1. BHP Billiton welcomes the establishment of a single regulator to regulate the electricity, piped-gas and petroleum pipeline industries by the Department of Minerals and Energy (DME), which will hopefully add to the coherence and consistency of regulatory frameworks in the various energy industries.
2. We further support the explicit safeguards regarding continuity of decision making in the electricity industry by inclusion of Section 5(5)(a) which states that part-time or full-time members of the Energy Regulator may hold office for a period of four years, unless the Minister appoints member of the Energy Regulator for shorter periods. BHP Billiton strongly supports the inclusion of several of the current part-time NER Board members as members of the Energy Regulator so as to ensure institutional memory and consistency of decisions are maintained.
3. BHP Billiton further appreciates the public nature of all Energy Regulator meetings as enshrined in Section 8(8)(a).
4. However, the Bill is silent on some issues in which very recent policy changes appear to have been made, most notably the transition of the ESI towards a competitive industry with wholesale electricity markets, and unbundled Generation, Transmission and Distribution businesses.
5. This issue is particularly important as the Energy Regulator Bill should provide high-level regulatory principles and guidance for the effective regulation of the ESI. The apparent move away from or indefinite delay in the introduction of competitive markets and towards a de facto ‘single buyer model’ in which the DME takes responsibility for ensuring security of supply of electricity is not addressed at all, thereby leaving the proposed Energy Regulator without guidance on basic yet critical issues, such as inter alia the regulation of independent power producers (IPPs), contestability, access to the Transmission grid, concurrency of jurisdiction with the competition authorities and Ministerial discretion.
6. The responsibility for security of supply is of critical importance at present and the parts of the Electricity Act (1987) that remain in force, such as Chapter 3 of the Electricity Act, suggest that the NER has this responsibility. Chapter 3 of the Electricity Act (1987) states that:

3 Objects of regulator

The objects of the regulator are, subject to the provisions of this Act, to exercise control over the electricity supply industry so as to ensure order in the generation and efficient supply of electricity, and to perform such other functions as may be assigned to it by or under this Act.

7. The current DME initiative to contract IPPs, although supported by BHP Billiton in the context of looming capacity shortages, appears to be at odds with the aforementioned object of the regulator. The Bill provides an opportunity to provide clarity on security of supply responsibilities including the obligation to supply, yet fails to do so.
8. The draft pricing policy produced by the DME, further includes the following (Section 4.2.7.3): "With the formation of REDS and the possible entry of private sector investors in the generation and other players (traders, retailers, financial brokers, etc) in the ESI in the future, the question of who has the obligation to supply becomes critical and will be addressed in a different text." BHP Billiton agrees that this is a crucial issue and urges that this be resolved as soon as practicably possible. The draft pricing policy further states that ‘The DME, in consultation with the Department of Public Enterprises, shall ensure the national security of supply of electricity’, which is equally at odds with the object of the Electricity Act. It is further our position that implementation of the security of supply policy, once defined by the Department of Minerals and Energy, should ideally rest with an independent Transmission System Operator and in its absence, with the Energy Regulator.
9. BHP Billiton strongly supports the position on non-discriminatory access to the transmission network as outlined in the draft DME pricing policy and would like to urge the Department to provide a timeframe for its implementation. In our view the regulation of third party access to the Transmission grid, including terms and tariffs, should be included in the Energy Regulator Bill. (It would further be helpful if the term ‘uncommitted’ capacity is clarified as this is a potential source of abuse of dominance by the currently integrated monopoly).
10. BHP Billiton therefore requests the DME to provide clarity on the policy revisions and to map out the envisaged future industry structure and the various responsibilities of the players, including the DME, Eskom and the regulator. In particular the policy towards IPP tenders (including the approach to ‘unsolicited’ IPP projects) and the regulation of the associated power purchase agreements needs to be incorporated into the Bill so as to ensure the regulator of adequate powers.
11. Moreover, the composition of the Energy Regulator is unclear in terms of the distribution of executive and non-executive members, in the discussion below some suggested improvements are included.
12. Lastly, a clarification of the grounds for and procedures to be followed in appeals to the Minister must be included in the Energy Regulator Bill, so as to prevent undermining of the independence of the Energy Regulator or spurious appeals. This also requires a clarification of the concurrency of jurisdiction between the competition authorities and the Energy Regulator on competition matters.
13. The headings used below correspond to the Chapters of the Energy Regulator Bill.

