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South African Energy Policy Discussion Document

July 1995

 Contents

• Foreword
• Consultation programme
• Submissions
• About this document
• Contributors
• The process...
• A new direction...

VOLUME I

Acronyms used

1. INTRODUCTION

2. NEW POLICY IMPERATIVES

3. DESCRIPTION OF THE ENERGY SECTOR

4. GOVERNANCE OF THE ENERGY SECTOR

5. POLICY ISSUES AND OPTIONS

Governance

• Energy governance roles, functions and institutions
• Governance of the electricity subsector
• Liquid fuels industry governance
• Governance of the downstream gas industry
• Nuclear governance
• Integrated energy planning
• Resourcing of government energy governance

Demand subsectors

• Households
• Industry and commerce
• Transport
• Agriculture

Energy supply subsectors

• Electricity
• Petroleum
• Gas
• Coal
• Nuclear energy
• New and renewable energy

Cross-cutting themes

• Environment, health and safety
• Energy efficiency
• Research, development and demonstration
• Human resources

References

Index to Policy Issues and Options

VOLUME II : Background on the South African energy sector

Foreword

By the Minister of Mineral and Energy Affairs, Mr R F Botha

Ever since Prometheus (his name means forethought) went up to heaven and lit a torch with fire from the sun to provide an energy source for our ancestors, humanity has realised that energy is life. Any movement involves energy, and who can imagine life without movement? If South Africa is to give its citizens the opportunity to improve their lives, she will have to provide the energy necessary for human endeavour.

This is particularly so at this time of major transition. South Africans have a new political dispensation and are setting off on new journeys to new destinations. It is not only appropriate but essential that we reconsider our energy position and our energy policies. New tasks and new situations require that we maximise our resources for the challenges that lie before us.

That is why we are taking a long and hard look at our energy picture. That is why we have launched an initiative to draw up a new energy policy for South Africa with the maximum input from all interested parties.

What are we required to do to optimise the energy sources available to us? How do we want to apply our available energy so as to benefit as many as possible to the greatest extent? Which kinds of energy should we use? In what mix? These and many others are the questions we are asking ourselves. In particular we need to have specific energy policies in order to achieve the following three priorities:

• ensuring that all South Africans have equitable access to basic and reasonably priced energy services;
• providing the energy supplies that industry and commerce need to achieve economic growth; and
• promoting the kind of energy use that will not damage our environment.

It is not always easy to balance these priorities. Only if we embark on an open and participative process which ensures that all stakeholders have the opportunity to table their facts and express their views, will we be able to do so appropriately. That is why the Parliamentary Portfolio Committee on Mineral and Energy Affairs has been invited to assist in accommodating and encouraging public participation in the formulation of the Government's new energy policies.

As the first step in the process, the Department of Mineral and Energy Affairs has drawn up this Energy Policy Discussion Document. The Document is both a basis for discussion and a source of information about our energy sector, its needs and re- courses. It describes, analyses, and provides data on energy in South Africa.

The Document is based on research and on discussions which have already taken place in a number of forums dealing with energy. It does not contain Government's pre-conceived policy conclusions. Instead, it is intended to lay the major issues, and all the possible policy options in response to those issues, before all who will be involved in the search for a definitive energy policy. It is designed to promote informed and meaningful debate.

Naturally, there could well be issues and policy options beyond those covered by the Document. We are looking for these as well. That is why we are following a procedure which will enable us eventually to prepare the best possible White Paper on South African Energy Policy.

In-depth debate and discussion on the liquid fuels sector has been taking place for some time now in the Liquid Fuels Industry Task Force previously under the National Economic Forum and now Nedlac. The Task Force will hopefully soon come forward with comprehensive and effective proposals to Government on liquid fuels policy. The process we are following in this Document in order to reach a general energy policy is not intended to duplicate the work already done in the liquid fuels field.

Nevertheless, liquid fuels issues and policy options are included in the Document. Liquid fuels policy is an integral part of overall energy policy. Since facts, issues and policy options relating to the liquid fuels sector often impinge on other energy policy considerations, it is important to have a complete and comprehensive overview of the entire energy sector. Likewise, liquid fuels policy will be dealt with in the draft White Paper on Energy Policy.

A description of the detailed process of consultation to develop the draft White Paper follows this Introduction. I will be taking a keen personal interest in the whole procedure. It will be an interesting, constructive and learning experience for all of us.

This is our chance to develop the government policies required to make South Africa a competitive contender in world markets because they provide energy efficiently. This is our chance to become more attractive to overseas investors because of the availability of inexpensive, effective and reliable energy.

The liberating power of effective energy supply and use should not be underestimated. The Industrial Revolution in Westem Europe and North America was made possible by the unleashing of new forms of energy - electricity, petroleum, coal. The first practical electric light bulbs were developed during the 1870s by Joseph Swan in Britain and Thomas Edison in the United States. By 1900 electricity was in use all over the world. Since 1920 electrically-driven modern appliances have transformed daily life for millions.

It is time to similarly broaden the energy resources available in our society, to so constitute our energy affairs that those who live under South African skies are spurred on to greater achievements by greater access to appropriate energy

Now is our chance to bring the energy of the Industrial Revolution to the humblest squatter, the mother urging her children to do their homework, the tired father who seeks to enjoy some television, the baby who may otherwise shiver through the winter, the office clerk studying into the night to become a lawyer.

Join me in this great opportunity.

R F (Pik) Botha
Pretoria
24 July 1995

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Consultation programme to develop a draft White Paper on energy policy

The inclusive and transparent process of consultation to develop a Draft White Paper on Energy Policy consists of the following steps:

• the release of this Discussion Document to interested parties for study and written comment. (Those wishing to make written submissions are asked to use the enclose format provided for in this Document);
• a Workshop with the Parliamentary Portfolio Committee on Mineral and Energy Affairs;
• ad hoc briefing sessions for major stakeholder groups in the energy sector;
• an open Workshop on the small-scale use of energy, mainly for households, where interested persons and representatives from local communities; both urban and rural, will participate;
• a Workshop on energy governance and the process of energy policy formulation, to which senior representatives of the energy industry, large and small energy consumer groups and government departments at national and provincial level, will be invited;
• an open National Energy Policy Summit at which the various policy options will be debated in detail.

Contributions from all the various discussions mentioned will be considered by a Drafting Committee of senior Departmental officials and outside experts which will be responsible for formulating the first draft of the White Paper on National Energy Policy. The Draft White Paper will then be subject to the normal comment, discussion and decision procedures followed when developing government policy positions.

How to make submissions for the White Paper on energy policy

Individuals or organisations wanting to make submissions concerning the White Paper on energy policy should please do so according to the format given below. This will help with the processing of submissions.

A. Basic information

1. Name (If the submission is coming from a collective source, please give the name of a contactable individual.)

2. Postal address, telephone and fax numbers.

3. Date of submission.

4. Submissions from an organisation: Please indicate whether you represent any specific organisation; and, if so, whether you have a clear mandate to speak on behalf of this organisation, either by virtue of your of fice or by virtue of a process within the organisation.

B. Comments and proposals

• Use separate sheets for each Issue or Option: please do not comment or make proposals on more than one Issue or Option per sheet of paper.
• Your name should be given on each separate comment or proposal. If your comment or proposal occupies more than one page, the pages should be numbered, and your name should be given on each page.

5. General comments on the Energy Policy Discussion Document

You are welcome to make general comments on the content of the South African Energy Policy Discussion Document. Comments on specific policy issues and options must, however, be provided separately, in the way indicated below.

6. Comments on existing issues and options

If you want to make a comment on a specific Issue or Option in the Energy Policy Discussion Document, it is important that you refer to its number and subject. Examples:

Comment on Issue 47: Specialised services for the electricity supply industry
I wish to support the importance of this issue ...

Option 103.3 Intelligent geyser thermostats
This option should be scrapped, because ....

Remember to use separate sheets for each Issue or Option to facilitate the processing of your submission.

7. Proposals for new issues and options

If you feel that there are energy policy issues which the Energy Policy Discussion Document has overlooked, make a specific proposal, indicating that it is a new issue. For example:

New issue: Support for the development of perpetual motion machines

I propose that the Department consider the issue of support for the development of perpetual motion machines. I believe that this issue is important for the following reasons: ...

Similarly, make a proposal if you feel there is an option which has been overlooked, whether it falls under an existing Issue or relates to a new issue. Please try to conform as closely as possible to the format used in the Green Paper, and give consideration to all aspects of policy implementation. For example:

Issue: Support for the development of perpetual motion machines

New policy option: Establishment of an Institute tor the Development of Perpetual Motion Machines

Time frame: From 1996 onwards

Consequences:
South Africa will be assured of an inexhaustible supply of free energy for all time.

Implementation:
(a) The Department should establish the institute.
(b) I should be appointed as Director for life.

Remember to use separate sheets of paper for each Issue or Option.

Submissions deadline:

All comments and proposals should be submitted by 31 October 1995. They should be posted or faxed to the following address:

Energy Policy Discussion Document
Department of Mineral and Energy Affairs
Private Bag X 59
Pretoria, 0001
Fax: (012) 322-0810

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What this document contains

This document is divided into separate sections. Most readers will be interested in one or two specific sections and do not have to read the balance of the document. The main sections are:

Chapter 3:

A brief DESCRIPTION of the energy sector (especially Figures 5 and 6 provide a quick view and analysis).

Chapter 4:

The present GOVERNANCE of the energy sector.

Chapter 5:

This is the main part of this document as it identifies KEY POLICY ISSUES per topic and describes OPTIONS and IMPLICATIONS for each of the options. It is divided into four main sections:

• future GOVERNANCE of the energy sector, including specific demand sectors (page 25).
• DEMAND subsectors (ie the sectors using energy) (page 64).
• SUPPLY subsectors (ie the sectors converting and supplying final energy to the demand subsectors) (page 94)
• CROSS-CUTTING THEMES (ie themes that affect more than one of the other topics) (page 169).

References:

This lists the main sources of INFORMATION used in the development of this document (page 198).

Index to Issues and Options:

A detailed LISTING of all the issues and topics, in number sequence per area and topic as described in the document (page 203). As is indicated on the contents page, a 50-page Volume II to the document is available that to a great extent expands Chapter 3 of this document. It provides an overall description of the energy sector and background information to specific sections of the document, and will most probably only be used by those persons who require detailed information on the energy sector or parts of it. Copies can be provided on request by writing to Energy Policy Discussion Document, Department of Mineral and Energy Affairs, Private Bag X59, Pretoria 0001; fax: (012) 322 0810.

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Contributors

This document is the result of an initiative of the Department of Mineral and Energy Affairs, and follows a series of sectoral energy policy synthesis studies completed in 1994.

Core project team:

Charles Anderson
Johann Basson
Anton Eberhard
Mark Pickering
Robert Scott
Hilton Trollip
Sarah Ward

Supported by specialists from the Department of Mineral and Energy Affairs, the Energy for Development Research Centre at the University of Cape Town, and the Minerals and Energy Policy Centre, including the following persons:

DMEA

Hein Baak, Theunis Burger, Tony Golding, Izak Kotzé, Hannes Opperman, Pieter Rossouw, Tony Surridge

Independent consultants:

Thomas Auf der Heyde, Mark Borchers, Bill Cowan, David Freeman, Derek Hurlin, Glynn Morris, Wrenelle Ruiters, Grové Steyn, Anthony Williams, Clive van Horen, Klaas van Zyl

Editor: Anton Eberhard

Project manager: Hilton Trollip

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The process ...

The South African Government of National Unity is undertaking a fundamental review of its energy policy. To facilitate this process it has commissioned this Energy Policy Discussion Document, in effect a green paper', which will lead to an Energy White Paper outlining the government's intended policy for the sector. The Energy Policy Discussion Document presents a brief overview of the energy sector and its current governance. Key policy areas, topics and issues are then identified. For each of these policy issues various policy options are identified, as well as the time frame, consequences and steps for implementing these policies. The intention is that this Energy Policy Discussion Document will provide a coherent and systematic framework for government, energy suppliers, users and other stakeholders to begin a dialogue on a desired future energy policy for the country. Policy choices will have to be made from these and other options identified by stakeholders in the energy sector. The government envisages a consultative process which includes an invitation for submissions from interested partes and the holding of a number of policy workshops. Particular attention is being paid to the effective engagement of those stakeholders who have historically had no voice in the formulation of policy. The Government of National Unity will seek to collate and balance the policy choices which best support national social and economic policy and for which there is the greatest consensus. Where consensus cannot be reached, Parliamentary hearings could be held to clarify preferred options. The policy choices will be synthesised in an Energy White Paper and will form the basis of South Africa's new energy policy. This process is described in the diagram below.

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A new direction ...

The policy options in this policy discussion document indicate the potential to move boldly from the status quo to a new, clear vision and policy framework for the energy sector in South Africa. Gone are the exclusive concerns of fuel security and self-sufficiency held by an apartheid government beleaguered with international sanctions. The advent of democratic government and the re-acceptance of South Africa by the international community offers the opportunity for a radical shift in energy policy. Energy policy will align itself with the new social and economic policies of the Government of National Unity aimed at reconstruction and development. In addition it will take cogniscance of important international trends which are placing greater emphasis on competitiveness, efficiency and environmental sustainability. In summary, a new energy policy will specifically aim to:

• improve social equity by addressing the energy requirements of the poor;
• enhance the efficiency and competitiveness of the South African economy by providing low-cost and high quality energy inputs to industrial, mining and other sectors; and
• accomplish this within the constraints of environmental sustainability.

The picture which emerges from this document is the pervasive hand at present of the state in nearly all aspects of the energy economy. The challenge is to develop a coherent and clear framework of energy governance which frees the energy sector to fulfil the above goals. A common refrain throughout the document is the need to equip government and relevant stakeholders to fulfil this role professionally and effectively. In addition, many energy subsectors could potentially be restructured and sensible, practicable policies put in place to re-direct efforts towards these new goals.

Households need widened access to affordable and clean fuels of choice. The productive sectors - industry, mining, commerce and agriculture - need assured, low-cost, clean and high-quality energy supplies which promote efficiency and competitiveness. The regulatory system governing the liquid fuels sector may need to be reformed. The electricity sector may need restructuring and re-orienting to achieve ambitious electrification targets while incorporating increased competition, integrated resource planning, demand-side management and stricter environmental controls. The appropriation of rent in the dominant low-cost coal sector needs to be looked at. The nuclear sector is undergoing a fundamental overhaul and its dependence on the fiscus will be reduced. Renewable energies could be more vigorously promoted, especially biomass and solar systems. Energy efficiency could be improved. And research and human resource capacities need to be enhanced. The energy sector is a large employer and potential exists for redistribution of income and opportunity.

These are just some of the issues raised in this document, which seeks to provide a coherent framework of key issues and a menu of options which will not only guide and stimulate discussion, but will result in improved policies and more effective implementation.

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Acronyms Used

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1 Introduction

Nearly every aspect of South African social and economic policy is being re-examined, reformed and created anew. As the Government of National Unity sets out on a path of growth with redistribution, many economic sectors require new, bold and imaginative thinking. More than most, the energy sector represents the challenges of transforming an industry and a system of governance to meet new policy goals. This document is the first step in constructing a new energy policy for South Africa. It is a resource document which aims to provide a comprehensive, yet clear framework for identifying key energy policy issues and the range of policy options available for resolving these issues. The document firstly provides an overview of the energy sector in Chapter 3 and a description of its governance in Chapter 4 which enables the reader to understand the main features of South Africa's energy system, and how energy policy is made and implemented. This provides a context for the policy proposals which follow.

The bulk of the document is found in Chapter 5, which is a structured list of energy policy issues and options. This chapter explains why each issue should be considered as significant and then lists a number of options for dealing with the issue. It is important to recognise that the options which are presented are precisely that: options. They have been included either because they represent the opinion of an important stakeholder or because, in the light of international experience in dealing with the same policy issue, the option must be considered as a possibility for South Africa. Each option is presented with a timeframe for implementation, the possible consequences that could result from implementation and a set of concrete implementation steps including who would be responsible for their execution. This enforces a realism on the consideration of the option and avoids the adoption of a wish list' as policy. It also informs the debate in evaluation and comparison of the various options.

The new government is committed to active programmes aimed at achieving specified goals and the options framed in the discussion document are meant to be concrete proposals that can be measured against the actual achievement of these goals. The discussion document will have succeeded if it resources a high quality debate around each issue which leads to the choice of policy options which will form the basis of a new White Paper on energy policy.

Because of the size and diversity of the energy sector (there are at least six major fuel types and many more categories of consumers and energy industry institutions), there are a large number of issues that are dealt with in the document. These have been grouped in four categories.

First, issues around governance are considered. These largely concern the nature of relations between government and the energy sector. This sets the stage for the following groups of issues.

The second group contains issues that are important to energy consumers. This categorisation recognises that the reason for the existence of the energy sector should be the satisfaction of various consumers' needs for energy services and thus these issues should take precedence in government policy. However, a viable, sustainable energy industry is necessary if consumers' needs are to be satisfied and so the third group considers issues important to the energy supply industry: those issues which, if resolved, will result in effective energy service for consumers, in line with government's overall policy objectives.

The final category contains those issues that either do not fit into the previous categories or affect all of them in an overarching way. In the energy area the most important of these are environmental and energy efficiency considerations, energy research and development and human resource issues.

For easy reference, a list of policy issues and options is included at the end of the document.

Finally, the energy policy discussion document has been conceived as an integral part of a larger process. It is meant to resource an effective consultative process in which new policy is formulated in an open manner. This does not mean that stakeholders are only to look on while government makes the policy. What is meant is active participation. While the established energy industry can be relied on to look after their particular interests the new policy needs to balance these interests and to effectively facilitate the engagement of those stakeholders who have not had a voice in the formulation of policy.

The quality of the new policy will be judged not only on the effective delivery of energy policy that facilitates achievement of the new government's economic and social policy goals but also on the development of a participative process in which all affected parties effectively represent their interests and in so doing increase their understanding of what is possible and what is not possible for South Africa's energy sector. It is hoped that this discussion document provides a firm foundation for the achievement of these objectives.

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2 The new imperatives for energy policy

Introduction

As South Africa moves out of the era of apartheid into a new era of popular democracy it is inevitable that old policy goals will be rigorously examined to establish whether they stand up to the tests of the new order. But what exactly is the new order? In what ways has the policy environment changed? What are the new macro imperatives and how do they relate to energy policy? This chapter will attempt to outline some aspects of the broad policy framework and link them, where possible, to specific policy imperatives for the South African energy sector. In so doing a range of local and international factors are considered.

The Reconstruction and Development Programme (RDP)

Originally drawn up by the African National Congress (ANC), in consultation with its allies and a range of experts, the RDP attempts to provide an integrated, coherent and viable socio-economic policy framework, geared towards meeting the needs of a new democratic South Africa and its people. Despite its original party political sponsorship the RDP has been broadly welcomed by most sectors of South African society and adopted by the Government of National Unity (GNU) as a whole. It is generally accepted as forming the basic policy framework for South Africa for the remainder of the term of office of the GNU until 1999.

The six basic principles underlying the programme are:

• it needs to be an integrated and sustainable programme;
• it should be a people driven process;
• it must provide peace and security for all;
• a key goal must be nation-building;
• it should link reconstruction and development; and
• it must contribute to the democratisation of South Africa.

The RDP is seen as being composed of five key integrated programmes aimed at:

• meeting basic needs;
• developing human resources;
• building the economy;
• democratising the state and society; and
• implementing the RDP (ANC 1994a).

Following the general election in April 1994, the Office of the President has produced an RDP White Paper. This document builds on the RDP 'base document' in setting out the initial plans of government to orientate its activities towards the achievement of the interdependent objectives of reconstruction and development on the one hand, and high and sustainable economic growth on the other. The document commits government to the following set of macro-economic policies:

• the gradual reduction of the fiscal deficit in order to avoid the debt trap;
• the intention of ensuring that recurrent government expenditure does not increase in real terms;
• a further government commitment to reduce government dissaving over time;
• a commitment to changing the ratio of government expenditure towards increased capital expenditure;
• a commitment to finance the RDP primarily through restructuring the national, provincial and local budgets to shift spending, programmes and activities to meet RDP priorities;
• the government will reorganise and train the civil service to ensure the delivery of effective and efficient services to all citizens and progressive cost savings; and
• the government will develop our human resources, facilitate labour market reform and establish collective bargaining-based rights for all (President Mandela in the RDP White Paper preamble 1994).

This first White Paper on the RDP is envisaged as being one of a series of white papers. Future government white papers will evaluate progress with the implementation of the RDP generally and set out more detailed policies for economic growth, as well as covering other areas related to the RDP, such as basic needs provision, including energy. The first White Paper does not cover sectoral issues in any detail. However, the RDP base document does, including the question of energy, and electrification in particular.

The RDP base document asserts that future energy policy must concentrate on the provision of energy services to meet the basic energy needs of poor households, stimulate productive capacity, and urgently meet the needs associated with community services such as schools, clinics and water supplies. It accepts that energy policies must be developed on the basis of an integration of supply-side and demand-side considerations. Immediate policies to meet energy needs would include a low-smoke coal programme, improved management of natural woodland, social forestry programmes, commercial woodlots, and support for the transport of wood from areas of surplus to areas of need. Gas and paraffin prices should be reduced through better regulation and by bringing bulk supplies closer to households.

The RDP base document also argues that energy efficiency and conservation should be a cornerstone of energy policies. This should involve the adoption of least-cost planning approaches, the improvement of dwelling thermal performance, the promotion of energy efficient appliances, the use of solar water heaters, appliance labelling, and the implementation of time-of-use electricity tariffs. Financial assistance to ensure households have access to efficient appliances is seen to be essential.

The cornerstone of the RDP's energy policies is an accelerated and sustainable electrification programme which aims by the year 2000 to increase access to electricity to 72% of households (compared to 36% in 1990) (ANC 1994a). Both grid and stand-alone renewable electrification technologies are to be considered and the electrification of schools and clinics is to receive priority. Communities are to be involved in the planning and execution of the programme and micro, small and medium enterprises should be given preference in the contracting process. The electrification programme is envisaged to cost around R12 billion (in 1993 rands). This is to be financed mainly from within the industry via cross-subsidies from other electricity consumers. Where necessary, government will provide concessionary finance for the electrification of poor households in rural areas. A National Electrification Fund, underwritten by a government guarantee, will be created to raise bulk finance for electrification from lenders and investors. Such a fund could potentially be linked to a Reconstruction Fund which could be utilised for other related infrastructural financing needs. A national domestic tariff structure with low connection fees is recommended in order to promote affordability. An agreement will be sought on the rationalisation of the fragmented electricity distribution industry to achieve the above objectives.

The RDP base document envisages the establishment of a National Energy Policy Council to institutionalise the role in policy formulation of stakeholders such as government, unions, civic associations, the energy industry and consumers. A National Regulator is envisaged to enforce public policy, ensure long-term financial viability, assure environmental sustainability, and act as an ombud in the event of conflicts between consumers, government and the electricity industry.

The RDP base document thus goes some way towards establishing an analysis of the problems around the provision of energy services to meet basic needs, it proposes a set of broad energy policies and programmes to overcome these problems, it defines specific targets for an electrification programme and it also addresses some of the energy governance issues pertinent to the sector. Of these the contribution that has captured the public's attention to the greatest degree has been the electrification target of 2.5 million households by the year 2000. This target was accepted by the National Electrification Forum (NELF) as both realistic and achievable. Some members of the NELF, particularly Eskom, have committed themselves to individual organisational connection targets for the years leading up to 2000.

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Further energy policy imperatives

Besides the policy framework advanced within the RDP there are a range of other initiatives which will impact on energy policy.

The writing of a new Constitution for South Africa

Although not so much a policy as a legislative framework the writing of the new Constitution by the Constituent Assembly has two important implications for energy policy:

• the adoption of a Bill of Rights with references to third generation rights may impact on claims that access to energy services is a basic right; and
• the delimitation of the powers of national, provincial and local tiers of government will have important implications with respect to energy and related functions.

Following the completion of the Constitution there may be legislative anomalies which require resolution through amendments to existing energy related legislation or the creation of new legislation.

The activities of various forums in South Africa

Various forums within and affecting the energy sector continue to debate energy policy issues directly and indirectly. Of particular importance is the National Economic Development and Labour Council (Nedlac), which has still to decide how it will approach sectoral issues such as energy.

The concept of a National Energy Policy Council, as proposed in the RDP base document, has been publicly debated without yet reaching any firm consensus on the form, role or functions of such a body.

South Africa's admission to SADC

Following the democratic elections, South Africa was finally admitted to the Southern African Development Community (SADC) which is currently undergoing extensive re-organisation, partly in response to the changes within South Africa, and is in the process of drawing up a new protocol on energy. This protocol will define SADC's structures and arrangements for dealing with energy issues.

Since there is already significant energy trade within the region, and considerable opportunities for expansion of this trade, developments around SADC have important economic consequences for South Africa in the long term.

International pressures for shifts in energy policy

International pressures for shifts in local energy policy can be detected in trade agreements and in more formal agreements such as GATT and the Framework Convention on Climate Change. Competitive pressures on South African exporting industries will result in continued pressure on domestic energy producers to reduce energy input prices. Militating against this, however, may be further international pressures to reduce carbon emissions to acceptable levels and to adhere to more stringent pollution control standards. These conflicting trends must inevitably result in local policy debates as South Africa struggles to find its place in an increasingly competitive world with environmental issues rising slowly but steadily up the agenda.

A further interesting international trend on the part of energy supply utilities is the tendency to view energy in the context of energy services, rather than as a simple commodity. For example, electricity distribution utilities are beginning to see themselves as selling lighting, heating and cooking services, rather than simply selling kWh of energy. This deceptively simple change in philosophy ensures a systems perspective on energy, rather than a traditional supply-side or demand-side perspective.

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DMEA policy principles

The Chief Directorate, Energy of the DMEA has previously conducted an internal process to produce a set of policy principles, reproduced below. These are included here as an input to the policy-making process. This list of proposed actions should be seen as a resource for the policy debate, and not as pre-emptive of the policy decision-making process leading to the energy White Paper.

The aim of the policy shall be to provide sustainable access to energy services for all on a least cost basis in order to support social and economic development. It shall be based on the following principles:

1. The policy shall recognise the important role of energy in the country's economy and particularly that ready access to adequate, appropriate and affordable forms of energy is a prerequisite for sustainable socio-economic development and the improvement of the quality of life.
2. The Government shall support equitable access for each citizen to the energy carrier of his choice, by means of an accelerated electrification programme, through grid extension and remote area power systems, a biomass programme and the efficient supply and marketing of transitional fuels. These shall apply to households (especially women), community services and productive enterprises, and will involve active consultation with communities.
3. Government shall endorse the need for community development and empowerment toward self-sustenance. Energy policy shall therefore ensure consumer access to information, extension and guidance in satisfying energy service needs, and that the policies, activities and decision making in the energy sector are transparent.
4. The policy shall endorse free-market principles and shall allow Government intervention only to the extent of meeting the aims of the policy. Where energy institutions operate in the public sector they shall do so under commercial conditions/culture.
5. The policy shall be based on the creation of competition in the sector, be it direct, indirect, by the threat of control or comparison, in order to improve business efficiency. It shall also ensure that the necessary investment is attracted.
6. The Government shall plan for a balance between demand and supply side measures, balanced use of the various energy carriers, optimal exploitation of both non-renewable and renewable energy resources, appropriate imports and exports and short and long term considerations which are in harmony with the physical environment.
7. The Government shall ensure that this balance policy is developed by applying the principles of an integrated energy analysis, including active coordinated with other policies, bodies, departments and stakeholders.
8. The policy shall ensure the implementation of a national programme for energy efficiency and demand side management to increase economic competivness and reduce adverse effects on the environment.
9. The Government shall require that energy prices, excluding embedded taxes and levies, are relatively stable and cost reflective and based on the long term marginal cost of supply, or are market related. Where subsidisation or cross subsidisation is required, it shall only be used for specific reasons, be transparent and be applied for a specific period for a specific consumer or group of consumers.
10. Because of concentrations of power, specific parts of the energy sector may need regulation. The policy shall allow for this to protect the interests of consumers and increase efficiency and needs to be benign, objective and depoliticised.
11. The Government shall ensure the maintenance of balanced and responsible standards regarding the interface between the energy sector and the physical environment. Shadow external costs shall initially be used for decision making.
12. Government shall endorse the development of those renewable energies that will be cost effective in the medium term, allowing for environmental cost credits and their support by appropriate institutions.
13. The policy shall allow for the creation of new energy institutions or new legislation, where necessary.
14. The policy shall encourage international cooperation with the emphasis on Southern Africa, and this cooperation shall be based on a win-win principle.
15. The Government shall ensure that appropriate surveys, investigations, and demonstrations are carried out to reach informed decisions. Specific sectors in the energy industry shall be responsible for these activities in their domain.

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Conclusion

It is clear that the new imperatives for energy policy are significantly different from the past focus on fuel security and self sufficiency. Instead, the country is facing the realities of addressing vast social backlogs whilst at the same time attempting to build a competitive economy.

It is useful to encapsulate these issues within a new energy policy paradigm consisting of three potent individual imperatives, namely:

• the need to address equity issues through the delivery of basic energy services to the poor;
• the need to enhance the efficiency and competitiveness of the South African economy by providing appropriate low-cost, high-quality energy inputs to the industrial, mining, manufacturing, domestic and other sectors; and
• the need to work towards environmental sustainability by addressing short- term environmental problems and planning for a long-term transition towards renewable sources of energy with minimum negative environmental impact (Eberhard & van Horen 1994: 19).

It is also clear that past energy governance practices of secrecy and cloistered policy formulation processes will have to change. The new government's policy of people centred development demands an entirely new approach to the inclusion of people and interests in decisions affecting them. This must inevitably have implications for the governance of the sector. The following chapters of this paper will attempt to demonstrate through discussion of a range of practical issues how this new energy paradigm, and the new approach to energy governance, may be translated from philosophy into practice.

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3 Description of the energy sector

Introduction

Energy services are necessary to fulfil basic needs such as cooking, warmth and light, and as an input to productive economic sectors such as industry, mining, commerce, agriculture and transport.

Because of its importance for human needs satisfaction, the economy, and its effects on the natural environment, it is important that the energy system is properly governed. For this a good understanding of the energy system is necessary.

This chapter provides a brief description of the South African energy system and gives an overview of the physical energy flows and the organisation of the institutions that are involved, as a context for consideration of the policy issues and options that follow. As will become apparent in this chapter, the state is heavily involved in the South African energy sector and there is much potential for the state to implement effective policies.

Macro-economic factors

The energy sector has a significant effect on the macro-economy. Investments in energy industries such as coal mines, power stations and oil refineries, represent a large demand on available investment capital which is in short supply. In the past, there have been significant demands on the fiscus for funding huge investments in synthetic fuels (synfuels) and there are continued subsidies for both synfuels and nuclear energy.

FIGURE 1 Gross domestic fixed investment 1950-1993

Figure 1 shows that energy sector investments form a significant part of total gross domestic fixed investment (GDFI) in South Africa and that this amount varies considerably. Investment by Eskom in new power stations peaked in 1985 but relatively high levels of investment were sustained by Sasol, Mossgas and, more recently, by oil refiner. Eskom, Sasol and Mossgas have accounted for a significant proportion of the public sector GDFI in Figure 1.

The energy sector employs about 250,000 people, representing a significant opportunity for redistribution and human resource development.

Imports of crude oil represent nearly 10% of the value of total imports (highly dependent on crude price) and taxes on liquid fuels make up about 10% of government revenue. Because energy is a significant input to many industries - directly, and through transport costs - energy prices have a strong impact on inflation.

Energy consumption has been increasing steadily but it is also apparent, in Figure 2, that consumption is linked to GDP growth and that in periods of economic recession energy consumption has dipped with GDP. Whilst industrialised economies have managed to delink energy consumption from economic growth, it appears that South Africa will continue to experience growth in total energy consumption as GDP increases for some time unless radical efficiency measures and restructuring of the economy occur. The high energy intensity of industry, the main energy consuming sector, militates against this and while this should not deter policies aimed at greater efficiency, increased consumption connected to economic growth can be expected in the short term at least.

The relative size of the South Africa energy sector's contribution to GDP, at 15%, is also important. This compares with an average of 8% in the International Energy Agency countries which points to the structure of South Africa's economy but also to the relative inefficiency of an energy sector which has had to pay a very high price for attempts to achieve energy self-sufficiency and security under the oil embargo.

