Submission by the African Climate Reality Project relating to the Eskom revenue application to NERSA for FY 2018/2019

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Submission prepared by Adv. Johan van den Berg for the African Climate Reality Project

13 November 2017
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ACRP in summary makes the following submissions:

  1. NERSA has to adjudicate Eskom’s application under a known legal framework about Eskom’s rights and obligations towards the South African rate payer and Eskom’s commercial counterparts. This is established by the Constitution, South Africa’s binding international commitments, the National Energy Regulator Act 40 of 2004 (NERA), The Electricity Regulation Act Electricity Regulation Act 4 of 2006 (ERA), the MYPD Methodology, the Electricity Regulations on New Generation Capacity promulgated under section 35(4)(j) of the Electricity Regulation Act (“the Regulations”), and ministerial determinations made under section 34 of the Electricity Regulation Act. The aforesaid Regulations were published under Government Notice R399 in Government Gazette 34262 of 4 May 2011, and amended on 4 November 2016;
  2. The legal regime emanating from all of the above, as it is widely understood and accepted by all participants except Eskom, holds that electricity is a regulated commodity in South Africa and that the industry is regulated by NERSA. Eskom incurs expenses of a capital and operational nature in the execution of its mandate as the country’s vertically integrated monopoly, which expenses plus a return (if prudently incurred) is covered from the consumer via the tariff. In the legal regime as it is understood, NERSA is the judge of whether the public is receiving value for money while the Department of Energy is the custodian of energy planning and the Minister of Energy activates programmes to establish new generation assets via Ministerial Determinations. The understanding is that Eskom as a State Owned Enterprise yields to NERSA’s authority and carries out the wishes of its shareholder, being the Department of Public Enterprises.
  3. In the recent past, Eskom has directly challenged this established legal order. In Eskom’s view of the regulatory framework, Eskom itself is responsible for energy planning in the country and Eskom is the final arbiter of what the country needs, possesses a veto right over Ministerial Determinations, need not carry out the wishes of its shareholder and replaces NERSA as the final arbiter of value for money for the country.
  4. The above manifests in many Eskom utterances, media statements, deeds and omissions but is most pertinently illustrated by its refusal to sign Power Purchase Agreements for preferred bidders under the REIPPP Programme Rounds 3.5 – 4.5 (as will be illustrated below). Eskom has been resisting inter alia on the grounds that it is allegedly expensive (despite the fact that NERSA in each case has adjudicated on value for money and granted a generation licence), on the ground that the country does not need the power (despite the fact that the Minister of Energy has per Ministerial Determination ordained that the power be built). Eskom refuses despite public statements by the erstwhile Minister of Finance and the erstwhile Minister of Energy that the agreements need to be signed and that Eskom does not make energy policy, and despite an assertion by the State President in the February 2017 State of the Nation address that the agreements would be signed.
  5. Eskom’s unlawful recalcitrance has led to five of the 12 new green industries reported at the end of 2015 closing, while operations at four are under review. According to GreenCape and the South African Renewable Energy Council, a total of five of the investments planned at the time have been suspended. The combined impact of these closures is substantial. At least 190 jobs have been lost, 600 forfeited and a further 620 are in jeopardy. A total of R2.84 billion in investment has been suspended and more than R1 billion invested in the manufacturing sector has been lost or is at risk. Moreover, infrastructure investment of some ZAR 58 billion has not occurred. The present projects are able to provide electricity at an average of 62c/kWh (2015), which the CSIR states is 40% less than the cost of comparable new coal power and even cheaper relative to the power from Medupi and Kusile.
  6. The South African Wind Energy Association laid a complaint against Eskom at NERSA a year ago, and also lodged a complaint with the Competition Commission. At the time NERSA gave a verbal undertaking to SAWEA that the complaint would be finalized within three weeks. In the intervening year, NERSA has not decided SAWEA’s complaint and indeed has not even elevated it to a tribunal. Nor has NERSA collaborated with the Competition Commission in any meaningful way to halt the immense damage to the economy.
  7. Eskom now applies for a price increase and claims compensation for the very contracts it is steadfastly refusing to sign (REIPPPP Round 3.5 – 4.5 and Small Scale).
