The ANC signalled its acceptance that state entities can be run incompetently and with complete disregard for how they impact on the economy and wellbeing of citizens when it nominated Brian Molefe to Parliament. He is expected to be sworn in this week and is believed to be President Jacob Zuma’s favoured candidate for the job of finance minister. Molefe, a former acting CEO of Eskom, presided over the utility before resigning in disgrace after his name was peppered throughout Thuli Madonsela’s state capture dossier. Molefe denied being in touch with the controversial immigrant Indian family – the Guptas – who have risen to join the ranks of the country’s wealthiest. He claimed he was at a Saxonwold “shebeen” instead of at the Gupta compound, in the same suburb, and then subsequently denied he said that. The Guptas are central figures in the state capture narrative that is playing out across national entities such as South African Airways and the SABC. With huge sums involved in energy deals, including nuclear, Eskom has inevitably been a part of the state capture plan. Although President Jacob Zuma and his clique have effectively given the nation the two-fingered salute in appointing Molefe to a political leadership role, they can expect resistance from the citizens who bravely soldier on in the fight against financial irregularity and patronage. These anti-corruption activists include the Organisation Undoing Tax Abuse, which has lodged a formal complaint against Eskom. OUTA highlights Eskom’s anti-competitive behaviour and abuse of its market position. Chris Yelland, investigative editor at EE Publishers, summarises the complaint. – Jackie Cameron
By Chris Yelland*
On 17 February 2016, the Organisation Undoing Tax Abuse (OUTA) lodged a formal complaint, evidence and detailed submission to the Competition Commission, alleging anti-competitive behaviour and abuse of dominant market position by Eskom, the national electricity utility of South Africa.
OUTA is a civil action organisation in South Africa that investigates, exposes, litigates and mobilises public opposition against what it sees as tax abuse, maladministration and corruption in the public and private sectors. – Wayne Duvenage, chairman of OUTA
OUTA started out mobilising civil opposition to electronic tolling (e-tolls) of provincial highways in Gauteng by the South African National Roads Agency (SANRAL), and this has since extended to e-tolling nationally.
In 2016, OUTA further expanded its activities to include civil actions against South African Airways (SAA), the South African Broadcasting Corporation (SABC), Eskom, electricity price increases, the proposed carbon tax, and the proposed nuclear new-build in South Africa.
This latest submission and complaint to the Competition Commission comes after recent media exposés of Eskom malfeasance including:
- Massive time and cost overruns in the construction of Eskom’s 4800 MW Medupi and Kusile coal-fired power stations and 1333 MW Ingula pumped water storage scheme;
- An allegedly irregular R587-million payment by Eskom to Tegeta enabling the Gupta controlled company to buy Optimum Coal;
- The Dentons investigation and report into financial, operational and procurement irregularities at Eskom in the lead up to and aftermath of load shedding in 2014/15;
- The Deloitte report and subsequent investigation by the Special Investigating Unit (SIU) into coal procurement irregularities before, during and after the load shedding of 2007/8; and
- The Public Protector’s report on state capture in South Africa, which had a heavy emphasis on the allegedly irregular relationship between Eskom and the Gupta family, and led to the resignation of the former Eskom CEO.
A summary of OUTA’s case against Eskom has been extracted from its full submission to the Competition Commission, and is provided below.
Summary of OUTA’s case against Eskom
- Electricity is a key input into the South African economy. It was historically very affordable, leading to an energy-intensive yet thriving economy.
- Electricity prices have risen dramatically in the past ten years, due amongst other things to the fact that Eskom has set out on a new-build of power plants that is running severely over budget. It is also likely that poor governance by Eskom’s leadership has fostered corruption and maladministration, which has led to price increases.
- At present, power from independent power producers and especially renewable energy is considerably cheaper than new Eskom power, and in many cases cheaper than Eskom’s average selling price of electricity. Indeed, the cheapest renewable energy may soon be cheaper than Eskom’s average cost of production.
- This situation is likely to be exacerbated in the next few years as Eskom is allowed by NERSA to again raise its price considerably in order to recoup sunk costs.
- Consequently, large consumers like municipalities and energy intensive users could buy power from independent power producers at costs far below the costs of buying from Eskom (about 25% now, perhaps 40% in two years).
- Even if the costs of expanding and running the national grid are compensated for, this price differential would remain significant. This is due to the fact that Eskom is no longer a cost-effective producer of electricity.
