Comment on the National Energy Regulator Amendment Bill

Amendments to National Energy Regulator Act 40 of 2004

1. The Free Market Foundation

The Free Market Foundation is an independent non-profit public benefit organisation founded in1975 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.

This comment is submitted as a contribution to attempts to find a solution to the precarious position in which the country finds itself as a result of an inadequate supply of energy, particularly electricity, to meet the needs of the nation.

2. Introduction

Comment on legislation and regulations relating to the supply of energy in South Africa must necessarily be made against the background of the environment that currently exists. However, to be useful, the comment must also encompass the potential for government to create an alternative environment which will eliminate the ever-present threats of disruption that hang over the country’s energy consumers.

Comment on the National Energy Regulator Amendment Bill will therefore focus on the potential for the Bill to improve conditions for the supply of energy, for it to have little or no effect, or the possibility for it to have negative implications for the supply of energy.

3. Provision of energy in South Africa

An adequate and uninterrupted supply of electricity is one of the most important matters facing South Africa today. That there is currently an inadequate electricity supply to guarantee that there will be no blackouts is not a technical or financial problem. It is a policy problem. Eskom is not to blame; the public enterprise should not be in the invidious position of being compelled to supply all the electricity required in the country. Without the existence of stifling regulations the current precarious electricity supply position would not exist. Consequences of shortages and higher prices of petroleum and gas due to excessive petroleum pipe-line and piped-gas regulation will not be as visible as electricity blackouts but will nonetheless be costly.

Will 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 improve economic conditions in the energy field? Unfortunately, all 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 not make a substantial difference to the decisions they take but there will predictably be a difference because of those discretionary powers.

4. Administrative Discretion

In section 14A, 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 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, the Petroleum Pipelines Act, and the Gas 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 energy 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.

5. Energy Appeal Board

The intention to establish an Energy Appeal Board as provided for in Chapter IIA of the 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), 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) 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) 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.

6. Ease of Doing Business

A body called an Energy Regulator has built into its name an expectation that it is intended to regulate, prescribe and control, all functions that tend to reduce energy output and not increase it. If the body were called an “Energy Facilitator” its role would clearly be to promote a policy environment that facilitates energy production and therefore increases it.

The Ease of Doing Business ranking produced by the World Bank does not specifically measure conditions in the energy field. If it did, South Africa would probably not fare well. There are many countries where energy investors find it easier to enter the business than investors in South Africa. Increased competition, especially in the generation, transmission and distribution of electricity would improve conditions for electricity users and consumers. Instead of keeping competitors out of the energy business the Energy Regulator should be utilising every opportunity to grant new licences to ensure that energy supplies are adequate.

In a completely competitive energy market there would be no need for the Energy Regulator to become involved in the regulation of prices and tariffs. That the Regulator is involved in such regulation provides evidence of the existence of barriers to entry, resulting in inadequate competition, and in electricity, blackouts. In the electricity Act there is no injunction that, for instance, the Regulator must ensure that there is an adequate supply of electricity from competing generating companies to ensure that no blackouts occur. This does not mean that the Regulator should attempt to judge how much generation should take place; that is a matter for the generation companies to decide. The role of the Regulator would be to remove barriers to entry. If there is a surplus of generation capacity it is the problem of the generating companies, not of the Regulator or the government. It is fierce competition that achieves the best prices for consumers, not regulation.

7. Conclusion

The following changes to the Bill are recommended:

Administrative discretion should be substantially reduced by removing, as far as possible, the need for the exercise of discretion by the Energy Regulator. If the granting of discretionary powers cannot be avoided, the legislation should provide objective criteria according to which such decisions should be taken.

The proposed Energy Appeal Board is not a court of law and cannot be equated with a court of law. On the face of it the proposed provision contained in Section 14C(11) that an order by the Appeal Board “has legal force and may be enforced as if it were issued in civil proceedings in a division of the High Court” would appear to be unconstitutional. It is recommended that, in order to comply with the separation of powers necessary to comply with the rule of law, appeals against decisions of the Energy Regulator should be heard by the courts.

The primary role of the Energy Regulator should be to remove barriers to entry so as to increase competition in all aspects of the energy business. In the electricity sector, true competitiveness will have been achieved when all prices are determined in the market place for electricity and there is no regulation of prices and tariffs.


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

9 February 2012