New Nersa CEO grilled on issues facing the electricity supply sector

EE Publishers investigative editor, Chris Yelland, and assistant editor, Pierre Potgieter, interviewed Mr. Chris Forlee, the new CEO of the National Energy Regulator of South Africa (Nersa). Mr Forlee, a graduate electrical engineer by background (see CV here), assumed the position of CEO of Nersa on 1 January 2017. 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.

Q6: Has Nersa received or seen a copy of the Public Protector report on its investigation entitled “A State of Capture”, which focused 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 a 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 i.r.o. 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 i.r.o. 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 (South African Wind Energy Association) put forward.

Q10: Following the judgement in the Pretoria High Court that was highly critical of both Eskom and Nersa i.r.o. the 2013/14 RCA award component of Eskom’s 2016/17 price increase, how do you intend to rectify the weaknesses and irregularities in Nersaand Eskom processes and procedures identified by the court?

You know, of course, that Nersa and Eskom have appealed the judgment 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 judgment 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 judgment, 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% 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 1 April 2017?

To deal with the 2017/18 revenue increase allocation announced on 23 February 2017 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 1 April 2017 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 R42bn. 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 they 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 where 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 31 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.