- Eskom is however a vertically integrated monopoly. Its generation division and its grid management functions are embedded within one state owned enterprise.
- In order to protect the monopoly of its inefficient electricity generation division, Eskom has been engaged in various abuses of its monopoly position, and exclusionary acts that deny its competitors access to the national grid.
- The complaint is that Eskom is abusing its dominant market position in the South African electricity supply industry (ESI) as a vertically integrated electricity utility who is refusing to sign power purchase agreements (PPAs) with independent power producers (IPPs) which have been appointed by the Department of Energy (DoE) as preferred bidders in the DoE’s renewable energy IPP procurement programme (REIPPPP) (Tender No: DOE/003/13/14), in defiance of government policy and international conventions signed by the Republic of South Africa, and in attempt to retain its historical electricity generation monopoly for the long term and to squeeze out new market entrants/IPPs and competition from the South African ESI.
- The complaint is furthermore that Eskom is using the abovementioned recalcitrance, media channels and selective facts (which are not factually accurate regarding renewable energy IPPs) to attempt to influence the policy debate on the country’s energy mix in its favour, which policy is underpinned by the Integrated Resource Plan (IRP) 2010 and updates thereto, most prominently the IRP 2016 just released for public comment.
- The impact of this agitation may be that, while the lowest cost electricity path for the country as per the CSIR would see Eskom’s market share drop to approximately 15 – 28% by 2050 (depending on who owns the gas fleet), the building of a large nuclear fleet and continued reliance on coal power would see them maintain a market share of approximately 55 – 70%, depending on the exact scenario that unfolds and who owns the gas fleet. This might extend Eskom’s market monopoly into the next century.
- Eskom’s motive is clearly to ensure its dominant position for the next 34 years at least but probably the next 70 – 100 years. If Eskom succeeds in including the unneeded and very expensive nuclear programme in the IRP and/or to continue with such procurement in circumvention of the IRP, its dominant market position will be assured for this period of time unless they meet with insolvency, at great cost to the country and its tax payers.
- Section 8(b) of the Competition Act prohibits a dominant firmfrom ‘refusing to give access to an essential facility when it is economically feasible to do so.’ The national grid is submitted to be an essential facility – ‘an infrastructure or resource that cannot reasonably be duplicated, and without access to which competitors cannot reasonably provide goods or services to their customers’.
- As appears from the totality of the documentation submitted:
- Eskom is a dominant firm– Eskom’s own website indicates that they generate approximately 95% of the electricity used in South Africa and it is undisputed that they have a complete monopoly on transmission and is seen by government as the ‘Single Buyer’ of electricity;
- that refuses to give access– It is clear that Eskom is: refusing to sign agreements with IPPs named as preferred bidders under Rounds 3.5 and 4 of the REIPPPP; is defying ministerial determinations to so; is ignoring communication from the DoE’s IPP Office attempting to get these projects to financial close; has been actively and over time seeking ways to stop issuing budget quotes for connecting to the grid to these companies; and has been programmatically allowing existing and binding budget quotes to lapse;
- to competitors– The IPP’s are clearly competitors that are incrementally removing Eskom’s position of dominance as they become operational;
- to an essential facility- The national grid is an ‘essential facility’ – ‘an infrastructure or resource that cannot reasonably be duplicated, and without access to which competitors cannot reasonably provide goods or services to their customers’;
- while it is economically feasible to do so– From a national perspective, the CSIR has shown definitively, as has the work done on the IRP at the request of the Ministerial Council on Energy (MACE), that a gas and renewable energy future is by far the lowest cost for the country. Thus, it is clearly financially feasible for the country to go down this road that Eskom is trying to scupper. From Eskom’s own perspective, it is a national utility that is supposed to serve the country, and is wholly owned by Government. Its finances are governed by legislation and Eskom is essentially allowed a certain return on capital deployed which is paid for by Nersa setting electricity rates at a level that would give Eskom their legislated return. It is clear that the costs of connecting IPPs to the grid and also the impact of any loss of sales that Eskom may incur through IPPs coming in all go into the calculation of the electricity tariff that is passed through to the electricity rate payers of the country. Under recoveries and over recoveries are equalised in time through the Regulatory Clearing Account. Eskom at present is over recovering but in the long run will still be brought back to its regulated return. Eskom’s absolute profit is a function of its market share (capital deployed) but it should not be Eskom’s aim as a national utility to remove all competition. The Government White Paper on Energy Policy of 1998 envisions exactly the opposite.
