Independent System And Market Operator Bill scenario building: Task Team report-back

Meeting report

In opening the joint meeting of Portfolio Committee on Energy and Select Committee on Economic Development, Mr Adams explained the cluster system, and how it was necessary for organisations to brief Committees of both the National Assembly (NA) and National Council of Provinces (NCOP) and welcomed the Select Committee on Economic Development. The people of the country should benefit from the decisions made in Parliament. He called on all present to introduce themselves.

Mr Njikelana said that Members would receive an update from the Task Team that had been investigating key issues around the Independent System and Market Operator (ISMO) Bill. The ISMO would be an entity that would be introduced in keeping with the structure of the electricity sector, and specifically to monitor the supply side. This would take some functions away from Eskom. When the Bill had been submitted to Parliament, public hearings had been held. There had been a major emphasis on the transmission sector, which many presenters felt should be taken away from Eskom. The Bill was silent on this matter. Parliament had asked the Task Team to do further due diligence on removing the transmission function from Eskom. The other area was building future scenarios. What was clear was that this might not be a simple exercise.

Mr Njikelana reported that things had not gone according to plan. The Portfolio Committee had been given an update earlier. At that stage, the Committee had decided that there should be a balance. They had requested feedback within a month. He trusted that the Task Team would be sensitive to the fact that they were also briefing the NCOP who might not be aware of the rationale for the introduction of the ISMO Bill.

Introduction by Department of Energy (DoE) Director-General
Ms Nelisiwe Magubane, DoE Director-General, said that Eskom was responsible for 96% of the electricity generated in the country. This was distributed both directly to customers and to municipalities. The Bill proposed that the transmission sector would become a separate state-owned entity. This had been proposed in the Energy White Paper of 1998. In 2001 Cabinet had instructed government to implement these policies. There had been a number of challenges at the time. There had been a total collapse of the system in California which had prompted Cabinet to call for due diligence to determine what was best for the South African market. This had discounted the possibilities of independent power producers (IPPs). The system had partially broken down later in the decade. It was realised that private sector involvement was also needed on the generation side. It was a question of how the private sector could be encouraged, and Cabinet felt that the system had to change as there was no incentive at that time. The state would retain the majority of generation and supply capacity. Cabinet had decided on a gradual implementation of the White Paper.

Ms Magubane said that there would be free access to the network. Both Eskom and the private sector should have the opportunity to generate electricity. Cabinet had enabled the DoE to determine if the proposed model was acceptable to the public. This had created the concept of the ISMO. This would allow for private sector participation. The renewable energy programme's success would hinge on the equal access to the transmission network as proposed. The team would present on the progress achieved. The last thing government wanted was to see Eskom disabled.

Task Team (National Treasury, Department of Public Enterprises and DoE) presentation
Mr Maduna Ngobeni, Deputy Director-General: Energy Regulation, DoE, said that the presentation was an outcome of the joint effort of three national departments, namely National Treasury, Department of Public Enterprises (DPE) and DoE, working together with Eskom. State funding would have to be used, funded either by a cash injection from the state or by tariff increases. Another possibility was the raising of loans. There had been some thought by the departments that an alternative means of funding was needed. Access to the funds available in the private sector was an option. The team had come up with a middle man proposal. Certainty was needed for the private sector in order to encourage investment. Overall this would reduce sector risk as the private sector would assume some of the risk currently carried by Eskom.

Mr Ngobeni explained what ISMO meant. While being independent, it would remain state-owned. It would have access to the national electric system, although he used this term guardedly. It would buy electricity from the generator and sell it on to customers.

Mr Ngobeni said that ISMO would be a key to the introduction of IPPs. It would promote transparency and level the proverbial playing fields. There would be no conflict of interest created by generation and transmission falling under a common body. There would be benefits to private funding, enabling government to free resources for other areas. More investment was needed in generation. The risk would be transferred to the private sector, particularly regarding tariff increases.

Mr Ngobeni said there would be four functions. One would be that the physical infrastructure would reside with Eskom. ISMO would do resource planning, buy power from Eskom and overseas operators, trade in electricity and undertake the current system operations.

Mr Ngobeni sketched the current structure. At present, Eskom was responsible for generation, transmission and retail. There was a system operations function. This latter function would be passed on to the ISMO. There were two retail components to the retail operation. These were key customers and direct supply to consumers, and supply to municipalities.

