EE Publishers investigative editor, Chris Yelland, and
assistant editor, Pierre Potgieter, interview Chris Forlee, the new CEO of the
National Energy Regulator of South Africa (NERSA). Forlee, a graduate
electrical engineer by background ( see
CV here), assumed the position of CEO of NERSA on January 1. Here are the
questions posed and the answers given.
Q1: How are you
settling in to your new role as CEO of NERSA, and has it been something of a
baptism of fire?
I guess my whole career has been leading up to this
point. The experience I gained in Eskom, getting to know the complete value
chain, but also working at NERSA as an analyst when it was still the NER, then
working in government at the Department of Public Enterprises, working in the
private sector, and then coming back, it’s been a progression. It wasn’t a
planned thing, it just happened. Part of the baptism as CEO of NERSA is
correcting a lot of the things that have slipped in the last two years while
the organisation did not have a permanent CEO. We’ve done a lot to correct some
of the stuff that’s just fallen by the wayside. It doesn’t feel like a baptism
of fire to me. Maybe it is still to come. We’ve got an MYPD4 coming. But at the
moment I’m quite comfortable that we’ve got a handle on things.
Q2: In several
countries, being a former employee of the national electricity utility, which
you (and some of your predecessors) are, would legally preclude you from
occupying the position you now hold. Does this trouble you in any way, and do
you feel compromised?
I would be interested to know those countries, because I
don’t know their construct, and I would be interesting to know why they do it.
For us at NERSA, I actually find it helpful to have people here who know the
licensees and their businesses, and the space that they are regulating, because
it helps us to make more informed decisions. If there were questions about the
integrity of what we do, you’d have to look at it. But given the way we do
things, and also that we’re just professionals doing our job, I am not troubled
by it. Do I feel compromised? No. The Regulator itself, where the decisions are
made, are nine individuals. The decisions are made as a collective. So it’s not
like I could sit here and make decisions on my own.
Q3: Has NERSA
received from its licensee, Eskom, or from any other source, a copy of the
Deloitte report commissioned by Eskom to investigate alleged irregularities,
maladministration and/or illegal activities by the company, its executives,
management, staff and/or suppliers, leading up to and following the 2007/8
load-shedding, and has NERSA ever seen the Deloitte report, or asked for it to
date?
My understanding is that NERSA’s Electricity Division has
now requested the Deloitte report. We haven’t received it yet, so obviously all
the analyses on it have not been done. But I think I can go a little further to
say that when these reports come to light, it is important that we do have
sight of them, because there is probably another MYPD coming up soon. We need
to factor the findings of the Deloitte report into the decisions, and we need
complete information. But we don’t function as Eskom’s auditors. To deal with
the report in terms of our processes, we have to request it from the licensee
formally. Eskom has never really been non-compliant with our requests, so I’m
pretty sure we will get the Deloitte report soon.
Q4: Did NERSA
receive from any source a copy of the subsequent Special Investigations Unit
(SIU) report into the affairs of Eskom commissioned by the President of South
Africa in 2012 and resulting directly from the findings of the above Deloitte
report, and has NERSA ever seen the SIU report, or asked for it to date?
We haven’t seen the SIU report or asked for it, and we’re
only aware of it because you’re telling us it’s there. If a copy came to light,
we would have to take legal advice. Is it a legal copy? Is it public? For us,
we have to work through the legal processes. And from working in government, I
remember that an SIU report is commissioned by the President of South Africa,
and goes to the President. So we would have to ask the President for that
report. We weren’t involved in setting it up, so we wouldn’t really have any
knowledge of it, other than of its existence through the media. How it may have
got out into the public domain, I wouldn’t know. Officially, we’ve never had
it, we’ve never seen it.
Q5: Has NERSA
received from its licensee, Eskom, or any other source, a copy of the Dentons
report commissioned by the Eskom board into its management, financial,
procurement, new-build delays and other problems within the utility leading up
to and during the electricity shortages and load-shedding of 2014/15, and has
NERSA seen the Dentons report, or asked for it to date?