Energy use

Successful energy policy should focus on meeting the needs of energy users, within the goals and constraints of economic, social and environmental policy. So whilst the energy industry is an important part of the economy, is a large employer, and needs to be viable, its raison d'etre is the effective provision of energy services. In this vein, contemporary energy policy studies begin with an understanding of use of energy services. This includes suppressed demand, i.e. those energy services for which there is a need which is not being met. An example of this would be non-electrified households' need for electricity. It also requires an understanding of which fuel/appliance or equipment combination meets an energy service requirement best. With the main policy goal of meeting energy service needs in mind we now move on to more detailed descriptions of current energy use by different categories of users.

FIGURE 3 Nett energy consumption by main user categories (1993)

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Industry

Industry accounts for 54% of nett energy consumption. It is well supplied with inexpensive energy, with coal (58%) and electricity (36%) being the main fuels. Much of the energy in this sector is consumed in minerals beneficiation and mining (50%) and manufacturing (20%). Mining relies heavily on electricity with 70% of energy consumption on the mines being electricity. In fact, supply of electricity to mines was the main factor spurring initial development of South Africa's large electricity sector. Major concerns for the industrial sector are the reliability and price of fuels of choice, improvements in energy efficiency and competitiveness, and environmental sustainability.

Households

Households can be divided into the four categories shown in Table 1.

TABLE 1 Household energy use

Only about 40% of households have access to electricity. However, the government's RDP electrification programme plans to electrify 2.5 million households by the year 2000, raising this proportion to 70%. This has important implications both for the structure of the electricity supply industry and the total system load. Other key issues facing households are security of fuelwood supplies, and cost, health and safety issues related to coal and paraffin use. The poor household sector has historically been ignored in government energy policy. With the new government's emphasis on fulfilling basic needs, the problems facing this sector will top the energy policy agenda.

Community facilities

The results of apartheid planning have had a similar effect on community facilities as on households. Facilities in the former black 'homelands' and black townships are poorly resourced. 80% of South African schools do not have electricity and many clinics are also not supplied.

Transport

Liquid fuels comprise 92% of energy consumption for transport. Availability is good and prices are average and stable by international standards. Rail transport accounts for 5% of total electricity consumption.

Agriculture

Liquid fuels account for 78% of energy consumption in this sector. Electricity allows use of sophisticated technology on commercial farms whilst subsistence agriculture is severely hampered by lack of access to electricity and other fuels even for basic services such as water pumping.

Trends for different fuels

Coal use has dominated consumption but growth in electricity use has outpaced growth in other fuels and coal has been displaced. This reflects the change in structure of South Africa's economy, largely in terms of the growth and satisfaction of industrial and mining demand for electricity. The growth in consumption of liquid fuels reflects both the increase in ownership and use of private motor vehicles and minibus taxis and the use of heavy diesel-powered road transport.

FIGURE 4 Use of different fuels from 1950-1993

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The energy filière

There are clear and extensive interlinkages in the energy sector. These comprise energy flows along a chain or a filière from a resource base, through various stages through to the delivery of energy services to end-users. An overall picture of the energy filière and the respective institutions and their functions enables a clear insight into the key features of the energy system. Figure 5 (overleaf) presents such a picture.

FIGURE 5 South African energy filière: energy stocks and flows

In Figure 5, four energy system functions are identified, namely:

• distribution and/or marketing of fuels to end-users;
• bulk, long distance transmission or transport of energy;
• transformation of energy to a desired fuel from a primary source (for example, electricity generation from coal); and
• exploitation of primary energy reserves, for example, coal mining.

The manner in which each of these functions is performed in South Africa is now briefly described.

The marketing and distribution of energy

Electricity

Marketing and distribution of electricity is regulated by the National Electricity Regulator (NER) and performed by Eskom and local authorities (LAs). LAs have the legal right to supply users in their jurisdiction. The industry is highly fragmented with 450 LAs each having their own staff, policies and tariffs. About 36,000 people are employed. LAs derive a large surplus from the sale of electricity amounting to R1.5 billion per annum. Eskom has been granted the right to supply some areas but the legacy of a highly fragmented ESI is highly problematic in implementing a rationally structured supply industry which can deliver the RDP electrification programme. The role of LAs and the allocation of the surplus on electricity sales are key factors. In 1994, 400,000 additional households were connected, of which Eskom accounted for 250,000. A recent Cabinet decision makes Eskom responsible for rural electrification.

Liquid fuels

There are seven oil companies in South Africa selling fuel under nine brands: BP, Caltex, Engen, Shell, Sasol, Sonap (owned by Engen), Total, Trek (owned by Engen) and Xenex. The marketing of liquid fuels is carried out by 4 900 independent service stations supplied by the oil companies (apart from Sasol and Mossgas who are restricted from operating in this market). The service stations are most often owned by the small business sector and account for 45,000 employees, mainly petrol pump attendants. The sector is highly regulated: prices are regulated, the number of service stations is regulated and the oil companies are obliged to market all of Sasol and Mossgas' production and to pay a set price for this product. The oil companies distribute and sell products from each other's refineries. Taxes make up about a third of the retail price, and contribute about 10% of government revenue.

Piped gas

This is largely marketed by the Sasol subsidiary Gaskor (90%) and the Johannesburg Water and Gas Department (10%) with very small industries in Cape Town (Cape Gas) and Port Elizabeth.

Other fuels

Marketing operations of the remaining fuels are owned by private companies. Coal marketing is unregulated and carried out by a mixture of big and small businesses. Much of the supply of coal to poor households is by micro-enterprises in the informal sector as is that of paraffin and LPG. Whilst these industries make a contribution to the economies of this sector, this structure also makes the implementation of policies dealing with the high prices and health effects of the fuels difficult to formulate and implement. Paraffin prices are regulated by law but enforcement at the level of retailing to poor households is difficult.

Bulk transmission and transport

Electricity is transmitted in bulk by Eskom. The long distance liquid fuels bulk transport sector is largely in state hands with some transport being done by privately owned road tankers. There is no regulation of tariffs, and tariff structures of the commercialised Eskom, Spoornet and Petronet parastatals are set independently.

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Energy transformation

Electricity generation is largely in the hands of the parastatal, Eskom, although large local authorities have retained some generation capacity. Eskom's total generation capacity in 1993 was 31,585 MW and electricity production was 154,000 GWA, 98% of South Africa's total. Economies of scale predominate, with most production coming from large mine-mouth coal-fired stations producing low-priced electricity from low-cost coal. There is significant overcapacity. Peak demand in 1993 was 23 169 MW. There is general acknowledgement that this sector operates relatively efficiently according to world standards, although past generation planning has been poor. The monopoly power of Eskom in this sector and the absence of effective government capacity means that Eskom's influence on national electricity policy is very strong. This has implications for demand-side policies and integration of other fuel subsectors. Eskom also operates Africa's only nuclear power station which produces electricty at a higher cost than the coal fired stations. Small hydro and pumped-storage facilities make up the balance of South Africa's electricity generation. Eskom employs a staff of 40,000.

Liquid fuels production

The structure of this industry is unique in world terms and issues related to synthetic fuels (synfuels) have a fundamental effect on the organisation of all phases of the liquid fuels industry. Synthetic fuels from the Sasol coal and Mossgas natural gas plants account for approximately 35% of the South African liquid fuel supply, the balance being from imported crude oil which is refined locally. The Sasol plants were constructed by the state and then privatised although large loans are still owing to the state and a large state subsidy is paid to Sasol. The Mossgas plant is state-owned and uneconomic. Direct employment is 27,000. Sasol has diversified into petro-chemicals and the size of Sasol makes it an important player in the economy. Sasol estimates that its operations save more than R5 billion in foreign exchange annually and that it makes a contribution in excess of R5 billion to the GDP.

Crude oil refineries are owned by private oil companies (BP, Shell, Caltex and Engen) and Sasol (with Total) owns a refinery (Natref) in the Gauteng province making it the dominant fuel producer in this extremely important region. Oil companies have made significant investments in expanded refining capacity in recent years. The crude refineries have a capacity of 455,000 barrels per day, representing significant overcapacity. Crude refineries receive a regulated price for their product. The crude refining industry has 6,000 employees and estimates that local crude refining saves R1.8 billion annually in foreign exchange. About R600 million of refined product is exported annually.

TABLE 2 South African liquid fuel production facilities (after completion of current expansion plans)

Primary production

Economically exploitable coal reserves of 55,000 million tonnes (11% of world bituminous reserves) are owned both by the state and private companies but all production is by privately owned mines. Ownership of coal mining companies is highly concentrated and largely controlled by three companies: Amcoal, Ingwe and Sasol, which accounted for 80% of 1983 production of 183 million tonnes. This production was allocated as follows:

TABLE 3 Allocation of coal production

Eskom and Sasol account for more than 80% of local coal consumption and by virtue of their large purchases of coal on long-term contracts and ownership of mines have a strong influence on the coal mining sector. The strong government influence on Sasol and Eskom therefore means that effectively coal production is heavily influenced by government policy decisions, even though it is in private hands and not subject to regulation. This subsector employs 59,000 people, down from 100,000 in 1986.

Uranium

Uranium production is linked to gold production, which is in permanent decline. The Atomic Energy Corporation (AEC) has recently ceased production of enriched uranium for Koeberg. Thus uranium is more a minerals issue and although uranium is included as an energy resource the most important factor in including the nuclear industry in an analysis of South African energy policy is the government's DMEA budget of R489 million for 1995/96 (R178 million for loan repayments) for the AEC. Another factor could be the value of considering longer term international trends in nuclear energy.

Gas

South Africa has small natural gas reserves, amounting to 57 billion cubic metres, off the south coast. Natural gas production is dedicated to synfuels production and controlled by state-owned Mossgas. Piped gas is also produced as a by-product of Sasol chemicals production. It is believed that Sasol has significant capacity to manufacture gas at its synfuels production plants and it has recently expanded pipeline connections to connect these plants to industrial gas applications. Gas from Mozambique and Namibia may be imported in future. There are also possibilities for exploiting South African coal bed methane.

Oil

South Africa does not have commercially exploitable oil reserves. The state-owned Strategic Fuel Fund controls strategic oil stockpiles, which are currently being reduced, of 76 million barrels. In 1995 South Africa imported 70 million barrels of crude. Very limited amounts of refined products are imported.

Biomass

Woodfuel is largely gathered by users from natural woodlands. While some areas are still well supplied, others are facing severe denudation. While this fuel has a strong daily impact on possibly half of the population of South Africa no clear state policy for dealing with this problem has been adopted and implementation projects are few and have had little impact.

Ownership and regulation

FIGURE 6 South African energy filière: ownership, regulation and market conditions

Figure 6 repeats the picture of energy flows shown in Figure 5 but focuses on details of ownership (private and state), regulation and market conditions. A clear overall picture emerges.

Firstly, with minor exceptions, significant participants in the system concentrate on only one major fuel type in only one, or at most two, of the four energy system functions of primary exploitation, transformation, transport and marketing. One could say that each of the energy system functions, for each fuel-type, is largely performed by a homogenous group. For example, all crude refining is done by privately owned oil companies, most electricity generation is done by the Eskom parastatal, and all coal mining is done by privately owned mining companies.

Secondly, another important conclusion gained from analysing the filière, as depicted in Figure 5, is the strong involvement of government, either through ownership or regulation. In general, for each fuel/energy system function combination, the government either owns the institution performing the energy system function, or the function is tightly controlled by regulation, or the energy flow into or out of the function is controlled by one of these means. Possibly the lowest level of control is over the production of coal for industry, but even in this case most coal would be transported by Spoornet, the state parastatal, and thus the setting of tariffs and the provision of rail infrastructure would exercise influence over prices.

Having explored the structure of the South African energy sector and the significant role of the state it is valid to ask whether policy is being formulated and implemented in a transparent, professional, rational manner in line with public policy goals. Another way to phrase this question is whether the government, through its DMEA, has the necessary means to effectively engage the powerful players who dominate the industry.

This question does not imply that it is desirable for the state to exercise extensive control over all energy subsectors. Where markets operate effectively with energy services and economic benefits equitably distributed, there is minimum need for state involvement. However, much of South Africa's energy system is characterised by lack of access to desired fuels, by concentrated oligopoly or monopoly ownership, unintegrated pricing and taxation policies and a relatively poor environmental record. There is clearly a role for the state in guiding the energy sector to more effectively meet goals of social equity, economic efficiency and environmental sustainability

These questions need to be borne in mind when considering the governance goals expressed in the next chapter and when considering the wide range of policy issues and options presented in Chapter 5.

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4 Governance of the energy sector

A definition of governance

The term 'governance' is used to describe the complex set of policy processes and control relationships which occur between the various players in the energy sector.

Key energy governance players include:

• policy makers: such as Parliament, the Minister, and institutions empowered to govern certain activities or institutions, such as regulators or local authorities;
• energy industries: such as the coal, petroleum, nuclear, electricity or renewable energy subsectors and the various industry owners, including the state and private shareholders;
• government departments: such as the Department of Mineral and Energy Affairs (DMEA), Department of Public Enterprises, Department of the Environment and Tourism, provincial governments and local authorities;
• energy consumers: such as taxi owners, households or large electricity based industries;
• supra-national bodies: such as regional trade blocs, a growing global reality as trade links grow; and
• other stakeholders: such as organised labour, civic organisations, researchers and energy service companies.

An examination of energy governance would seek to understand how these various players interact, their interests and their motivations. A starting point for energy sector policy development is a clear understanding of the role of the state in relation to the energy sector, an issue already touched on in Chapter 3.

Particularly important aspects of energy governance are:

• the processes by which policy is formulated and implemented;
• how the public authorities interact, both at central government level and between the various tiers of government;
• the role of the state in owning and/or managing energy industries;
• enabling markets to function competitively and efficiently; and
• regulatory processes where markets fail and where externalities are not incorporated.

Energy plays a vital and pervasive role in all national economies. Typical illustrations of this are the scale of capital expenditures on energy infrastructure, the importance of oil imports or exports on the balance of payments and the contribution of the energy sector to the gross domestic product.

The energy sector is characterised by a wide variety of economic conditions within the various subsectors. These range from highly competitive markets to natural monopolies and from tradeable to non-tradeable goods and services (Olade 1992). Furthermore, some subsectors are based on revenue generating natural resources with high strategic values whilst others are of little economic consequence. Governance styles consequently vary between energy subsectors depending on the economic conditions. A definitive factor in any country's style of energy sector governance is, of course, the prevailing economic ideology.

Energy governance in South Africa should be shaped by a recognition of the following important economic factors:

• the impact of the South African energy sector on the economy, including the fiscus, balance of payments, investment, and employment;
• the high level of economic linkages with other sectors, particularly the minerals sector;
• the high level of state involvement in the energy sector through ownership, subsidies and regulatory controls;
• the sector's strategic importance in terms of international trade and domestic energy security; and
• the broadly acknowledged need for structural and governance reforms within most energy subsectors in order to promote economic efficiency as a pre-requisite for sustainable economic growth.

The critical role of energy in the social well-being of people should be a major factor in the governance of the energy sector. This factor was seriously neglected in South Africa's past. Furthermore, the majority were excluded from participating in the governance of the energy sector.

Although elected democratic government must play a primary role in ensuring the achievement of social goals through energy governance there is a clear need to broaden participation in the future in order to ensure more balanced and appropriate energy policies and the effective and equitable delivery of energy services.

An environmental rationale for governance

A cursory examination of South Africa's energy economy will reveal a degree of market failure in the lack of internalisation of environmental externalities in energy prices. Examples include:

• high levels of household pollution arising from the combustion of dirty fuels and related health costs;
• the environmental effects of burning low grade coal in massive power stations;
• the opportunities for importing clean hydropower or natural gas from the southern African region, rather than burning coal resources; and
• South Africa's contribution to global warming and related atmospheric effects through the emission of carbon dioxide and other gases.

An increasing realisation of the environmental impacts of energy exploitation and usage must result in a growth of environmentally related regulations and governance activities within the energy sector.

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Energy governance in South Africa

The consolidation of state involvement in the energy sector began in 1980 with the creation of the Department of Mineral and Energy Affairs (DMEA). Previous energy functions were transferred from the former Department of Planning, the former Department of Industries, the former Department of Commerce and Consumer Affairs and several other institutions. In 1987 many functions of the DMEA were transferred to a National Energy Council (NEC), a statutory body with an appointed Council and a professional staff able to function more efficiently outside of the constraints of the Civil Service (Energy Act 1987). The NEC was partly funded from levies on liquid fuels, electricity and coal.

Unfortunately, the organisational structure of the NEC could not cope with the tensions created by the effects of the vested interests of those commercial sectors represented on the Council. Furthermore, the allocation of regulatory functions, particularly for transport fuels, to the NEC, essentially an extra-government policy research management and policy formulation body, created a crisis of identity for the Council. These factors were aggravated by Ministerial differences about the NEC's off-budget funding and non-civil service staffing conditions, resulting, four years later, in the NEC being dissolved and downgraded to an Energy Chief Directorate back within the DMEA (Abolition of the National Energy Council Act 1991).

The Minister of Mineral and Energy Affairs and the Chief Directorate: Energy of the DMEA currently have responsibility for developing energy policy, framing legislation, administration of regulatory controls, funding and management of national energy policy-oriented research, and overall control of the Central Energy Fund and the National Electricity Regulator (NER).

Other national departments which play some role in the governance of the energy sector include:

• the Department of Public Enterprises, which inherited responsibility for Eskom from its predecessor department responsible for the privatisation of state assets;
• the Department of the Environment and Tourism, which administers environment related legislation affecting the energy sector;
• the Departments of Foreign Affairs and Trade and Industry, owing to the importance of energy in foreign trade;
• the Department of Finance, owing to the fiscal importance of the energy sector, particularly petroleum taxes.
• the Department of Transport, owing to the importance of liquid fuels to transport;
• the Department of Housing, which has an interest in the thermal performance of buildings; and
• the Department of Constitutional Development and Provincial Affairs, which has an indirect role to play in the affairs of local government.

The governance of the South African energy sector is thus accomplished by a range of institutions each with defined, but often overlapping, roles and functions.

The Minister of Mineral and Energy Affairs, as part of the Cabinet, assisted by the Parliamentary Portfolio Committee (PPC) on Mineral and Energy Affairs, are the ultimate policy makers for the energy sector. Traditionally the role of the PPC has been reactive, compared to the Minister who is proactive in initiating policy changes and legislation. Indications are that in future the PPC may play a more significant role in policy development.

A feature of the governance of the South African energy sector has been the devolution of policy making authority from the Minister and legislature to various subsectoral bodies. An example is the Electricity Council, which supervises Eskom.

The Department of Mineral and Energy Affairs

Responsibility for energy matters within the Department of Mineral and Energy Affairs is assumed by the Chief Directorate: Energy, which sees its role as the 'promotion of effective integrated and balanced energy use and provision based on the right of access to energy services for everyone at affordable costs on a sustainable basis' (DMEA 1994c). The DMEA is responsible for administering the following energy acts:

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• Central Energy Fund Act (Act 38 of 1977)
• Petroleum Products Act (Act 120 of 1977)
• Nuclear Energy Act (Act 131 of 1993)
• Electricity Act (Act 41 of 1987 as amended)

In terms of these acts the DMEA performs certain regulatory functions, particularly in relation to the liquid fuels subsector, and more recently, oversight of the NER and the Council for Nuclear Safety.

Current functions of the DMEA

In order to fulfil its role of promoting effective integrated and balanced energy use the Chief Directorate: Energy considers itself to perform the following functions (DMEA 1994c):

• advising the Minister and others;
• administration of energy acts;
• environmental scanning and analysis;
• management of an energy projects programme;
• policy development;
• integration with socio-economic activities; and
• action programmes where appropriate.

The Chief Directorate: Energy has the structure given in Figure 7.

FIGURE 7 DMEA structure

In 1994 the Chief Directorate: Energy had the following staff complement:

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TABLE 4 Chief Directorate: Energy staff complement

Since its creation in 1980 the Chief Directorate has experienced difficulty in attracting professional staff from the energy sector. The reasons for this are thought to be the relatively low pay scales of the government and perceptions of employment conditions within the bureaucracy. Consequently, the Department is forced to recruit professionals with little or no energy background. Critical skills that the Department has not been able to attract are multi-disciplinarians with engineering, business and economic backgrounds. The Chief Directorate is particularly deficient in energy-economists and energy systems planners.

The Chief Directorate's racial and gender composition reflects the old order of South Africa, particularly in the senior posts with all posts from Deputy Director upwards currently occupied by white males.

Problems faced by the DMEA

The Chief Directorate has identified the following organisational problems:

1. A lack of internal capacity: The Chief Directorate lacks the internal capacity to adequately perform its functions. This has been aggravated by the frequent re-organisations of the Department over past years, the increasing workload faced by the Department and the large number of external demands on the Department, such as pressure to participate in the various subsectoral policy forums where the Department has generally been unable to play its proper role. The proportion of the DMEA budget for administration and energy management is very small
2. A short-term focus: Largely owing to the high workload experienced by the Directors in managing the Department's research programme, senior staff tend to be over-involved in the operational aspects of the Department's functions and Directorates consequently tend to adopt a short-term focus.
3. Insufficient policy development work: Partly due to the short-term focus insufficient energy policy development work is being performed within the Department.
4. Filling institutional gaps within the South African energy industry: In the absence of other institutional players within the South African energy industry, particularly around renewable energy and energy efficiency matters, the Department acts as the de facto institution of last resort. This places pressure on the Department's resources which were not intended to perform these functions, particularly involvement in the implementation phase of projects.
5. A vacuum in integrated energy planning: Although supposedly a major function of the Department the current structure makes no provision for integrated energy planning activities. The Department lacks the capacity to perform integrated energy planning, has not established the necessary database facilities and, in fact, has no staff employed to perform this specialised function.
6. Institutional limitations to the integration of energy policy: The practice of delegating policy authority to statutory councils responsible for particular energy subsectors creates a significant problem for the Department in terms of its ability to coordinate and integrate energy policy. This is aggravated by the organisation of the Directorates along energy carrier lines, rather than functionalities, whereby each Directorate is responsible for monitoring, research, policy development and regulatory (where appropriate) functions (Basson 1995). Furthermore, major energy institutions such as Eskom answer to other line function ministries

The DMEA is currently undergoing an internally driven evaluation of its structure. Recommendations will be made to the Public Service Commission during the course of 1995.

Provincial and local government

At this stage, provincial government has no explicit role in relation to energy other than broad responsibilities for development strategies within which energy services form a part. In the future, provinces may play an important role in integrating the planning of energy services. Local government, on the other hand, has traditionally played a central role in the electricity subsector where most distribution is performed by municipal electrical undertakings. Until recently local authorities were effectively exempt from regulation by the Electricity Control Board. Following the Cabinet's acceptance of recommendations from the National Electrification Forum the Electricity Act has been amended to bring both municipal electricity undertakings and Eskom under the regulatory power of the NER.

Policy formulation

There is no simple definition of the energy policy formulation process within South Africa, and policy is developed within and around a range of institutions. Policy oriented research is conducted by many organisations, including government commissions, the DMEA, academic institutions, independent policy centres, statutory councils, the energy industry itself (both private and public sector), political parties, trade unions, regulators and others. Policy positions are formulated by various stakeholders and pursued through both public and private agendas. In the past, the government has adopted a fairly opaque policy development mechanism, largely on account of the strategic nature of the energy sector, particularly the oil and nuclear industries.

The 1986 White Paper on Energy is an example of such an opaque process. In April 1984 the Minister of Mineral and Energy Affairs requested the then Energy Policy Committee to reformulate the Republic of South Africa's energy strategies and to identify future priorities in collaboration with the DMEA (South Africa; Ministry of Mineral and Energy Affairs 1985). The fairly extensive Draft White Paper which resulted from this collaboration was circulated within selected parts of the energy community. Following submissions to the Minister a much abbreviated version of the White Paper was published the following year (South Africa; Ministry of Mineral and Energy Affairs 1986). Both versions of the White Paper focused on energy security, and ignored appropriate energy services for the majority of South African citizens.

Further examples in the lack of transparency in policy making in the past were the decisions to commit huge amounts of public finance to uneconomic ventures such as Mossgas and nuclear fuel production, which continue to have major fiscal impacts through large synfuel subsidies and the major portion of the DMEA budget still going to the AEC.

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Recent developments in the policy arena

Recent policy activity within the sector has corresponded to the general growth of public policy activity stimulated by the transition to democracy, as has been evidenced by the development of a number of subsectoral forums. The National Electrification Forum, the Liquid Fuels Industry Task Force and recent calls for a Nuclear Forum are good examples of the need for policy development. Unfortunately, in keeping with the tradition of subsectorally based approaches to policy, these forums have largely failed to integrate their efforts. A single exception to the subsectoral approach was the Summit on a National Energy Policy Council, called by the Minerals and Energy Policy Centre in April 1994, at which broad consensus on the need to establish a mechanism for the development or negotiation of sector wide policies was achieved. Unfortunately this initiative has not progressed further although the same call has been repeated by the Energy Research Institute which commented that:

The sector requires a policy-making body supported by a research and information organisation.... The policy making arm of government has to be firmly embedded in a ministerial department, but for optimum efficiency the research arm should be set up as a parastatal body along the lines of the defunct National Energy Council. (Dutkiewicz 1994: 83)

New approaches to energy governance in South Africa

As has been pointed out in preceding chapters, the South African energy sector currently suffers from serious distortions. The new policy goals for the sector will require significant realignments of the state's role, in terms of its research agenda, its policy agenda and its involvement in, and budgetary commitments to, the various subsectors. New approaches to the governance of the energy sector might include the following:

• a recognition of where markets work, and where markets fail and where government interventions are necessary to achieve energy policy goals;
• the development of energy policies within an integrated framework which takes adequate account of national, social and economic goals, desired energy end-uses, demand-side management strategies and the potential of all energy subsectors to provide energy services;
• a clear recognition of the different roles involved in energy sector governance, including:
  • policy oriented research conducted by a wide range of stakeholders and research bodies to support policy development;
  • policy formulation through appropriate processes and forums which bring together researchers, stakeholders, the DMEA and Parliament;
  • policy making by government;
  • management activities conducted by both government appointed and private sector bodies; and
  • regulatory functions conducted by various bodies.

  and, wherever possible, the institutional separation of these roles;

• a commitment to a more transparent and inclusive process of policy formulation which involves key stakeholders whenever possible; and
• a commitment to build capacity within all bodies in the energy sector concerned with the creation of policy and the regulation of energy industries in order that they can adequately perform their governance functions.

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5 Policy issues and options

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AREA

Energy governance

Much of the background to the area of energy governance has been covered in the previous chapter on governance. Topics considered are overall energy governance roles, functions and institutions, governance of individual energy subsectors, integrated energy planning and the resourcing of energy governance. Policy issues and options are raised which seek to clarify the functions of different institutions within the governance structure.

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TOPIC

Energy governance roles, functions and institutions

Issues requiring clarity regarding the functioning of the South African energy governance system include:

a unified governance framework; the various processes by which energy policy may be formulated; organisation and rationalisation of regulatory institutions; integration of national energy policy with provincial and local government energy planning and service delivery; and local participation in energy needs identification, planning and implementation.

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1 ISSUE

A unified governance framework for the energy sector

The analysis in Chapters 3 and 4 has indicated the pervasive role of the state in the energy sector. Various legislative acts define the state's functions in particular sectors, while in others this role has never been formally defined. There is room for a bold, incisive move to enact an overall consolidating Energy Act which would provide a vision for the energy sector and define an overall governance and regulatory framework.

South Africa's previous Energy Act (No. 42 of 1987) was concerned solely with the establishment of a National Energy Council in which was institutionalised a variety of energy functions from research and development, to policy formulation, to regulation and even implementation of various energy policies. For various reasons a decision was taken to abolish the NEC and, with it, the Energy Act. Given a new integrative approach to energy governance in South Africa a new Energy Act could be considered.

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1.1 OPTION

Establish a new Consolidated Energy Act

Time frame

1996.

Consequences

A Consolidated Energy Act could establish a clear vision and framework for the governance of the energy sector, clarify institutional roles and specify various policy formulation aisms. This intervention should streamline the role of the state in the governance of the energy sector and improve the effectiveness of the operation of the various institutions concerned with energy governance.

Implementation

1. Develop a vision and policy framework for the energy sector (DMEA White Paper process).
2. Develop maximum consensus amongst stakeholders in the energy sector on a governance framework, key institutional structures and their powers and functions including the Minister, DMEA, Parliamentary Portfolio Committee, a National Energy Policy Forum, regulators, provinces and local government (DMEA White Paper process).
3. Prepare and pass legislation (DMEA, Parliament).

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2 ISSUE

Process of energy policy formulation

Perhaps the most fundamental issue is the process by which energy policy is formulated. Past government practice in formulating energy policy has tended to be non-transparent, non-inclusive and often secretive. Recent pressures for an opening up of the policy formulation process have resulted in the formation of various forums which have tended to operate on much more transparent and inclusive lines. The success of these forums, in terms of efficiency and effectiveness, in contributing to the process of energy policy formulation has yet to be fully assessed. There can be little doubt, however, that the ethos of energy policy formulation has undergone a radical change from the past. The question facing the government and the energy community at this point is how best to institutionalise the process of policy formulation in a manner which retains the positive aspects of the new ethos and also ensures effective processes in the future which minimise the use of scarce resources and organisational time.

Each of the following options for policy formulation may co-exist with others and each has its strengths and weaknesses.

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2.1 OPTION

 

Formulate energy policy through ministerial initiatives, supported by the Department of Mineral and Energy Affairs

Time frame

At any time deemed necessary by the Minister.

Consequences

There can be no doubt that a minister, who bears the political responsibility for the development and implementation of public policy for a particular sector, should be able to initiate processes of policy formulation. However, to rely solely on the post of the minister to initiate these processes could have the following disadvantages:

ministers are generally appointed for short periods, relative to energy industry planning horizons, and may not develop sufficient insight into the area during their term of office;

• a sole reliance on politically appointed officials to generate policy options would not include the structured involvement of stakeholders; and
• important policy issues may not be addressed.

  Consequently, it is necessary to ensure that additional mechanisms exist whereby policies may be formulated in order to provide an adjunct to ministerial initiatives.

  This option can be combined with some of the others listed below.

Implementation

The Minister may initiate policy formulation processes by, amongst other mechanisms:

requesting advisors or DMEA officials to develop policy positions;

• constituting advisory bodies or forums to make recommendations;
• circulating draft policy options, such as a White Paper; and
• preparing legislation.

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2.2 OPTION

 

Formulate policy through the appointment of commissions of enquiry

Time frame

At any time deemed necessary by the Minister, or as a result of pressure from stakeholders.

Consequences

The commission mechanism has been a key policy formulation process used by the government in the past. Whilst commissions of enquiry may be called on the basis of ministerial initiative they can also be called as a result of public pressure to develop policy around a particular issue. (The De Villiers commission of enquiry into Eskom in 1986 is an example.) Whilst commissions are useful in that they can achieve an in-depth assessment of a particular policy problem by focusing intently on it for a short period they have the following disadvantages:

they are short-term and therefore, by nature, have difficulty developing a consistent long-term perspective which the energy sector requires;

• they are not necessarily effective in building the capacity of either government or the various stakeholders in the energy industry to participate in policy processes on an ongoing basis.

Implementation

Commissions of enquiry may be established by the Minister from time to time to investigate topical issues.

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2.3 OPTION

 

Involve the Parliamentary Portfolio Committee on Mineral and Energy Affairs in the development of policy

Time frame

Build on the existing trend for the Portfolio Committee to become more involved in policy issues.

Consequences

Democratic participation in policy making would be enhanced through elected political representatives taking an active role. Partnerships could be built between Parliament, the Minister, the Department and other stakeholders. Political control over policy development would be expanded. Portfolio Committee hearings are open to the public and more relevant data and information would enter the public domain, enhancing the quality of energy debates.

Implementation

The Portfolio Committee assesses the budget and reviews proposed legislation. It can play a more active role by asking the Minister, departmental officials and any other stakeholders to appear before the Committee and it can suggest policy changes before budgets or legislation come to Parliament.

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2.4 OPTION

 

Delegate responsibility for the development of policy for particular energy subsectors to appropriately constituted and mandated councils

Time frame

This option currently exists for some subsectors, such as the Electricity Council which oversees Eskom.

