ESKOM’S COMMENTS ON
THE ELECTRICITY REGULATION
AMENDMENT BILL
[B20 – 2006]
1.
Introduction
1.1.
This submission provides Eskom’s commentary
and proposals on amendments to the Electricity Regulation Act (“the Act”) as
contained in the Electricity Regulation Amendment Bill (“the Bill”).
2.
Achieving the Objectives of the Electricity
Regulation Act
2.1.
Eskom supports the following key objects
(amongst others) of the Electricity Regulation Act:
2.1.1.
achieve the efficient, effective, sustainable and orderly development
and operation of electricity supply infrastructure in South Africa
2.1.2.
ensure that the interests and needs of present and future electricity
customers and end users are safeguarded and met
2.1.3.
facilitate a fair balance between the interests of all stakeholders.
2.2.
Eskom believes that the Amendment Bill should be consistent with these
objectives.
2.3.
In order to achieve the objectives of the principal Act, Eskom recommends:
2.3.1.
A definition of reticulation
based on voltage of supply which is unambiguous in relation to roles of
stakeholders, and identification of customers and associated assets
2.3.2.
An institutional framework
for regulation based on National Energy Regulator of South Africa (“NERSA”), as
a single national centre of excellence for regulation, for efficient,
effective, sustainable and orderly development of the industry
2.3.3.
Transitional measures which enable effective operations during the
conversion of licenced supply to regulated reticulation services without threat
of disruption to customer service, economic growth and the quality of life of
citizens
2.3.4.
Appropriate administrative measures, notably for tariffs and servitudes
or similar rights, to support the application of the Act to reticulation, and
consolidation of the industry in support of public policy for electricity
industry restructuring.
3.
Regulatory Framework
3.1.
The regulatory framework consists of two
parts:
3.1.1.
the definition of reticulation which identifies the type of regulation
applicable
3.1.2.
the institutional framework which applies the regulatory framework in
terms of public policy.
3.2.
Regulation of non-reticulation is achieved
through the independent regulator, NERSA and includes regulation of tariffs
based on allowed costs and allowed return on assets. To be effective, this regulation requires unambiguous
identification of non-reticulation assets.
4.
Definition of Reticulation
4.1.
The Bill defines reticulation in terms of
distribution to customers with consumption of less than 5000MWh per annum at a
contiguous site.
The definition is critical to the regulatory
framework since it defines the roles of all stakeholders: customers,
municipalities, reticulation service providers, regulator and Minister, and
also the associated assets.
4.2.
The definition allows significant uncertainty
as to the intention of the Bill in terms of electricity assets. Due to the technical arrangements to deliver
electricity to different customers, this definition cannot specify which assets
are used in reticulation services: the same high voltage (“HV”) and medium
voltage (“MV”) lines are used to deliver electricity from Transmission to
customers regardless of total purchases by each customer.
4.3.
A line which formerly supplied only
reticulation customers could be used in future to also supply a
non-reticulation customer. Similarly,
reticulation customers could be added to an existing line previously only
supplying non-reticulation customers.
Or a customer could switch between categories based on growth or decline
in purchases.
4.4.
In contrast, a definition in terms of the
voltage of electricity supply is unambiguous when referring to any customer or
to any asset in the electricity network since the voltage of customer supply
can only be changed by specific technical intervention and assets are
identified by voltage level. Such a
definition clarifies the roles of stakeholders and will enable regulation of
the operation of such assets and supply to such customers.
4.5.
Eskom recommends:
4.5.1.
Reticulation should be defined in terms of the voltage of electricity
supply
4.5.2.
The reticulation voltage should be set at a value designed to include
the “community” as defined in the Bill - in our opinion this voltage should be
380 volts to include all normal supply to the community as intended by the
Bill.
This new definition will also help clarify the Service Delivery Agreement (“SDA”) which, in terms of the Municipal Systems Act
(“MSA”), must provide for the transfer of reticulation assets to the
municipality on termination of the SDA.
5.
Institutional Framework
5.1.
The Bill provides that reticulation is not subject to regulation by the
regulator, but also provides for extensive powers and obligations for the
Minister to set compulsory norms and standards, including a national tariff
framework, quality of supply, basic services, etc.
5.2.
This “dual regulation” concept is contrary to the objective of an integrated
and effective electricity supply industry, and could lead to greater
disparities than in the present industry.
5.3.
Eskom believes that the independent
regulator, as a component part of NERSA, should play a significant role within
South Africa’s regulation of energy matters in terms of public policy. The regulator is the preferred source of
competence and excellence to provide non-discriminatory regulation of
reticulation and non-reticulation services.
5.4.
Eskom recommends
5.4.1.
The Minister should be responsible for policy and strategy
5.4.2.
The regulator should have regulatory authority over reticulation,
instead of the Minister, in all appropriate circumstances, notably in setting
compulsory norms and standards, including a national tariff framework, quality
of supply, basic services, etc., where current proposals allocate such powers
and obligations to the Minister
5.4.3.