Eskom released the redacted version of the Dentons report
into the public domain, so we have seen this report, and we have a copy of it.
But it is not part of our formal processes. We have requested a copy of the
report from Eskom, but it has not been received yet. Once we get the Dentons
report, we can formally bring it into our system. Those findings or outcomes or
whatever is in the Dentons report do have to be looked at when we assess the
next MYPD application. There are licence conditions attached to all our
licensees. But remember, we’re an economic regulator. Yes, we do require our
licensees to comply with all of the laws of the country, health and safety
laws, environmental laws, etc. But the primary information we would get is
economic information. But as I said, all this has to be part of a formal
process, and we can’t just take what’s in the public domain.
Read also: Nersa approves 2.2% tariff increase for Eskom
Q6: Has NERSA
received or seen a copy of the Public Protector report on its investigation
entitled “A State of Capture”, which focussed heavily on the affairs Eskom?
We have seen it, but I don’t know yet what we’re doing
with this information. There are still some other processes taking place. I
guess the Public Protector report has been taken on review by the President of
South Africa. As a prudent and responsible regulator, we would need that
process to be finalised, and for the Public Protector to pronounce that this is
the final report before we could then start looking at the information in the
report to factor it into the decisions we make.
Q7: Is NERSA
taking or intending to take any action against its licensee, Eskom,
specifically in respect of the adverse findings of the Deloitte, SIU, Dentons
and Public Protector reports, and the specific findings of imprudent,
inefficient and irregular coal and diesel procurements contained therein?
Sitting here, I can’t say that NERSA will or won’t take
any action against Eskom. It will be collective decision of the Regulator. But
there are license conditions that apply to Eskom and all our licensees. If they
contravene their license conditions, and if we see that they have contravened
them as part of our compliance assessments, etc., there is a process that can
be followed to deal with this. We give them warnings, time to rectify, and if
they don’t, there’s a tribunal process that can be followed, and fines that we
can impose. I don’t know if the public also realises, if anyone thinks a NERSA
licensee has contravened a licence condition, this can be brought to NERSA’s
attention. So you can make a complaint, and we will investigate it.
Q8: In light of
NERSA’s role in protecting the electricity supply industry, electricity
customers and the public from any abuse of dominant market position by its
licensees, can you indicate the status of and NERSA’s response to OUTA’s formal
complaint to the Competition Commission and NERSA in respect of a wide range of
allegedly anti-competitive behaviour by Eskom?
Anti-competitive behaviour, in my view, is squarely in
the domain of the Competition Commission. We have in our legislation
requirements for orderly development of infrastructure, but also transformation,
and all those kinds of things. If you’re talking anti-competitive behaviour, it
could be in the domain of transformation and third party access, and all that
kind of stuff. But in this particular case, OUTA hasn’t made any complaint to
NERSA. They’ve lodged a complaint with the Competition Commission, and OUTA has
sent a copy to us for information, and they’ve indicated as such. We’ve looked
at it, but not formally – because it has not been submitted formally, but more
as a “heads-up”. But as the Competition Commission makes its investigations, we
may well be asked by them to participate or make inputs.
Q9: Similarly, can
you advise the status of and NERSA’s response to SAWEA’s formal complaint to
NERSA of anti-competitive behaviour in respect of Eskom’s refusal and/or
delaying tactics in signing PPAs for approved bids in the DoE’s REIPPP
programme?
This is a formal complaint that we have received. In our
evaluation of it, we wouldn’t look at it purely as anti-competitive behaviour.
We’d be looking at it in terms of the licensing conditions, legislation, even
government policy that must be adhered to, and ask: “Is Eskom being compliant?”
This complaint has been through our committees. I’m not quite sure if the
record of the minutes is available publicly yet, but it should be in due course
if it’s not. A decision has been made, and it must just be confirmed, that the
matter must be further investigated. I don’t know what the outcome of the
investigation will be, but there is merit in investigating the issue that SAWEA
put forward.
