Johannesburg - On February 17, 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 p osition 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.
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;
Read also: Minister's Eskom support worries IPP
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 percent now, perhaps
40 percent 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.
Read also: The Eskom dilemma
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.
Market abuse
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 percent 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 percent,
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 firm from ‘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.
TAKING ACTION: Outa’s Wayne Duvenage
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.
Exclusion
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.
Calls for fine
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.
Mandate
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.
Click here for the full submission by OUTA to the
Competition Commission