Wayne Duvenage, chairman of the Organisation Undoing Tax Abuse (Outa), says that on 17 February, Outa lodged a formal complaint, evidence and detailed submission to the Competition Commission (CompCom), 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.
JOHANNESBURG – 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.
Click here for the full submission by Outa to the Competition Commission
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 CSIRwould 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.
- 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.
- 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.
- 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.
- 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.
Note: The above is a summary of Outa’s case against Eskom, extracted from its full submission to the Competition Commission.