The regulator should licence and regulate service providers in the
provision of reticulation services to municipalities in order to integrate the
regulation of reticulation and non-reticulation services
5.4.4.
The regulator should develop rules and policies for reticulation that
are appropriately aligned to non-reticulation regulation
5.4.5.
The regulator’s powers should be consistent with Constitutional
imperatives.
6.
Transitional Measures
6.1.
We note that the Bill requires that
reticulation services, if not provided by the municipality, must be provided in
terms of a Service Delivery Agreement (“SDA”) which complies with the MSA.
6.2.
There are no transitional provisions to facilitate:
6.2.1.
municipal procedures in terms of the MSA, which would require a section
78 study to be performed by each municipality since this is a required lengthy
procedure prior to entering a SDA with a service provider for a municipal
service
6.2.2.
agreement on SDAs to convert existing licences to reticulation service
provision
6.2.3.
a dispute resolution mechanism which must be followed upon failure by
the parties to conclude an initial service delivery agreement due to a dispute.
6.3.
Despite compulsory provisions proposed for
SDAs in section 30 of the Act, the essence of an agreement is that neither
party can be forced to accept that agreement. We believe this requirement for an agreement
fails to acknowledge the severe transitional situation in the event that the
municipality and the existing license holder (Eskom) are unable to reach
agreement. The proposal in section 28
(6) (b) that the service provider will “cease to provide reticulation services”
may be impractical, but the alternative continuation of service will be
illegal. The regulator is best
positioned to adjudicate a solution that includes flexibility appropriate to
the circumstances of the municipality and former licence holder.
6.4.
Such adjudication should be speedy and have time frames because the
Minister will prescribe a period within which the SDAs must be entered into and
failure to enter into an SDA within that period will result in the service
provision of the service provider being illegal.
6.5.
We also note that
negotiation and administration of the initial individual SDAs will be a major
burden on Eskom unless the initial SDAs are standard. It will be impractical for Eskom to negotiate and administer individual
SDAs with each municipality in any reasonable timeframe that may be prescribed
by the Minister.
6.6.
Eskom recommends:
6.6.1.
The Minister should prescribe a transitional standard SDA (or small set
of standard SDAs) which will apply to all municipalities
6.6.2.
Municipalities should be exempt from requirements of the MSA section 78
(and similar requirements) for external service provision if the parties use an
approved standard SDA.
6.6.3.
In the event of non-agreement by a municipality and a former licence
holder on the terms of the SDA to transition from licence holder to service
provider, the regulator should act as adjudicator and may issue a new licence
to the former licence holder in its former area of supply within the municipal
area of jurisdiction on such conditions as the regulator deems fit
6.6.4.
Automatic lapsing of Eskom’s license on commencement of the Act should
be deleted since this implies a possible period of Eskom distribution with
neither licence nor SDA.
6.7.
Such provisions will promote continuity of
supply and resolve other difficulties such as the costly metering and
ringfencing of reticulation assets, impact on employees, collection of
outstanding debt, transfer of customer contracts and assumption of statutory
responsibilities. Further benefits
could be obtained by exemption from requirements of the MSA section 78 for external
service provision if service is according to a standard SDA.
7.
Administrative Matters
7.1.
We comment on administrative matters that impact the objectives of the
principal Act, including:
7.1.1.
A tariff framework
7.1.2.
Transfer of servitudes and similar rights
7.1.3.
Industry Consolidation
7.1.4.
Public entity price changes
7.1.5.
SDAs in the event of emergencies
8.
A tariff framework
8.1.
We note that the Bill seeks to provide a framework for setting of
tariffs by municipalities which must comply with the requirements of the
MSA. Eskom welcomes a tariff framework
for sufficient recovery to enable investment in assets to assure supply and
sustainability for the entire extended electricity supply value chain. We believe that this framework should also
support Government policy of “low cost electricity to all consumers, with
equitable tariffs for each customer segment” (Blueprint). This will require the ability to transfer
subsidies between customer categories and geographies across municipal
boundaries.
8.2.
We believe the National Tariff Framework should recognise the importance
of a common subsidy framework to avoid the disparity of tariffs currently
established within the industry.
8.3.
We believe that the Bill should recognise Eskom’s vital role in
supplying electricity as a regulated service provider and the fact that Eskom
has equitable national tariffs in its current supply areas. This role may be transferred to a future
national distributor in terms of Government policy.
8.4.
We note that section 74 of MSA requires a municipal council to adopt and
implement a tariff policy in which tariffs comply with certain principles. These principles include:
8.4.1.
Reflecting costs reasonably associated with rendering the service,
including capital, operating, maintenance, administration and replacement
costs, and interest charges
8.4.2.
Setting at levels that facilitate the financial sustainability of the
service, taking into account subsidisation from sources other than the service
concerned.
8.5.
In requiring that a municipal tariff policy will comply with “national
norms and standards”, the Bill should provide that such a tariff policy will
automatically comply if based on regulated tariffs charged by an external
regulated service provider.
8.6.
