Independent System Market Operator (ISMO) Bill and public comments: overview

Published on Parliamentary Monitoring Group website, http://www.pmg.org.za.
Energy Portfolio Committee summary of Meeting.
Date of Meeting: 27 Mar(sic) 2013
Chairperson: Mr S Njikelana (ANC)

Summary:
The Department of Energy provided an overview of purpose, mandate, and logic of the Independent System and Market Operator Bill. ISMO would be an autonomous state owned company, mandated to assist in the development of Generation Resource Planning, buying of power from generators, as the Department was currently not well established to be procurers of energy so ISMO would be the dedicated procurer. Currently, the Department was the procurer of energy but trading took place within an Eskom function, and this was not an ideal structure. it would also deal with electricity trading at a wholesale level and system operations. Bias could not be eliminated unless an autonomous entity was set up to deal with these issues and the playing field was levelled. However, key policy and finance considerations still needed to be made by DoE as well as by government.

Independent Power Producers (IPPs) had not been forthcoming in significant volumes due to:
∙ Perceptions of conflict of interests in vertically integrated Eskom
∙ Perceptions that government was not serious about reforming the industry
∙ Perceptions about long-term viability of present electricity supply industry (ESI) structure
∙ Lack of clear policy specifically aimed at IPPs
∙ Lack of enabling legal/ regulatory framework to facilitate IPPs.

The Committee commented that what came up strongly in the public hearings was that there needed to be a long term vision for the electricity industry and its end state. More concrete work was needed in formulating relevant policy by the DoE to reach agreement on what the ultimate objectives in the energy industry were. DoE needed to revisit some of the issues which had failed in the past and re-cast a new framework. The Minister should therefore address the restructuring of the electricity sector as a matter of urgency, which included policy renewal, legislation, programmes and road map. It was suggested that DoE should hold another energy summit to address some of these issues.

Questions and other comments from the Committee included:
∙ The role of the Minister: would the Minister be responsible for the IRP and ISMO for procurement
∙ What about compensation for Eskom
∙ What about key customers
∙ The slow progress by the working group was not satisfactory.
∙ The prospects of improving operational efficiency in the supply industry was also a concern.
∙ An objective of the Bill was to ensure enhanced affordability of prices so how would the DoE enhance operational efficiency to improve the reduction of costs.

The second presentation dealt with the key issues raised by the 116 public submissions. The Department responded to these and provided suggested actions.

Minutes:
Chairpersons opening remarks
The Chairperson stated that even though the Bill under discussion was relatively small in size, its significance was fairly profound and complex, therefore the processing of the Bill should not be rushed. The ISMO Bill was suppose to have been finalised in June 2012, however, due to the far reaching consequences of its implementation, more work still had to be done. The Department of Energy (DoE) would therefore be highlighting the key areas of the Bill as well as its functions, looking at how it would restructure the entire electricity and supply industries. For example, one of the consequences of the Bill was that it would be taking away some of Eskom’s functions. The Chairperson requested that the Department also refresh the Members’ memory on the 19 public submissions and the key issues they raised and the Departments’ response to these.

Presentation: Establishing the Independent System & Market Operator (ISMO)
Mr Mthokozisi Mpofu, DoE Deputy Director, stated that the presentation would be about explaining what ISMO is, its functions and its process. Comments and suggestions received from public hearings would also be discussed, to ensure that the ISMO Bill achieves the purpose it seeks to address in the electricity industry. The presentation would help to impact on Members’ memories about why there was a need for the establishment of ISMO. The challenges of tight security within the energy sector were still prevalent; this therefore provided urgency for the Department to address challenges such as these. ISMO was critical because Eskom cannot carry the burden of providing energy to the entire country on its own; there was a need to bring in other players within the sector to lighten this burden. There was a need to establish an independent structure with the following functions: planning, aggregation and managing the system. Each of the functions would alleviate governments’ balance sheet, by making provisions for money from the private sector to assist in ensuring the sustainability of the energy sector; minimising government exposure. ISMO would therefore assist in reducing the spiralling costs of energy. ISMO would therefore remain a state owned entity which facilitates private sector entry into the electricity/ energy sector.

What was ISMO?
ISMO was an acronym for “Independent System and Market Operator”. By being independent, ISMO would remain independent from generators and distributors of electricity. It would be controlled by the state, and ISMO would be buying electricity from electricity generators and selling it to customers at a wholesale level.