Consequences

Subsectoral councils have the advantage of potentially incorporating stakeholders in policy making and oversight of energy subsectors. They are able to develop an in-depth insight into their area over a long term and should be able to constantly adjust policy based on evaluations of past policies. On the other hand, however, in the absence of national integrated energy planning, subsectoral councils can become too parochial, concentrating on protecting their parochial interests at all costs. The success of subsectoral councils is therefore likely to depend on the balance of power between themselves and central energy policy formulation processes. Councils may be difficult or impossible to establish in subsectors which have a high degree of private ownership, such as coal and petroleum.

Implementation

Existing councils, such as the Electricity Council, may be maintained or restructured to play a clear role in formulating and making policy for energy subsectors. New councils may be established, such as for the renewables energy subsector.

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2.5 OPTION

 

Formulate energy policy through an interdepartmental committee of senior officials

Time frame

From 1996 onwards.

Consequences

A permanent committee would force officials, and departments, to think less along sectoral lines and the power to formulate, and even implement, policy options would be in the hands of experts. However, such a committee would not be particularly accountable to the public and there would be no structural involvement of stakeholders. The current capacity of many departments is also limited.

Implementation

Following the development of an integrated strategic framework, interdepartmental discussions and Cabinet approval, such a committee may be based on ministerial appointments.

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2.6 OPTION

Establish a National Energy Policy Forum (NEPF)

Time frame

From 1996 onwards.

Consequences

The implications of this proposal are extensive and these are discussed in more detail than some of the other options.

The role of the NEPF will be to advise government on energy policy options developed on the basis of an integrated energy planning framework, taking into account national and economic goals within a long-term perspective. Assuming that the establishment of the forum is accompanied by development of the country's energy policy research capacity, well formulated policies from the NEPF could result in significant economic benefits, given the size and importance of the county's energy sector and the current lack of integrated energy planning activities.

The NEPF may have the following structural components:

a decision making forum: the possible composition of which is addressed below;

• a forum chair: the selection of the chair is addressed below as a key factor in the forum's relationship with the Minister responsible for energy;
• sub-components of the forum: dealing with specific supply-side sectoral issues, such as electricity, petroleum, renewable energy sources, or households. This option would facilitate the integration of the National Electrification Forum (NELF), the National Economic Forum's Liquid Fuels Industry Task Force (LFITF) and various other energy related forums into an integrated energy planning framework. Furthermore, the use of sub-components of the forum could facilitate the inclusion of a greater range of both experts and stakeholders in the policy process. Forum sub-components could be created and dissolved depending on the level of interest in particular policy issues;
• a professional secretariat: the implementation of the support capacity to the forum is discussed below;
• a policy research capacity: the establishment of a policy research capacity can be achieved through a number of further options which are discussed separately under the 'Research' Topic later in this document; and
• a Chief Executive Officer: to manage the professional secretariat. The implementation of this option will depend in part on the decision around the professional secretariat to the forum.

The role of the NEPF will have to be clearly defined vis-à-vis the roles of other policy advisory bodies, such as the proposed National Economic Development and Labour Council (Nedlac), as being related to energy policy only. Furthermore, a clear division of roles between the NEPF as a policy advisory body and the Department of Mineral and Energy Affairs (DMEA) will have to be established. The relationship between the NEPF and other energy functions such as the various energy regulators, the Central Energy Fund (CEF) and others will also have to be clarified. Based on a clear understanding of the different roles, the exact functions of the NEPF relative to these other bodies will have to be agreed upon.

Once the functions of the NEPF have been established the appropriate institutional arrangements will have to be made to provide the NEPF with the necessary capacity to perform these functions.

The membership of the NEPF may include:

independent experts;

• energy stakeholders.

Should the NEPF be composed of stakeholders the following groups may be considered for membership:

government departments;

• provincial government representatives;
• energy industry owners;
• large energy consumers;
• small and medium scale enterprises;
• domestic energy consumers, principally women, and including rural consumers; and
• labour.

Decisions on forum membership could be taken by:

the Minister; or

• the forum chair; or
• the forum itself.

  The size of the forum could be determined by:

• legislating its size as fixed; or
• legislating its size as variable between certain limits; or
• the Minister from time to time; or
• the forum from time to time.

The use of a stakeholder based forum could assist government in overcoming some of the current problems faced in formulating energy policy by providing a structured process for stakeholder involvement. A stakeholder based forum may serve to mediate the vested interests in the country's energy sector in an open and constructive fashion, thereby reducing the potential for conflict and uncertainty around energy policies. On the other hand, a NEPF composed of experts may lead to more rational and objective energy policy making. Experts may be able to devote more time to participation in the NEPF than stakeholder representatives and a forum composed of experts may be more likely to agree on policies than stakeholders with competing vested interests. However, energy experts may not have sufficient insight into energy policy issues and may develop unrealistic policy proposals, whereas a NEPF composed of stakeholder representatives may generate more realistic policy options. Furthermore, stakeholders may be more committed to implementing policies which they have been part of negotiating.

Since stakeholders change from time to time consideration should be given to the process of revising the forum's membership. Since the relationship between the Minister and the forum will be crucial to its success a delicate balance will have to struck which avoids the danger of the Minister, or a set of vested interests in the forum, being able to dictate the membership of the forum and exclude potential adversaries from access to the policy process. This may be achieved by a process which leaves the Minister with the ultimate decision on any party's membership of the forum, but which requires the Minister to show due consultation and reasoning in his or her decisions.

The relationship between the NEPF and the Minister responsible for energy could be established by the following mechanisms:

Minister as chair of the forum

• a member of the Minister's department as chair of the forum
• an independent individual as chair of the forum combined with legislation compelling the Minister to consult with the NEPF on energy policy matters.

Since politicians tend to be driven by short-term political pressures it may not be advisable to involve the Minister too closely in the workings of the forum. Furthermore, for the forum to play an effective advisory function, it will require sufficient autonomy to voice public criticisms of political decisions on occasion. In like vein, the intentional separation of the roles and functions of the department and the forum may make it inappropriate for an official of the Minister's department to chair the forum.

A potential drawback of too much autonomy on the part of the forum may, however, be a reluctance on the part of the Minister to engage with the forum on energy policy matters. Legislation compelling the Minister to do so may even hinder the process of policy making should the forum prove slow to respond. Nonetheless, the essential difference in outlook between short-term focused politicians and a long-term energy planning process may mitigate in favour of an independent chair.

Decisions within the forum on policy recommendations to the government may be taken on the basis of:

a vote

• consensus
• majority and minority positions

The use of a vote may not sufficiently reflect the relative weight of the various stakeholders, should the forum be composed of stakeholders, and consensus will not always be possible. Hence majority and minority reports to government may be the most constructive means of reflecting differences of opinion and the causes of these differences when they exist.

A professional capacity to support the operations of the NEPF may be established through the following mechanisms:

through the Minister's department: Whilst responsibility for this function may be an unnecessary burden on an already overloaded department, there are certain start-up advantages to employing existing administrative and support systems. This option may, however, result in a confusion of the functions of the department and the NEPF. A further consideration is the potential difficulty of establishing posts and attracting personnel under civil service conditions;

• through spare capacity in the Atomic Energy Corporation: The scaling down of state support to the AEC may result in spare capacity becoming available at the AEC, which could serve as the nucleus of the NEPF secretariat. The cultural heritage of the AEC may, however, prove to be a disadvantage to the NEPF.
• by establishing new capacity: Whilst this option presents the opportunity to establish a new organisational culture it may also result in a high level of start-up costs and problems.

The establishment of a professional support function for the NEPF will depend, in part, on the number and complexity of the functions allocated to it. The potential exists for the support capacity to grow over time as the number of functions increase, a factor which should be borne in mind when taking this decision.

The NEPF would require supportive policy research. See the 'Research' Topic later in this document.

Implementation

Responsibility for taking and implementing a decision on the need for, and appropriate nature of, a NEPF lies with the Minister of Mineral and Energy Affairs, the Cabinet and, potentially, the legislature.

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1. In terms of the National Energy Council Act (1991) the Minister of Mineral and Energy Affairs has the power to appoint persons to advise him with regard to any energy matter and with regard to the execution of the functions entrusted to him in terms of the provisions of the Act. Furthermore, the Minister may authorise a committee of persons, designated by him, to exercise or perform in general or in a particular case or in cases of a particular nature, any power, duty or functions conferred or imposed on him by or under the Act.
2. The alternative would be to enact specific legislation to create the NEPF which would define its powers, functions and structures.

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3 ISSUE

Rationalisation of regulatory institutions and related infrastructure

A number of developments around energy regulation point to the need for a thorough examination of the future of energy regulatory institutions and their associated infrastructures. The establishment of the National Electricity Regulator (NER) and its empowerment to regulate the entire electricity industry will require the rapid establishment of a suitable support capacity for the NER Board. The possibility exists that a gas regulatory agency may be established and that the manner in which the petroleum subsector is regulated may be amended. The role of the Council for Nuclear Safety (CNS) is also under debate.

The United States of America provides an interesting example of how regulatory activities for multiple energy subsectors may be rationalised into a single institution. The Federal Energy Regulatory Commission is an independent organisation linked to the Department of Energy and is responsible for certain regulatory functions concerning electricity, gas and, to a lesser extent, oil. The Nuclear Regulatory Commission is, however, an independent agency which is not part of the Department of Energy and which is responsible for licensing nuclear power plants for both construction and operation as well as nuclear weapons issues (IEA 1992: 293).

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3.1 OPTION

Create a single energy regulator responsible for regulating specific energy subsectors

Time frame

1996.

Consequences

A single energy regulator would have the advantage of being able to develop a holistic perspective of South Africa's energy sector. This should not only improve its regulatory action but also enable it to provide valuable inputs to policy makers once it identifies problems requiring corrective policies. A single energy regulator should also be able to attract and retain the highly skilled professional support staff that smaller scale regulators find difficulty in acquiring. A single regulator should also benefit from economies of scale deriving from the use of a single infrastructure, rather than the state having to provide for multiple infrastructures required by multiple regulatory agencies.

Implementation

Appropriate legislation will have to be passed to create such a regulatory agency (DMEA, Parliament).

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3.2 OPTION

All energy regulators to share a common infrastructure

Time frame

1996.

Implementation

A common infrastructure may be created, including database, administration, accounting, legal, technical and public relations resources, which could support several regulators, whether they be boards or appointed individuals. This infrastructure may be established within the Civil Service, such as within the DMEA, or in an external state owned company, such as the Central Energy Fund, or even within the private sector.

Consequences

The costs of maintaining regulatory support infrastructure should be reduced and regulators should be able to attract better staff. Although the various energy regulators would operate under different Acts, the potential for development of a more holistic approach to energy regulation would be enhanced.

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4 ISSUE

Integration of national energy policy with provincial and local government energy planning and service delivery

Under the 'legislative competence of provinces' the Interim Constitution excludes energy as a provincial matter, by omission from the functional areas specified in Schedule 6 (South Africa 1993: 220). However, as energy is intimately related to development in general it is difficult to see it being totally excluded from provincial planning. Furthermore, energy requirements are known to be region specific and location specific. At present there is a vacuum within the emerging provincial and local governments with respect to, inter alia, energy planning, although certain provinces have initiated informal energy forums. At a local level it is apparent that communities have already articulated their energy needs as well as their needs for other basic services such as water. The lag in developing local government to the point where it can fulfil its intended role may mean that community forums are an appropriate interim measure.

The fuels will probably have to be treated differently. Biomass is inevitably a local issue because of transport limitations, but electricity and natural gas will have to have strong national dimensions because of national transmission networks.

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4.1 OPTION

 

Assign energy planning functions to provincial governments

Time frame

This would depend on the process of constitution writing and could only take place in 1996 at the earliest.

Consequences

Since many energy functions are inherently national great care would have to be taken when defining provincial energy functions in the Constitution. Provinces would then need to develop their own capacities to perform these functions. On its own this would not necessarily guarantee responsiveness to local community energy needs and may also create conditions for conflict with central government. It would, however, shift responsibility to provincial governments to ensure that regional developmental planning includes an energy component. Integrated energy planning at this level would be enhanced. Extension services could be coordinated.

Implementation

1. Amend the Constitution
2. Create provincial energy departments
3. Allocate budgets, recruit and appoint new staff
4. Coordinate with other development services
5. Develop regional energy plans
6. Implement

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4.2 OPTION

Establish provincial energy planning committees

Time frame

These committees could be established within 1996 on an evolutionary basis.

Consequences

These committees could facilitate liaison within provinces on energy needs, prioritisation and the dissemination of information and advice as to how to meet these needs. This would be undertaken within an integrated energy planning framework to guide the forward planning of individual energy providers such as Eskom, oil companies and also provincial departments involved in service delivery such as housing, water, health, agriculture and forestry. They could be based on, or linked to, rural development and interdepartmental committees that already exist. Potential disadvantages are that they may not be responsive to local interests, may duplicate the efforts of a national energy policy forum or may duplicate the work of broader provincial development and economic coordination committees and forums. Linkages would need to be established with other forums to avoid duplication of responsibility.

Implementation

1. Consult relevant provincial stakeholders, RDP structures and energy providers (DMEA).
2. Convene provincial energy planning committees or forums (Provincial Premiers).

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4.3 OPTION

 

Expand the energy advisory capacity in DMEA provincial offices

Time frame

Possibly during 1996.

Consequences

Energy officers in DMEA regional offices could provide energy information and advice to provincial planning authorities. They could also fulfil a liaison function with the national office and national policy goals. Energy extension officers could be assigned to the Districts to work with extension officers of other departments and help to integrate energy services into other development initiatives.

Implementation

1. Make provision in budgets (DMEA, Parliament).
2. Appoint new staff by 1996 (DMEA).

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5 ISSUE

Local participation in energy needs identification, planning and implementation

Meaningful and structured participation by communities in the processes of needs identification, prioritisation, planning and the implementation of energy projects will increasingly become central requirements of government policy and assistance. Indeed, the RDP gives a great deal of emphasis to people centred development. With increased involvement in the decision-making process, the accountability of communities in the process of energy delivery will also increase. An environment conducive to all parties meeting their obligations must be created if sustainable development is to be achieved. (See also the Housing White Paper [South Africa 1994e: 42].)

The participation of women is particularly important. In the household women are the main end-users of energy and are the basic survival strategists. In many low income areas female headed households exceed the number of male headed households: 57% of black urban households are headed by women (Williams 1994b). In shack areas this figure can be as high as 75%. In rural areas, as a result of migrant labour practices, households are predominantly inhabited by women and children for the greater part of the year. The White Paper on water recommends that all statutory bodies in the sector comprise a minimum of 30% women (South Africa 1994f: 31).

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5.1 OPTION

 

Strengthen district and local government's ability to deal with energy issues

Time frame

Evolutionary, commencing in 1996.

Consequences

As the level of government closest to the people, local councils are well placed to identify energy needs and coordinate energy services. However, given the current weakness of the South African local government system, this may not be an effective mechanism to ensure the planning of appropriate energy services in the short term and greater reliance could be placed on local development forums and organisations of civil society. In the future district councils will play a crucial role in prioritising needs and in development planning. Support from central and provincial government would be necessary for district and local councils to perform this role. Rural local government, in particular, has an important potential role in facilitating the participation of local communities in the identification of energy needs and priorities and in energy planning and implementation.

Implementation

1. Discuss with provincial governments (DMEA, RDP).
2. Include responsibility for energy in Provincial Ordinances on district and local government (Provinces).
3. Put programmes in place to equip district and local government to play a role in energy planning (Provinces).

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5.2 OPTION

 

Establish local energy action committees

Time frame

Evolutionary, commencing in 1996.

Consequences

Local energy action committees, modelled on the local water committees, would be accountable to local energy users. These forums could relate to district and provincial energy advisory forums to guide regional initiatives and provide feedback. Financial and personnel implications should be minimal. An obvious concern, however, would be the sustainability of such local bodies.

Implementation

Build on initiatives of CBOs, NGOs and local RDP structures.

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5.3 OPTION

 

Require that there is at least 30% representation of women on all stakeholder bodies in the energy sector, in particular local energy action committees

Time frame

Achieve this within the next five years.

Consequences

By including women at all levels of government, some of the social, cultural and legal impediments to women's access to energy services and to finance will be challenged. Policy will be actively informed by women, making it more gender sensitive and appropriate to users.

Implementation

Establish measures to monitor progress (NEPF, National Women's Coalition, DMEA).

The electricity supply industry, perhaps more than any other energy subsector, illustrates the tensions arising from the policy shifts within the energy sector as a whole. The industry is charged with a heavy financial burden in the form of an RDP target of 2.5 million household electricity connections by the year 2000. Yet, as a key input into South Africa's energy intensive minerals processing industries, there are expectations that the real price of electricity will continue to decline as a contribution to global economic competitiveness. Weighing up against both of these goals are expectations that electricity taxes levied through local government distributors will continue to partly fund local authorities and finance development. Although not formally recognised as taxes, and more generally referred to as surpluses, the effect for commerce and industry of municipal electricity profits is exactly the same as levying an input tax on electricity. Finally, global demands for cleaner products are resulting in mounting environmental pressures on the electricity generation end of the industry.

The electricity sector thus presents a number of clear policy choices or trade-offs. An increase in electrification targets for a distributor must inevitably result in a general increase in electricity prices in the long run. Regulations limiting power station emissions must also result in an increase in the general price of electricity. Neither of these choices can be made by electricity utility managers alone as the impact of these decisions on broader public interests are too significant. On the other hand, however, it is important to avoid the situation arising whereby utilities become mere instruments of government policy. International experience of attempts by government to 'meddle in the engine-room' of these industries has frequently demonstrated the sub-optimum results of government's attempts to manage electricity utilities. There is, therefore, a need for an appropriate system of governance for the electricity industry which keeps government at 'arms length' and permits suitably qualified managers to get on with the business of running the industry in the most effective and efficient manner possible.

A review of governance of the electricity supply industry (ESI), including generation, transmission and distribution requires an understanding of the institutional relationships within, and legislation affecting the sector, including the new Constitution, the Electricity Act, the Eskom Act, the DMEA, the National Electricity Regulator (NER), the Electricity Council, Eskom, provinces, local government, municipal electricity undertakings and customers (see Appendix).

Overview of key governance policy issues

A variety of governance policy issues have arisen out of the pressures on and changes within the electricity supply industry. For convenience sake these are grouped and described as follows:

The general direction and evolution of the electricity supply industry

An examination of the industry's political economy reveals several distinct driving forces for change, including:

• the RDP electrification target of 2.5 million connections by the year 2000. Owing to the high capital and financing costs of electrification which result in financial losses in the initial stages, there is pressure on the industry to rationalise into larger, more fundable and more efficient utilities. Furthermore, there is a likelihood that electrification will remain a high priority beyond the RDP;
• increasing pressure from large consumers for a choice of supplier, an issue which was alluded to in the National Electrification Forum (NELF) with the concept of special customers who, for technical or financial reasons, might be deserving of the right to take supply from a supplier other than the distributor within whose supply area they are located. Essentially this is an argument for price based competition within the industry, also known as third party access. Should third party access become a recognised and allowed practice in the current ESI structure it is likely that municipal undertakings would lose some of their large consumers to Eskom;
• competitive pressures within the industry, i.e. between Eskom and the municipal undertakings around supply rights. A related issue is the high level of foreign investor interest in the electricity industry and the question of whether Eskom should be privatised;
• recent and future revisions of electricity related legislation, such as the passing of the Local Government Transition Act, the creation of provinces, amendments to the Electricity Act and the new Constitution, which have the effect of changing the rules of the game;
• the operation of the new National Electricity Regulator (NER) as it defines its role, particularly during the first licensing round; and
• the necessity for integrated resource planning across the entire ESI, the potential for demand-side management, and environmental considerations in new power generation planning.

Taken together with the established political agreement at NELF, that the electricity distribution industry (EDI) needs to be rationalised significantly, it is clear that these forces for change will result in significant structural evolution over the coming years. This raises the question of how best to govern a rapidly evolving industry consisting of a motley mixture of utilities of varied size, ownership and supervisory structures. Potential solutions to this issue vary from the radical free market position to the more conservative social compact option to more direct forms of state intervention. In order for government to develop appropriate electricity policies and regulatory structures to direct the evolution of this industry it is essential that a long-term vision for the industry be developed.

Electricity and local government

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Governance issues concerning electricity and local government revolve around three key factors:

• the imperative to rationalise the electricity distribution industry and to possibly separate it from local government, thus facilitating financing, pricing, and the achievement of RDP electrification targets;
• secondly, the need to clarify the legal ambiguities that have arisen between various pieces of legislation affecting the position of local government with regard to electricity supply; and
• thirdly, a resolution of the financial dependence of many local authorities on electricity trading surpluses.

Various issues and options arising out of these imperatives are discussed below.

Electricity regulation

Although the style of electricity regulation will depend mainly on decisions taken around the general direction and evolution of the electricity industry itself there are a range of immediate governance issues concerned with the establishment of the NER.

The process of electrification planning, although not simply a regulatory issue, raises a number of significant policy issues. Firstly, appropriate planning of the process is essential in order to optimise the use of scarce resources. Secondly, the fact that the EDI is incoherently governed by both national and third tier government means that there is effectively no line responsibility for national electrification planning. As a result there is no means of devolving national electrification targets to the local level or of ensuring appropriate provincial allotments of electrification connections.

In licensing electricity undertakings, the regulator could be faced with a range of complex issues, including capacity to meet RDP targets, ability to raise finance, compatible tariffs and performance measures, including progress in demand-side management and environmental impacts.

Given that the NER is a newly created body with a significant role in the governance of the ESI there is an urgent need to provide it with an appropriate policy framework. Various solutions to this issue are possible.

Eskom

Shifts in Eskom's core business as well as changes in societal approaches to the governance of parastatals have resulted in a need to re-examine the nature and composition of Eskom's Electricity Council. Furthermore, a debate has arisen about the appropriateness of having Eskom report to a non-energy ministry.

Potential policy options to address the issues raised in the above discussions are dealt with below.

6 ISSUE

An appropriate mode of governance for the South African electricity supply industry

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6.1 OPTION

Government to develop a long term vision for the evolution of the mode of governance for the South African electricity supply industry

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Time frame

1996.

Consequences

Given a clear policy direction, the South African ESI will be able to evolve in an orderly process, under the guidance of the NER, towards its future form. This will reduce the potential for conflict and legal confusion around the industry.

Implementation

The formulation of this policy may be achieved through one or more of the mechanisms described earlier in the section on general energy policy formulation. Perhaps the most effective mechanism would be a ministerial commission comprising a limited number of independent experts. Some of the key issues which such a vision would have to address would include:

the optimal ESI structure; future ownership patterns within the industry; appropriate roles for foreign investors; the implications of privatisation; the issue of exclusive supply rights vs. the introduction of various forms of competition within franchise areas; the issue of whether there should be a supplier of last resort; appropriate ESI governance roles for the various tiers of government; the powers and functions of the national electricity regulator; and the involvement of stakeholders in policy development.

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7 ISSUE

The relationship between local authorities and the electricity industryAlthough many local authorities currently own and operate their own electricity undertakings there are many who do not. As the trend towards rationalisation of the fragmented distribution industry continues, increasing numbers of local authorities will lose their supply rights.

Local authorities currently derive significant revenue from surplus income from their municipal electricity undertakings. The transfer of these surpluses to general local government finances could prejudice the national electrification programmes by diminishing available finance from within the industry. On the other hand local government could lose a crucial source of income if electricity departments were to be segregated from local government. There is also the issue of local planning control over the delivery of infrastructural services including electricity. The imperatives of an accelerated national electrification programme are resulting in the following policy options being considered:

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7.1 OPTION

Ring-fence finances, management and operations of municipal electricity undertakings

Time frame

1996 onwards.

Consequences

Financial transfers between local authorities and municipal electricity undertakings would be made transparent. The rationalisation of the electricity distribution industry and accelerated electrification would be facilitated. Failure to ring-fence finances would result in continued non-transparent and unregulated financial transfers from electricity consumers to general local government finances.

Implementation

Amend Electricity Act and Local Government Transition Act (DMEA and Parliament).

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7.2 OPTION

Remove ownership and operation of electricity undertakings from local authorities

Time frame

Legislate in 1996, but phase in over 3 years.

Consequences

The rationalisation of the electricity distribution industry would be speeded by municipal electricity undertakings amalgamating to form metropolitan or regional distributors or by being taken over by Eskom or new statutory bodies. A uniform tariff system would be easier to implement and cross-subsidised finance would be available for electrification. Local control and local taxation of electricity would still be possible (see policy options below) and would be more transparent.

Implementation

a. Amend Electricity Act and Local Government Transition Acts (DMEA, Parliament).

b. Manage rationalisation of EDI (Eskom, AMEU, local government, labour).

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7.3 OPTION

Amend legislation to guarantee to local authorities certain basic rights with regard to electricity provision

Time frame

1996 onwards.

Consequences

Local authorities would retain powers over any ESI utilities operating within their boundaries, irrespective of whether they hold the licence to supply or not. This could be formalised using the concept of a concession between a local authority and one or more utilities who are granted the right of supply by the local authority in return for guarantees by the utility(ies) that they will meet certain obligations, for instance involving the local authority in electrification planning or in negotiations around appropriate service standards.

Note that the concession concept may also be implemented between a local authority and its own municipal undertaking in a similar process to the social compact between Eskom and the government. Appropriate ring-fencing of the electricity undertaking's accounts would, however, be required to make this a workable arrangement.

By implementing the concession concept in law those local authorities who currently have other authorities supplying electricity within their boundaries will gain greater control over electricity service delivery within their areas. Those local authorities who lose their supply rights in future through decisions by the NER will at least retain an appropriate level of control over the service.

A concession between a local authority and its own municipal undertaking would increase the transparency of the undertaking's operations as well as management's autonomy.

Implementation

1. Amend Electricity Act and Local Government Transition Act (DMEA, Parliament).
2. Local authorities enter into concession agreements with Eskom, other local authorities or their own municipal undertakings.

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7.4 OPTION

Grant local authorities formal fiscal powers to tax electricity distribution utilities operating within their boundaries

Time frame

1996 onwards.

Consequences

It should be noted that electricity taxes are an input tax for enterprises and have certain economic consequences. The advisability of this form of taxation needs to be considered within the broad fiscal policies of the government.

Should local authority earnings from electricity be formalised through a system of taxation the following would result:

a far greater degree of transparency than the current system of electricity trading account surpluses; a new source of income for those local authorities who do not own their own electricity undertakings, but in whose area other utilities are already operating; a reduction in the perceived threat to local authorities of the consequences of restructuring the electricity distribution industry; and the possibility of monitoring and regulating electricity taxation within national or provincial norms.

Implementation

Investigate desirability of local authorities earning revenue from the ESI by charging:

concession or franchise fees; turnover or revenue taxes; profit base taxes; or other forms of taxes.

Appropriate forms of taxation would have to be decided upon by fiscal authorities considering third tier finances as a whole (Finance and Fiscal Commission, Katz Commission).

b. Amend Electricity Act and Local Government Transition Act (DMEA, Parliament).

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8 ISSUE

ESI regulation

The Electricity Control Board (ECB) has existed as the regulator of electricity since 1922. Because of the previous government's policy of minimum central control of the ESI, and the dominant position of Eskom and local government authorities as electricity suppliers, the ECB eventually exercised very little control over the industry. Some of the results were poor planning. Eskom ended up with large over-capacity in generation plant while, on the distribution side, very little advance was made in widening access to electricity to the majority of the population. Furthermore, insufficient attention has been given to integrated resource planning (IRP) or demand-side management (DSM). In view of the urgent need for a reconstituted regulator to assist with the implementation of a new national electricity policy, the Electricity Act, 1987, was amended during 1994, so that the ECB was transformed into the NER with control over the entire ESI including Eskom and local government electricity undertakings.

The main functions of the NER will be to issue or revoke licenses for electricity distributors, to determine whether electricity distributors are competent to supply, to regulate towards the achievement of electrification, to regulate electricity tariff structures and levels, to regulate electricity service standards, to settle disputes between electricity suppliers and customers, and to approve expropriation and transfer of assets. The NER will also have to promote efficiency in the ESI and ensure the attainment of minimum environmental conservation standards by the ESI through the application of integrated electricity management, and incorporation of environmental economics (Anderson 1994b). Regulation of the ESI is correspondingly defined here as the supervision and control of the activities of private and arm's length public electricity undertakings in the interest of economic efficiency, social equity and environmental sustainability (adapted from Anderson 1994a).

A wide variety of regulatory approaches are applied in developed and developing countries. Besant-Jones (1992) classified these approaches generically under rate-of-return regulation, incentive regulation and performance contracting. These approaches are briefly described in the Appendix. The preferred mode of regulation which is emerging in South Africa is a version of performance contracting where the issuing of licenses is linked to the compliance of electricity distributors to achieve electrification targets and, potentially, other performance goals.

International experience shows that the following pre-requisites are essential for successful regulation:

sufficient regulatory authority; to avoid the prospect of regulatory capture by utilities or government; independence; through an arms-length relationship with both the public authorities and the utilities; transparency; both in terms of information (accounts, numbers, data) and the regulatory process. Both of these make a contribution towards reducing informational asymmetry, improving the quality and fairness of the regulatory process and lowering the probability of regulatory capture. In economic terms transparency also makes a significant contribution in increasing the efficiency of markets; and impartiality; in terms of being fair to both the buyer and seller, and being seen to be fair (IEA 1994: 44,46).

In South Africa, the regulator has become the agent to monitor electrification targets and to oversee the restructuring of the EDI and the reform of tariff and financing systems. It will be important to provide a policy framework for the NER.

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8.1 OPTION

Empower and resource the National Electricity Regulator to oversee the achievement of a complex set of goals and objectives for the ESI which are in the national interest

Time frame

From 1996 onwards.

Consequences

A new mode of regulation, incorporating negotiated agreements and contract plans and embodied in the licensing process, could serve as an innovative South African mechanism, to get the ESI to move fast in meeting electrification targets, to establish a national electrification planning and monitoring system, to restructure the industry, to introduce a national tariff system, to effect necessary cross-subsidies, to facilitate financing mechanisms and also to improve the performance of the EDI in a number of other areas such as IRP and DSM.

Implementation

1. Develop a communication programme on national regulation, directed at all role players, in which the new performance-based licensing approach is fully described, hidden fears in the ESI are allayed and cooperation is established (NER).
2. Establish necessary professional staff and technical teams to perform functions (NER).
3. Negotiate contract plans with Eskom and capable local government undertakings through licensing process (NER).
4. Introduce a central performance appraisal system (NER).
5. Manage towards the achievement of national objectives (NER/ESI).
6. Resource above (DMEA).
7. Establish policy framework to guide NER (NEPF, DMEA).
8. Amend legislation where necessary to empower NER (DMEA, Parliament).

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8.2 OPTION

Define the role and composition of the NER through the formulation of new electricity legislation

Time frame

1996.

Consequences

The formulation of new legislation would present an opportunity to revise the regulatory approach envisaged in the current Electricity Act to suit the changing conditions in the electricity industry. The NER will be able to function more efficiently, with a clearer sense of its authority and in the independent, transparent and impartial mode that will be necessary for its long term success.

Implementation

New legislation determining the role of the regulator may be formulated through inputs by stakeholders, the existing regulator, and the parliamentary process.

Whilst formulating new electricity legislation defining the role of the NER consideration should also be given to, inter alia:

membership of the NER; processes of nomination, selection and appointment; the structure of the NER; decision-making within the NER; powers of delegation; the licensing process; mechanisms for NER-government reporting; relations with Parliament; the process of NER budget approval; and processes of appeal (DMEA).

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8.3 OPTION

Define the role and composition of the NER through Ministerial regulations

Time frame

Ongoing.

Consequences

Whilst this is a suitable mechanism for small changes in the direction of the regulator it cannot, however, address the fundamental role defined in the Act.

Implementation

In terms of current legislation the Minister of Mineral and Energy Affairs is empowered to direct the regulator by issuing regulations.

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8.4 OPTION

Establish the policy framework for the NER through Ministerial regulations or the issuing of a White Paper

Time frame

From time to time.

Consequences

The regulator would have a clear government framework to guide its decisions and deal with conflicting interests.

Implementation

Ministerial direction for the NER can be achieved through the issuing of regulations in terms of the Electricity Act. The Minister could be advised by the DMEA, the Parliamentary Portfolio Committee, or the National Energy Policy Forum.