Q10: Following the
judgement in the Pretoria High Court that was highly critical of both Eskom and
NERSA in respect of the 2013/14 RCA award component of Eskom’s 2016/17 price
increase, how do you intend to rectify the weaknesses and irregularities in
NERSA and Eskom processes and procedures identified by the court?
You know, of course, that NERSA and Eskom have appealed
the judgement of the Pretoria High Court because we feel there are elements
that need clarification. This is important because without clarification, the
RCA methodology struggles. Major procedural issues identified in the judgement
were the lack of quarterly reports from Eskom, and the RCA applications being
submitted and received “out-of-time”. Going forward this has now been
corrected, but for us, it’s how do we look at the procedural issues going
backwards. It’s not about saying that the judge was wrong, but our legal and electricity
teams have identified areas that we don’t understand within that judgement, and
we’re asking why were we wrong and how do we correct this. The problem we have
going forward, even with properly submitted RCA applications, is that we are
not comfortable with the lack of clarity. So we have to go through the appeal
process. We hope this will cover the concerns the judge identified, and that
we’ve made the RCA process more robust.
Q11: How do you
respond to suggestions that through all of the above, NERSA has compromised its
role as an independent regulator by being too soft on its licensee, Eskom?
This thing of being too soft or too hard doesn’t really
feature in our considerations. The Electricity Act of 2008 requires us to
ensure that Eskom is a financially sustainable business, and also to ensure
that only prudently and efficiently incurred costs by Eskom are recovered
through the tariff. If I remember correctly, in the last RCA, we didn’t allow
Eskom their OCGT diesel costs. And coal is also an issue, and how Eskom
procures coal. And that will be looked at. I don’t think we’ve ever given Eskom
everything they’ve asked for. We’ve got the 2008 Act, and then there’s a
revision that says we have to give Eskom a return based on the depreciated
replacement value of its assets rather than the depreciated historic value.
This has had an impact on increasing the revenue requirement for Eskom to fund
plant replacement. This revision was done too late in my view, and Eskom didn’t
recover enough money in the earlier years, which means the tariff increases had
to be higher in later years. So it looks like we’re being soft, but actually
it’s a decision made on what’s required to ensure sustainability. Eskom would
say we’re being very hard on them, while the public is saying we’re very soft.
I guess it’s a matter of one’s perspective, I don’t know.
Q12: Please can
you indicate the status of the Eskom 2017/18 price increase of 2.2 percent
recently awarded by NERSA? What are the reasons for and implications of
reported requests by Eskom and DPE Minister Lynne Brown to delay this price
increase beyond April 1?
To deal with the 2017/18 revenue increase allocation
announced on February 23 first, we simply confirmed what was determined four
years ago for the last year of the five year MYPD3, and we’ve also approved the
retail structure tariff adjustments based on this. Therefore, on our side, the
process up to April 1 is complete, and Eskom has these approvals. I don’t know
about media reports of a delay in Eskom’s price increase – that’s really an
Eskom issue and not something we would deal with. We did give Eskom an
indication that we would be open to an application for an additional price
increase, following a full Promotion of Administrative Justice (PAJA) process
to come to a determination, should they feel that their financial
sustainability is in question. They haven’t communicated anything to us, and
we’re not involved in a delayed price increase process – it’s really with the
minister of finance. I can only assume they are weighing up other options,
whatever their options might be, and they want some time to kind of figure
things out.
Q13: Eskom and
ratings agencies have raised concerns resulting from delays by NERSA in
processing Eskom’s 2014/15 and 2015/16 RCA applications totalling R42 billion.
But NERSA has indicated that Eskom may apply for a further price increase in
2017/18 should it face any resulting financial hardship. However, please can
you respond to a subsequent statement by Eskom interim CEO Matshela Koko that
Eskom would face an immediate legal challenge if were to make any such further
application to NERSA?