Approach to the implementation of ISMO
Depending on the outcomes of the Committee’s deliberations, Eskom’s core functions would be ring-fenced to facilitate the formation of ISMO. Past the ring-fencing, ISMO would be taken out of Eskom and established as a standalone entity, and upon the approval of the ISMO Bill, ISMO would then carry out its various mandates. The issue of transmission networks was a contentious one, and so different options were considered to ensure the independence of transmission networks. However, further work still needed to be done as transmission would have a significant impact on the electricity sector. Proper due diligence thus needed to be done and understood.

Impact of the current structure on Independent Power Producers (IPPs)
Mr Mpofu stated that IPPs have not been forthcoming in significant volumes due to:
∙ Perceptions of conflict of interests in vertically integrated Eskom
∙ Perceptions that government was not serious about reforming the industry
∙ Perceptions about long-term viability of present electricity supply industry (ESI) structure
∙ Lack of clear policy specifically aimed at IPPs
∙ Lack of enabling legal/ regulatory framework to facilitate IPPs.

ISMO on its own did not deal with the regulatory framework which was dealt with by the Electicity Regulation Act (ERA) which was also under amendment. The ISMO Bill and the ERA could not be looked at separately. With regards to ISMO being a business unit within Eskom, a number of issues were raised, one of which was the issue of key customers. What the Department provided for in the Bill was that there would be regulations defining customers for both ISMO and Eskom.

ISMO Functions
Mr Mpofu argued that the ISMO Bill would be an autonomous state owned company, mandated to execute the following functions:
∙ Assist in the development of the Generation Resource Planning, a function contained in the Integrated Resource Plan (IRP)
∙ Buying of power from generators, as the DoE was currently not well established to be procurers of energy, ISMO would thus be the dedicated procurer. Currently, DoE was the procurer of energy but trading took place within an Eskom function, and this was not an ideal structure
∙ Electricity trading at a wholesale level
∙ System Operations (it was critical that it was housed independently to facilitate transparent dispatch).

All distributors would therefore have the opportunity to purchase electricity from the wholesale ISMO

ISMO Logic
The IRP outlines the amount of energy which it brought to the grid. Currently there was a determination that was done by the Minister of Energy, and the establishment of ISMO would mean that all functions were performed under one entity. The implications of transmission also need to be reassessed as it plays a big role in dealing with the perceived conflict of interests between ISMO and Eskom. Therefore bias cannot be eliminated unless an autonomous entity was set up to deal with these issues and the playing field was levelled. However, key policy and finance considerations still needed to be made by DoE as well as by government.

Discussion
The Chairperson stated that the way the Bill was crafted responded to the logic presented, as the presentation raised key issues.

Mr L Greyling (ID) said that what came up in the public hearings was that there needed to be a long term vision for the electricity industry in the country. He asked what long term vision the Department had and what kind of end state it wanted to create with regard to the electricity industry, and whether the DoE was willing to share the vision. He asked whether ISMO would be contracted to buy and sell electricity and how these contracts would be guaranteed. The impact that ISMO would have on National Treasury was raised as a concern.

The Chairperson responded that Mr Mpofu would not answer the question of the ‘end state’ and whether the DoE was willing to share its vision as it was obvious that the DoE would share its vision for the electricity industry in due time.

Mr K Moloto (ANC) raised a number of concerns about the role of the Minister and whether the Minister would be responsible for the IRP and ISMO would be responsible for the procurement, how the ERA fitted into that agreement. Added to that, the working group still had a number of outstanding issues on ISMO, such as what about compensation for Eskom and key customers. He asked whether the working group had made any progress with these.

Mr Mpofu responded to the ‘end state’ question by referring to the Energy White Paper 1998. DoE needed to go back and highlight the processes that did not work and reaffirm those that were still applicable. The 2007 Energy Summit was supposed to take some matters and move them forward, but not all the matters that came up in the summit had been engaged. This was why the idea of an ISMO seemed to be an option that the DoE needed to implement. It was also agreed that the DoE needed to be more firm in implementing strategies which were in line with the electricity value chain, and the DoE should therefore take lessons from where it had failed.

Mr Mpofu responded that if ISMO was established the national balance sheet would underwrite all contracts and commitments.

Mr Mpofu replied that Section 34 of ERA stated that the Minister made determinations on who bought the energy and who procured. “Procure” therefore included facilitating and finalising contracts. With regard to the renewable IPP Programme, the Minister would make a determination. As for the compensation of Eskom, National Treasury would lead the DoE on such matters.

