ELECTRICITY REGULATION BILL, AMENDMENTS: SUBMISSIONS AND HEARINGS.

SUBMISSION BY CENTLEC (PTY) LTD’ A MUNICIPAL ENTITY (ME) OF MANGAUNG LOCAL MUNICIPALITY (MLM).

PRESENTED IN CAPE TOWN SEPTEMBER 2006.

 

A WRITTEN SUBMISSION BY CENTLEC (PTY) LTD, A MUNICIPAL ENTITY (ME) OF MANGAUNG LOCAL MUNICIPALITY (MLM) ON THE ELECTRICITY REGULATION AMENDMENT BILL. PRESENTED IN CAPE TOWN (SEPTEMBER 2006).

 

1. INTRODUCTION

 

As CENTLEC we welcome the opportunity to contribute our thoughts and suggestions concerning the Electricity Regulation Bill. CENTLEC is happy to support the reforms inherent in the bill, though CENTLEC is concerned about certain aspects of the bill, details thereof are discussed latter on this submission. In our view the bill signals government's determination in ensuring that the industry improves its efficiency and effectiveness to meet not only the needs of the country's economy but also the residential customer’s expectations by lowering electricity prices and their demands. The bill will support and build on the electricity distribution reform initiatives that commenced in 1997.

 

 

There is no doubt that the electricity regulation framework as it stands today is inadequate for the effective management of the electricity distribution industry today. The number of pieces of legislations governing this sector confirms this conclusion. The reason for this is that, these Acts/regulations were developed at different times, and largely in isolation from each other. When read together, these statutes do not provide a complete or logical legislative framework for meeting today's electricity distribution needs. They cover different geographical areas and have different—and sometime conflicting—goals. The Electricity Regulation Act, of 2006; Under Schedule 1 has attempted to correct such glitches. The draft bill in our view is a further attempt to clear similar mismatches especially in the areas of roles and responsibilities amongst different players. 

 

CENTLEC’s submission concerns itself mainly with the definition(s), and their implications on the Municipalities, Eskom and the Industry at large. Due to the inadequacy of the bill, many discussions are raised in the submission though not raised by the bill but were deemed crucial by ourselves. Our emphases are bolded to highlight the gist of our submission.

 

2. INPUT NUMBER 1: Under Amendment of Section 1 of Act 4 of 2006.

 

On the definitions of: (a) “community” (b) “domestic end user” & (c) “light industrial or commercial customer”.

With the exception of the above mentioned definitions, CENTLEC commends the bill on all other definitions as stated in the bill especially the RETICULATION definition. The bill has defined reticulation in a manner that spells out municipal licensing rights, and that will go a long way in clearing the confusion in as far as the legitimacy of the licensee is concerned. 

However as CENTLEC we do NOT agree with the bill’s definition of (a)  “Community”, (b) “domestic end user” and (c) “light industrial or commercial customer” all read interchangeably. It is our view that the three definitions do not only corrupt the meaning of reticulation as we understand it, but are bound to give rise to unanticipated complexities.

From various English dictionaries and indeed anthropological sources we understand “community” to mean the following:

A “Community” is a social group of any size whose members reside in a specific locality, share government, and often have a common cultural and historical heritage. Perhaps the most appropriate definition of community in the context of the bill should be the one from Collins internet-linked dictionary of sociology wherein “community” is defined as: “any set of social relationships operating within certain boundaries, locations or territories.” 

The term is also applied to non-residential communities as indeed was applied by the bill when defining community to mean “domestic end user” and domestic end user as a person who consumes electricity for domestic purposes, a light industrial or commercial customer and such other customers as the Minister may, in consultation with the Minister for Provincial and Local Government and the Minister of Finance, determine by notice in the Gazette”.

Now CENTLEC’s difficulty is the limitation on the definition of “person”, be it legal or natural. In this case the limitation to the legal persona is based on the following definition by the bill:

light industrial or commercial customer means a service rendering, retailing, manufacturing, mining or agricultural customer who purchases less than five thousand mega watt hours ( 5000 MWh) of electricity per annum at a contiguous site other than a public water pumping scheme or public traction substation”

In CENTLEC’s view the area of jurisdiction comprises all land which municipalities control. This should be interpreted to imply: The sale and distribution of electricity within every part of the area of jurisdiction of any local authority should be under the control of that authority. Irrespective of whether the end-user (natural or legal person) use electricity for domestic purposes, public water pumping scheme or public traction substation, etc.

Exclusion or failure to implicit inclusion of large industrial customers in the definition of “community” will result in residential customers not realizing the benefits of restructuring especially in areas of price reduction and/or low cost/affordable electricity especially in rural areas. There are a number of reasons why the residential customers-especially rural-may not achieve the significant price reduction that both industrial and commercial customers are and will continue to receive. These reasons include the fact that cross-subsidization of the residential customers from the large industrial and commercial customers may no longer be available as large industrial customers commonly referred to as ‘Key Customers’ in other areas, will be regulated  differently at least as implied by the bill.