- Moreover, with reference to section 8(c) of the Competition Act which prohibits a dominant firm from ‘engaging in an exclusionary act’… if the anti-competitive effect of that act outweighs its technological, efficiency or other pro-competitive gain.
- Refusing to sign PPAs is an ‘exclusionary act’ – it ‘impedes or prevents’…IPP’s… ‘from entering into, or expanding within the market’.
- Nothing is gained for the country by Eskom’s behaviour and it is imminently feasible for Eskom to welcome IPPs to the grid, as its website purports to do.
- Eskom’s exclusion of IPPs from the national grid amounts to an exclusionary act that has an anti-competitive effect. The anti-competitive effect of the act far outweighs any relevant gains.
- The effect of Eskom’s abuse of its dominant market position and exclusionary acts, if unchecked, would be that the South African economy becomes hostage to Eskom’s steeply increasing price path, that the country’s competitiveness is very likely to suffer, and that economic activity would be suppressed and/or would decline to the prejudice of the common good in the country.
- Moreover, the nascent IPP sector would be destroyed and the capital deployed there would be partially lost with the remainder being deployed elsewhere in the economy or outside the country.
- In the process Eskom’s prices would continue to rise while the costs of domestic solar with storage would continue to drop, risking a cross-over point at some time in the future where a sufficient number of customers have chosen to leave the grid so that the remaining customers can no longer sustain payment of Eskom’s fixed costs and marginal costs on a lower base of sales.
- At that point, on the present trajectory, the IPPs will have been driven away and South Africa would be left with neither a functional electricity utility nor a thriving private sector. Moreover, unless unbundled, the Eskom’s grid operations would be compromised by the problems created by Eskom’s generation division.
- These abovementioned actions occur at a time where the country has an opportunity to migrate to a modern and cheap electricity system with affordable electricity, high sustainability and low levels of pollution. This energy future as detailed by the CSIR is dominated by gas and renewable energy and requires Eskom to allow competition into the market.
- Eskom is however agitating to keep competition out of the market and to steer the country towards a nuclear/coal dominated energy future that will cost the country approximately ZAR 90-billion per annum more than the clean energy future dominated by renewable energy and gas, and enabled by Independent Power Producers. The quantum of damage was revealed by the CSIR at the IRP public hearings in December 2016.
- For order of magnitude, evidence can be tendered that shows that this amount, if not wasted, could pay or fund the following:
- Free tertiary education for three times the number of students South Africa has today; or
- Three new Gautrain projects per year – or about 100 Gautrain projects by 2050; or
- The proposed National Health Insurance scheme within 4 years, and 9 times over by 2050; or
- Approximately 900 000 RDP houses every year, and 30-million RDP houses by 2050; or
- Free tertiary education in South Africa, plus one Gautrain every year, plus 90 000 RDP houses every year, and still fund the National Health Insurance scheme within about 14 years.
- Moreover, as detailed in the suite of documents submitted, Eskom is claiming that as a grid operator it does not have the capability to connect the new gas and renewable energy plants to the national grid fast enough and that therefore, the vastly more expensive nuclear/coal option should be chosen. This unsubstantiated and self-serving claim has now led to an artificial and very low constraint being inserted in the modelling of the country’s future energy blueprint (the IRP) that leads inevitably to a modelling outcome steering us towards the expensive nuclear future. See CSIR presentation to IRP 2016 hearings, December 2016.