Mr Moloto pointed out that the last question he asked was not answered

Mr Mpofu responded that with regard to compensation, the DoE and National Treasury had held a meeting in an attempt to come up with a road map on how to deal with such matters, however not enough progress had been made for a more detailed response.

Mr Moloto reiterated that the question on Eskoms’ key customers had not been answered.

Mr Mpofu responded that the DoE had not yet dealt with the matter in detail as that would be done once the Bill has been processed. The DoE would be able to formulate regulations pertaining to customers.

Mr Greyling stated that the White Paper gave guidelines on which first steps need to be taken but it did not outline any definition about an end state. What studies had the DoE done in the electricity supply industry, seeing that the 1998 White Paper simply provided some guidelines? More concrete work in formulating proper and relevant policy needed to be done by the DoE to formulate agreement on what the ultimate objectives in the energy industry were.

The Chairperson agreed that the issue of an end state and a vision for the electricity sector came up very strongly in the public hearings.

Mr Mpofu responded that a multi-market model structure was going to be implemented between 1993 and 1995 but the structure collapsed because of the electricity structure of the time, following the collapse of [Carlifonia (sp?)] and the likes, so the multi-model structure was disbanded. There was agreement that the DoE needed to revisit some of the issues which had failed in the past and re-cast a new framework.

The Chairperson stated that the Committee’s resolution captured most issues concerning the structure of the electricity industry. The Minister should therefore address the restructuring of the electricity sector as a matter of urgency, which includes policy renewal, legislation, programmes and the current road map from DoE was not clear. He suggested that DoE hold another energy summit to address some of these issues.

Ms Mathibela enquired about the conflict of interest between ISMO and Eskom, and whether the 1998 White Paper that the DoE used as a legislative framework was still relevant, seeing that it had failed the DoE before.

The Chairperson stated that the White Paper did not fail; rather it was the implementation of the paper which was not proper.

Mr Mpofu responded that Eskom had showed support for the ISMO Bill and so it would be a matter of implementation where the process could fail. DoE needed to work harder to identify challenges. The ISMO Bill would therefore only fail if the spirit within the sector was not receptive to the idea and was not supported.

The Chairperson noted the question about the progress of the working group, and said the slow progress by the working group was not satisfactory. He drew attention to the impact study which raised a number of important issues that the working group had to deal with. The prospects of improving operational efficiency in the supply industry was also a concern. One of the objectives of the Bill was to ensure that affordability of prices was enhanced, and he wondered how the DoE would be enhancing operational efficiency to improve the reduction of costs.

Mr Mpofu responded to the issue of prices and stated that ISMO would be in a better position to kick-start the process of harvesting inefficiencies as it would be in a better position to understand the cost chain thoroughly, from generation to distribution levels. Currently cross subsidization in industry was not influenced by policies of government but was influenced by entities. This therefore created an imbalance, so the establishment of ISMO would mean that current players determine levels of subsidies and the DoE would not have much influence on this. Also ISMO would be an enabler in informing policy better.

Presentation: Public Comments on Independent System and Market Operator Bill
Mr Mpofu argued that a number of issues were raised in the public hearings. Some of these were not addressed by the ISMO Bill but rather were dealt with in the Electricity Regulation Act. Some comments dealt with language and drafting matters. Attention was drawn to the fact that there were more than 100 comments and submissions, 116 to be exact. The List of Comments document outlined all of these as well as the DoEs’ response and actions suggested. However, the presentation would only be touching on some of the key issues, as the full list was available on request.

The Chairperson reminded Mr Mpofu that the DoE would only be refreshing Members’ memories so what was important was to highlight only the key issues which came up in the public hearings.

Mr Mpofu noted the Chairperson’s comment. He referred to Prof Eberhard of the University of Cape Town (UCT) whose main point was that ISMO would be constrained by the powers of the Minister, which was a similar concern raised by Mr Moloto. With regard to the separation of powers between procuring and buying, the DoE assured the Committeee that once ISMO was up and running, the DoE would only be dealing with determinations and not with procuring.

Another point raised by Prof Eberhard was that of the integration of planning, procurement, dispatch and selling. The DoE responded that the aim of the ISMO Bill, together with associated legislation such as the ERA was to provide for such integration. ISMO would therefore be responsible for the technical part of the plan whilst the Minister would be responsible for the policy element. With regards to procuring and the allocation of power between role players, the DoE responded that the IRP, the regulation which emanated from the ERA, outlined the procurement process, which was linked to the determination process as well.