 

Chapter II National Energy Regulator

Section 4 Functions of the Energy Regulator

14. Section 4(a) indicates that the Energy Regulator must ‘undertake the functions of the National Electricity Regulator as set out in section 4 of the Electricity Act’, which inter alia includes:

4 Functions of regulator

(1) The regulator may-

(a) issue licences for the generation, provision and, within the area determined by it, distribution of electricity;

(b) determine the prices at and conditions on which electricity may be supplied by a licensee;

15. Given the proposed restructuring of the ESI, which includes non-discriminatory access to the Transmission grid and contestability of large customers, this section should explicitly incorporate in 4 (a) the role of suppliers who are neither generators or distributors, including the registration or licensing of contestable customers and electricity traders, whether by the proposed Market Governance Body or by the NER, as well as provisions for the importation of electricity by consumers; and in 4 (b) the determination of separate Transmission and Distribution charges (as opposed to bundled energy and transport charges).
16. Although the supply of electricity by IPPs appears to be included in Section 4(1)(b) of the Electricity Act, yet no explicit mention is made of pass-through of the cost of this supply by Eskom, or the regulation of such charges when the agreement is concluded between the IPP and either Eskom or the DME.
17. Similarly, the Energy Regulator should be able to determine or regulate the pass through cost of demand side participation via for instance reserve markets.
18. The Energy Regulator Bill also provides an opportunity to provide clarity on the requirements and implications of contestability, which are of imperative importance to demand side participation in an ESI that is increasingly in tight supply. This is particularly important as the DME pricing policy specifically includes the following: ‘Initially, all customers purchasing 100GWH or more at a single point will qualify to buy bulk electricity at wholesale prices.’
19. Section 4(c) of the Electricity Act states that the

4 Functions of regulator

(1) The regulator may-

(c) at the request of any licensee or its consumer settle disputes between licensees among themselves or between licensees and their consumers or prospective consumers regarding-

(i) the right to supply;

(ii) the quality of such supply and the provision of services in connection therewith;

(iii) the conditions on and prices at which electricity is supplied;

(iv) the installation and functioning of meters;

(v) the suitability of the equipment of the licensee;

(vi) delays in or refusal of supply by a licensee;

(vii) any other matter in respect of which a licensee or its consumer requests the regulator to act as mediator;

20. In addition, Section 10(2) of the Electricity Act (1987), which continues to be in force, states that among the Duties of a licensee is the following:

10 Duties of licensee

(2) In case of undue delay or refusal on the part of the licensee to supply any applicant with electricity, such applicant may appeal to the regulator, which shall decide whether the licensee shall undertake the supply and which shall determine the conditions on which it shall be done.

21. Given the concurrency of jurisdiction between the National Electricity Regulator and the competition authorities on competition matters, it would be prudent to update Section 4(c) of the Energy Regulator Bill and 10(2) of the Electricity Act accordingly and to explicitly include the approach to be taken both in mergers and in abuse of dominance cases. The current Memorandum of Understanding is in our view insufficient to prevent ‘forum-shopping’ or potentially conflicting adjudication on the same matter by both authorities and does not provide a clear appeal process (as Competition Tribunal judgements can be taken on appeal to the Competition Appeal Court and decisions by the NER can be taken on appeal to the High Court).
22. The manner in which concurrency of jurisdiction is dealt with, particularly regarding abuse of dominance in a regulated monopolistic industry undergoing transition, is pertinent.
23. As all of the items listed under Section 4 1(c) are areas in which competition concerns could arise, mere ‘dispute settlement’, without mandatory notification and consultation of the competition authorities or explicit anti-competitive practice restrictions, will be inadequate to address such concerns.