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9 ISSUE

Nature and composition of the Electricity Council

Eskom, as a publicly owned utility, reports to the Minister of Public Enterprises, who appoints an Electricity Council which supervises its operation. The Electricity Council in turn appoints a Management Board responsible for Eskom's day to day operation. The issue of the Electricity Council should be considered within the overall context of governance of the energy sector (see 'Governance' Topic).

The governance structure of Eskom was conceived during an era when Eskom was mainly concerned with the generation and transmission of electricity. Societal shifts in approaches towards the governance of parastatals, most noticeable in the ad-hoc inclusion of labour representatives on the Eskom Council in recent years, together with Eskom's massive expansion of its distribution interests, have rendered the legally defined composition of Eskom's stakeholders inappropriate. Concern has also been expressed about the effectiveness of the Council in its oversight capacity since its access to information is essentially determined by the very Management Board that it is intended to manage.

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9.1 OPTION

Improve the oversight capacity of the Electricity Council through the provision of a small independent staff to monitor Eskom's performance

Time frame

1996 onwards.

Consequences

The Council would not have to rely exclusively on the Management Board for information relating to Eskom's performance and the danger of utility capture will be reduced.

Implementation

The Electricity Council could establish a small staff, independent of Eskom's personnel systems, to act as a performance audit and monitoring team for the Council. This is provided for in Section 9 of the Eskom Act (Minister of Public Enterprises, Electricity Council).

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9.2 OPTION

Redefine the Electricity Council to consist of stakeholder nominees accountable to their nominating organisations

Time frame

1996.

Consequences

The Council would become more representative of Eskom's stakeholders than it is presently. The Minister would not be able to reject individuals nominated to the Council by the various stakeholder organisations and these organisations would be able to hold their nominees to account, even to the point of being able to recall nominees who are not performing sufficiently well in the eyes of the nominating organisation.

Implementation

This would require a political agreement as to the appropriate set of stakeholders for the Electricity Council and an amendment to the Eskom Act (DMEA, Parliament).

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9.3 OPTION

Disband the Electricity Council and empower the Management Board to manage Eskom within a broad policy established by government and the specific licence conditions imposed by the National Electricity Regulator

Time frame

1996.

Consequences

Depending on institutional developments around national energy policy formulation there may be less need for stakeholder involvement in the governance of Eskom. The Management Board would receive more autonomy and would become more accountable for the performance of Eskom. An arms-length relationship with government would be consolidated by Eskom which would still be required to operate within overall government policy.

Implementation

Amend the Eskom Act to disband the Electricity Council and transfer its powers either to the Management Board or another body (Minister of Public Enterprises, Parliament).

10 ISSUE

Eskom's reporting relationship to government

Prior to the passing of the Eskom Act in 1987 the Electricity Supply Commission (Escom) was created in terms of the Electricity Act, which had remained essentially unchanged since its creation in 1922. Under this Act Escom had generally reported to the Minister responsible for energy and mining, allowing for Cabinet reshuffles and redefinitions over the years. The 1987 Electricity and Eskom Acts separated the responsibility for government's involvement in the electricity industry between two ministries. Responsibility for electricity policy and regulation continued to lie with the Minister of Mineral and Energy Affairs whilst responsibility for Eskom moved to the Minister of Public Enterprises. This move was largely motivated by discussions around the possibility of privatising Eskom.

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10.1 OPTION

Eskom's reporting relationship to government to remain with the Minister of Public Enterprises

Time frame

Ongoing.

Consequences

Eskom will receive policy direction on electricity from the Minister of Mineral and Energy Affairs and will be accountable to the Minister of Public Enterprises for its performance as a public utility. This situation should prevent the possibility of an unhealthy situation arising whereby a Minister responsible for energy may seek to utilise the utility for policy goals which may have an adverse effect on the utility's long term financial health. On the other hand, it may be more rational to integrate oversight of Eskom with other energy sectors under one Ministry.

Implementation

This option would involve no legislative changes as it is the status quo.

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10.2 OPTION

Eskom's reporting relationship to government to change to the Minister of Mineral and Energy Affairs

Time frame

1996 onwards.

Consequences

The Minister of Mineral and Energy Affairs should be able to implement electricity related energy policy more effectively since he or she should have a greater level of access to Eskom. A more rational approach to integrated energy planning should be possible.

Implementation

The Minister of Mineral and Energy Affairs would be assigned responsibility for administering the Eskom Act.

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10.3 OPTION

Eskom's reporting relationship to government to change to a system of social contracting between government and Eskom

Time frame

1996 onwards.

Consequences

A social contract between government and Eskom should establish clear government objectives for the parastatal and, at the same time, ensure management autonomy. Since an appropriate range of stakeholders sit within the Electricity Council, which will ultimately be responsible for negotiating and achieving the contract's targets, this process will be inclusive by nature. The potential for tensions between the two government departments responsible for Eskom should be reduced.

Implementation

1. Establish an interdepartmental committee, lead nominally by either the Department of Public Enterprises or the DMEA, with representatives from at least the Departments of Public Enterprises, Mineral and Energy Affairs, Trade and Industry and the RDP.
2. Agree with Eskom on an appropriate time horizon (probably five years) and performance indicators for the social contract.
3. Agree on the quanta, if appropriate, for the various performance indicators and the monitoring and evaluation processes.
4. Agree whether the social contract will be renegotiated annually or only on completion of the time period.
5. Implement social contract through licence (National Electricity Regulator).

Liquid fuels industry governance

South Africa's liquid fuels industry is highly regulated. The industry was regulated before the introduction of the United Nations crude oil embargo and before the Sasol and Mossgas synthetic fuels (synfuels) industries were established. However, the current method of regulation and the objectives of this regulation owe much to the mode of operation of the industry under embargo conditions and accommodation of the synfuels industries.

Because of the strategic importance of the liquid fuels industry, the pressure on multinational oil companies to divest during the apartheid years and the history of Sasol's entry into the industry, the industry has had a special relationship with the state. Before April 1994, publication of information which in any way could indicate the size of South Africa's liquid fuels requirements or the source of its crude oil was an offence punishable by law. In this atmosphere a culture of secrecy was fostered. The industry is not only governed by regulation but also by a set of gentlemen's agreements'. It is argued that liquid fuels industry participants received an apartheid premium': that is return on their capital in excess of what they would have received if they had not had to be associated with running an industry necessary for the survival of the country under the apartheid government. In addition, it is argued that the government turned a blind eye to practices in the oil industry that likened it to a cartel and which, under more normal circumstances, would have been the subject of investigation of monopolies and unfair trade practices legislation.

This history is directly relevant to governance questions on three counts which will have to be dealt with by a future governance arrangement if it is to be effective.

1. The current regulations and industry agreements were determined by the objectives of an industry environment (namely sanctions) and a policy environment (namely apartheid planning for fuel self-sufficiency) which have since changed radically.
2. These regulations and industry agreements were the product of a process which was either secret, or non-transparent and in which participants built a culture of secrecy and non-accountability. Even though the secrecy legislation has been repealed, the re-orientation of this culture is a more difficult matter.
3. Government structures which were responsible for drafting the secrecy legislation, negotiating the special industry structure and implementing the policies, were also orientated towards the objectives of the sanctions-busting industry and were not accountable to open public processes. These structures have not been appreciably changed. In order to achieve the new policy goals centred around, amongst other things, people-centred development, meeting basic needs and democratisation of South African society, the government structures need re-orientation and re-structuring.

The need for restructuring the liquid fuels industry was recognised prior to the change of government. As part of the process of rethinking, the Liquid Fuels Industry Task Force (LFITF) was set up as a substructure of the National Economic Forum. The LFITF is a tripartite arrangement with representation from: government; private business, including the oil companies and Sasol, the South African Chamber of Business (Sacob) and the Motor Industries Federation (MIF); and labour.

Organisations have been represented by senior management at LFITF meetings which have been regular and much work has been done. However, the deliberations of the LFITF have been dominated by considerations of how the industry's pie will be sliced up now that the objectives of fuel self-sufficiency, engendered by a response to sanctions, have fallen away. There has been little evidence of a broader vision in planning for the sector in terms of its linkages with the macro-economy, other economic sectors and the achievement of RDP goals.

This lack of vision has been largely due to government's lack of capacity, detailed in Chapter 4, Governance of the energy sector'. The process of formulating broader policy for governance of the liquid fuel industry has been successfully completed. Government, lacking the back-up of its own policy formulation process and therefore without a policy agenda, has largely been limited to responding to the agendas of other parties.

Given the current resources in this area government is not in a position to develop policies for the liquid fuel subsector which would enable it to develop optimally in the direction of fulfilling the goals of the new government. This, then, is the substance of the issues that are relevant to governance of the liquid fuel industries namely the capacity in government for:

• policy analysis;
• policy formulation;
• policy implementation;
• policy monitoring and regulation.

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11 ISSUE

Policy analysis for the liquid fuels industry

The DMEA has not yet prepared an adequate, accessible, coherent analysis of the liquid fuels industry to facilitate the level of debate necessary for effective public policy formulation. As a result the existing powerful participants in the industry have undue weight in the policy processes. An example of this is that even though Sasol receives, albeit indirectly, about R1 billion from the state annually, the government cannot provide adequate information as to how these funds are utilised. The following question arises. Do existing governance structures have the capacity to make effective policy in a sector which makes a significant contribution to GDP, balance of payments, state revenue and state subsidies?

The guarantee of prices to participants and the existence of barriers to entry for others are mechanisms by which government allocates economic benefits. The government does not have a coherent accessible description and analysis of these allocations. Thus the operation and effects of existing policy cannot be evaluated and new policy cannot be effectively formulated. In the light of the size of these economic allocations it is important that the quality of this policy analysis function in government be improved.

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11.1 OPTION

Establish adequately resourced policy analysis capacity to prepare coherent, accessible models and descriptions of those liquid fuels industry sectors receiving funding or protection by the state so that an informed public policy formulation process can evaluate the cost and benefits of this funding and protection

Time Frame

Immediate.

Consequences

In line with generally accepted practice of democratic government the public will have access to information on how public funds are allocated and the costs and benefits involved.

Implementation

1. Evaluate what information is required and set up appropriate processes/institutions to develop this information (DMEA).
2. Institutionalise this (DMEA).

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11.2 OPTION

Establish adequately resourced structures to proactively develop policy analysis to service policy formulation that links liquid fuels industry policy to general energy sector policy and broader economic policy

Time Frame

Immediate.

Consequences

Instead of the public owned or public guaranteed monopolies or highly regulated industry participants determining the agenda in terms of their own interests, government as the owner, or guarantor of the special position of these participants, can fulfil the associated responsibility of accountability and determine the agenda. As a result, the industry will be more likely to serve broader interests than its own.

Implementation

1. Evaluate required capacity to perform proactive policy analysis (DMEA).
2. Institutionalise capacity (DMEA).

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12 ISSUE

Policy formulation

If the required policy analysis mentioned above is available as a result of dealing effectively with the previous issue, then a more credible public policy formulation process will be possible and furthermore, the results of this analysis can be communicated to other government departments and relevant stakeholders through a consultative policy formulation process.

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12.1 OPTION

Establish a programme in the DMEA to formulate policies for the liquid fuels industry based on the results of adequate policy analysis

Time Frame

Immediate.

Consequences

Government can formulate policy options which integrate energy sector goals with other economic sectors and government policy goals, instead of being limited to responding to the agendas of the existing stronger supply-side participants in the liquid fuels industry.

Implementation

1. Design projects and programmes for policy formulation for the liquid fuels industry on the basis of policy issues and policy formation methodologies identified by policy analysis work considered above (DMEA).
2. Institutionalise this integrative proactive approach (DMEA).

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12.2 OPTION

Set up liaison with other government departments. (1) Determine what policy analysis these departments require. (2) Meet these requirements

Time Frame

Immediate.

Consequences

Energy policy can be developed in harmony with other government policy.

Implementation

1. Set up appropriate inter-departmental committees involving the Departments of Finance, Foreign Affairs and Trade and Industry (DMEA-led).
2. Establish appropriate structures in the DMEA to provide technical services to these committees (DMEA).

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12.3 OPTION

Set up (or continue to support) appropriate structures for stakeholder involvement in policy formulation. This could be a forum as in the present LFITF or a more general energy policy forum (NEPF) as discussed in the section on general governance

Time Frame

Immediate, for continued support of the LFITF or when appropriate, if the NEPF is formed.

Consequences

Stakeholders' interests will be included in the process of policy formulation.

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13 ISSUE

Policy monitoring and regulation

While the liquid fuels industry is highly regulated, no formal or transparent regulatory institutions exist. In future, the industry could be regulated by existing government departments or by an independent regulator, guided by state policy but outside of the government administration. The choice of institutional structure for regulation will be affected by the type of regulation to be practised. The model of governance outlined in Chapter 4 argues strongly for the institutional separation of different governance roles. Questions around whether the DMEA can muster the necessary capacity and retain the necessary staff to exercise professional regulatory functions need to be asked. The recent experience of setting up the NER should be considered. Also, the necessary independence between making policy and administering it at the regulatory level is relevant. Is it possible for staff in the same institution to make policy and then to effectively administer it? The general principle of institutional separation of roles is particularly important in this regard.

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13.1 OPTION

Establish a professional, independent liquid fuels industry regulator

Time Frame

Immediately.

Consequences

The criterion of institutional separation of governance roles would be met. Situating the regulator out of the administration would mean that it would be more likely to attract and retain appropriately skilled staff. The role of the regulator could be clearly defined and the regulator, having no other responsibilities, could be held accountable for meeting these responsibilities.

Implementation

1. Research liquid fuels industry regulators in other countries and formulate appropriate options for South Africa (DMEA).
2. existing regulatory functions from the DMEA to the new body. Set up clear boundaries between the DMEA and the regulator (DMEA).

Governance of the downstream gas industry

The downstream gas industry is also dealt with later in the Gas' Topic and this governance section should ideally be read in conjunction with that section.

Currently there is no policy or legislation specifically for the downstream gas industry in South Africa. Also, general government energy policy does not explicitly deal with gas. However, the imminent development of the Pande gas field in Mozambique has stimulated activity in the gas policy area and the government has begun canvassing opinion among stakeholders. There seems to be consensus amongst stakeholders that policy is urgently needed to provide stable rules of the game' to provide potential participants with an environment conducive to making commitments needed to develop the industry and to facilitate industry development that will support government's social and economic development goals.

The gas industry has very special characteristics (see Gas' Topic). Among the most important are the large investments required, the long pay-back period, the special risk profile during the start up of the industry and the natural monopoly positions that producers and pipeline operators hold. The problems with these natural monopolies are well known and are usually dealt with by explicit government action.

A National Gas Policy Working Group representing potential stakeholders in the gas industry was convened by the DMEA and met for the first time in May 1994. By April 1995 draft options have been circulated to working group members. However, the document has yet to be taken to a more developed stage.

At the time the working group first met Sasol was in negotiations with Empresa Nacional de Hidrocarbonetos (ENH), the state owned Mozambican organisation responsible for developing the Pande field, which could stimulate the first large phase of growth of a South African gas industry. However, the agreement between Sasol and ENH to jointly promote Pande subsequently lapsed.

Since the second half of 1994 a large United States gas marketer, Enron, has shown interest in marketing Pande gas in South Africa. If Enron are able to line up the necessary deals with ENH, customers in South Africa and the authorities, they will be able to negotiate terms for a significant initial investment in the South African gas industry in the absence of any clear lead from government as to what desirable forms the industry might take.

During the same period Sasol has negotiated the rights to use an unused Petronet liquid pipeline to transport gas from its synfuels plants in Secunda to the Natal coast. Sasol and Petronet claim that their contract has clauses which guarantee open access to third parties but it is difficult to evaluate these claims because the contract between Sasol and Petronet is not open to the public for inspection. This contract has significant implications for development of the gas industry as a whole.

In summary, there is no explicit current gas policy and while the government has made attempts to formulate policy these have not been sufficiently resourced. In the meantime powerful gas marketers are moving to establish positions. If an effective policy is to be established it will have to be done soon if it is not to be entirely reactive and ineffectual in providing basic parameters for the governance and structure of the industry.

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ISSUE

Development of gas policy for South Africa

The debate concerning the possibilities for gas policy for a fledgling South African gas industry is undeveloped and cannot be adequately covered in this discussion document. (See Steyn 1995 and World Bank 1994 for information on South Africa specifically and world gas industries more generally.) The effective resolution of these issues is possible only through the use of appropriate policy development processes and the development of the necessary expertise and information to inform these processes.

In terms of the governance model outlined in Chapter 4, appropriate structures and processes need to be established to carry out policy research so that informed policy formulation can be accomplished. Institutions and associated knowledge and expertise to perform these functions have not yet been developed and without them any policy that is made will be the result of lobbying by powerful interests and an inadequately informed response by the government. Such a policy is unlikely to support attainment of broader policy goals or optimal development of the industry. Also, stakeholders without effective voices are unlikely to benefit.

Thus, the options considered here for dealing with the issue of establishing a gas policy for South Africa are largely concerned with first establishing the institutional and technical capacity for researching and formulating policy options and only then making the policy. The actual policy choices that need to be made involve a potentially complex industry and these choices will affect the development of an industry that has planning periods of at least twenty years. This does not mean that the policy process has to be long and drawn out. In fact, with appropriate resources and expertise quality policy can be developed relatively quickly.

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OPTION

Establish a Gas Policy Group' composed of government, stakeholders' representatives and resourced with appropriate technical expertise and charge the group with formulating policy within a specified timeframe. The group should be smaller and more effective than the current National Gas Policy Working Group

Time frame

The Gas Policy Group should be established immediately and the timeframe for policy formulation should be specified to be before major developments take place in the gas industry.

Consequences

Well informed policy will be formulated in consultation with stakeholders in time to guide the development of the fledgling gas industry in a direction which will be in line with overall government policy goals. Because of the quality of the policy there will be sufficient confidence in its stability to attract necessary participation and because good policy lowers the risk of projects there will possibly be a larger number of parties interested in projects and cost of capital will possibly be lower. Also, the research into a potential South African gas industry that is necessary to inform the policy formulation process can be used to publicise potential development and thus promote the development of the industry.

Implementation

1. Appoint the Gas Policy Group in consultation with the National Gas Policy Working Group. Also, contract appropriate technical support. The group should only be appointed for specific tasks and should be reduced / increased / disbanded according to needs (DMEA).
2. Approve the work programme proposed by the Gas Policy Group and supervise completion. This should include an iterative process whereby the group facilitates the political process of making the gas policy choices (DMEA).
3. Implement the policy (DMEA).

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OPTION

Establish a gas sub-council of the (National Energy Policy Forum) NEPF

Time frame

If / when a NEPF is set up.

Consequences

Gas policy issues will have a clear locus in the NEPF.

Implementation

Move the Gas Policy Group into the NEPF. The group should only be appointed for specific tasks and should be reduced, increased or disbanded according to needs (DMEA).

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ISSUE

Legislative and regulative mechanisms for the gas industry

As mentioned in the previous issue the actual process of policy formulation is complex and must take account of the role of government in the industry, legislation, potential industry structure and types of regulation, and should therefore be carried out by a group sufficiently resourced to produce well informed policy that has the support of relevant stakeholders. However, some broad options can be proposed to implement the detailed policy that the group would produce. These options deal with the type of legislative process which should be followed and the institutional nature of possible regulatory functions.

In terms of legislation there could either be no legislative process, in which case the gas industry would have to be managed in terms of existing legislation, or existing legislation could be amended, or a special Gas Act' could be promulgated. If no legislative action is taken the signal will be that the government is not taking a strong leadership role and that the industry will probably grow incrementally, with government reacting to developments. In this case the agenda will be set by the more powerful gas industry participants and their interests are more likely to be served than the interests of small users or the environment. On the other hand, a Gas Act would provide the best opportunity for government to take a strong lead in providing a context for industry development which attracts participation and directs development to attain broader social and economic development goals.

Only the options of passing a special purpose Gas Act and having an independent regulator are considered here. The other options and their consequences should be clear.

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OPTION

Pass new legislation, a Gas Act', to promote and regulate the development of the gas industry

Time frame

As soon as necessary policy has been developed.

Consequences

A clear framework, with the necessary authority and power of legislation, will be created for the gas industry. The Act does not necessarily have to create a context that is complex and restrictive. The Act could be based on appropriate legislation adopted from other countries' Gas Acts and allow potential participants in South African gas industry development to have a good understanding of the intentions of the state in developing the gas industry.

If the policy option of having a gas regulator is adopted, the Gas Act could be used to establish the regulator.

Implementation

If the Act is the result of work of the Gas Group then this group could be charged with drafting the necessary legislation (DMEA).

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OPTION

Establish a professional, independent gas regulator

Time frame

As soon as necessary policy and legislation has been developed. This should be before significant further development of the industry takes place.

Consequences

The criterion of institutional separation of governance roles would be met. Siting the regulator out of the administration would mean that it would be more likely to attract and retain adequately skilled staff. The role of the regulator could be clearly defined and the regulator, having no other responsibilities, could be held accountable for meeting these responsibilities.

Implementation

1. Charge the Gas Group with researching gas regulators in other countries and formulating appropriate policy options for South Africa (DMEA).
2. Implement results of Gas Group work (DMEA).

Nuclear governance

Despite the state's heavy involvement in the nuclear industry there has been no explicit system of governance over this sector either in the way policy is made or in the way the sector is regulated. A result has been the disproportionate allocation of fiscal expenditure to the nuclear sector with relatively little return in terms of cost effective energy production for the economy.

The Department of Mineral and Energy Affairs (DMEA), the Atomic Energy Corporation (AEC), the Council for Nuclear Safety (CNS) and Eskom all play different roles in determining nuclear policy and administering regulations. The Nuclear Energy Act (NEA) governs the nuclear industry and establishes the functions of the CNS and the AEC. The Act was amended in 1993 and there is a perception that a potential conflict exists with the AEC also having commercial interests in nuclear fuel production and marketing. There is a need to rationalise these functions and remove potential conflicts of interest.

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16 ISSUE

Nuclear policy

There is no clarity on how nuclear policy was made in the past, nor is it known who made it. Clearly, on some level the Cabinet will have given the lead for general directions, such as the decision to construct a nuclear power station, but there has not been any coherent nuclear policy in the public arena, nor has there been any debate about this. Instead, it appears that policy was made more on an ad hoc basis and by ad hoc committees, such as was the case with the decision to build nuclear weapons, which was made by an ad hoc committee convened by the Prime Minister. The lack of clarity in regard to the formation of nuclear policy is reminiscent of the apparent absence of a coherent, publicly accessible energy policy. Moreover, nuclear policy also seems to have been considered in isolation from any coherent national science and technology policy (in so far as this may have existed), with bodies such as the Science Advisory Council that were meant to guide policy in these areas largely being by-passed.

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16.1 OPTION

The various and specific roles of the AEC, the DMEA, Eskom, Nufcor and others in designing nuclear policy should continue, but ought to be made transparent

Time frame

Immediate.

Consequences

This option essentially leaves the status quo unchanged, except that it attempts to delineate openly what the specific roles of the various players are, and have been. Consequently, it will not draw nuclear policy closer to a coordinated national science and technology or energy policy, nor will it open up the process of policy formation to a greater range of stakeholders.

Implementation

1. Set up a commission to establish what roles the various players have in the formation of nuclear policy.
2. Publicise the results.

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16.2 OPTION

A representative Nuclear Policy Advisory Forum should be created (perhaps as a subsector of the proposed National Energy Policy Forum or the National Science and Technology Forum), including representatives from all stakeholder groups, as well as from the public at large, at which nuclear policy for South Africa will be discussed, and which will advise the responsible Minister on such matters. This body should have representatives from other government departments that are routinely involved in related issues

Time frame

Immediate.

Consequences

A representative forum would be established at which nuclear policy can be formulated with the inclusion of the broadest possible range of stakeholders. This would democratise the process, and therefore expedite subsequent implementation of specific policies. The option also makes provision for greater coordination with a national science and technology policy.

Implementation

1. Constitute a steering committee to drive the initiative.
2. Advertise an intention to create the Forum, calling for submissions.
3. Compose the Forum, including representatives from appropriate government departments (Minister, DMEA).

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16.3 OPTION

The activities of the AEC should be legally circumscribed to specifically exclude any policy-making role that it may currently have

Time frame

Immediate.

Consequences

This removes the possibility of the AEC being caught in a conflict of interests, in the event of the corporation simultaneously acting as a national policy-making body and a competitor in the market place for nuclear matters.

Implementation

1. Investigate what policy-making role if any the AEC has.
2. Redraft the NEA in order to remove this activity.

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17 ISSUE

Nuclear Energy Act

The Nuclear Energy Act (NEA) governs the nuclear industry, and sets up the CNS and the AEC. The Act was amended in late 1993, in response to various changes required as a result of South Africa's accession to the Non-Proliferation Treaty and ensuring safeguard responsibilities as well as the commercialisation of specific AEC activities. The AEC still retains various regulatory functions and there is a potential conflict of interest as the AEC also has commercial interests in nuclear fuel production and marketing.

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17.1 OPTION

Amend the NEA to remove all monitoring and licensing functions from the AEC, and other rights that are not equally vested with other participants in the nuclear industry, and to transfer these to the CNS

Time frame

Immediate.

Consequences

Regulatory oversight and control are separated from commercial activity in nuclear fuels.

Implementation

1. Set up enquiry that calls for submissions on this issue, and investigates their validity (DMEA-appointed technical team).
2. Enact changes to NEA as recommended by committee (DMEA, Parliament).

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17.2 OPTION

Amend the NEA to remove from the AEC all responsibilities in terms of international treaties, vesting them with the CNS instead or the Council for Non-Proliferation of Weapons of Mass Destruction

Time frame

Immediate.

Consequences

South Africa will fall in line with international practice where responsibilities for adherence to international treaties (such as the Non-Proliferation Treaty) are vested in local non-commercial regulatory bodies rather than commercial participants in the nuclear industry.

Implementation

Amendment to legislation (DMEA, Parliament).

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18 ISSUE

Council for Nuclear Safety

The CNS, a separate body that presently falls under the DMEA, has the tasks of overseeing the nuclear industry, and of licensing its operations. Its annual budget is about R20 million, of which it derives about R5 million from government, raising the balance through license fees. The CNS originated from within the AEC, having become fully independent from its parent organisation in 1988.

Many of the options presented under this issue should be read in conjunction with each other. When taken together, they would considerably broaden the brief of the CNS to become a public nuclear watchdog, rather than just a licensing and regulatory body; in other words, it would be tasked with proactively drawing the public into planning and policy development around the nuclear industry. A remaining policy issue is the appropriate location of the CNS, and how it is constituted.

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18.1 OPTION

Relocate the CNS within the Ministry of Environmental Affairs

Time frame

Immediate.

Consequences

This option would fall in line with present attempts to centralise all environmental and pollution monitoring bodies within the Department of Environment Affairs and Tourism (DEAT), which has the advantage that a more coordinated response to environmental issues can be initiated, within the framework of integrated environmental management and integrated pollution control. Some reorganisation of existing control bodies and relationships with other ministries (e.g. Health) may be required.

Implementation

1. Investigate the implications of a side-ways shift of CNS (DMEA, DEAT).
2. Enact legislation to implement shift (DMEA, DEAT, Parliament).

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18.2 OPTION

The CNS should report directly to the Cabinet or to Parliament

Time frame

Immediate.

Consequences

This option would have the advantage of clearly distancing the CNS from the AEC; it is the model followed in the United States. It might be argued that nuclear matters are very different from other pollution or environmental matters, requiring extremely specialised approaches that preclude bundling these issues under one ministry.

Implementation

1. Investigate the implications of a changed reporting structure.
2. Enact legislation to implement this shift.

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18.3 OPTION

The CNS should be associated with other energy regulatory bodies and should report to the Minister of Mineral and Energy Affairs

Time frame

Immediate.

Consequences

This option would have the advantage of clearly distancing the CNS from the AEC. It might be argued that nuclear matters are very different from other pollution or environmental matters, requiring extremely specialised approaches which should be integrated in the Energy Ministry. Various cost savings are possible if infrastructure is shared with other regulators.

Implementation

1. Investigate implications (DMEA).
2. Enact legislation to implement shift (DMEA, Parliament).

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18.4 OPTION

Involve the CNS closely in developing plans for eventual decommissioning of Koeberg and disposal of its irradiated fuel and other radioactive wastes, and in facilitating an open and transparent discussion and implementation of these plans

Time frame

Immediate.

Consequences

This option would demand a broadening of the CNS's mandate to enable a more proactive role as a nuclear watchdog'; it would also imply increasing its staff complement and skills base. The advantage would be that a very pressing problem associated with the industry would receive more attention, and that the public would be drawn into the process of developing a solution to it. The latter is imperative, for without confidence in any proposed solution and the instance that proposes it, the solution will be politically doomed, no matter how sound it is technically.

Implementation

1. Legislation changing the mandate of CNS (DMEA, Parliament).
2. Increase the budget in accordance with the arrangement reached between CNS and the Finance Department.

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18.5 OPTION

Require the CNS to publish regular reviews of the state of the nuclear industry, covering health and safety aspects and environmental issues, as part of a proactive public information campaign

Time frame

Immediate.

Consequences

This option would help to broaden public involvement in and understanding of the nuclear industry in South Africa. It would raise the credibility and transparency of the Council, and assist the public in its quest for information on the nuclear industry. The CNS would have to be seen to be acting independently of the industry, however, sincerely representing the public interest. A modest expansion of the budget/subsidy might be necessary to cope with an extended brief.

Implementation

Legislation changing the mandate of the CNS and increased subsidy for the enhanced public role (DMEA, Parliament).

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18.6 OPTION

Review the composition of the board of the CNS and the process whereby it is constituted

Time frame

Immediate.

Consequences

A review might find the range of stakeholders currently represented on the board too narrow, and call for a wider representation, and a more inclusive and open process of appointment. This may make the CNS and its activities more public and engender greater confidence in the Council.

Implementation

1. Institute review of issues (DMEA-appointed committee of stakeholders).
2. Effect recommended changes (DMEA).

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18.7 OPTION

Include labour representatives in nuclear safety activities

Time frame

Immediate.

Consequences

This option allows for greater on-the-job involvement of workers in monitoring their own health and safety. Mechanisms such as training workshops would have to be instituted to enable this process to occur.

Implementation

Legislation to allow for the inclusion of labour in monitoring processes at the work-place (Department of Labour).

The second chapter, New policy imperatives', outlines clearly how the overall goals of government policy have changed, and as spelled out by the RDP those goals are now focused on:

• meeting basic needs;
• developing human resources;
• building the economy;
• democratising the state and society; and
• implementing the RDP.

Thus, government policy makers for the energy sector have been given general guidelines as to what energy policy should achieve. In addition the RDP goes on to give clearer goals for:

• Equity: Including a large household electrification programme and policies to deal with alleviating energy poverty.
• Efficiency: Conservation and efficiency are identified as a cornerstone of energy policy'.
• Governance: A National Energy Policy Forum, adequately resourced to develop policies for the energy sector in response to the new government's goals is advocated.

In the third chapter, Description of the energy sector', key characteristics of the energy sector are summarised. This gives policy makers some idea of how well or badly the energy sector currently serves RDP objectives and also, how it might. This gives government policy makers an idea of the system that they have got to achieve RDP goals with: in essence a very strong sector which is highly structured, and nominally at least, under strong government control.

The fourth chapter, Governance of the energy sector', indicates what governance structures and processes might be used to achieve policy goals, or in more detail, how the relationships between the energy industry, energy users, other stakeholders in the energy industry and government might be structured to best formulate, implement and regulate energy policy. The first section of the current chapter on governance issues and options indicates particular structures that might be used to achieve these objectives.

However, even if a good idea of broad policy goals has been developed and there is knowledge of the overall energy system and a governance system has been put in place, what becomes immediately apparent when considering even the simplest policy options is the complexity of the energy system and the high degree of inter-linkages with all economic sectors and the natural environment. Because of this, in order to formulate policy options and to evaluate the trade-offs that are involved, a systematic framework for analysing the energy system and policy options is required. The discipline of integrated energy planning (IEP) offers such a framework.

In the past energy policy has been formulated for each energy supply subsector separately. The policies have also been dominated by supply-side considerations. This is evidenced by the organisational structure of the Chief Directorate: Energy in the DMEA, by the legislative and regulatory structures, and by the way data on the energy system is collected and managed.