I can’t respond to the statement that Eskom’s interim CEO
may have made, because that is not within our ambit. We assessed that there is
a section of the Act that would permit Eskom to submit an application for a
further price increase, and we could entertain this through a full consultation
process, and that’s we stand at the moment. I think there is recognition that
if we were to entertain any kind of increase that didn’t follow due process, we
would be interdicted immediately, because it wouldn’t be a legal process. So
from our side, we can consider a further application, and it would follow the
proper procedures. I’m not sure why Eskom feel they would inevitably face a
legal challenge if they were to submit such an application, but they would be
the best people to ask.
Q14: As the DoE
has not presented any pricing associated with the various scenarios modelled in
the Draft IRP 2016-2050 presented to the public and the industry for comment
and response by end March 2017, including the 20 GW and 25 GW nuclear
scenarios, do you consider the IRP public process to be fair and transparent,
and what is NERSA doing to protect the public in this regard?
I’m not sure about us protecting the public in this
particular process. We actually participate in the IRP public process. I do
think it’s quite a fair process. Maybe people are not happy with the
information that’s in the documents, or the documents themselves, or what’s
being presented. But there is the opportunity then to make representations
through the public process. I’m sure if enough people say we need the scenario
pricing, then it has to be one of the findings that come out of the process. I
think the objective is to consult on the non-pricing stuff, whether the
assumptions are correct, and from that you would develop your electricity price
path from the scenario costs. For me, of greater concern is, and I think we’ve
seen it with some of the industries that have made representations, to say:
look, we’re going out of business, the price of electricity is too high, we’re
not able to be competitive anymore. As NERSA, we make inputs, but once the IRP
is done, we effectively become an implementer. I think in protecting the public
we would be making sure that in implementing the IRP, it’s done in the most
efficient, cost-effective and optimal way possible.
Q15: Is your
licensee, Eskom, operating an environmentally sustainable business, and is
public health adequately protected from water pollution, particulate, ash, SOx,
NOx and CO2 emissions by non-compliant Eskom coal-fired power stations and
their associated coal mines?
It’s a bit difficult, because we impose license
conditions, and we’re an economic regulator, not an environmental and health
and safety regulator. Our counterparts in the Department of Environment would
impose certain requirements on Eskom, and in their application to us, Eskom
would say: “I need this money for XYZ environmental compliance” – and we would
consider it. The IRP for electricity has to take this into account. If the
costing and expenditure has been done prudently and efficiently, most of these
kinds of things would have to be a pass through in the electricity tariff. We
talk a lot on the IRP for electricity, but for NERSA, the integrated energy
plan (IEP) is more important in many ways, because it talks to the complete
area that we’re in – including oil, gas and petroleum. For us at NERSA, these
give us more issues, because of licencing and where to licence, and because we
do already have an IRP, regardless of all the issues around it, and now there
is an IRP update happening. But with the other energy carriers, we don’t have
roadmaps, and the IEP is still in discussion.
Q16: Can you
indicate the current regulatory framework for grid-tied, low-voltage, domestic
and commercial rooftop solar photovoltaic distributed generation systems in
South Africa? Are there any technical recommendations or standards in place, or
is it simply a free for all? What steps has or is NERSA taking to protect the
safety of electricity customers, and protecting them from any monopolistic
behaviour by its licensees (Eskom and municipal electricity distributors) in
this space?
We have developed rules around distributed generation
systems, but we haven’t implemented them yet because the regulations are being
updated, and that’s within the Department of Energy’s (DoE) ambit. At end of
January 2017, the DoE closed their consultation process, so we’re expecting
this pretty soon. In the absence of these regulations, there isn’t the
regulatory framework per se, but it’s ready to go as soon as we have the entire
chain. But it’s not a free-for-all, because the grid code has been updated to
cater for distributed generation, and the industry is developing an SABS
technical safety standard for roof-top solar PV installations. People want to
generate electricity, and feed it back into the grid, and get some credit. This
is needed, and some homes have made these investments. But we have to do this
properly and safely. So the rules, regulations and standards must be aligned,
without gaps. The DoE has pushed through with this, and we’re expecting it
pretty soon now.