 

Chapter II National Energy Regulator

Section 5 Composition of the Energy Regulator

24. Section 5(1) stipulates that the Energy Regulator consist of three full-time and five part-time members, but is silent on the nature of these members. In particular, it is unclear whether any of these members shall be executive members or whether the CEO will be a member. Section 8(7) further states that the CEO will have no voting rights, which suggests that the CEO will not be a formal member of the Energy Regulator.
25. This arrangement appears to be out of line with the King II report, which advises that any Board should be represented by a majority of non-executive directors and a minority of executive directors.
26. Although the role of the chairman and chief executive are separated in the proposed Energy Regulator, the Bill does not specify that the chairman should be an independent non-executive director and the CEO an executive director serving on the Board.
27. The stipulation in Section 5(3) that the ‘Minister must designate one of the full-time members to be primarily responsible for electricity regulation, another for piped-gas regulation and another for petroleum pipeline regulation’ suggests that these members may be executive, but this is not explicit. In addition, it is questionable whether a full-time executive member is warranted on both piped-gas regulation and petroleum pipeline regulation given the difference in regulatory obligations in these areas when compared to the much more significant responsibilities of the regulator in the electricity industry. The appointment of a full-time executive member could lead to replication and undue interference in the regulation of the gas pipeline and petroleum pipeline industries.
28. While not explicitly stated anywhere else in the document it is presumed that both the full-time and part-time members have voting rights. This presumption is supported by Section 8(4):

8 (4) ‘The quorum for any meeting of the Energy regulator is a majority of its serving members or four members, whichever is the greater.’

29. BHP Billiton is of the view that the executive members should include the CEO as well as the three aforementioned full-time members and that all members should have voting rights. The effectiveness of the proposed regulator would further be significantly enhanced by a clarification of the roles, responsibilities and voting rights of the Energy Regulator members.
30. In addition, Section 5(5)(c) states that:

‘If a part-time or full-time member of the Energy Regulator ceases to hold office for any reason, the Minister may appoint another person in his or her place for a period of up to 12 months without complying with section 6(7).’

31. This Section should be qualified by a statement that the Minister may not further extend the appointment for another 12 months without complying with section 6(7).

 

Chapter II National Energy Regulator

Section 6 Disqualifications and requirements for membership of Energy Regulator

32. Section 6 (1) states that:

‘No person may be appointed as or remain a member of the Energy Regulator if that person-

(c) has been convicted of an offence involving dishonesty.’

33. The range of offences should be expanded to at least include rape, murder and other crimes of violence.

 

Chapter II National Energy Regulator

Section 8 Meetings of Energy Regulator

34. Section 8(5)(b) states that ‘in the event of an equality of votes on any matter, the person presiding at the meeting has a casting vote in addition to his or her deliberative vote’, but does not define which member can be a presiding member. It appears from Section 5(4) that only the chairperson or the acting chairperson can preside. A definition should be provided of the ‘presiding member’.
35. Section 8(7) states that:

‘The chief executive officer, or if unavailable an employee of the Energy Regulator designated by the chief executive officer, must ex officio, attend all meetings of the Energy Regulator and has the right to speak and receive all documentation relating thereto including documentation contemplated in subsection 8(b) and (c) but may not vote at such meetings.’

36. With regard to Section 8(7), it is clearly stated that the CEO has no voting rights. As mentioned above, BHP Billiton believes this to be an anomaly that should be rectified.
37. Alternatively the restriction on voting could be limited to the CEO’s substitute.
38. Section 8(8)(a) states that:

‘Any meeting of the Energy Regulator must be open to the public unless the quorate meeting passes a resolution to the effect that matters to be discussed include confidential, proprietary or commercially sensitive information which would detrimentally affect a particular business or industry if disclosed to the public."

39. Section 8 (8)(a) states that any meeting of the Energy Regulator must be open to the public, which is strongly supported by BHP Billiton. However, in the same section an exception is provided when ‘matters to be discussed include confidential, proprietary or commercially sensitive information’ without providing criteria for determining whether information is confidential. It is anticipated that this exception provides the potential for abuse, as national and international experience show that an incumbent is likely to argue all information is confidential. BHP Billiton urges the DME to provide clear qualification criteria for such claims. There should be a limitation which prevents a blanket closing of meetings such as the requirement that a resolution passed must reference specific information or date to be discussed during a particular agenda item at a specific meeting.

