Cosatu, Num, Numsa and Samwu Submission on the Electricity Regulation Bill

COSATU, NUM, NUMSA AND SAMWU SUBMISSION ON THE ELECTRICITY REGULATION BILL

[B29 – 2005 (Reintroduced)]

Presented to the Portfolio Committee on

Minerals & Energy

28 October 2005

CONTACT COSATU PARLIAMENTARY OFFICE

(021) 461 3835

TABLE OF CONTENTS

1 Background

2 Introduction

3 The institutional configuration of the regulatory framework

4 The proposed regulatory framework of the Bill in perspective

4.1 New generation capacity

4.2 Wholesale competition for contestable customers

4.4 Consumer Forums

4.5 Environmental Levies

4.6 Transmitter

4.7 Time of Use Pricing

5 Proposals for amendments to the Bill

5.1 Chapter I: Interpretation

5.2 Chapter II: Oversight of Electricity Industry

5.3 Chapter III: Electricity licenses and registration

6 Conclusion

1 Background

Of necessity, both the Reconstruction and Development Programme (RDP) and the White Paper on Energy (hereinafter, the White Paper) could not have explicitly articulated a detailed end-state vision of the restructuring of the Electricity Supply Industry (ESI) and Electricity Distribution Industry (EDI). However, the Department of Minerals and Energy (DME) commissioned a restructuring blueprint by PriceWaterhouseCoopers in 2001, whose recommendation called for a managed-liberalisation broadly along the lines of the United Kingdom and some states in the United States of America. Consistent with this restructuring paradigm, the DME introduced the Draft Electricity Distribution Industry Restructuring Bill and the Draft Electricity Pricing Policy in 2003 and 2004, respectively. To some extent, both documents begun to point to what might be the DME’s end-state vision of the restructuring effort, even though as the Congress of South African Trade Unions (COSATU), National Union of Mineworkers (NUM), South African Municipal Workers’ Union (SAMWU) and the National Union of Metalworkers of South Africa (NUMSA), we are opposed to the mooted reform model contained in these documents.[1]

In our understanding, based on the May 2004 State of Nation address by the President and the Minister of Public Enterprises’ 2004-05 budget vote speech, there has been a shift from the main thrust of the PriceWaterhouseCoopers’s blueprint, hence the withdrawal of both this draft legislation and policy. Thus, we are unsure as to the status of the “Pro-competitive Reform Programme”, which has not been made public for engagement with stakeholders, at least as far as labour is concerned.

However, we are concerned that the DME is now embarking on a piecemeal and tentative restructuring drive of the ESI and EDI without any explicit policy framework. Hence, in our analysis, it would appear that some of the features of the PriceWaterhouseCoopers’s blueprint are stealthily advanced, as reflected in the provisions of the Draft Electricity Regulation Bill tabled at the Development Chamber of NEDLAC and to some extent in the current version of the Electricity Regulation Bill [B29 – 2005 (Reintroduced)](hereinafter, the Bill).

In this vein, we welcome some of the changes that this tabled version of the Bill reflects relative to the contents of the initial Draft Electricity Regulation Bill tabled at NEDLAC. In this regard, we particularly refer to provisions that were geared towards the creation of a Wholesale Electricity Pricing System underpinned by a market clearing pricing mechanism, and all the attendant institutions such as the Market Governance Body and Market Panel and Operators. However, we would like to express our concerns with regard to the fact that the DME by-passed NEDLAC when it released the current version.

2 Introduction

In its previous submissions on the restructuring of the electricity industry, COSATU and its affiliates in the sector have consistently expressed our concerns regarding the implications for employment security for workers in the industry. Similarly, we are also concerned about some of the provisions of this Bill in the light of the fact that part of the Bill’s stated objectives is to introduce competition in ESI or generation.

We are also concerned that with the advent of Independent Power Producers (IPPs) enjoying unfettered access to the transmission network and direct supply to large end-users (wheeling), some of these major customers may be lost by the REDs. This is a factor that is likely to have a bearing on the REDs’ operational capacity and therefore on their overall cost-structure, including labour. Until now, even though many of these EIUs entered into bilateral trade contracts with Eskom Generation, at least these contracts were subject to municipal levies and cross-subsidisation. We are concerned that this Bill seems to depart from this practice.