A logical result of focusing on individual supply subsectors is that energy users' needs cannot be prioritised. Users have needs for energy services, rather than for a specific fuel. To meet users' needs effectively, different fuels or a mix of fuels need to be considered, or possibly alternative investment in conservation or efficiency measures. Also, environmental consequences need to be evaluated and so do choices in terms of the effects on producing sectors of the economy and social development goals. It is impossible for energy systems analysis and subsequent policy formulation that is based on individual supply sectors to effectively deal with the balance required by this complex set of interlinkages.

Integrated energy planning (IEP) is both a methodology and a framework for analysing the energy system and linking policy formulation to broader national goals. In order to avoid the severe limitation of the supply-side perspective, IEP focuses instead on the energy service needs of energy users. This approach allows users, whose needs are being badly serviced, to be identified. Also, the effects of meeting needs in different ways can be analysed. Thus, opportunities for meeting needs through conservation or efficiency or appropriate energy carrier mixes can be identified.

Focusing on the user also means that the effects of the energy system on economic and industrial sectors become apparent. Whilst IEP focuses on the energy service needs of users, that is not where it ends. IEP begins with current end-use patterns and traces these backwards through the energy system. Thus the effects of aggregate demand by various users on the supply sector and the effects of changes in the demand can be anlaysed. IEP uses a scenario-based approach for considering different policies. The emphasis is removed from trying to predict what will happen, which has a bad track record in the energy sector largely because of crude oil price volatility, and places the emphasis on what the effects of various possible scenarios could be. In this way, policy analysis could begin by looking at possible desired changes in energy services and evaluating the effect of these changes on the energy system. When changes that have realistic and plausible outcomes in terms of requirements from the energy supply system have been identified, implementation mechanisms to effect the changes can be considered.

Another advantage of the IEP approach is the way in which it structures data requirements. The fact that energy use is the starting point allows a unified method of dealing with all users and supply sectors from the beginning. The traditional supply-side approach often made comparisons between various supply options impossible.

Integrated resource planning (IRP) is a further development of IEP ideas. IRP approaches energy services in a broader way. More emphasis is placed on finding alternatives in which all energy mixes and DSM measures have been thoroughly investigated to find the least cost solution with adequate provision for externalities.

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Key characteristics of the IRP include:

• explicit consideration and fair treatment of a wide variety of demand and supply options;
• consideration of the environmental and other social costs of providing energy services;
• analysis of the uncertainties associated with different external factors and resource options;
• public participation in development of the resource plan.

An important component of the practice of IRP in the USA is the inclusion, in legislation, of a definition for IRP. This definition includes wording to the effect that: planning a selection process for new energy resources that evaluates the full range of alternatives ... in order to provide adequate and reliable service to its customers at the lowest system cost ... shall treat demand and supply resources on a consistent and integrated basis' (United States of America 1992).

The de facto situation of many of the components of the South African energy supply industry is that they are in monopolistic or oligopolistic positions. The state does control, or have nominal control over, these components. If planning is driven by supply-side consideration and heavily influenced by existing powerful participants, the objectives of economic efficiency of the economy as a whole and equity and environmental considerations will be poorly served. IEP and IRP provide a framework and methodology for the explicit inclusion and balancing of these components in the policy formation process.

19 ISSUE

The development of IEP/IRP capacity in the DMEA

Because of a lack of funding and staff the DMEA Chief Directorate: Energy is forced to focus on short-term issues in a reactive manner. The combination of the arrangement whereby much policy authority is delegated to statutory councils responsible for specific energy subsectors and the organisation of directorates along energy carrier lines creates significant problems in terms of the integration of policy as required by IEP. The possible exception is the Energy for Development Directorate. Despite the fact that a portion of the Chief Directorate: Energy's budget is allocated to integrated energy policy development', this has not found effective implementation. Energy data is also not collected or arranged to facilitate IEP. In short, the DMEA has neither the professional capacity, nor the structure, nor the database facilities nor the budget to perform IEP in a meaningful way. This means that policy will continue to be formulated along energy subsectoral lines, with insufficient attention given to linkages. Despite the pervasive nominal involvement of the state in the energy sector, a continuation of the incapacity to formulate integrated energy policy will mean that the sector will continue to be driven by the agenda's of individual supply subsectors and the new policy goals of the state will be not be achieved in the energy sector.

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19.1 OPTION

Establish a dedicated task team to familiarise themselves with IEP / IRP theory and experience of its practise. It would be best if most of the team were DMEA staff members so that the expertise could be retained in the Department. Charge the team with making recommendations as to how IEP / IRP can effectively be incorporated into South African energy policy analysis and formulation

Time frame

Within less than a year.

Consequences

Energy policy formulation in South Africa will have a systematic framework based on international best practice. The balanced consideration of demand and supply options, users needs and economic and environmental effects will be possible.

Implementation

1. Draw up terms of reference for the team and commission the work (DMEA).
2. Involve senior DMEA officials and other relevant officials sufficiently so that they gain an understanding of the benefits and requirements of IEP (DMEA).

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19.2 OPTION

Provide all DMEA professional staff with training / educational and job-exchange opportunities so that they may be orientated into IEP

Time frame

Within a year.

Consequences

Staff will become familiar with IEP theory and have the opportunity to be released from work with a short-term focus and experience energy policy work from a different perspective. Energy policy professionals from countries that practice IEP will be able to transfer their expertise to South African energy policy workers.

Implementation

1. Identify relevant educational / training courses and require staff to participate in these (DMEA).
2. Identify job-exchange opportunities in countries that practice IEP and encourage staff to participate in these (DMEA).

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19.3 OPTION

Begin the phased implementation of energy information systems to support IEP

Time frame

Immediate and then ongoing.

Consequences

Data for IEP cannot be immediately developed. Much of this data has not been collected in the past. Database development is an ongoing task and database maintenance requires significantly more resources than the original development cost.

Implementation

1. Establish information technology capacity that will be permanently retained. Standard methodologies are available for this and these should be used. Avoid ad-hoc arrangements (DMEA).
2. Establish operational links between staff that have been trained in IEP and the information technology facility (DMEA).
3. Develop the database at a rate which will allow for effective maintenance (DMEA).

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19.4 OPTION

Select energy system models that are compatible with IEP

Time frame

When staff have sufficient expertise within two years.

Consequences

Energy system modelling will be useful for the purposes of effective integrated policy formulation.

Implementation

1. Expose staff on job-exchange programmes to a number of models so that they can make an informed evaluation (DMEA).
2. Use a formal evaluation technique to select a model that is compatible with needs and availability of expertise and data. Like data maintenance, model maintenance requires significant resourcing (DMEA).

Resourcing of energy governance

Chapters 2, 3 and 4 identified firstly a vastly changed policy environment, secondly a pervasive role of the state in the energy system and thirdly the lack of capacity of the current main government energy policy body, namely the Chief Directorate: Energy of the DMEA, to play its role adequately to adopt energy policy to the demands of the new policy goals of the RDP. Despite the nominal control of the state over all significant energy system functions, made clear by the analysis based on Figure 3 in Chapter 3, the state at present has a department of only 23 professionals to manage this responsibility. In addition, conditions of service for these professionals are not such that the state can recruit, or retain, all the skills it requires. The result is that the government has difficulty in responding to the agendas of industry in terms of new policy and in negotiations of the operation of current regulations and agreements.

The energy system is highly complex and has interlinkages with all economic sectors and has significant effects on the macro-economy. The current resourcing of capacity to manage, implement and monitor policy for this sector is incommensurate with its size, importance and the degree of government involvement. The sector will have a large effect on the attainment, or otherwise, of RDP goals. The present capacity of government to formulate and implement policy for the sector to attain these goals is lacking.

All options for this issue involve building capacity in government to formulate and implement policies that will allow the energy sector to play a role commensurate with its importance in the economy, and support the new government's policies.

20 ISSUE

Resourcing of government energy governance

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20.1 OPTION

Increase the Chief Directorate: Energy's budget to make provision for requirements in policy analysis, formulation, implementation and regulation detailed in the rest of this topic

Time frame

Start immediately. Build up budget in line with limitations of staff and institutional development rates.

Consequences

The government will be able to meet its responsibilities in the energy sector to a degree commensurate with its involvement in the sector and the sector's importance to the economy.

Implementation

Refer to individual subsector governance issues and IEP issues.

20.2 OPTION

Recruit sufficient staff of sufficient calibre to engage effectively with professionals in the energy industries and provide the appropriate level of support for these staff

Time frame

Start immediately. Build up with considerations for limitations of rates of institutional development.

Consequences

The government will be able to engage on equal terms with highly resourced policy workers in the energy supply industry.

Implementation

1. Implement a human resources function at the DMEA with capacity to deal with staffing at this level (DMEA).
2. Provide support at the appropriate level to implement recruitment programmes designed by the human resources functions.
3. Actual staff requirements would be determined by capacity requirements detailed in the previous parts of this chapter.

20.3 OPTION

Provide appropriate training opportunities for staff

Time frame

Immediate.

Consequences

A higher level of skills in the Chief Directorate: Energy and re-orientation of staff to new policy paradigms and methodologies.

Implementation

1. function mentioned above.
2. Provide staff with the necessary opportunities in terms of time away from work (DMEA).

20.4 OPTION

Provide transparent mechanisms for identifying and developing terms of reference, commissioning and evaluation of work which do not fit the Chief Directorate: Energy's role

Time frame

Immediate.

Consequences

There are many areas of work that are better performed by agencies other than government departments. The consequence of this option is that there are transparent mechanisms to ensure that all competent bodies have an opportunity to offer their services and that the work is effectively managed.

Implementation

1. Publish guidelines for departmental subcontracting (DMEA).
2. Advertise work appropriately.
3. Implement a transparent review process for all phases.

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Energy supply subsectors

The following energy supply sectors are considered: electricity, gas, coal, nuclear energy and new and renewable energy.

TOPIC

Electricity

In the past, emphasis has been given to providing secure, adequate and cheap electricity supply to industry, mining, commerce, the railways, commercial agriculture and mid-to high-income households. No national policy existed to promote wider access and 60% of households remain unelectrified despite extensive over-investment in generation capacity. However, the new democratic government's commitment to meeting basic needs and its RDP have provided a new urgency for accelerated electrification.

A reliable and cost-effective supply of electricity is also crucial for economic growth and prosperity. Internationally, the perception of the ESI as a public utility with the primary role of ensuring a reliable supply is shifting to that of a business providing a range of electricity services in order to satisfy customer requirements (IEA 1994). These trends will create new challenges for the ESI in the future.

In the medium term, the key issues facing the ESI in the context of large-scale electrification were identified by NELF and are as follows:

1. Electrification
2. Electrification planning
3. ESI regulation (covered in the Governance' section)
4. ESI structure
5. Financing electrification (capital needs)
6. Electricity pricing (revenue needs)
7. Human resource needs
8. ESI technical standards and safety regulations
9. Integrated electricity management
10. Specialised services for the ESI.

    A set of interim NELF agreements were taken to Cabinet which agreed that:

• Eskom's generation and transmission business should be retained in its present form;
• local government authorities who presently operate their own power stations be allowed to continue to do so subject to regulation by a National Electricity Regulator;
• the Electricity Control Board (ECB) be transformed into an independent NER and new members be selected and nominated by NELF through a transparent process for consideration by the appropriate minister;
• the main role of the NER will be inter alia to issue licenses, regulate price and tariff structures, regulate service standards, regulate the achievement of electrification targets and settle disputes;
• there should be a rationalisation phase for the restructuring of the ESI, during which:
  • local government undertakings that are efficient, can comply with the requirements of the NER and elect to do so, should continue to supply electricity in their agreed areas of jurisdiction;
  • Eskom should take over the electricity supply of the previously independent (TBVC) and self-governing territories. Legislation through a Presidential Proclamation should be prepared to this end; and
  • local government undertakings who elect not to supply directly or those who cannot satisfy the Regulator's criteria for supply, will be obliged to transfer their supply rights to another supplier (Eskom or another local government supplier);
• a national domestic tariff system be developed and implemented as soon as possible by the Regulator; and
• the ring fencing (managerially and financially) of local government electricity undertakings and running them as separate business units as well as the taxation of electricity be referred to an ad hoc committee of ministers consisting of the Minister without Portfolio and the Ministers of Finance and of Local Government (Convenor).

The Cabinet also noted the probable financial implications for the electricity account of the relevant local authorities which would result from the merging of fragmented local authorities as well as the probable need for external sources of funding for specific parts of the electrification programme. Proposals on how to deal with these and related matters would be considered at a later stage (South Africa 1994b).

While NELF played an important role in identifying key issues facing the ESI and helped gain agreement on some of these, others remain unresolved and there is an urgent need for clear government policy for the ESI. The primary policy focus is on electrification and the required planning, regulation, restructuring, financing and tariff systems required to achieve ambitious targets. A number of other issues such as integrated electricity planning and competition are treated in less detail but will be important policy issues in the future.

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ISSUE

Electrification

The electrification programme was seen by NELF (a body representing all stakeholders of the ESI, established in 1993 with the goal of developing an implementable strategy for the accelerated electrification of South Africa) as a positive and dynamic step towards eliminating discrimination and as a push for broad based empowerment, job creation and economic growth. NELF stated that the RDP electrification target of 2.5 million homes by the year 2000, thereby increasing the level of access to electricity to about 72 percent of all households, is achievable, provided that the NELF proposals, which are the result of an in-depth study of the key issues over 2 years, are implemented (NELF 1994g). The Cabinet approved almost all of NELF's recommendations (see Appendix) and the Electricity Act, 1987, was amended accordingly. The scene is therefore set for South Africa to embark on one of the most rapid and largest electrification programmes ever undertaken.

It is, however, imperative that the ESI also remains well managed and financially sound to maintain South Africa's competitive advantage in low electricity prices, reliability of supply and availability of electricity to industrial, commercial and agricultural consumers (NELF 1994e).

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OPTION

Large-scale electrification by Eskom and local governments aimed at making 2.5 million connections by the year 2000

Time frame

Sustained electrification at this level during the next 5 years.

Consequences

The electrification drive, together with other infrastructural investment, will promote economic growth and improve social equity. These ambitious targets will highlight the need for restructuring the electricity distribution industry, and for reforming planning, tariff and financing systems.

Implementation

1. Adoption of a national electrification planning system (see Electrification planning' Issue).
2. Include the electrification programme under Eskom and local government distributor annual and 5 year business plans and as part of the National Electricity Regulator's licensing (see Electrification planning' Issue).
3. Rationalise the electricity distribution industry (EDI) to achieve more efficient distribution (see ESI structure' Issue).
4. Implement national tariffs, effect necessary cross-subsidisation and financing (see Financing electrification' and Electricity pricing' Issues).
5. Plan, coordinate and execute the projects with community involvement (EDI).
6. Operate and maintain the networks in an efficient manner (EDI).

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OPTION

Provision of electricity to clinics and schools

Time frame

Focused effort over 5 years.

Consequences

Health, educational and other services will be enhanced. Electricity services could be expanded to adjacent homes and productive sites. International donor finance could be attracted. It is not clear whether having electricity in all schools is a first priority. Many schools in remote rural areas would have to be electrified with stand-alone off-grid technologies such as photovoltaics. There is the danger that in the absence of established institutions to undertake large scale solar electrification, ambitious, early targets could lead to poor design, implementation and insufficient maintenance.

Implementation

1. Liaise with provinces to establish extent to which electrification of schools and clinics are priorities.
2. Assign institutional responsibility both for grid and off-grid systems for planning, financing, installation, operation and maintenance (RDP Office, DMEA or NEPF).
3. Carry out the necessary planning and execution in collaboration with the communities involved (Eskom, SAREDA).
4. Obtain concessionary or loan finance (RDP Office, Eskom, DMEA).

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ISSUE

Electrification planning

Ideally, the national electrification action programme should be developed and prioritised by the Government, together with the EDI, taking consumer's needs as well as resource/supply constraints into account (NELF. Technology, Standards and RAPS Working Group 1994). Furthermore, the programme should be designed with a balance between electrification of urban and rural areas from the outset (Horvei & Dahl 1994). Based on the accepted national programme, regional and local electrification programmes should then be planned (NELF. Technology, Standards and RAPS Working Group 1994). Areas with the greatest development potential will be prioritised.

Electrification should not be carried out in isolation, but as part of integrated infrastructure provisioning. The necessary integrated planning methodology has not been fully developed as yet and will have to rely heavily on the use of shared information systems.

NELF compiled a national database in support of electrification planning and restructuring of the EDI. This database now resides with the NER and is also accessible to distributors and other infrastructure providers. The database was developed for both the supply and demand-sides. The supply-side database provides information on the structure of the EDI, whereas the demand-side database provides the location and number of current and future urban and rural households (NELF 1994e).

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OPTION

Adopt a national integrated top-down/bottom-up electrification planning and monitoring system

Time frame

1996 onwards.

Consequences

A combined top-down/bottom-up approach would facilitate the integration and prioritisation of electrification planning into coherent national and provincial programmes, moderated and informed by local needs and priorities with commitment by all key role players.

Implementation

1. Establish draft provincial and distributor targets for the next 5 years, using the NELF/ESI database (DMEA or NEPF in consultation with Provinces, NER, EDI and aided by Eskom).
2. Reconcile electrification targets with national and provincial RDP offices and provincial development planning (DMEA or NEPF).
3. Negotiate targets with all potential distributors and include as part of the licences to be issued (NER).
4. Collate proposed targets (DMEA or NEPF aided by Eskom).
5. Compile annual, 5 year and 15 year electrification plans in collaboration with all relevant bodies, using the NELF/ESI database (DMEA or NEPF in consultation with Provinces, NER, EDI and aided by Eskom).
6. Monitor progress (DMEA, NER).

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OPTION

Overall planning of the ultimate national transmission system aimed at identifying network and non-network supply areas

Time frame

Initial planning completed in 1996, updated periodically.

Consequences

By identifying country-wide network and non-network supply areas it would be possible to proceed with detailed urban and rural electrification planning.

Implementation

1. Complete broad planning of ultimate national transmission system, using the NELF/ESI database (Eskom).
2. Identify future network and non-network supply areas (Eskom).
3. Publish the information (Eskom).

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OPTION

Develop a methodology for urban electrification planning as part of integrated urban infrastructure planning aimed at achieving 100% electrification of urban areas by the end of this century

Time frame

Methodology completed and ratified early in 1996.

Consequences

Integrated planning and execution of infrastructure provisioning would reduce costs and would enable the organisations involved to do the right things right the first time.

Implementation

1. Commission a multidisciplinary group of experts to draft a methodology in collaboration with all key role players, which is suited to the country's unique characteristics (DMEA).
2. Disseminate document to all role players (DMEA).

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OPTION

Develop a methodology for rural electrification planning, as part of integrated rural infrastructure planning aimed at achieving the highest possible rate of electrification of rural areas and removing 80 percent of the rural electrification backlog by year 2010

Time frame

Initial guidelines by 1995. More comprehensive plan by 1997.

Consequences

Cost reduction. In addition, the methodology would enable decision-makers to understand how electrification can support development and would provide guidelines on how to target and prioritise areas and how to integrate with local end-users and local development planning.

Implementation

1. Commission a multidisciplinary group of experts to integrate all relevant issues into an understandable picture (NELF 1994g) and to draft suitable methodology in collaboration with all key role players (DMEA).
2. Obtain additional international grant aid.
3. Disseminate document to role players (DMEA).

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OPTION

Further development and utilisation of supply-side (distributor data) and demand-side (population and housing data) databases and electrification modelling and benchmarking facilities aimed at providing the necessary information system support to decision-makers

Time frame

Ongoing.

Consequences

The databases would be useful to the Government, the NER and electricity distributors in breaking down the RDP targets to regional and local levels, in making impact assessments, and in modelling the restructuring of the EDI. The databases would also be accessible to other providers of infrastructure (eg: housing, water, communication).

Implementation

1. Enhance and maintain databases and modelling and benchmarking facilities (Eskom).
2. Convert data into proposed distributor targets and integrate with monitoring of progress (NER).

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ISSUE

ESI structure

The electricity supply industry essentially comprises the power generation, transmission and distribution sectors. Generation and transmission, which mainly resides with Eskom, are relatively well managed and financially sound although competition is limited and overcapacity still exists in the generation sector. For historical and political reasons, the EDI is inefficient and ineffective in achieving accelerated rates of electrification and most of the problems which are currently being experienced in the ESI, lie with the distribution of electricity.

The EDI currently comprises the Eskom distribution business (including the former independent states and self-governing territories) and approximately 300 local government electricity suppliers. The main weaknesses of the EDI were identified by NELF as:

extreme fragmentation as a result of numerous local government structures; an inappropriate governance framework; insufficient stakeholder involvement in the industry; unequal financial viability of different distributors; politicisation of electricity supply; non-uniform regulation; low rate of electrification; the inability to redistribute resources; lack of accountability; sub-optimal use of scarce resources; very poor customer service in many areas; and low affordability of electricity.

NELF therefore came to the conclusion that the EDI should be restructured, that such restructuring should be done gradually over time and should take place over two phases, namely a rationalisation phase and a consolidation phase (NELF 1994e & f) (see Appendix).

The restructuring of the EDI will take place within a constitutional and legal environment within which a number of significant developments are taking place. These developments include the negotiation of the final constitution, the transitional provisions contained in the interim constitution, and the process of restructuring of local government. It is also likely that future political and constitutional developments will have further impact on the ESI. This is especially so with regard to the rights and functions of provincial and local governments (NELF 1994e) (see Appendix).

NELF identified the following characteristics and requirements for an effective and efficient EDI:

• appropriate governance framework;
• acceptability to stakeholders;
• promotion of national economic and social goals;
• cost-effective and reliable supply of electricity;
• promotion of electrification;
• managed professionally and efficiently on acceptable business principles;
• promotion of operating efficiency (planning, co-ordination and optimisation);
• funding efficiency;
• progressive human resource policies (competence, training, development and affirmative action);
• customer involvement;
• new structures must be implementable and manageable; and
• appropriate pricing policies (NELF 1994f).

  The cabinet, on NELF's recommendation, resolved that during the rationalisation phase:

• Eskom should take over the electricity supply of the previously independent (TBVC) and self-governing territories;
• local government undertakings that are efficient, can comply with the requirements of the NER and elect to do so, should continue to supply electricity in their agreed areas of jurisdiction;
• local government undertakings who elect not to supply directly or those who cannot satisfy the NER's criteria for supply, will be obliged to transfer their supply rights to Eskom or another local government supplier (South Africa 1994b).

The structural configuration which is expected to evolve from this resolution is displayed as Option 1 in Figure 8. In addition, the ring fencing of all electricity undertakings on a regional basis would have to be considered. A number of policy options under Specialised services for the ESI' Issue could also be beneficial to the restructuring of the ESI.

Option 1

 

Metropolitan		ESKOM	--------	Special
distributors	--------	Generation		customers
		Transmission
		Distribution	--------	Competent
				local autority
				distributors
|		|		|
Customers		Customers		Customers

Option 2

Special	--------	ESKOM
customers		Generation
		Transmission
		|
|	--------	|	--------	|
Regional		Regional		Regional
electricity		electricity		electricity
distributor		distributor		distributor
1		2		n
|		|		|
Customers		Customers		Customers

Option 3

Special	--------	ESKOM
customers		Generation
		Transmission
		|
		National
		electricity
		distributor
		|
		Customers

• FIGURE 8 Structural options for the ESI

  NELF concluded that a decision on the desired end state of the ESI, to be aimed at during the consolidation phase, does not have to be made now, but that during the rationalisation phase the options should be regularly reviewed. During the consolidation phase the EDI could evolve firstly, towards a relatively small number of metropolitan and capable local government electricity undertakings supplying electricity directly, with Eskom taking over the rest of the industry; secondly, towards a small number of publicly-owned regional distributors; or thirdly, towards a single national publicly-owned distributor with regional divisions (see Options 1, 2 and 3 in Figure 8).

  The above perspective is essentially a short-term one and focuses on the need for rationalisation in the face of accelerated electrification. In the future, other structural options for the ESI would need to be considered including the possibility of increased competition in generation and supply of large customers.

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OPTION

Evolution of the EDI towards a hybrid structure with continued public ownership, ultimately comprising a relatively small number of metropolitan and capable local government electricity undertakings supplying electricity directly, and with the rest of the industry taken over by Eskom, aimed at improving effectiveness (including electrification) and efficiency

Time frame

Licensing of all capable electricity distributors during 1996. Rationalisation of the EDI into a smaller number of distributors completed by 1998. Consolidation into a relatively small number of distributors completed by 2000.

Consequences

This option will de facto be in place during the local government transition period. There would be fewer distributors and they would be more financially viable. A new culture of stakeholder involvement and accountability would be sought. The ring fencing of distributors would be needed to address a number of shortcomings, eg lack of transparency and the propensity of local government to overtax.

Because the focus of local government distributors would still be local, legislation would be needed to address national issues such as cross-subsidies required for domestic electrification. The mechanisms for achieving cross-subsidisation will be more complex and difficult than other options for the future structure of the EDI proposal below. The Regulator would have an important role in the achievement of electrification and other national targets, the restructuring process, and in the co-ordination of integrated electricity management (NELF 1994d).

Implementation

1. Develop a coordinated communication programme on the restructuring of the ESI, directed at the ESI and its customers (NER).
2. Transfer the assets of the electricity undertakings of the formerly independent and self- governing territories to Eskom by legislation (DMEA, Department of Public Enterprises, Eskom).
3. Rationalise and consolidate local government electricity undertakings by applying suitable criteria for the retention or transfer of supply rights (see Appendix) (NER).
4. Introduce legislation on national issues (DMEA).
5. Co-ordinate matters of national concern and the achievement of national targets (NER).
6. Regularly review other future structural consolidation options and compile document for submission to Cabinet if necessary (DMEA, NER).

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OPTION

Financial ring fencing of all electricity distributors on a regional basis aimed at commercialising their activities and achieving transparency

Time frame

Ring fencing of all distributors by end of 1996, assuming that the green light will be given by the cabinet.

Consequences

Ring fencing would promote transparency and would ensure that costs, levies (or taxes) and subsidies are separately identified and managed, as recommended by NELF (1994d).

The Regulator would be enabled to monitor the performance of distributors and to exert pressure to continuously reduce costs in real terms while improving customer service.

Facilitation of further consolidation of electricity distributors at a later stage.

Commercialisation of management and operations could lead to improved efficiency.

Implementation

Await the outcome of further study by the ad hoc Cabinet Committee.

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OPTION

Evolution of the EDI towards a small number of regional electricity distributors separate from local government, but still under public ownership aimed at improving effectiveness (including electrification) and efficiency

Time frame

Consolidation of the EDI into Regional electricity distributors by 2000.

Consequences

The remaining fragmentation of the EDI would be addressed. A large degree of economy of scale would be achieved and competition by comparison, resulting in horizontal effectiveness and efficiency, would be possible.

Legislation would be needed to address national issues and the Regulator would have an important role in the achievement of electrification and other national targets, the restructuring process, and in the co-ordination of integrated electricity management (NELF 1994d).

Implementation

1. Obtain cabinet approval in principle in due course (DMEA).
2. Commission a multidisciplinary group of experts to draft an implementation methodology in collaboration with all key role players (DMEA).
3. Compile draft legislation (DMEA).

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OPTION

Evolution of the EDI towards a single publicly-owned national electricity distributor with decentralised regional divisions, aimed at improving effectiveness (including electrification) and efficiency

Time frame

Consolidation of the EDI into a national electricity distributor by 2000.

Consequences

The remaining fragmentation of the EDI would be addressed. Full economy of scale and standardisation would be achieved. Electrification planning and implementation would be rationalized. A national electricity distributor would generally promote the application of national measures, e.g. national tariffs involving large-scale geographical cross-subsidisation. With high synergy in the organisation an excellent range of skills could develop. However, resources could be inefficiently allocated because of a lack of transparency in respect of cross-subsidisation. Inefficiencies could result because of lack of competition and therefore the natural tendency not to control costs.

There would be a limited role for the Regulator because of overall supervision by a stakeholders council. The Regulator would, however, be required to introduce measures to simulate natural competition and to coordinate integrated electricity management (NELF 1994e).

Implementation

Implementation would be as for Option Regional Electricity Distributors'.

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ISSUE

Financing electrification

It will be imperative throughout the electrification process to observe and implement the fundamental distinction between the funding of capital expenditure for asset creation, and the financing of deficits (not by loan funding) to cover operating shortfalls (NELF 1994a).

NELF came to the conclusion that most of the financing requirements for electrification can be met through debt or loan financing and revenue from the industry as a whole but that there may be a need for subsidisation of the very poor by means of Government grants. It is at present problematic for a number of smaller local authorities to obtain commercial loan capital. This problem will be addressed in the short term by means of the anticipated take-overs of those electricity undertakings who are not able to perform, by capable undertakings, under license by the NER.

The structure of the industry has a major impact on the financing of electrification. A single national distributor would be able to apply a national tariff and use surplus income from larger customers to finance new connections. Cross-subsidisation between distributors will be much more complex and electrification targets may be prejudiced by lack of funds for those distributors who have fewer established consumers and many potential customers.

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OPTION

Eskom and capable local authorities to secure independent capital loans on commercial markets with Government guarantees where required, aimed at providing the bulk of the capital needed for the execution of the large-scale electrification programme

Time frame

Continuation of present arrangements.

Implementation

1. Raise loans with development agencies and/or loans on the commercial markets, including the use of existing financing instruments such as Eskom's 168 bond and its Electrification Participation Note.
2. Secure commitment of Department of Finance for provision of government guarantees.

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OPTION

Establishment of internal electrification development funds by Eskom and capable local authorities, aimed at providing supplementary capital for the execution of the large-scale electrification programme

Time frame

Electrification development funds established by end 1995 by all distributors where the need for such funds exists.

Consequences

By generating sufficient development funds internally, distributors would move into a position where the maximum advisable level of loan charges (interest and redemption) would not have to be exceeded.

Implementation

1. Apply cross-subsidisation of low-usage domestic customers by means of a suitable new national tariff structure (see Electricity pricing' Issue).
2. Transfer a maximum portion of the funds generated into the electrification development funds (distributors).

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OPTION

Create a National Electrification Fund

Time frame

1996 onwards.

Consequences

Increased grant finance available to distributors facing the largest electrification demands enabling electrification targets to be met with tariffs which are affordable. Greater equality through poorer new consumers not having to pay higher tariffs. Improved access to loan finance for poorer distributors.

Implementation

1. DMEA to appoint agent (eg Eskom, DBSA or Central Energy Fund (CEF)) to establish National Electrification Fund.
2. Funding from central government, external sources, and possible levies on bulk sales.
3. On-lend to distributors for capital financing or make capital grants to distributors on the basis of subsidy criteria.
4. Determine subsidy criteria and possible financial flows between distributors (DMEA and NER).

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OPTION

Provision of grant funding by Government to leverage finance for specific rural electrification schemes selected according to national criteria

Time frame

80% of rural electrification backlog removed by 2010.

Consequences

The plight of the rural communities would be relieved resulting in a slower rate of migration to urban areas. Rural development will be promoted.

Implementation

1. Develop national prioritisation criteria (DMEA, Eskom).
2. Identify and prioritise all rural electrification financial needs and place in context of other urban and rural development needs (provincial and local government).
3. Include rural electrification schemes in 5 year state capital expenditure programme (DMEA).
4. Provide funds in annual state budgets (DMEA).

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OPTION

Raise additional finance for the electrification programme by means of a dedicated levy on electricity sales, aimed at obtaining funds from the ESI for discretionary use by the government

Time frame

An electrification levy could be introduced by the government (as a measure of last resort) after full consideration of all relevant aspects, including response of consumers to small price increases.

Consequences

Substantial funds would be obtained for acceleration of electrification. Because electricity is an input cost to industry and a significant increase in such a cost factor reduces the ability to compete internationally, the growth of the economy could be negatively affected. However, this depends on the size of the levy and the responsiveness of consumer demand to price increases. Firms might be encouraged to use electricity more efficiently or to use alternative energy sources in order to maintain competitiveness.

Implementation

Await the outcome of the investigations by the Fiscal and Finance Commission and the Katz Commission.

