupted the lives of consumers. The important issue was electricity and the affordability thereof. Until Eskom gave a price, the EFF were not interested. There should be no signing of anything, as the risks were simply a result of government mismanagement. As long as the IPPs were deemed to be expensive, the agreement could not be signed. They could not be subjected to foreign direct investment when the people did not have affordable electricity. The departments had to give clear answers before the EFF signed.

It was necessary to address the issue of Eskom costs. Eskom had just spent over R300 billion on power stations. How much could the IPPs produce, compared to the capacity of Eskom? What was the bigger plan? As long as nuclear energy was expensive, the EFF was going to oppose it. The EFF would oppose anything as long as it was going to cost more. The risks were government risks. He was interested only in the cost of the IPPs. They could just park it there until the Departments came back and said that the IPP’s were affordable. The foreign investors would just want their money back, and the ordinary people would have to pay. There was no crisis as Eskom had said -- there was an oversupply of electricity, so they could take their time and plan nicely. The Chairperson should send the presenters back.

The Chairperson said that the main issue was whether the signing of the agreement would increase the price of electricity. He was sure that there had been a lot of debate in the public about the cost of electricity. He called for responses.

The Deputy Minister asked the team to respond, saying that she would sum up at the end.

Department’s response

Mr Aphane said that one had to be very careful about the cost of electricity, because one had to compare apples with apples. Generally, people compared different things and therefore came to the wrong conclusion. Mr Mackay had stated that the cost of renewable energy was lower than nuclear, but this was not so, as one had to look at the balance of the system. If one were to take one kilowatt-hour and compare it to another, then one might come to a particular conclusion, but the system had to be balanced all the time, so external costs had to be taken into account as well. In a narrow sense, one kWh might be cheaper than another, but to bring it into the mix and to keep the integrity of the system, Eskom had to do other things that cost money. It had to do with the structure of the market. The external cost had to be understood. To bring renewable energy into the system, there were additional costs. There was a need to understand what it actually cost to balance a system.

He told the Committee that the introduction of new capacity would always have an additional cost. The issue was about which had the lower aggregate cost impact, and who bore the rest of the other costs. The IPP, whether coal or renewable, was responsible for connecting up to a point on the grid. The deep connection costs were borne elsewhere. Those costs were passed on to the utility, so they were not seen. One of the improvements that the DoE was introducing in the next IRP was to reflect on the transmission implications, because this created a more complete picture of what it took to bring a particular generator on to the grid beyond the collection point.

In response to the question about the IRP, it was incorrect to say South Africa did not need nuclear energy until 2032. The IRP entailed four milestones. What the department had shared was in relation to the second milestone, and it was dependent on the base case. In 2008, when the first IRP had been presented, a conscious government decision had been taken to introduce renewable energy, notwithstanding the cost of solar photovoltaics at that time. If that had not been taken into account, South Africa would never have had a renewable energy programme. It would have been deemed too expensive to bring in. The Department had to look at government policies - there were eight of them - and it had to ask how best to achieve them. It was not as simple as saying renewable energy constituted the lowest costs.

There had been a question around the changes to the IPP structure. The fact was the IPPs were not sitting at 40% -- there was an average of 29% of black economic empowerment (BEE) participation in the programme, and that was not just ownership. The fact that they wanted the level of black ownership to be increased would speak volumes for the programme.

Mr Aphane said that the Minister had gone on record about the Cape High Court judgment, and the questions that had arisen were related to all the other determinations, because the judgment seemed to create doubt about proceeding with those determinations. The Minister had stated that she would like to seek clarity on the court decision about the determinations.

He reminded the Committee that the question of electricity costs was a difficult one as there were so many different costs, depending on when the electricity was generated. Over and above that were the issues such as fixed costs, generation costs and the blended cost, and one had to be careful not to confuse apples with pears. Mr Dlamini had suggested that the reflection on the risks had not taken into account the impact on the consumers. It was a responsibility of the Department to ensure low energy costs. NERSA was also charged with the responsibility of ensuring that energy costs were lowered.

