Workshop on Electricity Restructuring

Meeting report

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This Report is a Contact Natural Resource Information Service
Taking Parliament to People, and People to Parliament
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The aim of this report is to summarise the main events at the meeting and identify the key role players. This report is not a verbatim transcript of proceedings.

MINERALS AND ENERGY PORTFOLIO COMMITTEE
19 September 2001
WORKSHOP ON ELECTRICITY RESTRUCTURING

Chairperson: Mr D. Nkosi

Documents handed out:
Workshop on Electricity Restructuring Programme (see Appendix "1")
International Experience with Power Sector Reform (ECON Centre for Economic Analysis)
National Electricity Regulator on ESI and EDI Restructuring (National Electricity Regulator)
Enhancing the Provision of ‘Public Benefits’ as the South African Power Sector is Reformed (Alix Clark)
Electricity Industry Restructuring (Department of Minerals and Energy)
Cosatu Input on Electricity Restructuring (COSATU)
[e-mail [email protected] for documents]

SUMMARY
The Committee conducted a workshop on electricity restructuring. Presentations were made by the Department of Minerals and Energy, Cosatu and various other interested organisations and individuals. The presentations focused on the international experience, the status of the development of energy policy within the Department of Minerals and Energy and the perspectives of the National Electricity Regulator and COSATU on electricity restructuring. The presentations concluded with a discussion on the possible public benefits that would result from reform in the electricity sector. Committee Members shared their comments and asked questions. For a complete list of the presentations, please refer to the workshop programme attached below.

MINUTES
International Experience with Power Sector Reform
Mr M. Davis, Partner/Director of Business Development: Power Market Reform from ECON Centre for Economic Analysis, focused on the international experience with power sector reform. He began by stating that reform was taking place across the globe with over a decade of experience in certain countries. He stated that the emerging consensus internationally was to promote maximum competition, ensure non-discriminatory access to grid networks and to establish multiple wholesale trading platforms.

Mr Davis stated that the first core theme in the international experience was the importance of minimizing market power. He stated that minimizing market power was essential because it would lead to increased competition. The second core theme he identified was the importance of ensuring non-discriminatory access to grid networks. He proceeded to discuss the two ways fair access to grid networks could be ensured. The Transco method was the popular method in Europe and involved the separation of the network owner from the electricity generators. The Independent System Operator (ISO) method was the popular method in the USA and proved useful where grid owners also owned the generation process and where more than one grid owner operated in a system. He stated that the Transco method was best suited to state-owned, vertically integrated monopolies. He added that in South Africa, given the ownership structure of Eskom, the best route to go would be separating the network owner from the electricity generator.

Mr Davis then proceeded to discuss wholesale markets. He stated that the international trend was towards more flexible arrangements and that wholesale markets had various benefits such as facilitating more effective competition, liquidity, unbundling and the better management of risks. On the issue of competition and privatisation, Mr Davis stated that competition was possible without privatisation. He stated that the gains from reform were achieved through promoting competition and not necessarily changing ownership through privatisation.

He then proceeded to elaborate on the energy crisis in California. He stated that the crisis resulted from a combination of bad luck with drought, nuclear outage and gas pipeline problems; strict environmental regulation that restricted supply and split regulatory responsibilities; and bad policy design which was over dependent on spot markets, price caps on end users and market power. He stated that the results were extremely high prices which could not be passed on to consumers. He stated that the lessons to be learned from the California case would be the importance of carefully considering incentive structures, testing arrangements in advance and avoiding political compromise at the expense of economic coherence. He concluded his presentation by reiterating the key issues.

The Chairperson stated that there would be further discussions on electricity restructuring at the joint meeting with Public Enterprises and Eskom on 9 October 2001.

Mr I. Davidson (DP) stated that there should be a debate on the motivations behind restructuring. He stated that in the South African situation, the reason for restructuring had not yet been adequately explained. He stated that Eskom’s efficiency could not be the reason because it already produced electricity at one of the lowest rates in the world. He stated that a debate on the motivations behind restructuring was very important and should be initiated. He also commented on the California experience. He then stated that in Mr Davis’ presentation, there was no mention of the distribution side and added that it was not possible to see the whole situation without considering the distribution aspect. He stated that additional information was needed on the California experience so that the Committee could use it as a benchmark.