The combined effect of these developments is likely to threaten workers’ employment security in the sector, hence we are calling on the DME to make sure that this process is handled with full participation of labour in the sector, namely the NUM, NUMSA, SAMWU and COSATU. We reject the use of a Social Plan as a means to legitimize avoidable retrenchments.

Despite our general criticism of some aspects of the White Paper, it seems as if the regulatory framework proposed in this Bill ideologically picks and chooses aspects of the White Paper neatly fitting the DME’s liberalisation schema. In other words, it leaves out some of the more important tenets of the White Paper, especially those geared at supporting the poor. Consequently, in the absence of a publicly confirmed restructuring vision, some of the provisions of the Bill are ambiguous and therefore create contradictions with the existing government’s overall policy. For instance:

• Where the White Paper calls for cross-subsidies, section 16.(1)(e) of the Bill provides that a license condition pertaining to the setting or approval of tariffs and the regulation of revenues “may (our emphasis) permit the cross-subsidy of tariffs to certain classes of customers”. This ambiguity suggests a continuing commitment to the withdrawn Draft Pricing Policy which called for the elimination of cross-subsidies and phasing-in of full-cost recovery pricing.

• On balance, the Bill’s provisions are openly biased towards one segment on the demand-side i.e. contestable customers. Section 15 grants certain categories of customers (previously, this explicitly referred to those consuming more 100 GWh of electricity per annum) the right to choose a supplier. In our view, this may have unintended consequences where a perverse incentive may arise as some of the light industrial and commercial customers raise their consumption levels in order to meet the threshold. If realised, this would undermine government’s Demand Side Management (DSM) policies and goals. From our point of view as labour, combined with the elimination of cross-subsidies, this could therefore unintentionally entrench or perpetuate the current capital-intensive industrialization trajectory and further shedding of jobs in the economy.

• One of the Bill’s objectives is to “facilitate universal access to electricity” and yet one of the tariff principles provided for in section 16.(1)(a) seeks to ensure that a licensee “recover the full cost of its licensed activities, including reasonable margin of return”. In our view, this isideologically inspired, based on the idea that any cross-subsidies are price or market distortions. We argue that full cost-recovery is going to lead to higher tariffs for remote regions - regions that tend to have lower or small customer density, size, geographic spread, financial base and socio-economic demographics. Moreover, it is going to undermine access and affordable use of electricity by the poor and small enterprises.

In our previous submissions (referred to above), we have consistently opposed this restructuring model and in our response to the White Paper we insisted that:

"The role and structure of Eskom should be tailored to advancing the aim of universal access to affordable electricity both for households and industry, within an overall policy of cross-subsidisation from rich to poor. In order to advance this aim legislation should clearly outline that Eskom is owned and controlled by the state and that in its external and internal programmes Eskom should be accountable to government’s broader RDP objectives."

Thus, our perspective broadly called for a regulated public monopoly, vertically integrated with a transmission agency and Regional Electricity Distributors established to consolidate the disparate municipal entities in order to realize economics of scale. In this context, Eskom must maintain its strategic development role including future expansion of generation, transmission and distribution capacity and ensuring maintenance of cheap electricity supply at lowest possible cost for poor households in particular.

Alongside the lifeline free basic provision for the poor, there must be an upward sliding tariff system in order to realize cross-subsidization in favour of the poor, and thus the promotion of DSM in the long-run.

At the COSATU 8th National Congress we further noted that;

‘Government’s restructuring model is not based on any comprehensive cost-benefit analysis as required in terms of the National Framework Agreement. Similarly, this pricing policy does not seem to be informed by any objective cost-benefit analysis beyond sheer faith in the possibility of competition to lower prices even as international experience betrays this faith’.