The Chairperson interrupted and asked the presenters to respond to the question of whether the purchase agreements would result in an increase in costs. The complicated answer was not helpful. If the DDG did not respond simply and directly, Mr Dlamini would leave the meeting and continue saying outside that they did not want those things as they cost too much. Could they not respond simply as to whether it was a fact or not? Mr Aphane found it extremely different to give a simple answer. He explained that when a peak had to be satisfied, in the South African system, diesel would be used. Diesel cost R4.00 per kilowatt hour, but did that mean that they should have replaced diesel with coal? It was about the whole system costs. For example, using diesel would be cheaper than a black-out, but in the energy mix there was space for various technologies. From the strictly financial point of view, it would be advantageous to make use of the sun as a resource in this country. For example, solar water heaters on the roofs would displace the need for coal.

Mr Dlamini said that if the DDG did not have an answer, he should not answer. It had nothing to do with “peaks.” The Minister had said that there would be an increase in costs, so he must answer the question. There were looking at planning and not just at stopgaps that had nothing to do with peaks. If he did not know, he should not try and make up an answer.

The Chairperson asked the Deputy Minister to respond, saying that the need for NERSA to be an integral part of the process was critical. as the agency took into account all the generation costs and determined the figure.

The Deputy Minister said that it was difficult for the Department to respond because those were, in fact, the issues that NERSA dealt with. It was indeed a very technical matter. When they dealt with the issue in pockets, they did not get the whole picture. The Department was going to engage with NERSA, so it would have a much clearer picture when it came back with the next report.

The Chairperson said that he was taking into account what had been said about the need for input from NERSA and National Treasury, so he felt it was necessary to have a comprehensive discussion quite soon to have clarity, but the Committee did not need to wait for the completion of the seven steps before having that discussion.

In relation to pace and scale, Mr Aphane said that the Minister had made determinations in relation to the integrated resource plan. When the decision was made relating to the pace and scale by the previous Minister, the circumstances had been different. The Department would like to reflect on the current reality relating to electricity demand, and then have the necessary flexibility to be able to manage the risk of capacity, ensuring that they did not create blackouts. Eskom currently had an overcapacity. He did not believe that they could predict accurately, and that it was more important to be flexible than to predict future needs.

DA’s proposal

Mr Mackay said that he had listened to Mr Aphane with great concern when Mr Aphane had stated that Mr Mackay had no understanding of the costing of electricity. He was no expert, but he had referred to the DoE’s own document which gave levelled costs. He believed that all the information Mr Aphane had given about different costs was simply to make a case for nuclear energy. The IRP was clear, but the Department was trying to do a backflip on an IRP which it knew could not work. Mr Aphane could regale the Committee with arcane methodology costs, but Mr Mackay objected to making an informed decision as they had no information other than what Mr Aphane and Eskom had presented. He believed that Mr Aphane should call a public hearing and present the costs so that there could be public consultation with those who were informed about electricity costs and who could make inputs, and question his assumptions around the costs. Mr Mackay was unable to make decisions following a one-sided presentation drafted mostly by Eskom and without any input from the sector that was affected by the decision. It was impossible for the Committee to make an informed decision. He suggested that if Mr Aphane was going to give a lecture about costs, he should do so in the company of his peers so that they so that they could counter his arguments on exactly which costs should be applied. The Committee was well aware of the Council for Scientific and Industrial Research (CSIR) findings about costs. A public hearing might be the best method of determining which costs to apply.

Mr Mackay said he was astounded by the DDG for Planning at DoE presenting a lecture on the changed circumstances under which the previous ministerial determinations had been given. If Mr Aphane was so taken aback at the determinations that had been made in the last three years, perhaps he was not the right person for the job of planning. The economy had fallen off the edge of a cliff and electricity demands were back at the 2006 level, but the Department’s head of planning had not anticipated this. The inability of the Department to do appropriate planning was a major concern in the light of the enormous capital investment involved in energy. What faith could Mr Mackay have in Mr Aphane when he said that nuclear was necessary by a specific date? He had concerns about the way in which energy planning happened in South Africa, as it affected multi-billion rand’s worth of investments. The people in the renewable energy arena wanted certainty, but the DDG was unable to give that to them, so how could they have the faith to invest in South Africa’s energy future? Energy affected all costs in the economy, so the issue had to be taken very seriously.