- It is appreciated that the Competition Commission will conclude the matter as it considers best, given its mandate. OUTA nevertheless submits that the logical end-state in the energy sector would be the following:
- Eskom should be fined now in order to signal that such behaviour will not be tolerated;
- Eskom should be unbundled so that its generation and grid operations become the distinct endeavours of two distinct, state-owned corporate entities. The Department of Energy or the National Treasury should become the owner of the national grid company incorporating a market operator, while the Department of Public Enterprises can remain as the shareholder of the generation company (see here for an extensive expert report on the matter);
- In this manner Eskom’s present conflict of interest would be removed, allowing the grid company to buy the most inexpensive power available on the market;
- Municipalities should in principle be granted ministerial determinations to build their own generation plant or to buy directly from IPP’s, as may start to become easier/possible given mooted amendments to the Electricity Regulation Act that are in draft at present;
- The resultant grid company must enable and facilitate a rational integrated resource plan by buying the electricity that the plan requires from both public and private electricity generators;
- The Eskom decommissioning schedule must be completely transparent to allow the grid operator to clearly understood in the national interest so that we know when the existing capacity will disappear (or not) and so that the required level of capacity can be maintained around it;
- Investigation must be done into adding flexibility to the Eskom coal fleet (e.g. the ability to operate at intermediate outputs and/or to ramp up and down in response to demand) so that it can support the development of a renewable energy dominated electricity system;
- Any further Eskom new-build should be scrutinised to ensure that the resultant electricity can be provided to the country on a cost-effective and competitive basis;
- The Eskom new-build at Medupi and Kusile should be scrutinised vis-à-vis decommissioning schedules for existing coal plant to ascertain whether some of the inefficient older plants can be commissioned early alternatively whether some of the planned new units should be scrapped entirely or can be postponed;
- Electricity price increases could then be contained by allowing low-cost alternatives to Eskom to gradually penetrate the generation mix to a much greater extent;
- Eskom’s amortised plant would still have an important role to play in providing the national economy with low cost electricity until such time as these plants are decommissioned;
- Eskom’s sunk costs on plant not yet amortised could then be amortised over an appropriate period of time and financed in a manner that ensures that electricity prices stay stable and the competitiveness of the national economy is maintained;
- An assessment needs to be done to ascertain whether the new Grid Company as a distinct entity from the existing Eskom would have the required skill, ambition, money and know-how to expand and modernize the grid as required by the future energy mix of the country. If not, competition should be considered in that market and/or the entity might be replaced by an international operator that is up to the task.
- The above is enabled by unbundling Eskom into “GenCo” and “GridCo”. The current internal conflicts of interest incentivise Eskom to act in an anti-competitive manner and this can only be resolved by separating the entity as described herein.
- It is submitted that the Competition Commission has the mandate to do what is required as described above. It can fine Eskom and to order Eskom to refrain from further abuse of their dominant position and/or refrain from committing further and on-going exclusionary acts.
- It is further submitted that there is no other remedy than unbundling Eskom to ensure that abuses do not recur in future. This indeed was the very reason why parliament approved the now-aborted ISMO Act. Eskom’s conflict of interest runs so deep that only extreme bona fides on the part of Eskom can avoid abuses as described herein.
- At the moment Eskom is deeply implicated in fraudulent practices by both the Public Protector’s ‘State of Capture‘ report and the Dentons report. There is thus no reason to believe that Eskom can be trusted to display bona fides.
- The Competition Tribunal has the authority to order a divestiture of shares, in terms of sections 58 and 60 of the Act. It is submitted that the unbundling of Eskom into a “GenCo” and “GridCo” as described herein would not amount to a ‘divestiture’ as the State would continue to hold the shares in all assets presently owned by Eskom – the assets would merely be placed in two distinct, state-owned enterprises preferably administered by two distinct ministries.
- It is submitted that the provisions of section 60 (2) – (4) of the Act would consequently not apply to such an order.
- It is nevertheless submitted that careful consideration needs to be given by the Commission to what entities may need to be joined should the matter proceed to the Tribunal, with the Republic of South Africa being one possibility.
- The Competition Commission is requested to:
- Investigate the complaint;
- Move it to the Tribunal as expeditiously as may be possible;
- Fine Eskom, bearing in mind that a fine against the state owned entity might not change the behaviour in that the fines may not be punitive because the fines will be recouped from the public through tariff increases to the consumer or via Treasury intervention;
- Consider a recommendation for the unbundling of Eskom Generation and Eskom Grid Operations into two distinct, state owned entities with two distinct boards serving two distinct agendas;
- Move for such additional and/or further relief from the Tribunal as the Commission may see fit, given the imperatives described above.
- In the event that the Competition Commission is of the opinion that any of the relief requested herein is beyond the mandate of the Tribunal to order (which is denied), the Commission is requested nevertheless to move for such relief as may be competent at the Tribunal and in parallel, without delay, in terms of section 21 of the Act is requested to investigate the regulatory regime permitting the present abuse (section 21(k) would apply) and to report same to the Minister of Trade and Industry, who would then table the report in the National Assembly in terms of section 21(3) of the Act, thus enabling the resolution of the matter by statutory means.
Note: The above is a summary of OUTA’s case against Eskom, extracted from its full submission to the Competition Commission.
- Chris Yelland is investigative editor, EE Publishers