Informed by this perspective, we take issue in this submission with a number of provisions which we consider to be objectionable policy directions that require thoroughgoing engagement. Amongst these issues are:

• New generation capacity through IPPs
• Wholesale competition for contestable customers
• Cross-subsidisation
• Consumer Forums
• Environmental levies
• Transmitter
• Time of Use Pricing

In line with our conceptual critique of the proposed regulatory framework, we make concrete proposals for amendments to the Bill.

3 The institutional configuration of the regulatory framework

Figure 1: An NPAs-based Wholesale Market Model implied by the Bill

As we have already indicated above, the absence of an explicit end-state vision of the restructuring drive creates an impression that this regulatory framework is only an intermediary step along the route towards a completely liberalized ESI and EDI. Figure 1 above constitute our impression of such an intermediary stage in terms of our understanding of the provisions of this Bill and the policy measures that are mooted on ad hoc basis by the government as well as the provisions of the Draft Electricity Regulation Bill tabled at NEDLAC. It would appear as though the DME is proposing a model for the deregulation ESI, in which there would be wholesale competition between Eskom Generation and IPPs for “contestable customers”, unfettered third party access to generation, transmission and distribution wires.

4 The proposed regulatory framework of the Bill in perspective

4.1 New generation capacity

As labour, we do note that there has since been some shift in the government’s position with regard to the restructuring of Eskom. This shift was articulated by the new Minister of Public Enterprises in his address to the National Assembly in the debate on the Vote 9, the Department of Public Enterprises (DPE) on the 14th June 2004. In welcoming this shift, COSATU announced that:

“We are encouraged by the Minister’s assertion that there will be no big drive to privatize those State Owned Enterprises (SOEs) that provide essential services to the people..”.

Certainly, this was a departure from the announcement made by the previous Minister of Public Enterprises, Jeff Radebe on the 26th November 2003 before the Portfolio Committee of Public Enterprises, wherein he said that: “we are continuing with the regulatory work for the disposal of part of Eskom generation”.

However, we are concerned that notwithstanding these commitments, there has been some stealthy privatization of the state’s generation capacity or assets in the form of the “mothballed” power station, and other existing municipal generation assets including the Kelvin, Athlone and Grootvlei power stations under the guise of Black Economic Empowerment.

With regard to this Bill, it is clear that through Section 46 (1) and (2) the DME intends to deregulate the supply industry as well as to hold out a possibility of privatisation as part of the managed-liberalisation programme. Hence, under the guise of expanding the generation capacity:

• Section 46.(1)(ii), “provide for private sector participation”
• Section 46.(2)(b) accords the Minister the power to “purchase, hire or let anything or acquire or grant any right for or on behalf of the state or for the purpose of transferring such a thing or right to a successful tender”.

To begin with, as far as we are concerned, the matter of the “new generation capacity” is not a regulation issue, hence we believe Section 46 should be deleted. As labour, we are opposed to these provisions and call on the Portfolio Committee on Minerals and Energy not to endorse them:

• Firstly, on the back of rolling years of profitability, Eskom Holdings posted a record net profit in the 2004/05 year to the tune of R5.2 billion. This profitability far exceeds that of 2003 when it posted a net profit of R3.4 billion.
• Secondly, according to the Eskom chief executive, Thulani Gcabashe, Eskom's debt-to-equity ratio has improved to the point where the company was able to negotiate cheaper loans for capital expansion.
• Thirdly, as a result of this year’s financials, the rating agency Moody's Investors Service upgraded Eskom's domestic currency debt to A1 and foreign currency debt to A2.

Against this background and even beyond the more than R90 billion commitment for the capitalization of generation by Eskom in the coming years, as labour we are not convinced that the electricity supply industry requires 30% percent of new generation capacity from the IPPs as mooted by government. This Bill attempts to deregulate the ESI more as a matter of a liberalization agenda than out of necessity. In many instances, governments in the developing countries resorted to IPPs where bankrupt public sector entities could barely afford such investments, which is not true in the case of Eskom as highlighted above.

In fact, in our view under certain circumstances, especially favourable circumstances such as the current state of our ESI, “IPPs are heralded as the start of further liberalization and subsequent privatization of electricity”.[2] Given the absence of a policy direction, also taking into account Section 46.(2)(b) that allows for the transfer of state assets to private tenders, we view the deregulation of the ESI as a step towards privatization as originally mooted, prior to the May 2004 State of the Nation Address by President T. Mbeki.