Mr Davis, responding to the issue of the motivations behind reform, stated that the motivations behind reform were increasing efficiency, improving investor decisions, the need for private capital and the desire to privatise. He elaborated stating that in regulated markets, the consumer paid the price while in de-regulated markets, investors paid the price. He added that due to this, better investment decisions would be made in competitive markets. He acknowledged the low electricity prices in South Africa, but stated that Eskom had not had new investment in a long time and the need for new generation capacity in the future would put an upward pressure on costs. He stated that reform could help manage the future increase in price. On the issue of distribution, he stated that his presentation focused on the wholesale supply of electricity. He stated that demand in South Africa was dominated by large users and reform of distribution would be influenced by other aspects. On the California experience, he stated that he would provide the Committee Secretary with additional information.

Ms D. Motubatse (ANC) stated that the Committee was unclear about what had gone wrong in California and added that the presentation had been helpful. She stated that the examples Mr Davis used were all from the developed countries and wanted more information on how reform had been carried out in developing countries.

Mr Davis responded by elaborating on reform in the less developed countries. He stated that experience in Argentina, Chile and Brazil had been good with price reductions and increases in the quality of supply. In East Asian countries, he stated that the motivation behind reform was the need for private capital to increase generation and the ISO method was used to facilitate investment. He added that these East Asian countries now wanted active trade in the electricity industry. In Africa, he stated that the focus of reform was improving performance and bringing in new investment. He stated that the power markets of most African countries were too small and added that a competitive market in South Africa would make the whole Southern African region more competitive.

Mr E. Lucas (IFP), referring to Mr Davis’ statement on ‘over’ regulation in California, stated that there was also pressure to protect the environment in South Africa and that the regulations were viewed as positive. He stated that the Californian experience showed bad planning and that the authorities had been over enthusiastic in their rush to reap the profits.

Mr Davis stated that the ‘over’ regulation in his presentation was not intended to judge the value or worth of the regulations in California. He stated that the strength of the environmental regulations in California contributed to the crisis by restricting energy supply. He further stated that he would not class the Californian experience as an illustration of bad planning. He added that large political compromises had to be made and so the end product of the regulations looked different from the initial plans.

Mr B. Bell (DP) referred to the Australian experience. He stated that Australia had initiated reform but that authorities had been reluctant to proceed with it. He requested Mr Davis’ input on the issue.

Mr Davis responded by stating that the Australian province of New South Wales had introduced competition. He stated that he was unaware of their reluctance to continue and added that the Californian experience had sent shockwaves. Planners were now more cautious.

The Chairperson stated that it was important to look at the issues the Committee needed to consider in order to support the reform process.

Mr Davis stated that, in competition, prices were more volatile and added that while this was a disadvantage, it was beneficial because the price mechanism would give signals to investors and consumers. He added that because there was no price stability in competition, risk hedging strategies would be necessary.

The Chairperson stated that this workshop was the beginning of discussions on the issue. He stated that the meeting on 9 October 2001 would give the Committee an opportunity to sit together with Eskom and the Department of Public Enterprises, and take the discussions further.

Electricity Industry Restructuring
Ms N. Magubane, Chief Director of Electricity at the Department of Minerals and Energy (DME), presented the progress made by DME on energy policy generally and electricity in particular. She began her presentation by identifying the key policy objectives contained in White Paper on Energy Policy for South Africa, 1998. These objectives included: increasing access; improving energy governance; stimulating economic development; managing environmental impacts; and securing energy supply through diversity. In discussing liberalisation of the industry, she stated that no wholesale of public enterprises would take place, but liberalisation would be carried out in a responsible and managed way.

