SACOB welcomes the intention to consolidate the three different energy regulators – electricity, piped gas and liquid petroleum pipelines, into one energy regulator. This should contain the costs of infrastructure and operations, resulting in a benefit for the South African economy.

The attached comments are based on a mandated SACOB position on Regulators, the essence of which is as follows:

• In broad terms, the functions of regulatory bodies generally include:
• licensing
• ensuring that licence holders comply with the licence conditions (i e fulfilling basic service provision objectives)
• protecting consumers against possible abuses by the operator (e g tariffs, the availability and quality of service, complaints)
• securing the objectives of competition policy

In fulfillment of these functions there must be a balance so as to ensure that consumer interests are not pursued to the detriment of investment in the industry and its efficiency goals.

The relationship between government policy towards competition and that associated with regulation requires clarity. At times it is easy to confuse a pro-market stance with condoning the abuse of market power. Such confusion can arise wherever there exists a dual role of promoting economic growth and regulating a market. As presently defined by competition law, the actions of bodies that are subject to public regulation lie outside the jurisdiction of the Competition Commission. Regulation should provide the antidote to the absence of competition. SACOB argues that certain guidelines are necessary so as to avoid the prospect of the process degenerating into one in which the relative power and influence of different interest groups largely determines the outcome. Such an environment can lead to ‘rent seeking’, as it can prove advantageous to employ resources for influencing the decisions of regulators.

It is with these concerns in mind that SACOB submits that regulatory policies should be guided by the following:

• Operational and policy formulation responsibilities are the prerogative of the government and should be separated from regulatory responsibilities.
• Such separation can be achieved by the establishment of independent regulatory bodies. In this manner a stable regulatory environment, free from political interference can be offered to investors and consumers alike.
• A process should be established for the appointment of regulatory bodies. Such a process must be free from any suggestion of partiality.
• It follows that it is important that the Regulator be funded adequately and independently.
• The regulatory process should be capable of straightforward and prompt implementation (e g tariff rule procedures). Its procedures must be transparent.
• In order for it to fulfill its function the Regulator should have access to the necessary information relating to the activities of the institutions that it has to regulate.
• The rulings of the Regulator must be enforceable with provision for an appropriate appeal and/or review procedure.
• Parties affected by regulatory decisions should be given the opportunity to present input to the process.
• Officials in regulatory agencies should be prohibited from being employed by the parastatal they are regulating, (and in this case, also from being employed by the private sector organization operating the piped gas facility), for a set number of years. Enforcement of this guideline would require an appropriate remuneration and training strategy.
• There is a need for balance to be maintained between the interests of the parastatal and the interests of the consumer.

The principles are not altered by the fact that in the case of the Energy Regulator, two areas fall under parastatal activities, namely electricity and petroleum pipelines, while the third, gas pipelines, under the private sector – Sasol.

SACOB recognises that the Energy Regulator Bill largely adheres to these principles.

SACOB observes that clause 5 (5)(a) states that for reasons of continuity or synchronisation, an appointment of either a part time or full time member could be for a period of less than four years. This seems to be a contradiction in terms as it is usual that continuity dictates that a period longer than that stipulated is the norm. SACOB therefore recommends that the words "of continuity or" be deleted in this clause, but that they be included in clause 5(5)(b) where provision is made for the reappointment of members, one of the reasons being for the sake of continuity.

SACOB agrees that it may be necessary to reappoint members for a variety of reasons. However, SACOB also notes that clause 5(5)(b) does not place a limit on the number of times a person may be reappointed. SACOB cautions that care should be taken in considering reappointments so that entrenchment of membership does not occur, leading to possible domination of proceedings. This could, however, result in difficulty in obtaining members of suitable qualifications. Since clause 6(3)(a) stipulates that full time members have to terminate any current employment and other relationships that may conflict with the duties as a member of the Regulator there may be a reluctance to accept a position where there is limited security of tenure. While SACOB does not have a ready solution to this dilemma, it points out that this could be an unexpected consequence.

Bearing in mind that Regulators should be independent bodies, and the fact that members will be appointed, and conditions of service will undoubtedly be confirmed by the Minister, SACOB seeks confirmation that the independence of the Regulator will not be compromised.

Clause 7(1)(b) states that a member must vacate his or her office if he or she has been absent from more than two consecutive meetings without the leave of absence from the Chairperson. SACOB suggests that the words "or does not have a valid reason for such absence" be added at the end of the sentence.

Clause 8(3) refers to prescribed procedures, but does not say where such procedures may be prescribed. SACOB proposes that this be clarified. For example, procedures could be agreed upon by consensus of the members or prescribed in the Regulations to the Act. There may be other means of determining procedures as well.

Clause 9(b) states that members must act in the interests of the Energy Regulator and not in their own sectoral interests. SACOB submits that the Regulator should act in the interests of the country, and hence the members should act in interests of the energy industry as a whole – consumers and providers, and therefore in the interests of the greater South African economy, and not in that of the Regulator.

Clause 10(1)(d) indicates that the Regulator must take decisions in a procedurally fair process in which affected persons have the opportunity to submit views and present relevant facts and evidence to the Regulator. SACOB believes that the Regulations should include provisions whereby such affected persons can be made aware of the issues being considered by the Regulator.

The business community has a fundamental interest in energy tariffs and in the maintenance and operation of energy infrastructure as these two areas impact on business costs. SACOB therefore requests that the annual report of the Regulator includes information on tariffs and tariff structures as well as infrastructure and access to infrastructure.

In concluding, SACOB would like to draw attention to a view on regulatory principles concerning the telecommunications industry that has been developed by the International Chamber of Commerce (ICC), one that business organisations are promoting worldwide. The principles can be equally applied to other economic sectors such as energy. In paraphrase, the ICC says that:

Competition best serves the objective of meeting users’ needs. As the number, role and variety of service and infrastructure providers multiply, the government’s function in the interests of users should shift accordingly from administering public utilities regulation to supporting full and fair competition by the following means:

Wherever competition is not yet allowed, or has only recently been introduced, the government should regulate the operator to the degree necessary to achieve the objective of meeting users’ needs with respect to price, choice, quality and consistency of service and in such a way as to minimise the distortion of competition in neighbouring markets. The extent of such regulation should be proportional to the need, using the least restrictive methods to achieve the regulatory objectives.

The authorities should remove regulatory barriers to competitive entry, enabling new entrants to contest markets. The objective is to ensure that there are economically viable alternatives for users or other service providers, either to select among competing operators or to establish their own facilities. Where this is lacking, such as where there are bottlenecks or instances of dominance, utility-type regulation may be required in the absence of market forces to ensure that users’ needs are met. In such instances, it should be limited to the facilities, services or geographic areas where viable alternatives are lacking, and it should be subject to periodic review.

The regulatory process itself should be organised so as to minimise the delays and costs associated with licencing and other forms of regulation, and should afford access to efficient and independent resolution of disputes and complaints, through commercial negotiations where feasible, and otherwise with regulatory oversight. As competition replaces utilities-type regulation, the competition authorities should formulate guidelines and enforce competition in the sector.

SACOB supports these principles, and believes that ideally the energy industry should operate in an open market, with competition possible both within and between the different sources. The chamber looks forward to a time when competition is such that there is no longer a need for a Regulator.

3 August 2004