Mr Mackay pointed out that Eskom produced electricity at a blended price. Renewable energy was becoming cheaper over time, and therefore would impact less and less on the blended price. He admitted that renewable energy had been very expensive in the first phase, but it was the only type of energy that was becoming cheaper all the time. How much would nuclear energy impact on the blended price? Where was the graph explaining the impact of all of the technologies on blended prices? The outstanding IPP agreements that were waiting to be signed would affect the tariff only in the 2018/19 year. It would therefore not affect Eskom’s  balance sheet immediately.

The Committee needed more information if they wanted to discuss it fully. It was not up to NERSA. NERSA had crunched the numbers, and they had concurred with the determinations. NERSA should be at the Committee meeting giving an explanation of the position and why they had concurred with the determinations. The law stated that Eskom had a legal obligation to sign the IPPs’ purchase agreements. There could be no debate as to whether Eskom had to sign. Could Eskom get to the point where it admitted that it had to sign?

The Chairperson suggested that the meeting move towards closure, but first he wanted to know what they were doing about the matter. He knew that things were not as simple as they seemed, but the main point was to establish when Eskom was going to sign. That was what the meeting was all about. He knew that other things needed to be taken into account, but the crucial matter was the signing of the document. He asked the Deputy Minister and the team when they would get to the point of signing. He did not want debates without experts. The Committee would definitely get the experts to a meeting so that they could debate the matter with the Minister, Mr Aphane and his colleagues. The Chairperson was trying to focus the discussion on the issue at hand. What were the steps needed to be able to sign the power purchase agreements?

Ministerial response

The Deputy Minister was of the opinion that the meeting had come to an end because the same official who was being seen as incompetent, had been responsible for the renewable energy agreement that had been praised as a world leader. Unfortunately, it was not a simple issue and it was not a decision that the Department of Energy could make on its own. A discussion was needed with all the role players. The Department of Energy had sat down with the Department for Public Enterprises and Eskom, and they were continuing to engage. The Committee might want to consider a debate with experts in order to understand how one arrived at the cost of electricity. NERSA could unpack the issues in non-technical language. She was mindful that the country came from a past when electricity had been very cheap. That cheap power had been utilised for some industrialisation, such as SASOL and others, which had been very good for the country, but had had a very negative impact because of the price. When one looked at the price of electricity in South Africa, one had to look at the point at which Eskom had started. A discussion had to be holistic in order to understand the situation.

In terms of the ministerial determinations, the Minister of Public Enterprises was quite clear about not challenging the issue legally. The Minister was seeking clarity. NERSA would assist as to the way forward as they would have to determine concurrence and what it meant for all the determinations. The court case had spoken about processes, and so it was around the issue of clarity. The team had committed that by the end of the month they would have something for the political principals to look at and to take forward. They would come back to the Committee after all the consultations and make a presentation on the way forward, taking into account the very valid issues of cost and affordability.

The Chairperson believed that the Committee had to do something so that when they came back, they gave feedback. The information was there and there were challenges. All they were asking for was the making of a decision so that the Committee knew where renewable energy was going. He told Mr Mackay that he had heard him, and so he was making a contrary plea to those participating in the programme. He was a democrat, albeit not from the Democratic Alliance, and he believed that South Africans had a right to make their choices but he would not encourage the public to believe that Parliament was not helpful, as that would have a negative impact on the balance of power.

A decision should be made and announced so that there was certainty in the industry. It was necessary, so that Parliament could play its role. He wanted the Departments and Ministers to return soon with the information and with a solution to the problem. The patience of people was not endless, but he hoped that those at the meeting would come back and take part in the discussion and be part of the solution.

The meeting was adjourned.

 

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