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ISSUE

Electricity pricing

The real challenge facing the EDI is to find ways of earning sufficient revenue to provide adequate support for the electrification drive with equitable tariffs and to ensure sustainable future operation of the power system. NELF (1994d) recommends that the following principles should be applied in setting pricing policies and developing tariffs:

the electrification programme must be financed as far as possible from within the sector itself; overall cost-reflectiveness in pricing is accepted as a guiding principle; deliberate cross-subsidisation within the ESI is accepted, as it may pertain to different individual consumers or categories of consumers, if the process of subsidisation is transparent, is consistent with specific socio-economic objectives, and properly managed throughout; in order to finance the national electrification programme a dedicated special levy or surcharge on consumption to all consumers is accepted as a financing option, but again within the caveats of transparency, fairness, equity, clarity and affordability; a nationally applicable tariff system for domestic consumption is accepted; the national domestic tariff system must be simple, understandable and practical to both the supplier/distributor and consumers; affordability is a key criterion in the pricing process; at the policy and strategic levels, all decisions and actions should be aimed at ensuring the long-term viability and sustainability of the ESI and its contribution to sustained economic growth in South Africa; the implementation of any proposal should be the least disruptive to the industry as possible; tariff structures and levels should encourage conservation and efficient use of all energy sources; and the electrification programme should be planned and implemented in co-ordination with other infrastructure services and socio-economic developments.

One question is whether the necessary cross-subsidies should be provided only by the high usage domestic customers or whether non-domestic customers should also contribute.

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OPTION

Implement a national household tariff system aimed at making a contribution towards internal electrification development funds and ensuring that poor households do not pay more per unit of electricity than larger domestic consumers

Time frame

Implementation of a national domestic tariff system during 1995 and 1996 in accordance with the 1994 Cabinet decision.

Consequences

An elegant mechanism would be in place to provide limited cross-subsidisation from high-usage household consumers to low-usage household consumers. It would, however, be difficult to ensure full transparency.

Implementation

1. Develop a communication programme on the national domestic tariff and the importance of terminating payment boycotts, directed at the EDI, its domestic customers and other relevant role players, in which the new system is fully described, support is obtained and cooperation is established (NER).
2. Implement the national domestic tariff system through the licensing process between the NER and Eskom and competent local authorities .

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OPTION

Application by Eskom and capable local authorities of cost-reflective tariffs in general, but with clear subsidisation of low-usage domestic customers by other consumer categories aimed at making the highest possible contribution towards electrification development funds

Time frame

1996 onwards.

Consequences

An mechanism would be in place to provide maximum cross-subsidisation. It would be difficult to ensure full transparency. Input costs for industry and other sectors will increase.

Implementation

Same as previous Option.

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ISSUE

Human resource needs

Large-scale electrification will impose heavy human resource demands on the EDI, not only in respect of management and construction, but also for operation and maintenance of existing and new networks. Ways will have to be found to address the internal shortage of skilled human resources. Obviously, the EDI will also have to make use of external resources where necessary. The emphasis will, however, have to be placed on opportunity enhancement and the empowerment of and job creation for previously disadvantaged individuals within the EDI, aimed at making the EDI as self-sufficient as possible.

In meeting its human resource needs the EDI will also have to make a wider contribution to the economy by implementing labour-based construction programmes and by procuring goods and services needed for electrification from micro, small and medium-sized enterprises, where feasible to do so.

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OPTION

Redeployment of existing staff during the rationalisation of the EDI structure, including secondment agreements with capable bodies, aimed at optimal utilisation of the work force and ensuring stable industrial relations

Time frame

Redeployment of personnel in the employ of the various distributors as the new dispensation unfolds.

Consequences

The disruption of the personnel would be minimised and the focus would remain on electrification as a national priority.

Implementation

1. Develop a communication programme on redeployment principles (see Appendix), directed at the ESI and other stakeholders (NER).
2. Apply these principles country-wide (local government and Eskom).

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ISSUE

ESI technical standards and safety regulations

A suitable strategy, process and structure for technology development and co-ordination will have to be finalised within the context of the overall structure adopted for the EDI, to promote rationalisation, standardisation and innovation. NELF has partially satisfied this need by means of a comprehensive study (NELF 1994g). At this stage, the institutional options for coordinated action should be considered.

Currently the reduction of the unnecessary or uneconomic variety in the specifications of purchasing organisations and the provision of guidelines to assist purchasers to establish their requirements is being addressed by means of the National Rationalisation of Specifications project. The work is being directed by the Electricity Suppliers Liaison Committee (ESLC). Some manufacturers and distribution authorities have, however, for various reasons, been reluctant to cooperate, with the result that the National Rationalisation of Specifications project has not made significant progress in rationalising the variety of standards'.

The institutional support given by the ESLC could be improved by extending its membership to include manufacturing sector representation and by allowing it to evolve into a technical cooperation committee responsible for promoting a cooperative approach by all electricity distributors and manufacturers of distribution equipment (NELF 1994g). Alternatively, a new technical coordination committee which is answerable to the ESI could be established.

The enforcement of safety standards by Government regulation is appropriate for our country. NELF found that certain safety standards and regulations will have to be reviewed in view of restrictions which are currently placed on the adoption of different technologies (NELF 1994g).

The institutional support to be provided for technical standardisation and review of safety standards is interrelated with the provision of specialised services for the ESI (see Issue Specialised services for the ESI' in Electricity' Topic.

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OPTION

Enablement of the ESLC to evolve into an ESI technical cooperation committee (answerable to electricity distributors), aimed at promoting voluntary rationalisation of technical standards

Time frame

Reconstitute the ESLC as a more representative body driven by electricity distributors, during 1995, in accordance with the NELF proposal that a cooperation committee which serves the needs of most of the users of electrical distribution materials and equipment be established (NELF 1994g).

Consequences

Technical standards would be rationalised in due course, with much room left for innovation. Little involvement of the NER would be needed. The cooperation committee would be driven by the needs of the EDI.

Implementation

1. Extend membership of the ESLC to include the manufacturing sector.
2. Allow the reconstituted ESLC to continue fulfilling its role from within the EDI, with its objectives modified to accelerate the standardisation process (ESLC).

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OPTION

Establishment of an ESI technical coordination committee (answerable to the NER), aimed at mandatory rationalisation of technical standards

Time frame

Reconstitute the ESLC as a fully representative body answerable to the NER, during 1996.

Consequences

Technical standards would be rationalised within the shortest possible period, with little room left for innovation. Heavy involvement of the NER would be needed.

Implementation

1. Extend the membership of the ESLC to include all relevant stakeholders.
2. Redirect the reconstituted ESLC to fulfil its role from outside the EDI (NER).

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OPTION

Review of appropriate safety standards and enforcement of promulgated safety standards by government regulation

Time frame

Review of relevant safety standards and regulations completed by end 1996.

Consequences

The EDI would be enabled to carry out electrification in the most cost-effective manner from a safety point of view.

Implementation

1. Set up a review committee.
2. Amend legislation including regulations where necessary (Department of Labour).

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ISSUE

Integrated electricity management

Integrated electricity management (IEM) is an holistic approach that integrates supply and demand-side management activities. The planning of electricity generation and transmission capacity is an example of a supply-side management activity, while marketing strategy formulation, tariff design and remote control of customer load are demand-side examples (see Appendix).

A definition of IEM for South Africa is as follows:

The management process which selects from a full array of demand and supply-side options, that combination of actions, risks and investments which: satisfies customer electricity service needs; is achieved at optimal value of electricity services to the customer; is financially viable for the electricity undertakings; and is environmentally sustainable (adapted from Eskom 1994c).

As part of IEM, electricity policy will have to grapple with the question of whether the environmental benefits of retrofitting pollution control technologies (such as desulphurisation equipment) to existing power stations will outweigh costs, and if so, when these costs are best incurred (Eberhard & van Horen 1994). Furthermore, policy will have to be formulated regarding access to the transmission system for large or special customers.

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OPTION

Application of country-wide integrated electricity management (including demand-side management), aimed at integrating the supply and demand-side activities of the ESI

Time frame

From 1996 onwards.

Consequences

Firstly, coal, nuclear, gas and renewables would be evaluated as potential future power sources, together with demand-side management (DSM) options, using a formal IEM approach. An appropriate balance should be established between primary energy sources. The conservation of water would be given priority. Local generation, cogeneration, independent power production and the joint development of regional electricity production schemes should be promoted. Secondly, a Southern and Central African grid and power pool, with acceptable risk attached to imported power, would be created. Finally, DSM would be applied by all suppliers and distributors in South Africa. As part of DSM the improved thermal performance of new and existing dwellings, appropriate electrical appliance development and energy performance labelling, the use of small independent photovoltaic systems where network electricity is not feasible, and the use of appropriate small-scale solar energy technologies would inter alia be promoted.

Implementation

1. Develop a communication programme, directed at the ESI and its customers, in which the new IEM approach is fully described, support is obtained and cooperation is established (NER).
2. Establish an ESI IEM co-ordination committee (NEPF or DMEA with NER/distributors).
3. Incorporate IEM requirements in the annual licensing of Eskom and competent local authorities (NER).

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OPTION

Equipping all new coal power stations with gas scrubbers and undertaking a cost-benefit study on retrofitting existing units, aimed at reducing toxic emissions (IDRC et al 1994)

Time frame

From 1996 onwards.

Consequences

Particulate, Nox, SO2 and other polluting emissions would be reduced.

Implementation

1. Commission a multidisciplinary group of experts, including Eskom staff members, to carry out a feasibility study (Eskom).
2. Submit report to NER (Eskom).
3. Decide on further action to be taken (NER/Eskom).

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OPTION

Application of non-discriminatory access to the national grid (including application of a suitable transmission tariff) to qualifying local government distributors and other large/special customers, aimed at improved transparency of the ESI and increased competitiveness of large or special customers (see Appendix)

Time frame

From 1996 onwards.

Consequences

The playing field for Eskom's large and special customers would be levelled.

Implementation

1. Submit report to the NER and DMEA (Eskom and AMEU).
2. Communicate and implement decision (NER).

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ISSUE

Specialised services for the electricity supply industry

A need exists for the provision of specialised services for the ESI on a full-time basis and with an end-use orientation, to ensure the effective and efficient use of specialised human resources. The functions which would have to be performed, are (adapted from Basson 1994b):

1. Coordination of planning at a national level and planning activities common to all distributors, e.g. national electrification planning.
2. ESI communication and information management, including the management of a detailed ESI database and sharing of information by networking of all role players.
3. Development of appropriate technical and safety standards (see ESI technical standards and safety regulations' Issue).
4. integrated electricity management including (see Integrated electricity management' Issue).
5. Demand-side management;
6. demonstration projects;
7. research and development;
8. coordination of ESI market research (including customer needs, perceptions and responses);
9. facilitation of the development of more appropriate appliances and communication programmes;
10. load profile research;
11. tariff development; and
12. the development of end-use electro-technologies.
13. Specialised training including
14. least-cost planning;
15. marketing of electricity services;
16. tariff analyses; and
17. client service.
18. Specialised investigations as required by the Government, the Regulator or the ESI.
19. Power system research and development.
20. Research in the socio-economic field.

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OPTION

Establish an ESI Specialised Services Cooperation Committee, together with a number of Working Groups, aimed at optimal employment of existing resources on a matrix/project basis

Time frame

From 1996 onwards.

Consequences

By making a small start and gradually building additional resources the necessary specialised functions could be performed cost-effectively and without major upheaval. In this way duplication of work would be avoided. The Electricity Suppliers Liaison Committee (ESLC) could be accommodated within the new structure. The Specialised Services Cooperation Committee could in due course evolve into a state body or an independent specialised services body.

Implementation

1. Negotiate voluntary cooperation agreement.
2. Create a suitably structured committee and working groups (DMEA/NER/ Eskom/ AMEU).

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OPTION

Rendering of specialised services by Eskom (on an agency basis) aimed at improving the effectiveness and efficiency of the ESI

Time frame

Continuation and expansion of present arrangements.

Consequences

The existing strengths within Eskom would be utilised and expanded to serve as a core of expertise for the ESI. Duplication of work would be avoided. Users outside Eskom would be charged for work done.

Implementation

1. Negotiate agreement (DMEA/NER/Eskom/AMEU).
2. Expand functions within Eskom as appropriate (Eskom).

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OPTION

Create a single or a small number of joint municipal action agencies (JMAAs) aimed at improving the effectiveness and efficiency of local government electricity undertakings

Time frame

JMAA or JMAAs established in 1996.

Consequences

Specialised services to participating local government distributors would be rendered on a non-profit basis similar to the joint action agencies in the US (City Council of Pretoria 1990). Competition would be promoted. The capability of local government to carry out electrification and to implement DSM would be enhanced.

Eskom would remain self-sufficient and would continue with the management and operation of the EDI database.

Implementation

1. Establish one or more JMAAs (AMEU/participating local authorities).
2. Co-ordinate the work done by JMAAs (AMEU).

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OPTION

Placement of specialised services under the DMEA aimed at improving the effectiveness and efficiency of the ESI

Time frame

Specialised services section established within the DMEA in 1996.

Consequences

All available spare personnel wishing to participate, would be seconded from Eskom and local authorities to the DMEA. The section would be provided with additional staff within existing constraints. It would be possible to co-ordinate electrification and other planning at national level, and to centralise the EDI databases, ESI communication and information management.

Implementation

1. Negotiate agreement (DMEA/NER/Eskom/AMEU).
2. Arrange for secondment of personnel and expansion of section within NER, as appropriate (NER).

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OPTION

Establishment of a fully fledged independent specialised services body (Electricity Services Institute) aimed at improving the effectiveness and efficiency of the electricity supply industry

Time frame

Electricity Services Institute' establishedin 1996.

Consequences

All available personnel wishing to participate would be transferred from Eskom and local authorities. The staff would be augmented where necessary. All necessary specialised services would be rendered with the user-charge principle applied. The Electricity Services Institute would be governed by a stakeholder council and would be funded by the electricity supply industry on an equitable basis. Scarce human resources would be optimally employed.

Implementation

1. Negotiate agreement and establish 'Electricity Services Institute' (DMEA/NER /Eskom/AMEU).
2. Discontinue defunct committees (Eskom/AMEU).

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OPTION

Diversification of distributors into the provisioning of non-network electricity supplies aimed at providing integrated electricity service solutions

Time frame

Continue and expand present arrangements within Eskom and apply diversification within capable local government distributors in 1996.

Consequences

Non-network electricity supplies would be provided by making use of existing resources within the public sector. An integrated approach and cross-subsidisation of supplies would be possible.

Implementation

1. Change mission of local government electricity undertakings (local government distributors).
2. Appoint additional staff where necessary (local government and Eskom).

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OPTION

Creation of a dedicated institution for the financing and provisioning of non-network electricity supplies aimed at accelerating electrification in remote areas (see The need for institutional and financial support for renewable energy technologies' Issue)

Time frame

Establishment of new institution by end 1995.

Consequences

The institution could function on a non-profit basis and private sector participation could be invited. Coordination with distributors would be necessary and direct Government subsidies would have to be provided.

Implementation

1. Negotiate agreement (DMEA/Eskom/AMEU).
2. Obtain Cabinet approval (DMEA).
3. Draft memorandum of association (DMEA/attorneys).
4. Form non-profit company (DMEA/Eskom/participating local authorities/private sector).
5. Establish coordination with distributors (new institution).
6. Provide direct subsidies (Government).

Petroleum

Petroleum is one of the most contested areas of energy policy in South Africa. The petroleum sector is governed by a complex system of agreements between government and the oil industry which essentially regulates the price of petrol and diesel and how it is distributed, produced, transported and sold. The system has been shaped by the previous government's concern for fuel security in the face of a UN-led oil embargo and its support for synthetic fuel production at Sasol and Mossgas. With the lifting of secrecy regulations and trade sanctions, the existing arrangements in the petroleum sector are inevitably being questioned. Public debate challenges the efficiency of the current system and industry players have begun a process of negotiations which have made more explicit the differing interests of multinational oil companies, national oil companies, synthetic fuel producers, consumers and government.

The Liquid Fuels Industry Task Force, representing government, labour, business and oil industry interests, was convened in September 1993 to conduct formal structural discussions on future arrangements for South Africa's liquid fuels industry. This document seeks to reflect the range of policy options identified by the Task Force. The criteria for selecting only the issues and options discussed below are that they are the most important, being both topical and relevant at present, and therefore require relatively urgent attention and clear policy decisions by the government. Longer-term issues which are nonetheless important but could be decided later are not included. Most of the issues discussed have already been the subject of debate. In some cases the issues are inter-dependent and highly complex, and the implementation of policy may require a transitional or a phase-in period of several years. Given the complexity of the issues, more detail is provided in the background sections than in other parts of this document. In reforming the liquid fuels sector, it will be important to improve economic efficiency and ensure lowest possible sustainable fuel prices while at the same time minimising job losses and small-business closure.

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ISSUE

Pricing of petroleum productsThe price of refined products produced by South African refineries is based on the in-bond landed cost (IBLC), which is calculated as 80% of the posted product prices by three major export refineries in Singapore (Esso, Mobil and the Singapore Petroleum Company) and one in Bahrain (Caltex) and 20% of the average spot prices quoted by the Singapore refineries. These prices are determined by the dynamics of international oil markets and are posted daily. The reason for the choice of these refineries is that the distance to the Middle East from where the crude oil is obtained, is similar to that of the South African refineries. The broad principle of the current South African pricing formula, which has remained unchanged in format for over half a century, is that prices are based on, and thus influenced by, supply and demand for petroleum products in east of Suez' markets such as the Arabian/Persian Gulf, Pacific Rim Countries and Australasia. These prices, which cannot be locally manipulated, are therefore the purchase prices should South Africa be required to import significant volumes of such products at the most economical freight rates.

The South African price of petrol (used as an example; other refined product prices are determined in a similar way) comprises international and domestic elements. The international element is the average of the free-on-board (FOB) petrol price listed by the four refineries in Singapore and Bahrain (combined with the spot price, as explained above), plus freight, insurance and ocean leakage costs, and is known as the CIF (cost, insurance and freight) of petrol landed in South Africa. Freight cost is determined on a monthly basis using a standard international tariff for product transport voyages from Singapore and Bahrain to South African ports. Insurance tariffs are determined by Lloyds of London according to prevailing risks for different product types. The ocean leakage element pertains to normal leakage, clingage and evaporation losses incurred during shipping (about 0.3%). Landing and wharfage charges (1.78% of FOB value) are added to the CIF cost to arrive at the so-called in-bond landed cost (IBLC). The IBLC (in US c/gallon) is converted to SA c/l by applying the average R/US$ exchange rate for the month in question. This represents the transfer price from the refineries to the marketing divisions of the South African oil companies.

The IBLC principle is regarded as an arms-length method of determining the basic prices of refined products which ensures that local refineries operate cost-effectively and as efficiently as their international counterparts.

Various costs are then added to the IBLC to make up the final pump price in a given price zone (magisterial districts are used as price zones). These costs are as follows:

Inland transport cost

Determined by the cost of transporting product from the coast (Durban, Port Elizabeth, East London, Mossel Bay and Cape Town) to the inland depot/s serving the zone.

Service differential

This element compensates marketers for the cost of operating the depot and distributing the product to the service stations. It is calculated on actual historic costs for the previous year for the whole oil industry, averaged country-wide.

Wholesale margin

The wholesale or marketing margin is monitored and controlled by the state using a formula known as MPAR (marketing of petroleum activities return). It is set at a benchmark of 15% (10-20% range) nominal return on the depreciated book value of assets (with allowance for additional depreciation and before interest and tax) as determined for the whole oil industry by an independent firm of accountants. The previous year's results are used to calculate profitability and determine whether adjustments to the margin are required. Although the benchmark is 15%, the margin is only adjusted if the return on assets is below 10% or above 20%.

Retail margin

The retail margin is also controlled by the state. It is determined by the DMEA on the basis of the actual costs incurred by approximately 80 representative service stations with an average monthly petrol sales volume equal to the country's average (153 000 l/month).

Equalisation Fund levy

For more than a decade until the early 1990s South Africa was forced to pay premiums for imported crude oil as a result of the oil embargo. These were financed by a levy on retail sales of petroleum products, known as the equalisation levy, which has been imposed since January 1979. The oil companies collect and pay the levy into the equalisation fund, managed by the Central Energy Fund (CEF) (Pty) Ltd and controlled by the Ministers of Mineral and Energy Affairs and of Finance in accordance with the Central Energy Fund Act, No. 38 of 1977. The levy is currently applicable to petrol, diesel and illuminating paraffin. Although the need to finance premiums on imported oil has fallen away, the equalisation fund is utilised for the following purposes by Ministerial directive:

Temporary financing of margin increases. Payments to Sasol and Mossgas. Synlevy payments to the oil industry for uplifting Sasol products (no longer). Funding of fire-fighting and security projects at key fuel installations.

The need for an equalisation levy will depend on whether the above payments can be justified in terms of future energy policy.

Fuel tax, customs duty and excise duty

The state collects tax on fuel, currently equal to approximately 40% of the retail price of petrol and 30% in the case of diesel. No tax is levied on illuminating paraffin used as a household fuel.

Multilateral Motor Vehicle Accident Fund levy

Compulsory third party insurance is financed via a levy on petrol and diesel. The exact amount is determined by the budget of the Fund, which is approved by the Minister of Transport in concurrence with the Minister of Finance.

The retail or pump price of petrol is the sum of all of the above elements. This is calculated by CEF, and pump price adjustments are made on the first Wednesday of each month. Strict retail price maintenance (RPM) on petrol is enforced by the DMEA in terms of the Petroleum Products Act (Act no. 120 of 1977). RPM is only applicable to petrol sold at retail level. All prices at wholesale level are maximum prices only and may be discounted. The retail price of diesel is not controlled, while in the case of illuminating paraffin, a gross retail mark-up of 33% is permitted. The prices of these products can also be discounted.

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OPTION

Continue the present system of retail price maintenance

Time frame

Continuous.

Consequences

This is a continuation of the present system of retail price maintenance which was modified in September 1994, whereby the international element of the pump price of fuel is determined on a daily basis by the CEF on behalf of the state, and pump prices are adjusted on the first Wednesday of every month. The Motor Industries Federation, representing the service station industry, believes that regulatory mechanisms including RPM are essential for the continued stability of an orderly fuel market, job opportunities, and the promotion of small business. It submits that if RPM is withdrawn, the predominantly small business activities of the petrol retailing industry will suffer and many small business closures will result, threatening the jobs of some 45 000 pump attendants.

Along with the continuation of RPM, a Petroleum Industry Regulator should possibly be established to take on the role of determining and maintaining retail and wholesale prices and margins and service differentials. The diversification of service stations into retailing other goods to reduce their reliance on petrol sales would be encouraged, and franchising laws improved to give oil company franchisees greater powers in their relationships with the oil companies. Furthermore, the synfuels industry would be given access to the retail business subject to the same restrictions currently imposed on the oil companies and without a proliferation of new service stations.

Implementation

Continue with present system (DMEA).

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OPTION

Abolish retail price maintenance and apply legislation to prevent collusive practices

Time frame

1996 onwards.

Consequences

This option would need to be implemented if Option Deregulation of the marketing and distribution of petroleum products' is adopted.

There would be no petrol price control at retail level. A fund may need to be established prior to the removal of RPM to compensate for redundancy/retrenchment/retraining of pump attendants.

The effect of removal of RPM in other countries has been studied by the DMEA, MIF and the oil industry. The results of these studies are not conclusive and it is difficult, on the basis of such studies, to accurately forecast what the impact of the removal of RPM will be in South Africa. Pump prices may drop in the urban areas due to competition, while in the rural areas prices may escalate. It is likely that there would be an underlying upwards pressure on prices to increase profits, but at the same time the individual companies and dealers would tend to become more efficient, with closures of uneconomic service stations. In this scenario, the state would need to deal with monopolistic, restrictive and/or other unfair trade practices.

Implementation

1. Amend Petroleum Products Act, 1977 (DMEA, Parliament).
2. Monitor pricing practices and strictly enforce legislation to control any undesirable tendencies if necessary (DTI).

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OPTION

Regulate petrol, diesel and illuminatory paraffin wholesale prices through price capping

Time frame

1996 onwards.

Consequences

The maximum price of petroleum products would be set but not the minimum price. Collusive or unfair trading practices such as unacceptable rent-seeking throughinflated prices would be restricted. Rather, the emphasis would be on discounting through improved competition and efficiency and the customer would benefit from lower prices. Legislation may be required to protect service station forecourt jobs as well as small-business. Loss leading by supermarket-owned petrol station outlets may need to be regulated. Price-capping would still require a complicated pricing formula (to calculate maximum allowable prices) and this could be performed by the CEF or a new petroleum regulator.

Implementation

1. Amend Petroleum Products Act, 1977 (DMEA, Parliament).
2. Monitor and mitigate impact on unemployment and small-business closure (DMEA, Department of Labour).

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OPTION

Remove zone-pricing and introduce one fuel price for all geographic regions

Time frame

Short term.

Consequences

The idea of a petrol price, for example, which is the same all over the country has several advantages. It would eliminate the administration of the zone-pricing system, which is problematic especially in certain regions where zone borders are close together. Magisterial districts are now used as geographic entities to ease the administration of the system, but formerly a more accurate grid system was used.

The present system of pricing, which reflects the cost of transporting product by rail from the coast (or more precisely, from the various ports of origin) results in price differentials of up to 30c/l between coastal and inland points of sale, and impacts on regional industrial and commercial development, favouring the coastal regions while disadvantaging the inland and especially the remote areas.

With a fixed price system, transport cost cross-subsidisation will be needed. This problem has been addressed and solved in the electricity sector and could therefore be similarly applied to the petroleum sector. The proposed abolition of zone-pricing would influence the pricing of various other petroleum products, including LPG, which in inland areas would be less expensive to consumers.

At present Sasol receives a deemed transport element in the price received for products at the refinery gate, which is a cost that has not in effect been incurred, but for products transported towards the coast, is penalised by approximately twice the actual transport costs due to the zone pricing structure. The Sasol geographic supply area has thus evolved into a peculiar pear-shape, favouring the higher price-zones, and minimising supplies into lower price-zones towards the coast. Because of the present zone-pricing structure, inland synfuels production (Sasol) is favoured, while coastal production (Mossgas) is disadvantaged. Because synfuels production is a significant percentage (approx. 35%) of the total fuels requirement of the country, the proposed pricing structure would be more equitable.

Implementation

1. Calculate new price for products based on present volume distribution and zone-price structure (oil industry).
2. Study economic consequences of single price mechanism (CEAS, DMEA).
3. Obtain views from all interested parties (DMEA).
4. Obtain cabinet approval (DMEA).

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ISSUE

Marketing and distribution of petroleum products

The Service Station Rationalisation Plan (Ratplan) was designed and implemented in 1960, with the DMEA as administrator of the plan. It has subsequently been reviewed and amended several times to accommodate new developments and needs so as to serve the general public interest. Essentially, the Ratplan endeavours to ensure that petrol is distributed economically and orderly throughout the country by a system of quota allocations to prevent the proliferation of service stations, thus promoting increases in average petrol sales per site and therefore improving profitability and thus the viability of dealers, who are also required to provide a basic minimum service standard. The present plan is valid until 31 December 1995.

In terms of the Ratplan the oil industry is prohibited from vertical integration which has led to the establishment of a large number of small businesses in the service station industry, employing about 45 000 petrol attendants. Self-service is generally prohibited by agreement between the state, the oil industry and the MIF in order to sustain jobs, but could be approved by the DMEA in special circumstances, such as for safety or security reasons. Such approval has not yet been granted, however.

Petrol is supplied to resellers on condition that they adhere to the provisions of the regulations concerning retail price maintenance, as promulgated by the Petroleum Products Act. Competition by price-cutting is prohibited, as is the granting of any benefits to end-users of petrol sold via service stations.

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OPTION

Regulate the number of service stations and fuel outlets by means of the Ratplan or a modified version thereof

Time frame

Continuous.

Consequences

This policy option would only be applicable as a cost-containment and employment enhancing measure in a price-controlled environment. (see Option ).

The option is a continuation or modification of the status quo. Control is effected in terms of the provisions of the present Ratplan. The orderly and stable development of the service station industry is promoted, petrol attendants' jobs are secured and increases in the retail margin on fuel sales are kept to a minimum in the interests of the consumer.

A modification to the Ratplan is possible in order to terminate elements which are not directly linked to cost-containment and to avoid overtrading.

Implementation

Develop possible modifications to refine the Ratplan, obtain consensus from all interested parties, and publish (DMEA).

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OPTION

Deregulate the marketing and distribution of petroleum products

Time frame

December 1995.

Consequences

The Ratplan is an adjunct to the current system of retail margin determination and price control, which could likewise be phased out if this policy option is implemented.

The termination of the Ratplan is expected to result in the following: an increase in the number of service stations country-wide if RPM is maintained coupled with increases in fuel prices due to upward pressure on the retail margin to compensate for lower volumes of product sold. Alternatively, a substantial decline in the number of stations if RPM is concurrently abolished, due to price competition, verticalisation, and supermarket entry squeezing low-volume operators out of the market; the introduction of self-service pumps; provision of credit facilities at the discretion of service stations; reduction in the required number of petrol attendants; minimal reduction in state expenditure incurred in administration of Ratplan.

There would thus be no restrictions on market entry or the construction, ownership, operation, purchase, sale or closure of service stations, except that appropriate regulations pertaining to building, safety and environmental standards will apply. Provision of self-service and/or credit facilities will be at the operators' discretion.

Implementation

Allow current Ratplan to expire.

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ISSUE

Economic efficiency of the oil industry

The viability of the oil industry is essentially determined by two margins, namely the refinery margin, providing a return on investments in refinery operations, and the wholesale margin, providing a return on investments in the marketing and distribution infrastructure. The state used to control both, but now no longer controls the refining margin.

Wholesale prices are based on the in-bond landed cost (IBLC) of refined products. Included in the IBLC is a refining margin. The local refineries need therefore to import and refine crude oil at least as efficiently as their counterparts in Singapore and Bahrain in order to realise similar refinery profits, although they do have a slight advantage in that IBLC includes the cost of transporting product which is higher than the cost of crude.

The oil industry has agreed to an average marketing margin based on a benchmark return of 15% (before interest and tax), on the depreciated book value of assets at historical costs but with allowance for additional depreciation to build up reserves for future asset replacement. While this is generally regarded by the private sector as a low return, it was accepted by the oil companies because of the low risks involved due to the stability provided by the present regulatory framework.

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OPTION

Deregulate the profitability of the oil industry

Time frame

Short-term.

Consequences

The oil industry would operate with minimum regulatory interference by the state. In order to achieve this a new dispensation for the synfuels industry would need to be found in order to ensure free and fair competition (see Issue State support for Sasol synfuels'). Sasol would thus be permitted to enter the local market directly and in competition with other marketers, only insofar as its crude oil-based products from Natref are concerned.

The role of the state would essentially be to monitor the oil industry and to ensure that any monopolistic and/or restrictive trade practices are dealt with effectively by means of general legislation, and that health, safety and environmental standards are maintained.

The equalisation levy would fall away. Fuel prices would be set by the market, obviating the need for a pricing structure to set refinery gate prices. Fuel pricing would thus be depoliticised.

The problem of lifting Sasol product and marketing would remain.

Transfer pricing and the repatriation of profits could not easily be monitored.

Investment in oil refineries would be governed by commercial criteria within a free-market economic framework. This would tend to ensure optimisation of refining infrastructure. Costly National Key Point requirements for refineries, fuel terminals and depots would fall away.

Implementation

1. Restructure present agreement between Sasol and oil industry (Sasol, oil companies).
2. Develop equitable dispensation for the synfuels industry (DMEA, synfuels industry, oil industry, MIF).

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OPTION

Regulate oil industry profitability with the re-introduction of the regulation of refinery margins

Time frame

Short term.

Consequences

The re-introduction of control of refinery margins, which was abolished by the Cabinet in 1991, would tighten state control of the oil industry. At the same time it would place a burden on the state of ensuring that oil industry profits are sufficiently attractive for the industry to remain viable, but not excessive, so as to protect the consumer against high fuel prices. A major problem associated with this approach is one of finding an acceptable formula to determine the financial performance or return on assets of the industry in a transparent and acceptable way. This can be calculated using actual or book value at various rates of depreciation, before orafter interest and/or tax, etc., and can appear higher or lower depending on the method adopted. Furthermore, an acceptable return on assets is dependent on risk and a variety of other factors.

Because the industry consists of a number of competing oil companies, an industry-wide approach should encourage companies to out-perform the average. However, by controlling overall profitability, essential elements for a healthy economy (reward for risk and improved productivity, competitive edge, etc.) are to a large extent removed and it may be expected that the oil industry would regard itself as protected' with little incentive to increase efficiency and productivity.