 

Chapter II National Energy Regulator

Section 9 Duties of members of Energy Regulator

40. Section 9 states that:

‘Members of the Energy Regulator must-

(d) recuse themselves from and refrain from voting on or discussing any matter, pending before the Energy Regulator and in which they have a direct or indirect pecuniary interest;’

41. The bold font "and" appears to be obsolete.

 

Chapter II National Energy Regulator

Section 10 Decisions of the Energy Regulator

42. Section 10(3) states that ‘any person adversely affected by a decision of the Energy Regulator may bring such decision under review by the High Court.’ However, Section 21 of the Electricity Act states that any undertaker, local authority or consumer (…) ‘shall have a right of appeal from a decision of the regulator to the Minister.’ If the two appeal routes are to co-exist, the grounds for appeal should be clarified in each case and the Bill should specify the process and criteria the Minister is to take into consideration in order to adjudicate on an appeal. Alternatively and preferably, the appeal process should be limited to the High Court application.
43. As indicated earlier, given the concurrency of jurisdiction between the National Electricity Regulator and the competition authorities on competition matters, it would be prudent to update Section 4(c) of the Energy Regulator Bill and 10(2) and 10(3) of the Electricity Act accordingly and to explicitly include the approach to be taken both in mergers and in abuse of dominance cases. Moreover, as Competition Tribunal judgements can be taken on appeal to the Competition Appeal Court and decisions by the NER can be taken on appeal to the High Court, it is not clear which Court shall prevail in the case of dissenting judgements by the two adjudicative bodies. This hiatus in the Energy Regulator Bill should be rectified.

Chapter II National Energy Regulator

Section 11 Personnel of Energy Regulator

44. Section 11(2)(c) mentions the ‘employees of the Energy Regulator’, although no mention is made of the right of the CEO to appoint such employees as Section 5A of the Electricity Act (1987) is to be repealed. Section 5A(2) states that:

5A Appointment and functions of chief executive officer

(2) The chief executive officer-

(a) shall be responsible for the management of-

(i) the affairs of the regulator in accordance with the provisions of this Act and subject to the directions of the Minister and the regulator; and

(ii) administrative control over the employees appointed under paragraph (b);

(b) may, subject to paragraph (c) and on such conditions as the regulator may determine, appoint such employees as may be required to perform the work connected with the functions of the regulator;

(c) shall pay such employees such remuneration, allowances, subsidies and other benefits as the regulator may determine in accordance with a remuneration structure approved from time to time by the Minister with the concurrence of the Minister of Finance;

45. This oversight needs to be rectified.
46. Section 11(5) states that ‘the Minister may instruct the Energy Regulator to appoint or make use of persons employed or contracted by another licensing or regulatory authority falling under the Minister’s jurisdiction’. BHP Billiton is of the opinion that the ‘instruction’ to do so could compromise the Energy Regulator’s independence and ability to fulfil its functions capably by such unconditional Ministerial discretion and suggests changing the wording to oblige the CEO to ‘appoint capable employees, taking current persons employed or contracted by another licensing or regulatory authority falling under the Minister’s jurisdiction into consideration.’

 

Chapter II National Energy Regulator

Section 12 Funds of Energy Regulator

47. Section 12(2) states a new source of funding of the Energy Regulator, namely: ‘money appropriated by Parliament’. It is assumed that this will occur via the budget vote of the DME and it would be prudent to include safeguards to protect the independence of the Energy Regulator in this Section.

 

Chapter II National Energy Regulator

Section 13 Accounting by Energy Regulator

48. Section 13(2) states that the Energy Regulator must keep ‘separate accounts for the electricity, piped-gas and petroleum pipelines regulatory functions’. It is unclear how practicable this Section will be, as many functions will presumably be shared by the different regulators, such as human resources, finance departments and the like. A formal protocol regarding cost and resource sharing will be required.

