1. 1 Click to edit Master subtitle style 5/24/12, Version Control South African Electricity Supply Sector ISMO Bill Independent System and Market Operator Establishment Bill [B9-2012]: Parliamentary Submission 15 May 2012 Energy Intensive Users of Southern Africa

2. 2 5/24/12, Version Control General Support for ISMO  EIUG supports the need for an ISMO  Will help facilitate the introduction of higher efficiencies: – Capital – Operations  Major step forward in levelling the playing field  In line with what is happening elsewhere in the world  ISMO is NOT a Destination, rather it is a Vehicle to a more efficient industry  Evolutionary rather than revolutionary approach But will it achieve what it sets out to do?

3. 3 Click to edit Master subtitle style 5/24/12, Version Control An even playing field for Generators Creating an environment for efficiencies Produce on site & us e at sit e Prod uce at energ y sour ce, wheel to use at site Wheel to a customers “Bilate ral” To Nationa l Buyer Own Use S el l Non- Eskom Costs Guaranteed Cost Recovery Generator back-up Pass through levies Access to low cost Capital Pass through taxes Protection against Risk Low Some High Very High Esko m Level of Uncertainty Source: EIUG Is “Own Use” and “Bilateral” also under control of ISMO?

4. 4 5/24/12, Version Control Overview The EIUG:  Acknowledges the progress made by Government in establishing the ISMO  Wishes to Highlight key focus areas that would materially enhance the effectiveness of the ISMO in achieving the Government objectives for the electricity supply sector The presentation reviews the main themes identified in the ISMO Bill  ISMO Definitions  ISMO Functions  Electricity Regulation Act and ISMO Governance  ISMO Viability  Transitional Provisions  Concluding Remarks

5. 5 5/24/12, Version Control ISMO Definitions Aspect “integrated power system” “distribution power system” “transmission power system” “ISMO Customers” Implications & Recommendations Core to ISMO functions Not adequately defined (e.g. currently also includes municipal systems under ISMO jurisdiction) Definitions to be amended to focus on the “national (Eskom) grid” Who ISMO will buy from and sell to Not defined in the Bill - left to Ministerial discretion Bill should clearly define “ISMO Customers” Including concepts of “captive customers”, “contestable customers” and “own use”

6. 6 5/24/12, Version Control ISMO Functions (1 ) Aspect Expansion Planning Transmission Network Ownership Implications & Recommendations ISMO charged with ensuring supply security (system operation) ISMO to “prepare input” into generation and transmission expansion planning but powers are limited Need for greater integration of planning with procurement/purchasing, dispatch and selling functions Potentially prudent to allow ISMO to commission new transmission capacity if needed ISMO will not own transmission network infrastructure Current provisions result in split accountability/ responsibility between ISMO and Eskom in respect of planning, expansion, maintenance, operation, scheduling/dispatch, 3rd party access Bill should provide for possible future ownership of transmission assets

7. 7 5/24/12, Version Control ISMO Functions (2) Aspect Electricity Procurement Tariffs Implications & Recommendations Procurement functions to be aligned with IRP and Electricity Regulation Act (including 2nd Amendment provisions – i.e. Section 34 process) This arguably precludes procurement from existing sources (e.g. Eskom, imports etc) ISMO should rather procure “….in accordance with the processes envisaged in the Electricity Regulation Act or its own procurement processes, as applicable in the circumstances” In terms of the Bill all ISMO energy supply tariffs must be approved by NERSA Undermines ISMO right to negotiate & design tariffs on a willing buyer/ willing seller basis with larger customers and suppliers

8. 8 5/24/12, Version Control Electricity Regulation Act & ISMO Governance Aspect Electricity Regulation Act (ERA) ISMO Governance Implications & Recommendations Bill makes reference to provisions of a still to be amended Electricity Regulation Act E.g. it provides for procurement of electricity by ISMO “…from generation licensees…with the exception of licensees exempted by licence from selling to ISMO in terms of the Electricity Regulation Act….”. The current ERA has no provisions around sales to ISMO or associated exemptions The ISMO Bill should be independent of possible future changes to the Electricity Regulation Act that may or may not transpire Bill deals with issues that are already dealt with under Companies Act, PFMA and LRA PFMA and Companies Act deals extensively with powers of directors, fiduciary duties, etc The Bill specifies certain demographic criteria for the constitution of the ISMO Board, but should also stipulate criteria around representation from industry experts etc

9. 9 5/24/12, Version Control ISMO Governance & Viability Aspect Viability Implications & Recommendations Key object of the ISMO Bill is to deliver an ISMO that is financially viable & revenue neutral The Bill adequately provides for funding and financial accountability However, the Bill is silent on ISMO rights and obligations in respect of customers (e.g. how customers will be shared between Eskom and ISMO) In this regard, the Bill should set out: customer categories to whom ISMO must sell the customer categories to whom ISMO may sell (i.e. also which customers may also purchase directly from IPPs) how existing customers will be dealt with (e.g. ISMO take over of all Eskom customers or only certain Eskom customers) how existing contracts will be dealt with

10. 10 5/24/12, Version Control ISMO Transitional Provisions Aspect Transitional Provisions. Its about PEOPLE Implications & Recommendations Limited primarily to Eskom asset and staff transfers However key aspects not adequately addressed include Contracts Customers ISMO Licensing (i.e. within 6 months, while current ERA does not provide for an appropriate license category) It is proposed that the Minister be given powers to issue regulations dealing with transitional issues regarding the establishment and functioning of ISMO

11. 11 5/24/12, Version Control Concluding Remarks  EIUG supports the Bill  Comments aimed at clarification and certainty rather than opposing the concept of ISMO  It is noted that this represents an evolutionary rather than revolutionary approach – to manage risks  However, in order to achieve the ISMO objectives, the following are noted:  Clear identification of ISMO Customers and associated ISMO rights and obligations are vital to ISMO viability but it is missing from the current bill  Stronger role and responsibility for ISMO in expansion planning is important for ISMO to fulfil its mandate in respect of supply security  Much implementation strategy will vest with the ISMO Board – a properly constituted and capacitated Board (with appropriate representation of industry experts) will maximise chances of achieving the stated objectives  In addition to other aspects identified in the EIUG submission, properly spelt out transitional provisions and associated timeframes are important to the successful entry into the institutionalisation and operational phases of ISMO development