With the re-introduction of refinery margins control, the price of fuel may increase because of the refinery expansion programme recently undertaken by the oil industry, and their need to obtain an acceptable return on these additional investments as well. At present the return earned on refinery investments and operations in South Africa (the refinery margin) is part of the IBLC or refinery gate price of fuel and not necessarily related to these investments.

Implementation

1. Reach agreement on formula to be used (CEAS, DMEA, oil industry, consultants).
2. Strengthen staff complement of DMEA and CEF involved in regulation of oil industry (Civil Service Commission).

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OPTION

Continue the regulation of wholesale marketing margins with improved criteria

Time frame

Short term.

Consequences

This option is essentially a continuation of the present policy of allowing the industry a reasonable wholesale margin but with a revision of the criteria for awarding margin increases.

The wholesale margin is presently determined on the basis of a formula known as the Marketing Petroleum Activities Return (MPAR), which allows a 15% return on depreciated assets before interest and tax. In terms of MPAR, a margin adjustment is warranted when the return on assets falls outside of the range 10-20% (DMEA proposes a reduction to 13-17%). This is determined through an investigation of the previous year's accounts of the oil industry by an appointed firm of accountants on behalf of the DMEA. An adjustment is then made in order to bring the margin back to the benchmark of 15%.

The application of the MPAR system would be changed as recommended by the Lambrechts report, the main suggestion being a move away from total reliance on return on asset criteria for awarding margin increases, by examining other factors such as international comparisons and other comparable industry's operating results.

Implementation

Continue with regulatory framework with changes in the criteria to be evaluated and finalised during 1995 and to be effective from January 1996, based on 1995 financial performance (DMEA).

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ISSUE

Inland transportation of crude oil and petroleum products

Background

Fuel is transported in four modes, namely coastal shipping (by oil industry-owned coastal tankers), road, rail and pipeline.

The transportation of crude oil (from the coast to the only inland refinery, Natref, as well as from bulk-storage facilities to the refineries) and of petroleum products from the refineries and storage facilities to inland depots is dominated by Transnet, the state-owned transportation company. Transnet owns and controls all crude oil and petroleum-product pipelines in South Africa through its subsidiary Petronet. The transportation of fuel by rail and road is done by other Transnet subsidiaries, namely Spoornet and Autonet respectively, as well as the road tankers of the oil companies.

Petroleum products are distributed from the refineries or coastal supply points (Durban, Port Elizabeth, East London, Mossel Bay and Cape Town) to the inland fuel depots (and from the depots to the service stations mostly by oil industry-owned road tankers), in the most economical mode or combination of modes available. The transport cost-element in the retail price of fuel is dependent on the geographic area in which the fuel is sold, increasing with distance from the coast. The country is divided into three zones, categorised by the dominant mode of transport in each, and the costs determined for the various magisterial districts which are used as pricing zones. DMEA uses Transnet rail tariffs as benchmark costs to determine the transport cost element of the fuel price for each zone.

It has been argued that the Transnet tariffs for transporting fuel, especially pipeline tariffs, are excessive and not market-related, and that they should reflect an equitable return on the capital investment and operating costs and not be used to cross-subsidise other transportation activities operated by Transnet. Also, there are no economy-of-scale advantages (lower tariffs for high volume areas and higher tariffs for low volume, outlying areas). This is of benefit to fuel users in outlying areas but results in a higher transport cost-element in the price of fuel for the majority of users. Finally, in view of the de facto deregulation of the transport industry, which has allowed Transnet subsidiaries to offer discounts on published tariffs, and in view of the less expensive rates offered by private road-hauliers, it is argued that these factors should be accounted for in the inland transport price component of the fuel price as determined by DMEA.

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OPTION

Review the Transnet tariff structure for crude oil and petroleum products to reflect fair pricing and access to services with no restrictions on ownership or operation of distribution facilities

Time frame

Short term.

Consequences

A study of the historical costs of infrastructure (in particular concerning pipelines) is likely to result in a new approach to the determination of Transnet tariffs, which would need to be considered by the state prior to the implementation thereof.

The use of the current rail tariff structure by DMEA as a benchmark for determining the inland transport cost element of fuel would be discontinued and a more acceptable, market-related benchmark would be implemented. It is likely that this would result in a lowering of the fuel price to the consumer.

The oil industry would be free, as at present, to enter into commercial supply arrangements, product exchange agreements and joint shipping, terminal and distribution operations.

As the possibility of unrestricted ownership and/or operation of distribution facilities including pipelines is not exclusively an energy policy matter, the consequences thereof would need to be evaluated in broader terms.

Implementation

Appointment of a mutually acceptable independent consultant to prepare a report comparing international experiences, and to recommend transport charges which are then considered as benchmark costs by DMEA if acceptable and if Option Continue present system of RPM' is adopted (Transnet, DMEA).

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OPTION

Continue the present system and tariff structure for pipeline and rail transport of crude oil and petroleum products operated by Transnet

Time frame

Continuous.

Consequences

Likely to lead to increased pressure from interest groups to reduce the benchmark fuel transportation cost-element of the fuel price, based on Transnet tariffs, which are perceived to be excessive. This could result in the commissioning of an independent study to determine whether Transnet tariffs are based on sound financial considerations and reflect true costs, finally resulting in the adoption of previous option.

Implementation

Continuation of the status quo.

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ISSUE

State support for Sasol synfuels

The framework for state support was changed in 1989 after a detailed study of Sasol's financial viability was commissioned by the state. This study by an independent firm of accountants indicated that Sasol needed to be protected if the derived price of crude oil (based on the historic relationship between the IBLC of refined products and the world crude oil price) decreased below $23 per barrel. This level was set as the floor price. The protection afforded by the state is thus the difference between the derived crude oil price and the actual crude oil price, with no protection above $23 per barrel. Should the derived price exceed $28.70 per barrel, Sasol is required to pay 25% of the additional income to the state, until the full benefit from previous protection since July 1989 has been eliminated.

The protection enjoyed by Sasol when the derived crude oil price is below $23 per barrel is achieved by paying Sasol out of an equalisation fund' which derives its income via a levy on the fuel price.

As state support is payable in SA Rands, changes in the Rand/Dollar exchange rate (assuming purchasing power parity), would tend to compensate for inflation-related cost increases incurred by Sasol, thus eliminating the need to continually make inflation-related adjustments to the floor price.

A study has recently begun to investigate the possibility of granting an alternative form of protection to the synfuels industry through the raising of customs duties on imported crude and refined products.

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OPTION

State support for Sasol synfuels to continue in the same form as at present with periodic reviews by independent auditors and adjustments to the level of protection as deemed appropriate

Time frame

Continuous.

Consequences

As the level of protection is related to a number of external and internal factors, it would be necessary to independently monitor profitability and adjust the level of support appropriately and on a regular basis.

Implementation

1. Sasol synfuels operations to be ring-fenced (Sasol).
2. Independent, impartial and detailed investigation on behalf of the state, to be done to determine the level and manner of support required, using transparent methodology (independent state-appointed firm of auditors).

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OPTION

Introduce an alternative form of support for all producers of synfuels from indigenous sources, in the form of customs duties on imported crude oil and refined products with a simultaneous reduction in fuel tax to keep fuel prices neutral

Time frame

Short term.

Consequences

This form of tariff protection would effectively be available to all producers of petrochemical products from indigenous sources such as natural gas, coal, crude oil and biomass. It would place Sasol in a similar position to other industries which have benefited by floor-price protection but who now will have ad valorem tariffs which will be lowered over the next 4 years in terms of the GATT. Local crude oil refiners would not receive tariff protection and might be discouraged from investing in further refinery capacity.

The result is likely to be a general increase in the price of all imported crude oil based products to consumers.

Implementation

1. Determination of the impact of ad valorem tariffs on prices of petroleum products on the chemical and related industries (DTI).
2. Determination and imposition of ad valorem tariffs on crude oil and refined product imports such that fuel prices remain neutral (DMEA, DTI).

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OPTION

State support for Sasol to be phased out in line with South Africa's trade policy and GATT agreements

Time frame

Short term.

Consequences

This option is likely to coincide with the restructuring of Sasol into its crude oil operation (Sasref) and synfuels. It is possible that Sasref would wish to market its fuels directly, and therefore may need to make investments in its own distribution infra-structure (including service stations). The provisions of the Ratplan would need to be amended unless the option deregulating the marketing and distribution of petroleum products is adopted.

Implementation

Study by DTI on impact of phasing out of state support for Sasol synfuels to be completed prior to implementation thereof by DMEA (DTI).

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ISSUE

Upliftment and marketing of synfuels

About 95% of Sasol fuel products are currently marketed by the oil companies, manifested in the Crude Refiners' Agreement. Sasol was given the assurance from the state that the petroleum marketing companies would be compelled to purchase all of its fuel production (synfuels as well as its share of Natref production) at a producer price based on IBLC, and, as a quid pro quo, Sasol agreed not to market a defined range of products directly to consumers except as allowed in terms of the Blue Pump Agreement which allows Sasol to market limited amounts of petrol and diesel on the forecourts of other industry service stations.

An important condition in the current supply agreement is that the oil industry has the right to renegotiate the price at which it uplifts Sasol production should there be a fundamental change to the IBLC pricing basis.

For as long as the production of synfuels by Sasol and Mossgas remains in the national interest, it is considered necessary to ensure that these products are accommodated in the local market in an equitable manner. One way of achieving this is for all wholesalers of fuel products, including any direct importers or new entrants to the market, to purchase synfuels in proportion to their South African market shares on a commercially fair and equitable basis. Direct local marketing by synfuels producers of their products uplifted by wholesalers should not be permitted as this would result in unfair competition.

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OPTION

Sasol (a privatised company) to supply synfuels to the oil industry who will market the fuels in terms of a commercially negotiated agreement, with no intervention by the state unless such agreement entails an unreasonably high level of state support

Time frame

Continuous.

Consequences

This option represents a move towards lesser state involvement in Sasol affairs, in that the state would only become involved in negotiations between Sasol and the rest of the oil industry if Sasol is unable to negotiate an equitable agreement for the upliftment of products by them and as a consequence, is unable to survive without state support. Because of Sasol's part ownership of Natref, uplifted products are not restricted to synfuels but also include Natref products.

Implementation

1. No immediate steps need to be taken other than to inform the parties concerned of the state's approach (DMEA).
2. Advise parties concerned to draw up a formal upliftment agreement to replace the current agreement (DMEA).

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OPTION

The oil industry to uplift and market synfuels supplied by Mossgas (as a public utility) at commercially negotiated wholesale prices unless such an agreement entails an unreasonably high level of state support

Time frame

Continuous.

Consequences

This policy option is not an alternative to the previous option, but is in addition thereto.

The oil industry would not receive any compensation payments from the state for marketing Mossgas products since the wholesale price would be a commercially negotiated price and would thus represent the commercial value of these products to the oil industry. On the other hand Mossgas would not be restricted to marketing its products in this way, and the state would encourage Mossgas to realise the highest possible nett prices on the local and export markets. From a taxpayers' point of view it makes little difference whether Mossgas is paid the netback price to oil marketers and receives a synlevy, or if a commercial price is negotiated with the oil companies. The state remains liable for any losses incurred at Mossgas and without the levy, there will be such losses.

Implementation

Mossgas and oil industry to be informed (DMEA).

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OPTION

Sasol to be exposed to the same commercial and competitive environment as the rest of the South African oil industry, with provision for the establishment of its own retail network

Time frame

Medium term.

Consequences

This option is dependent on decisions concerning the deregulation of oil industry. It would need to be considered if no agreement can be reached between the oil industry and Sasol in terms of the option requiring them to negotiate a commercial agreement, and the state decides to limit or phase out support to Sasol (see Issue State support for Sasol synfuels'). Sasol would then have to be given the option of marketing its synfuels products with equal competitive opportunity as the rest of the oil industry if the option to deregulate the marketing and distribution of petroleum products is decided upon.

The Blue Pump Agreement between Sasol and the oil industry would be terminated. The oil industry already has the distribution infrastructure to market all of current production. Given that Sasol contributes over 30% of total production, there would be an enormous duplication of facilities and hence likely price increases unless Sasol were re-allocated service station sites.

Implementation

1. Phased re-allocation of depot and service station sites in terms of the Ratplan (if still applicable) to accommodate Sasol within the Sasol supply area and in other areas where deemed appropriate (DMEA, MIF, Sasol, oil industry).
2. Cancellation of the Crude Refiners' Agreement and the Blue-Pump Agreement (DMEA, MIF, Sasol, oil industry).

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ISSUE

Importation and exportation of crude oil and refined petroleum products

Trade in crude oil and refined petroleum products is presently regulated in terms of the Petroleum Products Act, 1977. The rationale, more specifically directed at the control of imports of refined products, is to promote local refinery throughput especially in view of the oil industry's upliftment of synfuels. The substantial investments in crude oil refineries and synfuels plants in South Africa are aimed at satisfying the local demand for petroleum products, and any imports not specifically intended to provide for occasional shortages as a result of refinery maintenance shut-downs or product imbalances, could detrimentally influence the profitability of these investments.

The current import controls effectively protect the oil industry. Petroleum products which may become available from time to time on the international market at relatively low prices cannot be imported without the necessary permit issued by the DTI on the recommendation of DMEA. Permit application by parties other than the oil industry are usually refused if the products are locally available.

The export of petroleum products is only regulated to ensure that local demand and the requirements of the Southern African Customs Union are satisfied. Substantial volumes of products in excess of these requirements, refined by the oil industry from imported crude oil, are currently exported to neighbouring countries and to countries further afield, with a nett gain in foreign exchange.

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OPTION

The oil industry along with any other party with commercial interests to be permitted to trade freely in crude oil and/or refined products

Time frame

Short term.

Consequences

The importation of crude oil by the oil companies would continue without any significant changes. It is likely, however, that more trade in petroleum products could take place, particularly in the following areas:

• exports in the case of the oil industry;
• imports in the case of the oil industry and other commercial interest groups such as supermarket chains and industries which use petroleum products as feedstock.

  In the latter case, the incentive would be to import cargoes of products that become available on world markets from time to time at spot prices lower than those quoted by the local refineries, and to sell these products on the local market either with a higher marketing margin, or at lower prices than the competition should RPM be abolished. This process may cause market instability and occasionally in unsuitable quality fuel reaching the market. On the other hand, it could lead to greater competitiveness and efficiency in the local industry.

  It is possible that this policy option would cause problems in the refining industry due to design configurations which limit the flexibility to vary the volumes of products in proportion to demand, resulting in a build-up of a surplus in one or more products which would have to exported, possibly at a loss.

  Withdrawal of state control would result in fairly insignificant savings in Civil Service expenditure and be reflected as a small decrease in the budgets of DMEA and DTI.

  In fairness, independent oil product importers might, along with the local oil industry, be required to uplift and market synfuels.

Implementation

Study consequences and develop applicable duty structure (LFITF and Department of Finance, DMEA).

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OPTION

Trade in crude oil and refined petroleum products to be controlled by the state to ensure that South African needs are met and that the oil industry operates at maximum capacity in order to minimise unit production costs

Time frame

Continuous.

Consequences

This policy option is a continuation of the present policy which is implemented jointly by DMEA and DTI. Import and/or export permits are granted in deserving cases only. The objectives which are achieved are as follows:

• To ensure that South Africa's petroleum product needs are satisfied as a first priority.
• To ensure maximum utilisation of the refineries in order that the industry may operate at maximum efficiency to reduce unit costs.
• To monitor trade in crude oil and refined petroleum products because of the importance thereof in terms of foreign exchange requirements.

  Suitably qualified staff, particularly at the DMEA, would need to be retained to judge the merits of each application in terms of the policy objectives.

  It may be possible to attain the above objectives by allowing the oil industry to freely import and export petroleum products without any form of control. However, the industry would tend to base its decisions on financial considerations which may not always necessarily be in the national interest.

  It is thus likely that the state would continue to maintain strict control of international trade in petroleum products by the oil industry as well as by other parties with vested commercial interests, to ensure that the needs of the South African market are satisfied and long-term stability of the refining industry is safeguarded.

Implementation

Continue with present system applications for import/export permits are made to DTI and referred to DMEA for consideration (DTI, DMEA).

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ISSUE

Central Energy Fund

The development of the South African synfuels industry during the early 1950s was state-financed by way of allocations from the exchequer for the construction of Sasol I. The state thereafter decided to finance the Sasol Two project from contributions made by fuel consumers, by way of a portion of the customs and excise duties levied on fuel products. A vehicle for managing these funds was thus established, namely the State Oil Fund (SOF).

In 1977 the CEF was established by Act of Parliament to replace SOF, and customs and excise duties earmarked for synthetic fuels plants were replaced by a CEF levy on transport fuels. CEF was given the responsibility of managing the energy fund and for financing synfuels projects. Soekor and SFF Association were made affiliated companies of CEF (Pty) Ltd. All monies from the sale of Sasol I and II were paid into the fund, and more lately the cash generated in respect of the sale of Sasol III is being paid into this fund. Exchequer loans for the purchase of stockpiled crude oil are being repaid, making the crude oil stockpile the property of SFF, and the balance of the available cash is used for the financing of Mossgas and Soekor. CEF is also involved in several research and development projects to investigate new technologies for the production of synfuels and natural gas utilisation, as well as financial viability studies of new fuels projects.

It has been suggested that the need for continuation of a special CEF should be reviewed in the light of changed circumstances in South Africa, where the role of such parastatal bodies in controlling aspects of and undertaking various activities in the petroleum and related fields may well be considered superfluous.

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OPTION

Close the state-owned company CEF (Pty) Ltd, and transfer its financial and administrative functions to the Department of Finance and DMEA. The affiliate SFF to continue with the management of the crude oil stockpile if state involvement therein is deemed necessary. Process development activities to be transferred to Mossgas, and other research and development activities to be rationalised/ transferred as deemed appropriate

Time frame

Short term.

Consequences

The closure of CEF, an umbrella organisation responsible for Soekor, Mossgas, SFF and several smaller companies formed to develop synfuels-related technology and catalysts, would be in keeping with the government's commitment to rationalise state expenditure.

Implementation

1. The existing legislation giving rise to the establishment of CEF to be repealed and financial and administrative responsibilities transferred to relevant government departments (DMEA).
2. CEF to draw up proposals for government approval concerning future control of Mossgas, Soekor and SFF, as well as other smaller affiliates, dependent on policy decisions on the future of these organisations (CEF).

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OPTION

Continuation of CEF (Pty) Ltd as a state-owned company established in terms of the Central Energy Fund Act of 1977, but with amendments to this legislation to clarify CEF's role

Time frame

Short term.

Consequences

This option is a continuation of the status quo but provides for clarification of permissible CEF activities in terms of amendments to the relevant legislation. CEF future role to be limited to the financial administration of the energy fund on behalf of the state, as well as any specific activities or responsibilities delegated by the government.

Implementation

The Central Energy Fund Act, Act No. 38 of 1977, to be amended to ensure strict discipline on the management and use of the energy fund (DMEA).

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ISSUE

Oil and gas exploration

Soekor (305 employees) is a wholly-owned subsidiary of CEF (Pty) Ltd. Since its inception in 1965 to the end of the 1994/95 fiscal year, it has received R2 600 million (cumulative, i.e. not discounted to present value) from the state. Its current financial requirements amount to about R130 million per annum.

Soekor is unsure of its future, and is currently examining various possibilities including the following: acting as technical advisor and operational arm of the state in licensing acreage to exploration companies and ensuring that the state's interests are protected in exploitation thereof; undertaking selective exploration and development in South Africa and in neighbouring countries; provision of assistance to and participation with neighbouring countries in the development of their oil and gas resources, as requested by the government.

Insofar as current legislation concerning oil and gas is concerned, there is a need to re-define the term mineral' (Minerals Act of 1991) so as not to include crude oil and natural gas. Due to the high risk and extreme cost associated with the exploration and development of these resources, the legal and fiscal regime needs to be more attractive to promote international and local private sector interest. Furthermore, the question of ownership of the mining rights to crude oil, natural gas and coal-bed methane needs to be clarified and special legislation introduced for this purpose.

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OPTION

State-financing of Soekor's oil and gas exploration activities to be phased out. Soekor's role of policy-making, administration of offshore licensing, monitoring of exploration activities and regulatory aspects of exploitation to be taken over by the DMEA, and appropriate incentives provided to encourage offshore oil and gas exploration by the private sector

Time frame

Short-to-medium term.

Consequences

The closing down of Soekor, and state encouragement of private sector exploration activities is not expected to have a significant impact in the short-to-medium-term on provision of crude oil to meet the country's liquid fuel requirements. Soekor has been in existence for 30 years and over this period has made a significant contribution to knowledge concerning South African oil and gas resources. No major oil-field discoveries have been made but Soekor remains optimistic that further exploration, especially in deep water areas, may prove fruitful. The state will continue with endeavours to lease such unexplored offshore acreage to interested international exploration companies prepared to risk the investment required in drilling exploration wells. The management of the licensing and work programme monitoring will in future be done by the DMEA and data archived by the Geosciences Council. Soekor personnel with the necessary expertise will be transferred to the DMEA for this purpose.

Implementation

1. Study the potential saving in state expenditure resulting from the implementation of this policy option (DMEA).
2. Commence with the phasing out of Soekor's exploration activities and the disposal of assets on instruction from the Minister (CEF, Soekor).
3. Study the possible role of the Geosciences Council in taking over technical functions, e.g. archiving of seismic data (DMEA, Geosciences Council, Soekor).
4. Establish offshore licensing division in DMEA and appoint skilled personnel (Civil Service Commission).

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OPTION

Establish an independent professional petroleum licensing agency to handle Soekor's functions of the promotion and administration of exploration and exploitation activities

Time frame

One year.

Consequences

This will bring South Africa into line with common international practice. Appropriate existing expertise at Soekor and CEF can be engaged in an institution which can retain the services of staff with the required level of professional skills to manage these activities. The licensing agency would only administer legislation and regulation. Policy would be made by other appropriate bodies. This arrangement recognises the different roles involved in energy sector governance and requires that these roles be placed in an appropriate institutional structure.

Implementation

1. Identify relevant functions for licensing agency and formulate appropriate institutional and personnel requirements (DMEA).
2. Amend legislation (DMEA, Parliament).
3. Establish agency and transfer relevant Soekor expertise (DMEA).

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OPTION

Soekor to be operated as a quasi-government oil and gas exploration company with private sector shareholding and reduced state funding

Time frame

Short term.

Consequences

Due to continual cut-backs in state funding, Soekor has for several years investigated possibilities and generated limited income by marketing its expertise both locally and internationally, while continuing to function as a national oil exploration company. In so-doing, Soekor has been involved in both upstream exploration, development and production of crude oil, condensate and gas, and has been involved in studies related to downstream refining, wholesale distribution and retailing of liquid fuels and/or gas, particularly concerning the development of the F-A gas-field in the 1980s.

As a quasi-government organisation, Soekor will be better placed to follow its own strategy, with the state providing only the minimum funding for a limited period required by Soekor to develop business opportunities as it deems appropriate. The state would contract Soekor to provide specified services. It is likely that Soekor will undergo a rationalisation process to reduce staff and expenditure, focusing on those areas of its expertise which have the most earnings potential.

Implementation

CEF and Soekor to develop proposal for consideration by government (CEF, Soekor).

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OPTION

Soekor to continue operating as a state-owned oil and gas exploration agency

Time frame

Continuous.

Consequences

This option represents a continuation of the status quo. It is reasonable to assume, however, that state funding of Soekor (via CEF) will tend to decrease in the future due to increasing demands on available funds to finance other government programmes with higher priorities. This would impact on the effectiveness of Soekor's exploration programme, reducing the likelihood of a major oil-field discovery within the foreseeable future, and result in wasted expenditure if no substantial discoveries are made.

Implementation

Continuation of status quo.

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OPTION

DMEA to investigate legislative aspects concerning oil and gas exploration and development

Time frame

Short-term.

Consequences

At present crude oil and natural gas are included in the definition of minerals' in the Minerals Act of 1991, and are not state-owned except for offshore rights leased to Soekor that are due to expire in 2007. Internationally it is not normal practice to consider these resources as basic sources of energy and they are usually dealt with under a separate Act which takes account of all naturally occurring oil and gas, including coal bed methane. By creating a more attractive legal and fiscal regime, international as well as local investment in exploration and development of such resources would be encouraged.

Implementation

Discuss problems related to legislative aspects with all interested parties, and revise and draft new legislation as deemed necessary (DMEA).

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OPTION

Promulgate a Petroleum Act' to cover oil and gas exploration and production

Time frame

Immediate.

Consequences

The essential differences between oil and gas and other minerals will be recognised and in line with international norms. The special complexities of the oil and gas industries will be more effectively dealt with.

Implementation

1. Establish relevant international norms as expressed in other countries' Petroleum Acts (DMEA).
2. Frame legislation adapted to SA situation (DMEA).
3. Pass legislation (DMEA).

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ISSUE

Crude oil procurement

After anti-apartheid oil sanctions were introduced, the government of the day established SFF to develop and manage a crude oil stockpiling programme on its behalf. Prior to the 1979 oil crisis, crude oil was acquired by the oil industry for refining and SFF only purchased crude oil for strategic stockpiling, using funds allocated by the state for this purpose. Over 90% of South Africa's oil requirements were obtained from Iran at the time of fall of the Shah in 1979. This factor coupled with the tightening of the United Nations oil embargo against South Africa since the first oil crisis if 1973, led to South African oil companies having to do spot crude oil purchases in a world market which was experiencing major supply shortages. High premiums were paid to obtain the vital supplies of crude oil. These premiums had a negative impact on the economy; draining foreign exchange reserves and increasing the price of refined products to the consumer.

In view of the over-supply of crude oil on world markets in recent times, and the lifting of crude oil sanctions in 1993 as a result of constitutional reforms, the government decided in 1993 that the state's role in the procurement of crude oil by SFF should be gradually phased out and that up to 80% of crude oil requirements should be handled by the oil companies themselves.

As imported crude oil is by far the highest input-cost element for the oil industry, this industry considers it essential to retain control over the selection of their crude oil feedstock and all aspects of the procurement thereof including the management of price risk, in order to fully optimise refinery operations. Also, the management of strategic stocks and crude oil storage facilities by the state, through the SFF Association, needs to be done in close liaison with the oil industry. The possibility of the oil industry taking over this role of SFF could be contemplated.

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OPTION

State involvement in crude oil procurement by the oil companies limited to monitoring activities, with possible intervention only if considered strategically important

Time frame

Short term.

Consequences

This option allows the state to monitor and intervene in the process of crude oil procurement when considered necessary. Examples of the possible need to intervene are:

• Oil companies purchase a greater percentage of crude oil in the form of ad hoc single cargoes on the spot market to take advantage of lower prices. (Spot prices and posted prices vary, since they represent different markets. While they do move directionally the same way, postings tend to lag spot prices.) This may result in a decrease in long-term supply and product quality assurances as provided by large-volume contractual deals with built-in premiums for such assurances. This situation could place the country at risk of not being able to meet petroleum product demand if crude oil supply shortages should occur on world markets. Due to the strategic importance of crude oil, it would be incumbent on the state to ensure that requirements are always secured.
• Evidence of transfer pricing by local multinational oil companies to their upstream principles.

  The state would need to keep informed of developments in world crude oil markets and accurately monitor the procurement activities of the oil companies on a continual basis. These functions would be the responsibility of DMEA.

Implementation

1. Arrange with oil industry and SFF for the phasing out of the quota system by the end of 1995 and the introduction of new control measures in 1996 (DMEA).
2. Set up procurement monitoring activity in SFF.

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OPTION

No state involvement in crude oil procurement

Time frame

Short term.

Consequences

Crude oil can be purchased on the spot market at variable prices or by way of long term supply contracts, usually at prices higher than average spot prices. In the latter case, the risk of supply interruptions is reduced. Clearly a balanced approach is needed in order to take advantage of low crude oil spot prices while also providing long term supply security. It would be incumbent on the individual oil companies to follow their own supply policies. Due to the presence of several major oil companies in competition with each other in South Africa, it is likely that the required balanced approach would be adopted by the oil industry without any state control.

The role of SFF insofar as crude oil procurement is concerned would fall away and the impact of this step would need to be evaluated. Transfer prices by local multinational oil companies could be manipulated to the detriment of South Africa's interests.

Implementation

Arrange with oil industry and SFF for the phasing out of the quota system by the end of 1995 (DMEA).

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OPTION

Partial state involvement in procurement of crude oil - South African oil companies permitted to purchase 50% to 80% of own requirements on the world market and the balance to be acquired from SFF

Time frame

Continuous.

Consequences

This option essentially represents a continuation of the status quo that has existed since July 1993, with 20% of the crude oil requirement obtained via SFF. The actual and potential benefits to South Africa derived from a limited SFF crude oil procurement programme are of a political nature and difficult to assess in financial and/or economic terms. It is, however, possible to quantify the direct financial benefits or costs to the state and/or the economy as a result of SFF's crude oil procurement function.

SFF naturally incurs operating costs, which need to be financed. The company has established long-standing business relationships with major crude oil suppliers, and is possibly in a position to acquire crude oil on very favourable terms. This could result in foreign exchange savings and allow SFF to be self-financing, with no cost to the state or consumers. This would only be viable if the price paid by SFF for crude oil acquired on world markets was lower than that paid on average by the oil companies, and if the costs of running SFF did not exceed the difference.

The benefits of retaining the SFF quota system are to promote relationships and trade with crude oil producing and exporting countries and to facilitate the continued management of stockpiled crude oil by SFF. It places SFF in a powerful position to negotiate favourable supply contracts at the lowest possible prices. Retention of an SFF capability would also enable procurement and transfer pricing to be monitored.

The continuation of the state crude oil procurement function can thus be motivated in terms of economic and financial viability, supply guarantees (providing low risk of supply interruptions), effective strategic oil stockpile management (allowing upgrading, utilisation and replenishment of reserves), and the promotion of international political and economic objectives.

Implementation

1. Continue with existing programme (SFF, DMEA).
2. Monitor crude transactions and conduct random detailed investigations to prevent transfer pricing (DMEA, South A Reserve Bank).

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ISSUE

Strategic crude oil stockpile

The state embarked on a crude oil stockpiling programme under the management of SFF in 1964. The purpose was, and still remains, to bridge shortages in cases of world oil crises and other emergencies.

The original policy objective was to build up a reserve sufficient to supply the national demand for crude oil for a 2 year period. This was considered to be a long bridging period by international standards in terms of providing cover in the case of a world oil crisis, but South Africa had to also contend with an oil embargo. The development of the synthetic fuels industry (Sasol 2 and 3, and Mossgas) coupled with the over-supply of crude oil on world markets in recent years and the lifting of oil sanctions, has reduced the need to keep crude stockpiles at a 2 year level. Consequently, the state has sold a significant quantity of stockpiled crude oil to the local oil refiners. The capital raised has augmented state revenue used to finance capital expenditure and more recently, socio-economic upliftment programmes.

The present cover averages just under 8 months consumption and this is currently being reduced to about 6 months. A volume of 89 million barrels of crude has been de-stocked thus far, generating R1 790 million for the Treasury and R2 060 million to repay Central Energy Fund (CEF) loans. The present volume of the stockpile is 63 million barrels.

The strategic crude oil stockpile, which is a national asset, is stored in large concrete tanks at Saldanha Bay, and also in several disused coal mines such as Oogies in the Transvaal. The stockpile is managed by SFF. This management function entails beneficiation, replenishment and upgrading of the reserves to comply with present day requirements, as well as maintenance of strict safety and security measures. Excess storage facilities are commercially utilised by SFF, adding to its income and making it independent of state funding allocations.

OPTION

The management and maintenance of the state-owned strategic crude oil stockpile together with surplus storage facilities to be taken over by the oil industry under strict terms and conditions guaranteeing availability of petroleum products during times of national oil shortages, with appropriate state monitoring. The oil reserve to be maintained at an appropriate level to meet national demand for a pre-determined period in the event of an interruption in crude oil supplies to South Africa

Time frame

Short term.

Consequences

Provided the state maintains ownership and control of the strategic oil stockpile for use at times of national crude oil shortages, there is no essential reason for SFF to continue to manage and maintain this national asset. The oil companies are possibly better equipped to do this on behalf of the state as they own and operate all the crude oil refineries in South Africa. Clearly the crude oil reserve, as an emergency supply, is of no use until refined to produce the required petroleum products. From a strategic point of view the state is thus reliant on the oil industry to produce these products as and when required.