 In addition, residential customers will not have the scope to reduce usage through load management to the same degree that industrial and commercial customers have mainly because of “unavailability” of time of use metering mechanism. At this stage its uneconomical for rollout of such sophisticated form of metering among residential customers.

In our view it is almost impossible to eliminate cross-subsidies while maintaining affordability, safety; reliability and indeed rationalisation of tariffs by customer classes. The ideal state is having residential customers being in the same tariff structure regardless of location, thus effect cross-subsidy from urban to rural customers and Industry to residential. Domestic prices-especially in rural South Africa, should be subsidized by the so-called Key Customers. In our view subsidies are required to meet the goal of universal access and affordable electricity supply to all residents. It’s common knowledge that Key Customers are crucial for any distributor due to the correlation that exists between key customers’ long-term relationships and profitability. If indeed there is a strong hypothetical conviction and such vehemence prevails: that cross-subsidies should NOT exist across customer classes, then we propose that alternative ways of assisting (subsidy) the low income consumers be found and that in the case of Free Basic Electricity (FBE) be enhanced.

As CENTLEC we are in favour of a “market-based” electricity distribution sector as we interpret it based on the bill-with special emphasis on those customers that use 5 GWh and above of electricity per annum-but this should not be done at the expense of the poor. Indeed markets should be a means to the country’s well being. If that noble goal is not naturally achievable then the people centred state should in fact intervene.

2. RECOMMENDATION 1

The community definition should not be restrictive, and thus we recommend that the definition of community be defined to include every thing and every person (natural or legal) within the area of jurisdiction of the municipalities. 

If the palpable term “COMMUNITYreferred to in the RETICULATION” by the bill is confusing or is not sufficient/adequate/appropriate according to some stakeholders, then CENTLEC strongly recommends that, the definition of “community” be replaced by “local community” as it is sufficiently, adequately and appropriately defined by the MSA.

local community” is defined in Section 1 of the Municipal Systems Act (MSA) as follows:

“’local community’, in relation to a municipality, means that body of persons comprising-

(a)     the residents of the municipality;

(b)    the ratepayers of the municipality;

(c)     any civic organisations and non-governmental, private sector or labour organisations or bodies which are involved in local affairs within the municipality; and

(d)     visitors and other people residing outside the municipality who, because of their presence in the municipality, make use of services or facilities provided by the municipality, and includes, more specifically, the poor and other disadvantaged sections of such body of persons”.

It is CENTLEC’s view that this bill should be the main facilitator of ensuring that the entire distribution industry is eventually transferred to REDs without exceptions of Key/Large Industrial Customers, public water pumping scheme; public traction substation and whoever and whatever.

On the latter we feel compelled to make a justification for our position. Arguments can be made by some stakeholders with regards to the so-called Key/large Industrial Customers, as indeed similar arguments are raised in the blueprint. One, that a number of the large/key electricity customers in South Africa are currently supplied under contracts that contain specially negotiated terms, and to the best of our knowledge the majority of those contracts (+/- 98%) are with Eskom under Key Sales and Customer Services (KSACS). Secondly, that since the bill will facilitate the ‘exit’ of Eskom in the “community” -as narrowly defined by the bill- and that such a move will result in distributors having greater purchasing power and being able to obtain better prices.

Our view is the opposite and is aligned to counter arguments also raised in the blueprint. That removal of Key/Large Industrial Customers in the domain of the “community” (eventually the REDs), might result in the REDs struggling to survive. And, because the Electricity Act states that anyone supplying electricity to customers that uses electricity above 5GWh per annum should be licensed.  That implies that in the case of the bill all customers below 5GWh are deemed as captive customers since they fall within the bill’ narrow definition of a “community”. Hence the municipalities become the natural/automatic licensees. And that any customer that uses above 5GWh of electricity per annum becomes “contestable”. Now if our interpretation is correct, then we have the following concerns:

  1. The great possibility exist wherein municipalities stand to loose ALL customers that uses electricity above 5GWh per annum due to incentives that, “contestable customers” stand to get from Eskom. In our view Eskom is both the referee (Generation) and a player (Retail), and that can’t be deemed to be fair.
  2. The latter implies that, there will, in fact, be cross-subsidies amongst customer classes. Where the poor subsidise the rich instead of the other way round due to price squeeze tendencies that might arise from the Eskom generation.

In the same breath we will view special price agreements argument with the same suspicion. In our view the concerns around special price agreement have been satisfactorily dealt with by the blueprint. Wherein the blueprint recommends that such agreements should be honoured by the receiving entity.