With regard to the IRP, Prof Eberhard stated that IRPs should not be absolute but rather indicative. The DoE responded that this was a regulatory issue which was dealt with under the ERA. IRP should therefore provide sufficient surety for investment decisions to be made. The ERA therefore provides for deviation from the plan through the Minister’s approval. However, it was outlined as being critical not to undermine the plan through deviation, as deviation from the plan needed to be guided by certain principles such as security of supply. IRP therefore provides for long-term guidance, and there should not be any deviation from it.

The Competition Commission raised the issue of ISMO customers which needed to be identified. The DoE responded that there was general agreement that all transmission customers would become ISMO customers due to the willing buyer/ willing seller arrangement. However, other customer categories that would become ISMO customers still needed to be addressed, hence the need for ministerial determination thereof. The Commission also said access to the transmission grid needed to be regulated. The DoE responded that this concern was taken into account and that the ERA would be amended, so that ISMO could be licensed accordingly.

Mr Mpofu noted that Eskom had raised a number of concerns. One of them was the framework to ensure financial stability of ISMO needed to be in place prior to ISMO being operationalized. The DoE noted this concern and agreed, stating that the purpose of Chapters 5 and 7 in the ISMO Bill were to ensure this. The National Treasury agreed to provide the needed financial support to ISMO to ensure its financial stability. However, the legislation did not provide for the transfer of transmission assets. Eskom also stated that Clause 40 of the ISMO Bill, which dealt with transfer of employees, outlined that the Labour Relations Act (LRA) was sufficient and the clause could be deleted. The DoE responded that Clause 40 of the Bill would be amended, and the LRA would be used as a guide for the transfer of employees.

The RES Southern Africa raised a concern about clarification that generators outside South Africa were not licensed. The DoE agreed, and stated that with regard to imports, a trading licence would be required in terms of the ERA and the importer would have to deal with generation outside the country through its contractual arrangements. The National Energy Regulator of South Africa (NERSA) did not have the import licence.

NERSA raised a few concerns, one of which was that of the ISMO Management structure. The DoE responded and noted the concern, stating that all board members would have voting rights hence it was not necessary to emphasise such rights in the Bill.

The Energy Intensive User Group of Southern Africa (EIUG) drew attention to the fact that the integrated power system was not well defined with regard to ISMO jurisdiction, as it could include municipal systems. The DoE agreed and stated that municipalities should work closely with ISMO. EIUG also raised the issue of tariffs, and stated that it was envisaged that ISMO tariffs would be subject to NERSA approval and this was not correct for the willing buyer/ willing seller strategy, and should therefore only apply to captive customers. The DoE responded that the willing buyer/ willing seller tariffs would not be approved, and ISMO purchases would be approved by NERSA, and the matter would then need to be addressed under the ERA amendment.

The Chairperson stated that the Committee needed to work out its own mini project plan to make sure that there was progress and confidence in the work of the Committee, for funders and future funders.

Ms Mathibela asked for clarity on why the Bill stated that ISMO would not be supplying end customers entitled to Free Basic Electricity (FBE).

Mr Mpofu responded that ISMO would influence the integration of the high pricing structure as it would enable more transparency in subsidies, which would mean that the DoE could then develop better policy in an attempt to understand the nature of the subsidies.

The Chairperson responded that the issue of subsidies was always a heavily contested issue, and so the entry of ISMO would force the DoE to restructure cross-subsidization so that the DoE could also be in a position to devise better policies. The Committee was sluggish in looking at policing issues and this was a concern that needed to be addressed. An Energy Summit should be held by the DoE, where regional players were also invited to discuss and provide input on a way forward for some of the issues raised on ISMO and the energy sector as a whole. He again emphasised that the ISMO process was not one which could be rushed.

The meeting was adjourned.

[The following apologies were relayed; Mr J Selau (ANC), Mr S Radebe (ANC), Mr S Mayathula (ANC), Ms B Tinto (ANC).]

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[2] http://d2zmx6mlqh7g3a.cloudfront.net/cdn/farfuture/88MTWxU99gnVbxKOC–mpmLffdzHYWbsstLWId0kDV8/mtime:1362410276/files/docs/130227independent_0.pdf
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