Mr Ngobeni said the proposed changes would see the systems function being removed from Eskom. The transmission infrastructure would stay with Eskom, subject to an agreement between Eskom and ISMO.

Mr Ngobeni said that there had been initial delays with the due diligence process. This was now under way. More time was needed for a detailed analysis of the situation, but the Portfolio Committee had set a four month deadline. There would be an impact on Eskom. It was not clear if the ISMO or Transmission System Operator (TSO) route would be followed. Four areas would be considered: financial, legal, technical and human resources. The business case had not been considered in the due diligence process.

Mr Ngobeni said that two scenarios would be modelled. Against a baseline of the current situation, the implications of introducing either an ISMO or TSO were considered. The targeted completion date was mid-December 2012. He indicated a critical path. The financial impact consideration was of prime importance. There were representatives from Treasury who would work with Eskom. A shadow credit rating would be provided.

Mr Mongezi Ntsokolo, Group Executive, Eskom, said that progress was being made. The task team was meeting every second week. As project management meetings were scheduled they would be included on the progress chart. They were now in the fourth week. A financial model had had to be set up for the company. A similar model was being used as the one for the price application, slightly modified. This would have to be run for the different scenarios. The first was the base case, then for the ISMO, and finally for the TSO. The TSO option would include taking control over the transmission infrastructure. In each scenario there might be smaller scenarios. Once the modelling was complete, the results would be assessed and a determination of practicability would be made.

Mr Ntsokolo said that a Request for Proposal (RFP) had been issued for consultants to do credit investigations. A contract had been awarded that morning. The next phase was the commencement of the shadow review. This would start the following day. This was a critical part of the plan. The team would have to understand the implications of each course of action. If assets were moved between companies, the company surrendering the asset might experience a negative impact on its credit grading. If customers were to move, rating agencies looked at the source of revenue in consideration of the changed ability to meet financial obligations. He expected that there would be some impact on access to finances. The future sustainability of Eskom would have to be assessed. Eskom borrowed money against its balance sheet. Loans were tied to specific assets. Any moving of assets would have to see the liabilities shifted as well. Other Eskom loans were against the balance sheet. There were some clauses in loan agreements on changes to the business structure, which would require reconsideration of the arrangements by the lenders. All these exercises would have to be done for each scenario.

Mr Ntsokolo said that in terms of human resources (HR), this had not been considered previously. Assets were spread across the country. Training programmes would also have to be considered. Some personnel involved with the transmission network might have to move with any assets to be transferred. Benefits would have to be listed. There would have to be negotiations with the trade unions. Service level agreements and support arrangements would have to be considered.

Mr Ntsokolo said that this could be done at desktop level, but it became more complicated as one moved into the practical arrangements. Some contracts might have to be renegotiated as the change in structure might amount to breaches of contract in some cases. Loan agreements would have to reviewed. Intellectual property issues would have to be taken into account. Eskom did not own the land it used in many cases, and used land on a servitude basis. Legislation might be needed to transfer rights. Any current litigation should be identified.

Mr Ntsokolo said that the final phase of the project plan involved technical aspects. Electricity was generated at a relatively low voltage, and was stepped up before being introduced into the transmission system. If the transmission lines were transferred from Eskom control, some arrangement would have to be made to cover this. There would have to be a clear understanding on the difference between transmission and distribution. Many nuances would have to be cleared up. A proper risk assessment would be needed

Mr Ntsokolo said that Eskom believed that the last week of the planned period, ending in early December, would be very tight. He asked if this could be extended to January. Eskom was still committed to providing the final report by the middle of January 2012, and to provide two-weekly progress reports.

Discussion
Mr L Greyling (ID) said that Committee was being put into a difficult situation. At least there was a plan but it had not being put into place. The Minister had only approved the plan the day after the Committee had last met with the team. This process should have started much sooner. The finalisation of the Bill could now only be expected by March 2013 whereas the President had announced the intention to introduce the legislation two years previously. The Task Team was not reacting to the Committee's instructions. The goalposts kept being moved. Many of the issues raised should be dealt with only after the Bill was implemented. Members needed to know what the broader applications were.

Ms Magubane responded that it was regrettable that there was a perceived delay, but it was essential that the procedure be correct. The electricity sector could not be destabilised in the process. The third party would be a consultant reporting to the steering committee, which would make an unbiased judgement. She begged the Committee's indulgence.