 

Chapter II National Energy Regulator

Section 14 Reporting by Energy Regulator

49. Section 14 states the information that should be included in the Energy Regulator’s annual report, but does not include audited financial statements or stipulate the timeframe for such reporting, which should be rectified.
50. Section 14 further mentions ‘directives issues by the Minister’, which refers to Section 28 of the Electricity Act (1987) which remains in force:

‘(1) The Minister may make regulations relating to-

(a) the form and manner in which any application for a licence or amendment thereof or objection thereto shall be made and the fees payable in respect of any such application;

(b) the conditions, other than such conditions as are mentioned in this Act, which may be attached to the grant of licences;

(c) the duties and obligations of undertakers;

(d) the procedure to be adopted by a licensee requiring rights of way or water rights in connection with his undertaking;

(e) the protection of the public from damage owing to the exercise of rights granted under this Act;

(f) the inspection of and enquiry into the control and operation of undertakings;

(g) the units or standards for the measurement of power, the verification of meters, the fees to be charged therefor and the settlement of disputes as to measurements of power and limits of error;

(h) the frequency, type of current and pressure of electricity generated or supplied;

(i) the mode of supplying electricity;

(j) the procedure at and quorums for meetings of the regulator;

(k) the method of noting and conducting appeals from decisions of the regulator;

(l) the considerations which shall guide a water court in granting an application or awarding compensation under section 18;

(m) the obligation of an undertaker to supply electricity to a consumer and the circumstances under which the obligation will be deemed to have been waived;

(n) the conditions on which electricity supplied to premises may be resold to another person;

(o) the fines for offences referred to in sections 22 and 27;

(p) ......

(q) anything which may or shall be prescribed by regulation in terms of this Act, and generally for the better carrying out of the objects and purposes of this Act, the generality of this provision not being limited by the provisions of the preceding paragraphs.’

51. It is certainly acknowledged that the Minister needs to retain the discretion to provide the guiding principles for the direction Government wants to take the ESI to follow. However, a balance should be struck between direction and Ministerial discretion. Unfortunately, the provisions of Section 28 of the Electricity Act are too detailed in some respects whilst lacking in others. For instance, the objectives of the Energy Regulator, future market structure and guiding regulatory principles are absent, whilst technical regulatory issues (such as metering) are included in the Minister’s discretionary powers.
52. BHP Billiton would like to urge the DME to reconsider this balance and include a clear and unambiguous mandate for the Energy Regulator in the Bill, which provides guidance to all stakeholders.
53. Some of these powers would be best vested in the Energy Regulator, such as Section 28(a), (b), (c), (f), (g) and (h) of the Electricity Act (1987).
54. Section 28(j) of the Electricity Act, detailing the procedure at and quorums for meetings of the Regulator, is specified in the Energy Regulator Bill, making this Section obsolete.
55. Section 28(k) of the Electricity Act, the method of noting and conducting appeals, is a particularly important issue. As the experience of the 2004 price application by Eskom shows, appeals to the Minister are likely to become more frequent as Eskom’s tariffs are more effectively regulated (as the self-imposed pricing plan of the 1990s has come to an end). Therefore the grounds for and procedures and criteria involved in appeals to the Minister should be clarified in a detailed manner in the Energy Regulator Bill.
56. The appeals issue becomes even more pertinent given the increasingly tight supply that the ESI faces and the envisaged move towards a more competitive industry. The potential for abuse by an incumbent in such a situation is significant and therefore the ‘rules of the game’ should be made unambiguously clear. BHP Billiton urges the DME to ‘fill in the blanks’ regarding appeals to the Minister and provide all the industry’s stakeholders with enhanced certainty and policy predictability, thereby reducing the risk associated with investment in the ESI.
57. Similarly Section 28(m) of the Electricity Act, containing the obligation to supply, is becoming increasingly important, as security of supply and supply obligations are the central dilemmas facing ESI restructuring. As mentioned earlier, it would be helpful to all stakeholders if a firm policy position were developed on this issue, which needs to be enshrined in legislation.
58. In a restructured ESI the powers described in Section 28(n) of the Electricity Act, conditions for resale of electricity, should be vested with the Energy Regulator (or alternatively with the proposed Market Governance Body or independent Transmission System Operator if responsible for security of supply). The resale of electricity will play a critical role in demand side participation in the ESI, providing much needed market liquidity. Any policy uncertainty on this matter is likely to create problems in the future and aggravate looming supply shortages.

28 July 04