According to the Public Service International Research Unit[3], investors in a greenfield IPP development always require a Power Purchase Agreement (PPA) from the dominant utility, in terms of which:

• There is a guarantee that they will be able to secure returns to their investors in which the utility undertakes to purchase the power the IPP produces. Hence, it is understood by the Director of the AES-led consortium, Mr Christian Wright, that no bank would ever think of committing funds to an IPP “without the assurance of a PPA”.[4] As the PSIRU observes:

“The reality is that in a sector like electricity, dominated by capital costs and long lead-times, companies do not now knowingly take risk. Nobody is going to invest, or more accurately, no bank will finance the investment of a billion dollars in a power station without very strong, probably contractual, assurances on the volume and price of the power they sell.”[5]

• Thus, IPPs which are usually purported as foreign direct investments are not necessarily the source of investment capital. A utility such as Eskom, underwritten by the national government as the shareholder is crucial in the IPP obtaining finance for the project. As PSIRU argues:

“The government guarantee is in fact assisting the IPP investors to raise finance – not the other way round”.[6]

Thus, as labour we argue that under such circumstances, IPPs have no incentive to respond to market conditions or to compete with other producers, and therefore to realize efficiency gains especially because PPAs are fixed for longer periods. Hence, in our view the key objects of the Bill as stated in Section 2 would not be fulfilled, i.e:

• Section 2 (c) which seeks to “facilitate investment in the electricity supply industry”.
• Section 2 (3) which hopes to “promote competitiveness and customer choice”.

Moreover, the World Bank itself does acknowledges that the private sector is not any more interested in investing in the utility industries of developing countries. In June 2004, the World Bank published a report on this matter, in terms of which it was able to show “that foreign investment in 2001 was less than half the level of 1997..”[7]

Table 1: Private investments in electricity in the developing countries:
1990 – 99 (1998 $ millions)
1990 / 1991 / 1992 / 1993 / 1994 / 1995 / 1996 / 1997 / 1998 / 1999 / Total
Sub-Saharan Africa / 49 / 0 / 27 / 1 / 84 / 42 / 1,014 / 503 / 7091 / 455 / 2,884
East Asia & Pasific / 55 / 454 / 4,622 / 5,592 / 7,291 / 7,492 / 11,677 / 12,437 / 4,833 / 1,945 / 56,398
Europe and Central Asia / 85 / 0 / 1,041 / 0 / 1,332 / 3,369 / 3,507 / 2,128 / 504 / 688 / 12,655
L America & Caribbean / 1,204 / 23 / 2,497 / 3,298 / 2,924 / 5,788 / 8,750 / 20,629 / 12,720 / 6,287 / 64,120
M East &
N Africa / 0 / 0 / 0 / 0 / 225 / 0 / 217 / 4,679 / 0 / 715 / 5,837
South Asia / 169 / 735 / 37 / 1,186 / 3,081 / 3,193 / 4,934 / 2,319 / 926 / 2,227 / 18,805
Total / 1,562 / 1,212 / 8,225 / 10,077 / 14,936 / 19,884 / 30,100 / 42,694 / 19,692 / 12,317 / 160,698

Source: World Bank PPI Data.[8]

Whilst the 1990s saw a wave of unprecedented privatization of utilities around the world, including electricity utilities and the deregulation of the ESI for the participation of IPPs, by the end of the decade the trend was in decline as can be seen in Table 1. These investments were welcomed and punted as Foreign Direct Investment (FDI), only to become albatrosses over host governments in the wake of the currency crisis originated in East Asia in 1997 and 1998 as many of the PPAs were denominated in US dollar. As a consequence, noting that this trend has not fundamentally changed, we believe that government should not be looking up to IPPs for further capitalization. The phenomenal delay in securing a Second National Operator in telecommunications underscores lessons learned by international financiers over the years with regard to private sector participation in the utility industries. We urge the DME to realistically take the contemporary reality into account: