Comment on the Electricity Legislation Second Amendment Bill

Amendments to Electricity Regulation Act 4 of 2006

1. The Free Market Foundation

The Free Market Foundation (FMF) is an independent non-profit public benefit organisation founded in 1975 to promote and foster an open society, the rule of law, personal liberty, and economic and press freedom as fundamental components of its advocacy of human rights and democracy based on classical liberal principles. It is financed by membership subscriptions, donations and sponsorships.

Most of the work of the FMF is devoted to promoting economic freedom as the empirically best policy for bringing about economic growth, wealth creation, employment, poverty reduction and human welfare (including better healthcare, increased life expectancy, literacy and educational quality). As a think tank the FMFs fundamental approach to policy questions is consumer-based. The foremost question the FMF asks in addressing any policy question, including the contents of the above mentioned Bill is, will this policy be to the long term benefit of consumers and especially those who are the poorest and most vulnerable? Consumer satisfaction is generally achieved by an absence of barriers to entry into the provision of goods and services, allowing consumers a choice between the offerings of freely competing providers. The Bill and the proposed amendments will therefore be assessed to ascertain whether it is likely to result in the most beneficial conditions for the consumers of electricity.

This comment is submitted as a contribution to government’s attempt to find a solution to the precarious position in which the country finds itself as a result of an inadequate supply of electricity to meet the needs of the nation.

2. Provision of electricity in South Africa

The generation, transmission, and a large percentage of the distribution of electricity in SA is currently carried out by Eskom, which is a vertically integrated Public Enterprise. Local authorities carry out the balance of the operation of distributing electricity. The actual and persistent threat of power shortages and the previous frequent abrupt termination of power to certain areas (blackouts) demonstrate that to maintain the state electricity monopoly in its current form is not in the best interests of electricity consumers, the employees of Eskom, or the government – in fact, the entire nation. There is a general consensus that a method has to be swiftly found to terminate the blackout threats and build in a safety margin between minimum expected electricity supply capacity over potential maximum electricity consumption.

Avoidance of blackouts is the first and most important objective, which can be achieved by implementing either or both of two policy options which have diametrically opposite effects on electricity consumers in South Africa.

The first and most desirable option is to bring about a rapid increase in the supply of electricity to satisfy the needs of all consumers, especially the needs of the large-scale industrial electricity users but without depriving other electricity users, including domestic consumers. Another option, which is being followed while Eskom is building new generating plants, is to bring about a reduction of electricity consumption to a point below the minimum expected electricity production level. The second major option can be brought about by “voluntary” reductions in electricity consumption, through persuasion, price increases, or selective blackouts when load-shedding becomes unavoidable. The second option has huge negative consequences for the economy. Apart from the “voluntary” reductions, there are firms that are punished for “excessive” use of electricity, and others that are denied access to electricity for new industries, property developments and even the building of new homes. The cost in production and development loss is enormous. The first option, to increase supply as rapidly as possible, is without doubt absolutely essential to avoid stalling the economy and doing harm to economic growth that will never be made up.

2.1 Increasing electricity supply
Inadequate progress has been made in increasing the country’s electricity supply. There appears to be no good reason why the government did not in good time allow independent power producers to build generation plants and increase the country’s power supply security. Delays have already resulted in huge economic losses and escalating costs due to power outages and the capital investments that electricity users have made in back-up plants to keep their plants and equipment operating and the lights on.

If electricity generation, transmission and distribution had been in private hands, with no barriers to entry preventing competitors from entering the market, this situation would not have arisen. The need for additional electricity generation capacity was identified in good time but because of the existence of regulatory barriers to entry alternative power producers were prevented from providing the required additional capacity.

There is no point in dwelling on past errors but there is every reason to ensure that the problem of insecurity of supply of electricity is resolved as soon as possible. There is also every reason to establish an electricity supply environment that will ensure that the current disastrous electricity insecurity, once addressed, never again occurs.

2.2 An alternative electricity supply environment
An alternative electricity supply environment that will ensure that there is no repetition of the existing perennial threat of electricity blackouts must necessarily emulate the most successful arrangements operating in other countries. There is no doubt that private investment and management of electricity generation, transmission and distribution play an important role in the most successful environments. The most important reasons for this phenomenon are the critical role played by competition in ensuring the lowest prices, timely investment, availability of capital, and continuity of supply, and the assurance that electricity consumers have of choice of providers.

A well-functioning electricity supply system appears to have certain essential features. They are:

2.3 Independently owned and operated transmission grid
Of all the features that appear to provide an assurance of smooth operation, an independently owned and operated high voltage transmission grid appears to be the most important. The entire grid need not have one owner and parts of it can be independently operated but NERC in the US has demonstrated that independent supervision of the grid and its operation is essential to protect its integrity. NERC is responsible for supervising connected grids that cover much of Canada, the US and Mexico.

It is essential that objective rules be established by participants for assuring that the integrity of the grid is maintained. It is also essential that any generator of electricity who abides by the rules should not be prevented from utilising the grid to sell electricity to customers. Similarly, purchasers of electricity who follow the rules should not be prevented from drawing electricity off the grid.

There is consequently a strong case for Eskom to divest itself of ownership and control of the transmission grid. Sale of the grid to private purchasers would supply much-needed capital to finance the building of new power stations or to pay off debt and reduce the burden on the government, taxpayers, and electricity customers.

2.4 Independent Power Producers
Independent power producers have, according to reports, been ready and waiting to build new electricity generation plants. Once the transmission grid is independent, the conflict of interest that will unavoidably have played a role in delaying the entry of independent power producers will have been removed. Entry of further power producers could then be entirely dependent on their meeting objective standards and not on a licensing process based on the subjective judgements of officials. No restriction would be necessary in an effort to prevent “excessive” investment in generation capacity. If there is inadequate business to sustain additional entrants, the cost will be borne by such entrants and not by taxpayers.

2.5 Distribution of electricity
The market for distribution of electricity to end users should be opened up in the same way as the opening of the transmission grid, except that consumers should have access to a choice of competitive suppliers as they do in other countries. The financing of local authorities through excessive charges for electricity should be discontinued. Distribution grids could be sold off to investors without the promise of monopolies. In fact, every effort should be made to ensure that there are competitive distributors, or the potential of competitive distributors, in order to contain prices.

2.6 Trading in electricity
With an independent grid or grids, competing power producers, and competing distributors, trading in electricity will become commonplace. A market for electricity will help to smooth supply and demand and reduce peaks and troughs in demand as price adjustments change the behaviour of users and consumers.
2.7 European experience
The best structure is not a single government monopoly such as Eskom, with centrally controlled oversight and direction. Much better structures are those that have evolved and continue to evolve in the European Union countries, based on the UK example, and the structure that has developed in North America.

An economics or business-driven structure for the delivery of electric power consists of an electricity grid made up of inter-connected high voltage transmission lines supplied by a multiplicity of electricity generating entities that feed electricity into the grid. An even greater multiplicity of distributors purchase electricity from the generating companies or from wholesale intermediaries, draw it from the grid, transform it from high to a lower voltage, and distribute and sell it to end users. For all or most of these functions to be carried out by a single organisation such as Eskom is not a good idea, especially when that organisation’s very existence depends on a legislated monopoly that prohibits competitors from entering the business of generation, transmission and supply of electricity.

There is ample evidence that SA’s electricity generation and supply structure needs to change. For instance, the Ignalina Nuclear Power Plant in Lithuania observes on its website that: ‘Until the late 1980s, the structure of the electric sector in most countries was based on the idea that the most efficient way to provide electricity was to have a national electricity company which was a natural monopoly and so needed to be state owned to protect consumers. However, now experience shows it is possible to divide electricity companies into those parts which are still natural monopolies (for example, high voltage and low voltage networks) and those parts where it is possible to have competition (for example, power stations) and to create a market for electricity. This experience is now being used all over the world to create cheaper electricity by means of competition among power stations and among companies that are in the business of purchasing and reselling electricity. Western Europe has shown that prices to consumers can fall by up to 20% when the market is fully operational.’

According to the website, a May 2000 European Commission report revealed marked decreases in the price of electricity from 1996 to 1999 in Finland -19.6%, Sweden - 17.6%, and Germany - 9.6%, all countries with 100% market opening. Spain - 16.2%, Portugal - 14.0% and France - 12.7% also experienced significant price reductions with a reduced level of market opening (between 30% and 45%). At the time of the report Lithuania was in the process of meeting the conditions for its 1 May 2004 entry into the EU, one of the conditions being the opening of its electricity market to alternative suppliers, a condition that applies to all EU members.

3. Change in the composition of the National Energy Regulator

The replacement by the Minister of the National Energy Regulator’s current four full-time and five part-time members with a Commissioner and three Deputy Commissioners (section 3 read with section 3 of the National Energy Regulator Act) will make a considerable difference to the manner in which energy issues are dealt with. Unfortunately, whether this change proves to be beneficial will depend on the manner in which the Commissioners go about dealing with their tasks. The word “unfortunately” is used because the legislation places too much discretionary power in their hands. A change in the make-up of the National Energy Regulator should make little or no difference to the decisions they take but there will predictably be a difference because of those discretionary powers.

3.1 Administrative Discretion
In section 14A of the National Energy Regulator Bill (Regulator Bill), which deals with Appeals, we are provided with a list of seventeen matters that entail discretionary decisions against which appeals may be made to the proposed Energy Appeal Board. This list provides an insight into the wide range of matters on which firms and individuals operating in the energy field are subjected to the discretionary powers of government officials.

It is a recognised principle of good law, and a requirement of the Constitution and the rule of law, that legislation should provide for a minimum of discretionary power, and when it does so, it should be subject to the Guidance Principle (Dawood and Another v minister of Home Affairs and Others 2000 (3) SA 936 (CC), and Janse van Rensburg NO and Another v Minister of Trade and Industry NNO 2001 (1) SA 29 (CC)). In other words, the legislature should make laws as objective as possible and, when it creates discretionary power, it is obliged to prescribe objective criteria according to which the power is to be exercised.

The doctrine of the Separation of Powers, also part of our Constitution, requires that it is the legislature (by way of statutes) and not the Executives (by way of regulation) that must prescribe those criteria.

There are sound jurisprudential reasons for these provisions being in our Constitution. Were there a better understanding and appreciation of the logic that informs them, there would be less propensity to undermine or ignore them in draft legislation. Firstly, if people do not know their rights and obligations, there will be wasteful confusion, uncertainty and conflict. Secondly, and more importantly, unconstrained discretionary power is the primary cause of corruption and the abuse of power. Corruption is one of South Africa’s most disturbing and debilitating problems.

The problems of corruption and abuse should be addressed at two levels: by avoiding discretion and by ensuring that whatever discretion is retained is exercised according to maximally objective criteria, and subject to procedural checks and balances. Appropriate checks and balances include established and proven mechanisms such as mandatory transparency, accountability, due process, rights of appeal (to truly independent courts or tribunals), non-discrimination, and the like.

For these and other reasons, wherever the Regulator Bill creates executive discretion, it should specify the criteria according to which that discretion must or may be exercised, and it should provide for appropriate checks and balances.

The rule of law requires that government should enact only such laws as are general in nature, are applicable to everyone including itself, and which do not attempt to bring about particular outcomes. The rule of law was described by Nobel Laureate Friedrich Hayek in his book The Constitution of Liberty:

The conception of freedom under the law ... rests on the contention that when we obey laws, in the sense of general abstract rules laid down irrespective of their application to us, we are not subject to another man's will and are therefore free. It is because the lawgiver does not know the particular cases to which the rule will apply, and the judge who will apply them has no choice in drawing the conclusions that follow from the existing body of rules and the particular facts of the case, that it can be said that laws and not men rule. Because the rule is laid down in ignorance of the particular case and no man's will decides the coercion used to enforce it, the law is not arbitrary. This, however, is true only if by "law" we mean the general rules that apply equally to everybody.