Ms B Ferguson (COPE) agreed with what Mr Greyling had said. The Committee had given a time frame. She asked if there would be further delays. The Committee was unable to fulfil its commitment to finalise the Bill by the end of 2012. She thanked the Task Team for their commitment.

Ms Magubane committed the Task Team to complete the work on time. She knew that her statement would be on record.

Mr A Nyambi (ANC, Mpumalanga) said that it had been clear that Eskom felt it was only presenting to the Portfolio Committee. They should have recognised the Chairperson of the Select Committee. Many engagements were being made, but it was a problem if there was a lack of understanding. He wanted some elaboration on the changes put forward by Eskom. He asked why there was no business plan. There were broader implications, and he needed clarity on what these could be. Joint meetings like the current one would assist in reaching understanding.

Mr K Sinclair (COPE, Northern Cape) said that the perceptions that all processes terminated at the National Assembly should be stopped. He thanked the Chairperson for making that clear. There was still a proverbial elephant in the room. Smaller role players were needed to make the sector work. In many issues, such as staff, Eskom seemed to be the only role player. He might have missed something, but there was no mention of a business plan. The reality was that the process could not work without such a plan. Business imperatives should inform the decisions. The solution had to be financially sustainable. He could not see the project being completed even before 2014. On the appointment of consultants, Eskom and the various departments had many experts. If consultants were still to be appointed he could not see the January deadline being met. The project plan spoke about a third party. He asked who this might be. He stressed the need to include the NCOP.

Ms Magubane took note of the comments made by Members of the NCOP. The business case would be centred on business principles. Perhaps one should rather be talking about an implementation plan. Treasury was also part of the steering committee, and would have to give guidance and what support package could be given. Eskom could not do a credit rating on itself, hence the need for an outside consultant. This function had to be done independently.

Ms E van Lingen (DA, Eastern Cape) had listened to the introductions of the guests at the meeting. She sensed the urgency felt by the private sector, and felt there might be a purposeful dragging of feet to delay the process. The NCOP would be sitting until the first week of December and would be glad to assist.

Ms Magubane replied that DoE would work hard to speed up the plan. She again asked the Committees for indulgence.

Mr K Moloto (ANC) said that every piece of legislation presented to Parliament had to include the financial implications. The current form of the Bill had not included reference to the transmission system. He had warned that the deadlines would not be met. Due diligence had to be thorough. He felt that it was over-optimistic to expect the process to be completed within the time frame set. Members should not delude themselves. He was happy with the thorough scope presented. Such a process was needed before even thinking of removing something from Eskom. It would be irresponsible to consider the legislation without considering all implications. He supported the creation of ISMO. South African politics were riddled with dishonesty. Too much was expected of entities by Parliament, and the entities were then blamed should they fail. Eskom had been told to go ahead with its new building programme but had had to go to financial institutions to raise the finance. There was a need to define some of the technical terms. At some stage high voltages had to be stepped down for consumers, and he asked where this function fell. He asked if the credit review was a desktop study.

Mr Ntsokolo replied that the separation between transmission and distribution was on voltage. The sub-stations rendering this function provided an intricate challenge in defining which component belonged to which system.

Ms N Mathibela (ANC) said that one of the conclusions was that the team would have to shorten the process as much as possible, but still looked to last four to six weeks. She asked if there was approval for it yet.

Ms Magubane replied that the Minister had approved the original ISMO Bill. There were now significant changes. She was aware of the separation of powers between Parliament and the Executive.

Mr Thabang Audat, Acting Chief Director: Electricity, DoE, said that the initial intention had been to attend to the four functions. The issue of moving transmission assets had come up during the public hearings and was not part of the original mandate. Eskom was a state-owned company producing 95% of electricity requirements. IPPs were now being brought into the system and renewable energy sources, with private funding, were being included. Some independence was needed in the regulation of arrangements between these parties and Eskom. The independent entity would contract with both Eskom and the private sector. The functions would be ring-fenced and moved to an independent operator, and this package might include the transmission wires. The only difference between IPPs and renewable energy suppliers was in the procurement regime.

Mr Mohammad Adam, Divisional Executive, Eskom, said that some issues had been highlighted. The first was security of supply. Eskom had the challenge of ensuring supply while informalising the system. There was an issue with staff and in how customers would be affected. Eskom had suggested a phased approach as a result.