She proceeded to discuss the objectives of the electricity industry which included achieving universal access, promoting integrated rural development, promoting industrial development, achieving empowerment, improving human resources development, attracting investment, promoting the New Africa Initiative and ensuring security of supply. Ms Magubane then highlighted the rationale for reformation in the electricity industry. She stated that liberalisation was undertaken to reduce cost of energy as a whole, improve efficiency in the industry, attract investment and meet the developmental and social objectives of government. In relation to the rationale behind Electricity Supply Industry (ESI) reform, she indicated that it was necessary to: limit upward pressure on electricity prices; accommodate the need to build new generation capacity in the future; maintain competitiveness of prices, cross subsidies to the poor and free basic services; support industrial and commercial growth; promote economic and social development; and achieve empowerment, human resources development and skills and technology transfer.

Ms Magubane then referred to Cabinet resolutions relating to electricity and proceeded to discuss the ESI Reform Strategy. She stated that the government had social and development objectives and that Eskom would continue to play an important role in the industry. She stated that implementation would be phased in and various measures would be taken to ensure: participation of Independent Power Producer (IPP); diversification of primary energy sources; and that transactions between electricity generators, traders and power purchasers would take place on a variety of platforms.

Ms Magubane briefly discussed the Electricity Distribution Industry (EDI) reform strategy. She stated that transition and reform would similarly be phased in through: the establishment of six Regional Electricity Distributors (REDs); the establishment of a National Holding Company; Eskom and stronger municipalities supporting weaker municipalities; support being provided to low-income consumers; the establishment of commercial and regulatory arrangements; and ensuring the continuation of rural energisation.

Outlining the progress made to date, she stated that consultation with stakeholders had begun and that the EDI Holding Company had been established. Outstanding issues had been identified by Cabinet and the drafting of Regional Electricity Distribution Establishment Bill was being completed. In conclusion, Ms Magubane stated that the electricity restructuring strategy was guided by the White Paper on Energy Policy for South Africa.

The Chairperson stated that the process at this stage was to consult all stakeholders and that the Committee would be properly briefed on the programme, plans and frameworks of the upcoming legislation. He added that the Department should coordinate the information gathered from the workshop and store it as a resource file.

Mr Davidson stated that the Committee did not have enough detail on the issues, had not been adequately enlightened and was therefore not in a position to have a proper debate on the issue.

National Electricity Regulator on Electricity Supply Industry (ESI) and Electricity Demand Industry (EDI) Restructuring
Mr X. Mkhwanazi, from the National Electricity Regulator, presented on the role and perspectives of the National Electricity Regulator (NER) in electricity restructuring. He outlined the relevant areas of the White Paper on Energy Policy for South Africa and stated that it introduced competition to the industry, especially in the energy generation sector. He added that the White Paper also gave people the right to choose their electricity supplier. Referring to the role of the National Regulator, he stated that it was to ensure the efficiency of the Electricity Supply Industry (ESI), ensure the cost effectiveness of electricity prices and to protect the interests of customers. These roles were achieved through promoting competition among suppliers and regulating prices charged by monopolies. The NER also recommended the restructuring of the Electricity Demand Industry (EDI) as it would bring a uniform system of tariffs and prices and decrease the number of failing municipal distributors. He said that their approach to ESI restructuring was to design the strategy to fit South Africa’s circumstances. He reiterated that the NER supported the process to establish a framework for the natural gas industry and also supported the proposed new gas legislation. Referring to the aims of ESI restructuring, he stated that increasing competition in the supply industry would result in improved efficiency and lower prices. He confirmed that the NER was focusing on priorities for changing the ESI and that a business plan had been established. In conclusion, he said that the NER was committed to serve the ESI and its stakeholders, especially the customers.

Mr Davidson expressed concern over how local government funding, in relation to electricity distribution, would not be jeopardized.

Mr Mkhwanazi responded by saying that the NER was aware of the fact that local municipalities were allocated insufficient budgets, especially in the rural areas, and stated that this issue would be considered.

Ms Motubatse expressed concern in relation to ensuring the sufficiency of energy supply. She asked whether or not the suppliers would focus on the basic needs of people.

Mr Mkwanazi said that ensuring the basic needs of people was the fundamental role of the NER.

Cosatu Input on Electricity Restructuring
Ms F. Tregenna, Research Coordinator from Cosatu, stated that various issues remained unclear with regard to the restructuring of the electricity sector. These included the differences between restructuring and privatisation and in what form the restructuring would take place. She stated that the Californian experience proved that this areas approach to restructuring did not work and she therefore questioned why South Africa appeared to be following this process. She said that, given the huge regional inequalities that had been established by apartheid, electrification would require cross-subsidisation between the regions.