Matters in the Electricity Regulation Act, requiring discretionary decision-making on the part of the Energy Regulator should be reduced to a minimum by preferably setting out objective criteria in the legislation, with which firms and individuals can comply in conducting their affairs, removing the necessity for prior regulatory approval or administrative consent. Setting of objective criteria for the commencement and conduct of business in the electricity field would considerably reduce the need for approvals such as licence applications.

Reporting of the commencement of a business could be done by the filing of a “commencement of business” document to place the event on record. Where formal prior approval is considered to be necessary, objective criteria should be set in legislation to guide the administrative process and ensure that the exercise of discretion is carried out uniformly and impartially. The purpose in all cases is to make the law as clear and objective as possible, which facilitates economic activity, the provision of goods and services, and economic growth. Uncertainty resulting from a lack of clarity in laws and regulations, and lack of consistency in official decision-making, imposes unnecessary costs on entrepreneurs and diminishes economic activity.

3.2 Energy Appeal Board
The intention to establish an Energy Appeal Board as provided for in Chapter IIA of the National Energy Regulator Bill is unfortunate as the establishment of such a quasi-judicial body is not in the interests of either the providers of electricity or the consumers. The Board is to be appointed by the Minister and therefore becomes an arm of the executive branch of government, conflicting with the separation of powers requirement of the rule of law.

Attempting, as in section 14C(11) of the Bill, to give an order by the Energy Appeal Board the same legal force as a decision of the High Court is invalid and contrary to the spirit of the Constitution if not the letter. Section166 (e) of the Constitution mentions, apart from the regular courts, “any other court established or recognised in terms of an Act of Parliament, including any court of a status similar to either the High Courts or the Magistrates’ Courts”.

The Energy Appeal Board is not a “court” as intended by Chapter 8 of the Constitution. It is not presided over by a member of the judiciary, it does not have the independence and is not “subject only to the Constitution and the law” as stipulated in section 165 (2) of the Constitution. Section 14B(10)(b)(ii) of the National Energy Regulator Amendment Bill ominously stipulates that the Minister may remove a member of the Appeal Board from office “if the performance of the member is unsatisfactory”. The word “unsatisfactory” is not defined, which leaves the provision open to abuse in that the performance of a member could potentially be considered to be unsatisfactory if the member were to differ with the Minister regarding the manner in which the Energy Regulator has exercised its discretionary powers.

In terms of the Bill, the Minister appoints the Commissioner and three Deputy Commissioners who together constitute the Energy Regulator. In the event that a person wishes to appeal against a decision of the Commissioners, in their role as the Energy Regulator, their appeal lies to the Energy Appeal Board, also appointed by the Minister. This process is contrary to the separation of powers requirement which is an essential component of the rule of law. Justice cannot be done or seen to be done under such circumstances.

The Energy Appeal Board is not a court and an order by the Board cannot possibly have the same legal force as a decision of the High Court. On the face of it Section 14C(11) of the Regulator Bill appears to be unconstitutional and should be reconsidered. The nation would be better served if cases in which persons whose rights are adversely affected by decisions of the Energy Regulator were to be adjudicated upon by the courts.

4. Conclusion
Changing a large structure that has been in existence for many years is extremely difficult. It is understandable that government has approached the task with considerable trepidation and that there have been several changes of direction. However, while it is prudent to take care in making changes, a time arrives when to delay further becomes imprudent. Such a time has arrived in dealing with electricity generation, transmission and distribution. Making transmission independent and as neutral as possible has now become essential to save the South African economy from serious harm and the country’s people from unnecessary deprivation. The time has come for government to take determined and fundamental action to solve the problem of electricity shortages and potential regular blackouts.

Prepared by:
Eustace Davie
Director
Free Market Foundation
PO Box 785121
Sandton
2146

Tel 011 884 0270/Fax 011 884 5672/Email fmf@mweb.co.za

17 February 2012