Mr Njikelana reminded the meeting that different types of Bills were processed in different manners.

Adv Ntuthuzelo Vanara, State Legal Adviser (SLA), said that the Bill had been tagged as a section 75 Bill. This would not affect provinces. It had been put before the NA, and had been referred to the Portfolio Committee. Should the Bill be approved in the NA, it would go to the NCOP for deliberation. If the NCOP proposed any amendments it would be referred back to the NA. In the event of any difference of opinion, the NA would consider what to do with the recommendations and send the Bill through to the President.

Mr Sinclair said that this debate had been heard before. The fact was that the agenda for the day was a joint meeting. If the SLA was correct, then this meeting was not much more than a workshop. In fact, NCOP Members present were essentially wasting their time as they would consider the Bill at a later stage.

Mr Nyambi proposed that NCOP Members consider the input of the SLA, and then the two Committees could hold separate sessions to deliberate on the Bill. The joint meeting was helpful but Members would not be able to make any decisions.

Mr Njikelana said that joint efforts should be supported. It would be helpful that initial briefings on legislation should be considered by such joint meetings. Once the Bill arrived at the NCOP, its Members would already have some understanding.

Mr Greyling said that the process still had a long way to go before the Bill was enacted. He estimated that the Bill would only be finalised as early as 2014. There was going to be an impact on Eskom, and he asked what the consequences of a further delay would be. Similarly, IPPs were to be encouraged and he asked what challenges delays in passing the Bill would have on them. Parliament could continue with this through hearings while Eskom pursued the due diligence study. There were other pivotal items of legislation. If the ISMO Bill could not be processed, Members could apply themselves to the other legislation. A way forward had been given, and Parliament should proceed with all haste in order to reach this state.

Mr Njikelana noted Mr Greyling's comments. The DoE should respond on the Electricity Regulation Act (ERA) and other legislation. The National Economic Development and Labour Council (Nedlac) had been working on these. The delays with ISMO might have been an ideal opportunity to catch up with other legislation, but this had also been delayed.

Ms Magubane said that DoE had little control of legislation once it left Cabinet. Nedlac had said that they needed three months to conduct their processing of any new Bill. DoE did not control this institution. She asked the Chairpersons to see if there was any way to fast-track this process.

Mr Greyling asked if there was any precedent in government business, such as the removal of South African Airways (SAA) from the Transnet stable.

Ms Magubane said that she would need to do some research. It was more of an advantage for Transnet to be rid of SAA than a disadvantage.

Mr Njikelana said that a number of issues had been raised. The time frame was one of these. He asked both Committees to agree with the January 2013, but work must continue on the implications in the interim. Joint sessions should be sustained wherever possible. The ISMO proposal was a complex one. The role of other bodies such as the Treasury should be prominent. He understood that Treasury was part of the team and should be making a considerable input. The implementation plan was replacing a business case. This should be included in the analysis of the implications, and Members must decide if it should be considered at present or at a later stage. The concept of ISMO was to bring the private sector on board. The Committee could have been completed its deliberations by June already, but had been sensitive to the needs of the public and private sector. It was now time to move with speed. The Bill should fulfil its purpose by bringing more efficiency to the sector. There was a section in every Bill on financial implications. This was the reason for the delay, but this must not be extended unduly. Members should take on board what had been raised during the public hearings. The electricity sector as a whole might need to be restructured. The electricity distribution industry as a whole needed to be rethought. A roadmap was needed sooner or later. Electricity comprised 80% of the country's energy consumption. As much as possible should be invested in electricity issues.

Mr Adams said that section 75 and 76 Bills should be considered jointly by the Committees. There would be no need to duplicate public hearings although in terms of section 76 Bills, there would need to be consultation within the provinces. The duplication of meetings with the Committees on a separate basis was counter-productive. Members of the DoE were too busy appearing in Parliament to carry on with their normal business.

Mr Njikelana said that Nedlac had met on the ERA Act and negotiations was progressing. They should be completed by 21 November. He appealed to all Members to ensure that the final version of the ISMO Bill did not leave them with an uneasy feeling.

Mr Adams said that the procedure should not be allowed to drag out until January 2014. There was an impact for the entire country.

Ms Magubane thanked the Committees for their continued support.

The meeting was adjourned.