She then outlined Cosatu’s proposals on electricity restructuring which included: integrating municipal sectors into a national distributor; increasing focus on renewable sources of energy; and moving towards a National Energy Summit which could facilitate an inclusive and comprehensive approach to the restructuring process. She said that competition in the supply industry was likely to ensure good service for the rich while the poor faced higher costs and worse access. She criticised the free market approach as one that ran counter to the government’s overall aim of serving the poor. She stated that Cosatu needed to know who was driving the restructuring process and how decisions were made as no stakeholders had any clarity on proposed processes, plans and timeframes. Lastly, she mentioned that Cosatu was opposed to the introduction of the Wholesale Electricity Pricing System (WEPS) and privatisation of generation. She said that Cosatu thought it dangerous to push the implementation of WEPS and privatisation in the generation sector before having stabilised the distribution system. This was compounded by the absence of an adequate regulatory regime.

Mr Davidson stated that Cosatu’s concerns needed to be addressed. He felt that an open debate on the whole restructuring process was lacking.

Mr S. Louw (ANC) asked Cosatu about their view on the Gas Bill.

Ms Tregennar responded by stating that it appeared as though the energy sector was positioned for a takeover and that before any decisions were made, national needs should be considered.

Enhancing the Provision of "Public Benefits" as the South African Sector is reformed
Ms A. Clark, an independent consultant, defined "public benefits" as "social, environmental and developmental goods and services that bring about notable social welfare improvements". She said that these goods and services were those which society valued but the market did not provide. Important energy sector "public benefits" included: electrification and access programmes; public-interest research and development; energy efficiency; renewable energy; customer services; and integrated resource planning. Referring to possible power sector reforms, she stated that these could comprise of commercialisation, corporatisation or the introduction of competition. She stated that each of these variations of power sector reform could impact on the provision of "public benefits" and vice versa.

Ms. Clark then proceeded to assess the impacts and implications of power sector reform on programmes designed to produce "public benefits". She furthermore provided options to ensure that the various power sector reform options were not mutually exclusive to the generation of "public benefits". She stated that investment in public interest energy efficiency tended to be threatened by power sector reform. She indicated that electrification and access programmes may or may not be threatened by power sector reforms, dependant on the nature of the reform. She stated that similarly, research and development programmes may or may not be threatened by power sector reforms. With regard to renewable energy, she stated that power sector reform could in fact increase investment in this area. Finally, in relation to integrated resource planning, she concluded that power sector reforms may or may not promote investment in this area.

Ms Clark concluded her presentation by stating that "public benefits" yielded considerable benefit to the whole of society and that they were public service obligations that the market did not ordinarily invest in. This investment would therefore have to be taken on by the public sector. She stated that the present focus in the industry should be to ensure that "public benefit" programmes be implemented and that the performance of the Department of Minerals and Energy and the National Electricity Regulator, be monitored in this regard. She stated that the DACST memorandum on energy research and development should be supported and monitored and that energy efficiency and integrated resource planning needed serious attention. Finally, she stated that reliability and security of supply were crucial areas of customer service in the future.

There was no time for the Committee to address questions to Ms Clark as the meeting had to be adjourned in order for the Members could attend the National Assembly.

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Appendix 1

WORKSHOP ON ELECTRICITY RESTRUCTURING
PROGRAMME

19 September 2001
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09:10 Opening & Welcome – Duma Nkosi

09:15 International experience of electricity restructuring & the California experience – Mark Davis

10:00 DME on restructuring of the Electricity Distribution Industry and Electricity Supply Industry – Nellie Magubane, DME

11:00 Tea

11:15 NER’s role and perspective on electricity restructuring – Xolani
Mkhwanazi, NER

12:00 COSATU’s perspective on electricity restructuring – Fiona Tregenna &
Neva Makgetla, COSATU

12:45 Lunch

13:15 Enhancing the provision of ‘public benefits’ as the South African power
sector is reformed – Alex Clark

14:00 Closure