Because Eskom is a regulated service provider, consumers have assurance
that municipal tariffs based on Eskom’s regulated tariffs will reflect costs
and facilitate financial sustainability, subject to subsidies paid and received
between different customer classes and received from government. In principle the regulator will maintain its
oversight on the service provider’s costs and on financial sustainability to
provide assurance that municipal tariffs comply with the MSA.
Eskom
recognises the need for certain municipalities to surcharge services to assure
revenues.
8.7.
Eskom recommends:
8.7.1.
The regulated tariffs of reticulation service providers should be legally
accepted as reflecting costs and facilitating financial sustainability, as
required by MSA
8.7.2.
If using a regulated external service provider, the tariff of a
municipality should reflect the regulated tariffs of the service provider, and
may not be to the detriment of that service provider.
8.7.3.
Similar provisions should apply to the credit management policies and
other rights of the Executive Authority.
8.7.4.
Municipal surcharges should be transparent and regulated under
appropriate legislation.
8.8.
We propose these changes to support the Government policy for low
equitable tariffs for all consumers on a national basis.
9.
SERVITUDES
9.1.
Neither the Bill nor the principal Act enables the transfer between
distributors of servitudes and similar rights (“servitudes”) which provide
essential access to electricity assets.
9.2.
Section 13 of the repealed Electricity Act of 1987 enabled the transfer
of servitudes between distributors when responsibility for an area of supply
and the associated assets are transferred between distributors. Section 13 was included in the repealed
Electricity Act after a court ruling that Eskom’s servitudes are personal
servitudes and in terms of the common law cannot be transferred.
9.3.
Transfer of servitudes will be essential if reticulation services are
transferred to another municipality or service provider as envisaged in the
proposed section 41, Emergencies. Transfer of servitudes will also be essential
for EDI Restructuring where networks must be transferred to REDs with
appropriate access to the assets.
9.4.
If servitudes are not transferred, the existing servitude holder will
face challenges including compliance with the Occupational Health and Safety
Act, which places the duty to maintain the servitude on the servitude owner,
and the Municipal Property Rates and Taxes Act, which puts the duty of payment
of rates and taxes on the servitude owner.
9.5.
Eskom recommends:
9.5.1.
Legislative provision should give all distributors the right to transfer
their servitudes
9.5.2.
The provision should follow the wording of section 13 of the repealed
Electricity Act.
10.
INDUSTRY CONSOLIDATION
10.1.
The Electricity Distribution Industry (“EDI”) Restructuring Blueprint
proposes industry consolidation. The
benefits of consolidation include economies of scale, quality of supply, electrification,
staff career opportunity, and financial viability. It is clear that there are many aspects of Government policy that
will be enhanced through appropriate consolidation. However, the Bill acts as a barrier to consolidation in that it
reinforces the statutory obligations of the MSA in the provision of
reticulation services. Such obligations are only relaxed in the event of
“emergencies” in the proposed section 41 of the Act.
10.2.
Eskom recommends:
10.2.1.
The Bill should support the approved consolidation process for EDI
Restructuring through reduced statutory requirements for approved consolidation
of the industry
10.2.2.
Provisions should be similar to the relief for emergencies in the Bill’s
proposed section 41 or the more generalised relief provided by section 177 (3)
of the Municipal Finance Management Act (“MFMA”).
11. Price Changes
11.1.
The MFMA section 42 requires processes for price changes by organs of
state to municipalities to be effected by March 15 in any year for effect on
July 1 of the same year, else the price change is delayed to the following
year. To the extent that the Minister
prescribes time periods in the Electricity Regulation Act which impact Eskom’s
regulated bulk prices, then such time periods must take into account the
requirements of the MFMA.
11.2.
Eskom recommends:
11.2.1.
The Minister should be required
to take into account the requirements of the MFMA and the impact on organs of
state in prescribing dates and regulations in terms of the Act.
12. SECTION 41(6): SERVICE
DELIVERY AGREEMENT IN EMERGENCIES
12.1.
In an emergency, in which a directive has transferred reticulation
services to another municipality or service provider, the parties are
nevertheless required to enter into a SDA on taking over. This may be impractical, although the rights
of the accepting municipality or service provider should be protected.
12.2.
Eskom recommends
12.2.1.
the regulator should be the adjudicator under the circumstances of an
emergency and be enabled to sign the SDA with the accepting municipality or
service provider.
13. Conclusion
13.1.
In conclusion, Eskom believes that the Bill in its present form:
13.1.1.
Does not establish an optimal regulatory framework
13.1.2.
Creates an unworkable model for demarcation of the roles of the various
stakeholders
13.1.3.
Has the potential to seriously disrupt the provision of services by not
including adequate transitional mechanisms
13.1.4.
Does not facilitate consolidation for more effective restructuring of
the industry.
13.2.
Eskom believes that the recommendations above are within the objectives
of the Electricity Regulation Act and comply with the intent and terms of the
Constitution on Executive Authority.
Our proposals support the consolidation of the industry and keep the
significant national assets of the electricity distribution industry intact.