  8. South Africa is a signatory to the Paris (Climate) Agreement and has ratified it, making it part of South African law. The Paris Agreement envisions complete decarbonization after 2050, in other words the complete termination of any greenhouse gas emissions whatsoever. This implies an end to coal fired power generation as it exists today.
  9. The Paris Agreement is part of the South African regulatory framework within which NERSA is duty bound to operate.
  10. By 2050, by all credible and reasonable recent modelling scenarios, South Africa will have a renewable energy industry of between approximately 55,250 MW (DOE IRP 2016 base case) and 200,782 GW (CSIR decarbonized scenario). At the lower end this is larger than Eskom is now. It is thus of critical importance to protect the country’s renewable energy investors and workers in order to ensure that the skills and finances to build this very large infrastructure sector in the next three decades do not leave the country.
  11. Eskom is resisting SAWEA’s challenge, claiming its fiduciary obligations under company law and under the Public Finance Management Act trump all the legal imperatives mentioned above.
  12. Eskom is thus claiming, effectively, to have a veto right over what Independent Power Producers are allowed to build renewable or other electricity plants in the country.
  13. Eskom cannot in one set of NERSA proceedings be allowed to deny any obligation to sign the REIPPPP Round 3.5 – 4.5 agreements and in another set of NERSA proceedings to claim back the cost of doing so.
  14. NERSA has not decided SAWEA’s application. For this reason, it is unknown whether the regulatory regime as it used to be understood regulates the industry or whether Eskom does indeed have an effective veto right as described above.
  15. If Eskom is correct, it means that the regulatory regime safeguarding independent power producers in the country has come to naught and that the latter will be completely delivered to the mercy of the Eskom monopoly, meaning that capital and skills will leave the country for more secure investment destinations, that South Africa will go into a long term energy future dominated by coal and perhaps nuclear, that the electricity price will rise to levels far higher than the CSIR has shown it can be with a primary reliance on renewable energy, and that South Africa will likely default on its obligations towards the international community on climate protection.
  16. NERSA’s decision on SAWEA’s complaint is thus of the utmost importance and needs to be made.
  17. Moreover, the entire future of the Multi Year Pricing Methodology (MYPD) and NERSA’s traditional role as the custodian of the electricity sector depends on the specific decision. If NERSA agrees with Eskom’s interpretation, it will have effectively abdicated its responsibility as the custodian of the sector and made Eskom the custodian that NERSA itself used to be.
  18. It is submitted that Eskom’s revenue application cannot be heard until NERSA has decided on SAWEA’s complaint, given especially that Eskom is claiming back from the tariff the full expense it is expecting to lay out on the very agreements it is refusing to sign – and denying in law that it is obliged to sign.
  19. It is submitted that NERSA should postpone the revenue application process until such time as it has decided SAWEA’s complaint, and that failure to do so would be a misdirection that would open a decision on the revenue application to a judicial review.
  20. On the merits of SAWEA’s complaint it is submitted that the law clearly requires NERSA to rule in SAWEA’s favour.
  21. NERSA must make decisions in accordance with the objects of ERA and in accordance with its mandate under NERSA Act being:

(a) achieve the efficient, effective, sustainable and orderly development and operation of electricity supply infrastructure in South Africa;

(b) ensure that the interests and needs of present and future electricity customers and end users are safeguarded and met, having regard to the governance, efficiency, effectiveness and long-term sustainability of the electricity supply industry within the broader context of economic energy regulation in the Republic;… and

(g) facilitate a fair balance between the interests of customers and end users, licensees, investors in the electricity supply industry and the public.

  1. NERA states that every decision of NERSA must be consistent with the Constitution and all applicable laws and that it must be in the public interest (s 10).
  2. It is submitted that given all of the above, NERSA should after the postponement of the revenue application rule in favour of SAWEA.
  3. The revenue application can then be considered afresh with the legal uncertainties out of the way.

It is likely that the rights of municipalities to build or procure renewable energy to be wheeled through the Eskom network will also become pressing soon and requires clarity on whether NERSA is able in the final instance to hold Eskom to account.
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