In the event where our views are not favourably accepted, due to the ‘significance’ that Industrial Customers have on the South African economy. We move to acknowledge that to the business community electricity is the commodity that should be managed, but to residential customers electricity is a basic need. Therefore separation on how these two customers are viewed, and regulated might necessitate “dual” regulatory framework, the implications thereof notwithstanding.   

We however recommend that an agency (public entity) be created and that such an agency should become a wholly owned subsidiary of the EDIH, albeit on a temporary basis. Such a notion is in line with the blueprint recommendation on the ownership of the REDs until they are fully established, operational and sustainable.

The agency should amongst others be tasked with the following responsibilities:

(i)                  Rural Electrification in order to accelerate universal access to energy

(ii)                Wholesale electricity supply including international trading, retail marketing of a electricity product to key customers i.e. end-use customers with a consumption of 100 GWh per annum or more and/or from 5GWh and above; and Demand Side Management strategy formulation and implementation 

(iii)              Research and Development with special emphasis on environmentally friendly renewal energy sources.

(iv)               Interventions where capacity is lacking with the intention to capacitate ‘weaker’ municipalities.

 

The agency in essence will be the transfer of Eskom’s KSACS (mainly personnel, related assets; intellectual property etc.) from Eskom to the independent entity with separate management, books; personnel; signage; building etc. At that point KSACS will cease to exist and such a move will effectively deal with the potential conflict of interests on the part of Eskom. 

3. RECOMMENDATION 2: Norms and Standards Section 31.

CENTLEC is of a view that the norms and standards should form part of the bill and eventually the ACT as the addendum. And should amongst others include the following regulated surpluses i.e. limitation of surpluses from electricity accounts for rates relief, regulated minimum required expenditure on maintenance and capital; Board of directors etc.

4. INPUT NUMBER 2: Section 40, Intervention

Section 154 (1) of the constitution compels the national government and provincial governments by legislative and other measures to “support and strengthen capacity of municipalities to manage their own affairs, to exercise their powers and perform their functions” rather than taking the function away if a municipality lacks capacity.

5. RECOMMENDATION 3: Section 40, Intervention.

CENTLEC recommends that, this section be removed since it is covered by the constitution as explicitly stated above. Any thing to the contrary will be unconstitutional.

6. RECOMMENDATION 4: TARRIF SETTING.

Both this bill and other regulatory initiatives have consistently failed to explicitly deal with the ambiguity in roles between the municipalities and NERSA when it comes to tariff settings. EDI reform proposals (the bill included) assume a single national energy regulator and leave very little scope for local government to regulate electricity tariffs.  This national approach to economic regulations is not inappropriate, given our country’s economic and development challenges, and indeed need not undermine the potential for local government to exert an appropriate level of executive control over the industry.  The challenge though is that the same tariff setting authority is constantly assigned to both municipalities and NERSA. Lawmakers need to find a solution to this constitutional imperative which has assigned this role to the municipalities at least to the best of our knowledge.

The blueprint does propose that, the municipalities on an individual or collective basis should establish service delivery agreements with the electricity service providers operating within their area – be it the RED or Solar Home System providers.  In reality though, municipalities will effectively have no power to terminate agreements with REDs, since RED boundaries will be established by national government.  Such service delivery agreements will only make sense if they provide municipalities with some “teeth” such as those covered under section 40 (Intervention) of the bill, but currently assigned to another sphere of government instead of local government in the case of external service providers.

 

7. CLOSING REMARKS

 

We believe that the bill should unravel a lot of confusion that surrounds issues that we raised above and many others. Yet relevant issues such as staff transfer, electrification etc are not reflected in the bill. We are also of the opinion that issues involved in reshaping retail  as we have it today are obscured if the bill is surprisingly silent on them. Hence our view is that the important issues involved in reshaping the electricity distribution industry are NOT properly captured by this bill. In that context the bill is inadequate in addressing the needs of the industry as a whole, hence the call for comprehensive amendments.

 

Inadequacy of the bill would tend to defeat its purpose, which is to establish forthwith a comprehensive framework for the restructuring of the electricity distribution industry, and to make certain other changes in law, necessary or appropriate to effect/accelerate the restructuring. Therefore as CENTLEC we view this bill as an emergency one, necessary for the immediate preservation of the electricity service in South Africa (SA). A service in our view that is essential to the health and well-being of all residents of SA, to public safety, and to orderly and sustainable economic development.

 

Pula!!!

 

 

 

 

 

References:

  1. Electricity Act
  2. Electricity Distribution Restructuring Blueprint,
  3. Draft Policy on Negotiated Pricing Agreements, NER (2003)
  4. South African Constitution
  5. National Treasury Material
  6. Previous Public Hearings Materials
  7. Electricity Regulation Act (2006)