It would be necessary for the state to continually monitor the situation and to ensure that any financial benefits in transferring the management of the crude oil stockpile and storage facilities to the oil industry are accounted for.

Implementation

CEF to be instructed to develop a proposal for the transfer of responsibilities from SFF to the oil industry, and to draft an agreement for consideration by the state (DMEA).

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OPTION

The strategic crude oil stockpile together with surplus storage facilities to be managed and maintained by SFF under safe and secure conditions

Time frame

Continuous.

Consequences

This option is a continuation of the status quo. This option is acceptable provided SFF is financially self-supporting in terms of generating income from prudent management of the assets under its control to cover all expenditure, including capital requirements or the servicing of loans and operating expenditure, and is therefore not a burden on the state.

Implementation

SFF to be instructed to develop proposal outlining future strategy and to provide details of past financial performance specifically pertaining to the management of the crude oil stockpile and storage facilities, but excluding income and expenditure resulting from its involvement in crude oil procurement (DMEA). (See previous Issue.)

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ISSUE

Mossgas

Mossgas is not financially viable. Recent predictions have indicated that the project life will be less than half that originally projected due to depletion and reassessment of the present gas supply (F-A gas-field). The long-term future of Mossgas as an off-shore gas-based synfuels project is thus dependent on the development of discovered gas-fields adjacent to the FA-field at a further cost. The project has not been privatised and is owned and operated by CEF (Pty) Ltd on behalf of the state.

Refined products (petrol and middle distillates) are sold to the oil industry at prices below IBLC and which are commercially neutral, i.e. no losses or additional profits are incurred by the oil industry compared to marketing production from their own crude oil refineries. Mossgas (even though it is state-owned) receives compensation from the state to bring its prices on par with IBLC. Product is being uplifted by the oil industry subject to certain conditions. These are: The current regulated marketing environment and MPAR formula be retained; Mossgas to be operated as a public utility; Mossgas may not market in competition with the oil companies subject to conditions/exceptions negotiated and contained in the draft heads of agreement.

Currently Mossgas enjoys support identical to that given to Sasol, namely $23 per barrel of crude oil equivalent, although no financial basis exists for this decision as this floor price was specifically determined for Sasol.

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OPTION

Mossgas to be operated as a public utility (state-owned) for the production of synfuels, with product uplifted and marketed by the oil industry at commercially negotiated prices, free of ongoing support and compensation payments by the state, until depletion of gas reserves or for as long as a positive cashflow can be sustained, and thereafter to be privatised for possible conversion to a crude oil refinery and/or chemical plant

Time frame

Short term.

Consequences

The uncertainty in regard to the upliftment of Mossgas products by the oil industry will be removed. This will facilitate a clear understanding between the parties involved. The terms and conditions of a formal agreement could then be negotiated and the agreement finally ratified.

The cessation of compensation payments (the difference between IBLC and the negotiated commercial price paid by the oil industry to Mossgas for its products), and the cessation of support by the state will reduce Mossgas's cashflow to an authentic level. The burden imposed on the state by Mossgas would be lightened.

Implementation

1. Formalisation of an acceptable product upliftment agreement between Mossgas and the oil industry (CEF, Mossgas, DMEA, oil industry).
2. Ministerial notice to be served on CEF (Pty) Ltd to cease compensation and support to Mossgas, if so decided (DMEA).

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ISSUE

Unleaded petrol and octanes

The South African government has, since 1986, approved a programme for the progressive reduction of the level of lead in petrol. Prior to 1986, the maximum permissable level was 0.86 gm/l. Between 1986 and 1988 this level was reduced to 0.6 gm/l and as from 1989 up to the present, the maximum permissable level has been 0.4 gm/l.

In March 1990 the National Energy Council, on behalf of the state, convened a study group to examine the possible introduction of unleaded petrol as a result of increasing public awareness and global concern about the environmental implications of lead and other motor vehicle exhaust emissions. The group consisted of representatives of various government departments, the motor industry, the oil industry and research establishments.

The Group recommended the introduction of unleaded petrol in South Africa towards the end of 1995. This recommendation was not taken only on environmental grounds as commonly believed. The reasons given were based on technological and economic considerations as well.

The South African motor industry has access to the latest high fuel efficiency engine technology from overseas, based on unleaded petrol. These imported engine designs generally have to be down-graded at an economic penalty because unleaded petrol is currently not available in South Africa. This has limited the penetration of export markets by the motor manufacturing industry and thus the promotion of international competitiveness and improved profitability, by increasing production volumes. The use of unleaded petrol will assist in reducing atmospheric pollution in South African cities. Furthermore, the presence of lead in petrol prevents the possible use of exhaust catalytic converter systems to reduce pollution caused by other harmful compounds in motor vehicle exhaust gases, which may be necessary in the future as the motor vehicle population in cities increases.

South Africa will be the first country on the African continent to introduce locally manufactured unleaded petrol if present planning goes ahead, and will join most of the major countries in the world in making this fuel available to motorists. Leaded petrol is no longer available in 13 of these countries including USA, Canada, Brazil and Japan. In the European Community unleaded petrol use has risen to over 50%. Unleaded petrol accounted for over 70% of world petrol sales in 1992 (excluding the former USSR).

The South African oil industry has supported the introduction of unleaded petrol on condition that it is introduced as a replacement grade (replacing the lower octane-grade of the present two octane-grade structure), and that an appropriate price differential between leaded and unleaded petrol is maintained to ensure adequate market penetration.

The National Association of Automobile Manufacturers of South Africa strongly supports the move to introduce unleaded petrol, and has indicated that some 65% of vehicles currently on South African roads can be operated on unleaded petrol with no modifications and a further 15% with minor modifications. All vehicles marketed from 1996 onwards will be compatible with unleaded petrol.

Preliminary studies have indicated that the introduction of unleaded petrol will result in an overall economic benefit to the motor industry of over R900 million per year, with total costs to the oil industry estimated at R400 million. It is expected to give rise to a nett inflow of foreign exchange.

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OPTION

Continued availability of leaded petrol at octane levels which meet market requirements, with the introduction of unleaded petrol at the discretion of the oil companies, with no price cross-subsidisation between unleaded and leaded petrol and/or other fuels

Time frame

Continuous.

Consequences

This option is the likely choice if the option to abolish RPM is adopted. It allows the oil industry to provide petrol grades to cater for market needs based on business decisions as to the financial viability thereof. However, the state could insist on one condition, namely that there should be no price cross-subsidisation between the various petrol grades. This is to protect motorists who are currently driving older vehicles which are incapable of being operated on unleaded petrol from being forced to pay higher fuel prices in order to encourage the use of unleaded petrol.

Due to the fact that the countrywide introduction of unleaded petrol by October 1995 has been planned for several years by government, oil industry and the motor industry, and that significant investments have already been made in good faith by the oil industry, it is unlikely that the programme will be shelved at this stage. The programme would financially benefit the motor industry, while South Africa as a whole would benefit in the longer term by moving towards lower levels of environmental pollution resulting from exhaust emissions. However, the estimated market penetration of unleaded fuel is expected to be lower than in the case where a price incentive for unleaded fuel is given, and is likely to result in lower profitability or losses to the oil industry, and increased pressure for a fuel-tax incentive.

If the option to continue RPM is selected and the IBLC-pricing formula for determining the price of petrol is maintained, the price differential between leaded and unleaded grades is expected to be no more than a few cents per litre based on current postings which are determined by worldwide demand/supply economics.

Implementation

Discussions between the Minister of Mineral and Energy Affairs, the oil industry and motor industry to clarify government's stance on the issue (DMEA, oil industry, motor industry).

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OPTION

Unleaded petrol (91 octane inland, 95 octane on the coast) to be introduced country-wide by 1996 with continued availability of leaded petrol (93 RON inland and 97 RON in coastal areas). The state to allow an incentive in the form of a fuel-tax rebate for a limited period to reduce the retail price and thus promote the acceptance of unleaded petrol amongst the South African motoring public

Time frame

Continuous.

Consequences

This option represents a continuation of the current programme based on the former government's commitment to allow an incentive in the form of a fuel-tax rebate on unleaded fuel for a period of time, in order to facilitate a reasonable market penetration to warrant the required additional refinery investments by the oil industry. The required market penetration has been quantified as 15-25% within one year.

The required price incentive has been estimated at about 3.5% or 6c/l. A fuel-tax differential of 9c/l would be needed if the production cost of unleaded petrol is 3c/l higher than leaded petrol (based on the current IBLC differential). Calculations indicate that for tax revenue from petrol sales to remain neutral, the fuel-tax on leaded petrol (at 80% of total demand) would have to be increased by 1.8c/l. Without tax cross-subsidisation, the cost of the fuel-tax incentive to the fiscus is estimated at R174m per year based on the 1994 petrol demand of 9 671 Ml.

Implementation

Discussions between the Minister of Mineral and Energy Affairs, the oil industry and motor industry to clarify government's stance on the issue (DMEA, oil industry, motor industry).

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ISSUE

Refining

No crude oil refineries have been built since the early 1970s because of the decision by the government of the day to embark on a synthetic fuels programme based on technology developed at Sasol I (Sasol II and III, and Mossgas) for political and strategic reasons. However, a refinery expansion programme has been underway since 1991 to increase the capacity of all the refineries in order to meet the increasing demand for petroleum products. This programme will be completed during 1995.

Authority from the government for the construction of a refinery per se is not a requirement in South Africa at present and no legal prohibition exists for any entrepreneur who wishes to do so. However, in view of the present regulatory framework, both at wholesale and at retail level, it would be practically impossible to establish a local market for the refined products.

Considering the fact that the South African demand for petroleum products (particularly petrol) started to exceed the total production capacity during 1993, the 36% refinery expansion is expected to provide for the fuel and other refined product needs of South Africa until about the year 2003 if fuel demand continues at a growth-rate of about 3% per year.

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OPTION

No state intervention in decisions concerning investment in and construction of new crude oil refineries and/or the further expansion of existing facilities, other than that required in terms of environmental, health, safety and industrial regulations

Time frame

Medium term.

Consequences

This option is a continuation of the status quo. Any investment decision to build a new grass-roots crude oil refinery costing several billion Rands, or to further expand existing refineries, would be commercially evaluated by the oil company/ies concerned and would require accommodation in the future planning of the oil industry on an integrated basis, irrespective of whether or not the current regulatory framework is changed. The alternative to providing refining capacity to meet future fuel needs would be to import refined product at prices determined by international supply and demand. The commercial viability and risk associated with such capital intensive investments would to a significant extent be determined by international price movements.

Implementation

No action required by the state.

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OPTION

State controls investments in and construction of refineries

Time frame

Medium term.

Consequences

This option is a reversion to the situation that prevailed during the 1960s and 1970s when authority from government was required for the construction or extension of refineries. By controlling such developments, the state would be in a position to select certain oil companies (local, foreign or multi-national), favoured for various reasons.

Implementation

1. Study the broader consequences of a reversion to the former policy and carefully evaluate the need for state intervention (DMEA, oil industry).
2. Amend legislation to subject refinery developments to government approval (DMEA).

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ISSUE

Regional considerations

Until the establishment of the present democratically-elected government in South Africa, energy policy was inward-looking, governed primarily by a desire to increase national energy security, with little opportunity of promoting regional energy-economic well-being due to non-cooperation and political conflict with and in several countries of the region.

The southern African region has large resources of all the energy carriers with the exception of crude oil. Only Angola and Zaire have proven or probable oil reserves of any significance. South Africa has now the opportunity of establishing wide-ranging cooperation, conducive to the optimal development of the vast natural and human resources of the region. While the major field of energy cooperation is undoubtedly electricity, regional trade in oil, refined petroleum products and natural gas is growing in importance and offers considerable potential.

South Africa possesses the largest crude oil refining capacity on the sub-continent and following the recent expansion programme, is in a position to supply most of the refined product requirements of its neighbouring states after meeting local demand for these products, for several years to come. This trade is promoted through membership of appropriate regional organisations such as SADC.

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OPTION

Regional inter-governmental trade agreements in the area of petroleum products to be developed

Time frame

Short term.

Consequences

While South African exports of petroleum products to the sub-continent have increased significantly in the recent past, the establishment of more formalised trade agreements to promote business opportunities in this sector would promote the export of refined products and the possible import of crude oil (dependent on quality standards) and gas, with a net gain in foreign exchange due to added value. Also, dependent on the relaxation of import and export control of petroleum products, products such as LPG would be traded, stimulating competition in the local market and thereby reducing prices to the benefit of consumers.

Implementation

1. Better contacts to be established between respective government departments in various countries (DMEA, DTI, Department of Foreign Affairs).
2. Trade delegations to exchange visits (DTI, oil industry).
3. Ministerial meetings to discuss and formalise agreements (DMEA, DTI, Department of Foreign Affairs).

Nuclear energy

Faced with international sanctions, the apartheid government charged the AEC to supply nuclear fuel for Eskom's Koeberg power station and also to produce highly enriched uranium for the manufacture of nuclear weapons. The fact that the South African government has now renounced the possession and use of nuclear weapons and is giving greater emphasis to economic competitiveness, social equity and environmental sustainability, implies that a fundamental policy review of the nuclear industry is necessary. Issues being reviewed include the fiscal grant to the AEC, the commercial viability of the AEC's Nuclear Fuels Division and Pelindaba Technology Products, the future of its R&D activities and the Vaalputs nuclear waste repository. The future of Koeberg is also being reconsidered.

73 ISSUE

AEC fiscal budget

Approximately 70% of the DMEA's annual budget is allocated to the AEC. This state subsidy to the AEC contains provisions for loan redemption and operating expenses (opex). The former are state-guaranteed, and in 1993 the AEC was committed to repayments totalling R652 million over the period 1994-98 (Vermaak 1993). At the same time and for the same period, projected state contribution to opex was R1301 million. The AEC is dependent on the state subsidy, because its own income does not cover opex, but in 1990 the corporation launched its AEC 2000 Plus Plan', with the objective of reducing its dependence to zero by about 2000, excluding governmental nuclear activities (Stumpf 1995).

In 1994/5, three internal divisions received 73% of the AEC's opex budget (Auf der Heyde 1994): Nuclear Fuel Production (NFP), which is responsible for uranium processing (43%); Pelindaba Technology Products (PTP), the marketing branch for non-nuclear fuel products (15%); Technology Development, the R&D division (15%).

The NFP division has been investigated independently (Auf der Heyde 1994), and it has been argued that due to their inherent inefficiencies and mall capacities its plants cannot compete on the international market. Questions have also been raised about the commercial viability of the PTP division and whether it is appropriately located in the AEC. There is general consensus that fiscal support from the state should be reduced and eventually terminated.

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73.1 OPTION

Linearly reduce to zero over a period of three years state support for AEC operating expenses

Time frame

From 1995-98.

Consequences

This option puts the onus on the corporation to decide which of its activities to curtail: the advantage of this is that the decision would be made more swiftly than if it were made outside the AEC, the disadvantage being that the decisions reached may reflect the AEC's needs more than the national ones. State-imposed obligations with financial implications would need to be shifted to other departments, or would have to be contracted out to the AEC, though it may not be legally possible to commercialise all these obligations. A decision would need to be made on whether to assist the AEC in meeting retrenchment costs, or not. Considerable insecurity amongst AEC personnel would emerge, and this could affect the skills base at the corporation. The AEC would have to raise private loans for any new capital projects.

Implementation

1. The AEC budget for 1996/7 to be two-thirds that of 1995/6, corrected for inflation (DMEA, Parliament).
2. The AEC budget for 1997/8 set at one-third of the 1995/6 one, corrected for inflation (DMEA, Parliament).

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73.2 OPTION

Reduce to zero over a period of three years state support for AEC operating expenses in consultation between the government and the AEC

Time frame

Between 1996/7 and 1999/2000 national budgets.

Consequences

In this case, the rate at which cuts are made to the state subsidy, and the programmes terminated as a result, would be subject to negotiation between the state and the AEC. The advantage would be that the state would have some influence on what programmes are continued, and cutbacks would be more rationally implemented due to less financial pressure. The disadvantage might be smaller savings for government, if cuts are pushed toward the end of the three year period rather than being implemented linearly. However, the state could define the rate at which cuts are to be implemented. State-imposed obligations with financial implications would need to be shifted to other departments, or would have to be contracted out to the AEC, though it may not be legally possible to commercialise all these obligations. A decision would need to be made on whether to assist the AEC in meeting retrenchment costs, or not. Considerable insecurity amongst AEC personnel would emerge, and this could affect the skills base at the corporation. The AEC would have to take on any new loans resulting from capital projects.

Implementation

1. DMEA investigation into AEC activities, establishing what programmes are being run, and the cost of these.
2. Prioritisation of these programmes in conjunction with DMEA, AEC, National Science and Technology Forum, and Science and Technology Ministry. Steps a. and b. to be complete in time to affect 1996/7 budget.
3. Budget adjustment according to priorities established (DMEA, Parliament).

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73.3 OPTION

The state subsidy to AEC opex is reduced to zero gradually, in line with recommendations made by an independent investigation set up to investigate the issue

Time frame

From 1996/7 national budget onwards.

Consequences

This option would provide more flexibility to decide on a rational strategy for freeing the government of its financial obligations to the AEC.

Implementation

1. Set up independent investigation of AEC, defining terms of reference (DMEA appointed committee including stakeholders and technical experts).
2. Negotiate mutually acceptable strategy and timeframe for achieving financial independence, in light of results from independent enquiry (DMEA, AEC).
3. Implement budget cuts (DMEA, Parliament).

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73.4 OPTION

Review whether financial commitments arising out of international treaties or agreements, or that result from conditions set out in the Nuclear Energy Act of 1993 and that are currently borne by the AEC should be shifted to other government departments or bodies

Time frame

From 1996/7 budget onwards.

Consequences

This option should be read in conjunction with the Topic Nuclear industry governance'.

Implementation

1. Decision on whether to transfer international treaty obligations to another body (DMEA, Council for Nuclear Safety (CNS), Department of Foreign Affairs, technical experts).
2. If yes, reduce AEC budget by corresponding amounts (DMEA, Parliament).

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73.5 OPTION

Shift responsibility for loan redemption to another government department

Time frame

From 1996/7 budget onwards.

Consequences

Loans inherited from past governments would be separated from current opex subsidies. The administration of government funds would be streamlined. DMEA's role is not to administer loan repayments, but to oversee development of the mining and energy sectors.

Implementation

Identification of appropriate government department for relocation of loan redemptions (DMEA, Department of Finance).

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73.6 OPTION

State support for AEC operating expenses should be linearly reduced to the level required to cover the cost of programmes/responsibilities performed on behalf of the state

Time frame

1995 - 1998.

Consequences

This option puts the onus on the corporation to decide which of its activities to curtail: the advantage of this is that the decision would be made more swiftly than if it were made outside the AEC, the disadvantage being that the decisions reached may reflect the AEC's needs more than the national one. A decision would need to be made on whether to assist the AEC in meeting retrenchment costs, or not. Considerable insecurity amongst AEC personnel would emerge, and this could affect the skills base at the corporation. The AEC would have to raise private loans for any new capital projects.

Implementation

1. Establish cost of state-imposed obligations and deduct from 1995/6 budget.
2. Reduce net 1996/7 budget by half from 1995/6 budget.
3. Reduce 1997/8 budget by two thirds from 1995/6 budget.

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73.7 OPTION

Privatise PTP non-nuclear commercial activities, require NFP nuclear fuel activities to break even (cash flow) within 2 years or cease production and support rest of activities performed on behalf of the state Safeguards agreements, Non-Proliferation Treaty, etc at minimum cost

Time frame

1 year.

Consequences

Portions of PTP, most of NFP shut down, AEC returns to the original format of the old Atomic Energy Board.

Implementation

1. Set up committee to investigate separation of these components within the AEC (DMEA appointed advisors).
2. Implement separation.

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74 ISSUE

Nuclear fuel supply

During the eighties the AEC was instructed to develop the necessary infrastructure to ensure nuclear fuel supply to the Koeberg power reactor. As a consequence, a uranium conversion, an enrichment, and a fuel fabrication plant were constructed at Pelindaba at a cost of just over one billion 1988 rand; the latter two plants are often referred to as the Z- and the BEVA plants. These plants are managed within the AEC's NFP division. With the relaxing of international sanctions, Eskom is increasingly able to procure nuclear fuel on the international market without restrictions and more cheaply than from the AEC.

There are many instances of countries with a small nuclear power component but no indigenous nuclear fuel industry, and the latter is therefore not required to maintain the operation of Koeberg. The global nuclear fuel market is in a depressed state with large oversupply of all nuclear fuel services at least for enrichment and fuel fabrication and is widely expected to remain so for another decade (Auf der Heyde 1994).

It is extremely unlikely that either of the AEC's plants will be competitive on an international level, and in the case of the Z-plant this has already led to closure. Although Nufcor is purchasing some conversion services from the AEC, production costs are uncompetitive, with the state/taxpayer in effect subsidising exports of converted uranium. In addition, even though production costs at the fuel fabrication plant are apparently more in line with global averages, new Eskom fuel specifications require upgrading of the plant. However, the viability of an upgrade is questionable in view of the current and expected future global overcapacity in fuel fabrication.

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74.1 OPTION

Permit consumers of nuclear fuel and nuclear fuel services to purchase their requirements where they see fit

Time frame

Immediate.

Consequences

This option would expose the NFP division to economic reality, forcing it to price its product competitively. This would lead the AEC either to close its existing plant or to cross-subsidise NFP activities. Closure would imply about 360 retrenchments, while cross-subsidisation would require greater grants from the fiscus (unlikely) or less AEC expenditure on R&D. On balance, the most likely outcome seems that the conversion and fabrication plants would be closed, Eskom would import all of its nuclear fuel requirements, instead of only a portion, and this will impact negatively on the balance of payments at about US$ 30 million annually. The option also implies that consumers of nuclear fuel or nuclear fuel services will be free to contract through traders or brokers of their choice or directly, rather than through a government appointed trader or broker.

Implementation

1. Review all existing contractual obligations between AEC and Eskom or foreign clients, with a view to freeing Eskom of commitments to procure fuel from or through the AEC and resolving legal issues arising from possible defaults on behalf of the AEC (DMEA appointed technical team).
2. Review monitoring and safety aspects of unrestricted nuclear fuel imports (DMEA appointed technical team).
3. Draft legislation amending the Nuclear Energy Act so as to incorporate points a. and b. above (DMEA, Parliament).

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74.2 OPTION

Close the NFP division at the AEC immediately

Time frame

Immediate.

Consequences

This option would put in place immediately the most likely consequence of the above option, disallowing the AEC a decision on the future of the NFP plants, which might mean earlier closure, implying reduced losses on operating costs but higher costs to buy off contractual obligations. Eskom would no longer have the option of contracting locally for nuclear fuel or services, but would have to source its requirements abroad, with a corresponding impact on the balance of payments. Retrenchments due to closure of plant would need to be dealt with. Nufcor's access to local conversion services would be lost.

Implementation

1. Declare all contractual obligations between Eskom and AEC to no longer be of any force (Minister).
2. Remove NFP opex as a budget item (DMEA, Parliament).

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74.3 OPTION

Support the AEC financially until a commercially viable indigenous nuclear fuel industry is established

Time frame

From 1995 onwards.

Consequences

Potentially large demands on the national fiscus.

Implementation

An investigation would need to establish the realistic income that the industry could generate, and balance that against the costs of constructing that industry. Clarity would be required on future nuclear generation plans and international nuclear fuel markets.

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74.4 OPTION

Subject South African exports of uranium, nuclear fuel or nuclear fuel services to the issue of end-use certificates that specify the end utilisation of the product

Time frame

From 1996 onwards.

Consequences

This option would give effect to the GNU's stated strong support for efforts to stop and roll back nuclear weapon proliferation. There may be implications for uranium exports, but if there are, these are likely to be minor since exports are already covered by Safeguards agreements.

Implementation

1. Amend Nuclear Energy Act (DMEA, Parliament).
2. Assign responsibility to CNS.

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75 ISSUE

AEC R&D

At present, the AEC R&D budget comprises at least R80m per annum, of which about half is spent on the development of a new enrichment technology (called MLIS) (Auf der Heyde 1994). There are plans to develop a pilot enrichment plant with the aid of a commercial partner. Much of the balance of the R&D budget in the AEC's Technology Development Division is spent in support of PTP and operation of the Safari research reactor.

The AEC R&D budget should be considered in comparison to other scientific and technical R&D budgets. The FRD, for example, in 1994 disbursed just under R80m amongst all the country's universities, technikons and museums, the most expensive single research item having been R1m. The National Accelerator Centre in the Cape has an annual budget of just under R40m, the South African Astronomical Observatory about R7m (Mair 1995), while the CSIR's annual R&D budget amounts to about R420m, approximately R230m of which is derived from government, with the most expensive research programme (on rock engineering) receiving R24m per annum (Bredenkamp 1995).

The AEC considers the Technology Division crucial to the successful commercialisation of the corporation, in that it is viewed as the motor' for the development of its new high-technology products. However, since the funds for these research programmes are administered by the AEC itself, the programmes never have to compete with the bulk of scientific R&D programmes that are administered through the Foundation for Research Development, the Council for Scientific and Industrial Research, and the other funding bodies, which fall under the Department of Arts, Culture, Science and Technology (DACST); the bulk of nuclear research and development has therefore never been subject to coordination by the ministry that coordinates other science and technology issues. Instead, the AEC policy requires a return on investment as calculated with the aid of discount cash flow methods.

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75.1 OPTION

Fund the AEC's R&D budget from the DACST rather than the DMEA

Time frame

From 1996 onwards.

Consequences

Nuclear research would be put on the same basis as all other science and technology R&D programmes, and would compete for continued funding on an equal footing with other projects. The advantage would be greater coordination of the country's R&D policy, and therefore a more rational use of available funds. It is likely that some of the AEC's current projects would not be sustainable when competing for scarce funds with other high-priority projects. This would imply retraining and/or retrenchment.

Implementation

1. Ring-fence the AEC's R&D activities (DMEA, AEC, DACST).
2. Reduce the DMEA's AEC support proportionately (DMEA, Parliament).
3. The AEC, the DACST and the CSIR to negotiate acceptable research budgets within the parameters of national Science and Technology policy.

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75.2 OPTION

Transfer the AEC's Technology Division to the CSIR

Time frame

1996 onwards.

Consequences

Nuclear related research would compete with other industrial research for funding on an equal footing. The CSIR's budget would increase, or the amount spent on nuclear research would decrease or both.

Implementation

1. Institute inquiry into AEC's R&D programmes, analysing for compatibility with national science and technology priorities (DACST or CSIR appointed technical committee).
2. Investigate physical transferability of programmes considered fundable (DACST or CSIR appointed technical committee).
3. Implement transfer (Cabinet approval).

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75.3 OPTION

Support the AEC in maintaining an independent R&D capacity

Time frame

Immediate.

Consequences

This is an expression of the status quo. It implies that nuclear R&D projects at the AEC will not be subject to the same rationalisation that other science and technology R&D programmes are, nor will nuclear research and development be coordinated with other scientific research programmes within the context of a national Science and Technology policy. In other words, policy-making in the nuclear R&D arena will remain largely in the hands of the AEC. It would also preclude the commercialisation of the AEC.

Implementation

Already implemented.

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76 ISSUE

Pelindaba Technology Products

PTP is the business side of the AEC that is responsible for marketing all non-nuclear fuel products. It is the division through which the corporation is planning to commercialise itself, and according to the AEC, it is expected to be cash positive by 1996. It markets a wide spectrum of products, ranging from filters and electrostatic precipitators through flourine chemicals to radio-isotopes for medical purposes. No independent study of PTP's prospects for successful commercialisation has been performed. While PTP is not strictly a nuclear energy policy issue, it is structurally part of the AEC and any review of the AEC has to consider the future of PTP.

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76.1 OPTION

Enable the AEC to continue support for PTP businesses for as long as the corporation sees fit

Time frame

Continuous.

Consequences

This is an expression of the status quo. The major consequence is that the date for independence from state funding will be determined by the AEC as the date at which it regards PTP as being totally self-sustaining. And since the corporation argues that all other divisions are important to the success of PTP, the date for financial independence could be put off indefinitely by the AEC on the basis of a claim that the income generated by PTP is not yet sufficient to cover the costs incurred by the other divisions during their work in support of PTP although it may well be that the division itself is cash-neutral.

Implementation

Currently implemented.

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76.2 OPTION

Curtail fiscal support to the AEC for PTP businesses within one year

Time frame

1996.

Consequences

The AEC would need to critically evaluate which of the PTP product lines indeed have the potential to become self-financing, including all R&D costs incurred along the line, and would have to shut down all others. The advantage of this option is that the state would be rid of its financial obligations to PTP at an earlier stage than the AEC envisages. However, its disadvantage would be that because of the short time limit attached to this option, potentially useful products that are still at an early stage of development may be discarded during the evaluation process.

Implementation

1. An audit would need to be performed that carefully analyses cash flow within the AEC, identifying all funds related to PTP activities (DMEA appointed audit).
2. On the basis of the above analysis, the AEC's state subsidy for 1996/7 would have to be cut from what it would have been according to present projections, by an amount corresponding to the total budget for PTP (DMEA, Parliament).

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76.3 OPTION

Continued fiscal support to the AEC for PTP activities should be made dependent on the outcome of an independent study of their potential for commercial viability by 1998

Time frame

From now to the passing of the 1998/9 budget.

Consequences

In terms of this option the AEC would not receive a blank cheque for the furtherance of its plans for PTP, but would be tied to interacting with an independent investigation into the prospects of commercialising the PTP division fully by the 1998/9 budget. The advantage would be a more rational, less pressured decision-making process on continued subsidisation of the AEC for the promise of commercial success in PTP. The disadvantage is that the state would bear the financial burden of commercialising PTP longer than in the previous option.

Implementation

1. Set up independent study of PTP aspects of AEC, defining terms of reference. Set date for completion of study in time to effect adjustments to the 1996/7 budget (DMEA appointed technical team).
2. Implement suggestions from investigation (DMEA, Parliament).

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77 ISSUE

Safari 1

Funds for the Safari research reactor are apportioned as part of the Technology Development Division's budget. The reactor is used for applied research by both the AEC and bodies outside (such as universities), for production of radio-isotopes, which are then marketed through PTP, and for a variety of service applications. There have been plans to transfer the reactor to PTP completely, but it is unlikely that its total life-cycle expenses can ever be covered by income generated from the radio-isotopes and other products it produces. The AEC powers the reactor with fuel derived from the nuclear explosive material that was manufactured during the apartheid era, claiming that in this way the material could generate far more income than if it were disposed of (sold) in some way. However, the operation of Safari is not technically linked to the nuclear weapon material, since the AEC would have no problem in sourcing from abroad the small amounts of fuel that it requires. It could be, however, that the type of fuel sourced abroad may not yield optimum operating conditions for Safari.

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77.1 OPTION

Provide financial support for AEC to manage and operate the research reactor

Time frame

Indefinite.

Consequences

The operation of the reactor would remain outside the scope of a national science and technology policy, and would avoid competition with other R&D programmes for funding. Retention of the reactor by the AEC would considerably complicate the commercialisation of the AEC and PTP, since the operation of the reactor will more than likely require cross-subsidisation.

Implementation

Already implemented.

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77.2 OPTION

Subject funding support for the continued operation of the reactor to competition on equal terms with other state-supported scientific and technical R&D projects within the institutional framework of the Science and Technology Ministry or the CSIR

Time frame

From 1996/7 budget onwards.

Consequences

In terms of this option, responsibility for the reactor would be transferred to the CSIR or the DACST, where it would take its place among all components of a national science and technology policy that fall within the scope of these bodies. It would be priority-rated by the CSIR in accordance with national policy, and would be apportioned funds accordingly. The option would aid the commercialisation of the AEC.

Implementation

1. Set up committee to investigate mechanism whereby transfer could be effected and consequences for medical isotopes and other commercial products (DACST or CSIR appointed technical team).
2. Implement recommendations from that committee (Cabinet, DMEA, AEC, CSIR, or Science and Technology Ministry).

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77.3 OPTION

Decommission the reactor if analysis shows that the expense incurred in operation is not offset by a combination of generated income plus technological spin-offs

Time frame

Immediate

Consequences

Savings on operating expenses at the AEC, but also reduced income. Loss of major technological capacity to the AEC, loss of production facility for wide range of products, though it is not clear whether local production is cheaper than importation. Loss of technological competence and capacity on national levels. Policy decision may be necessary on whether to continue subsidisation in the interests of a national science and technology policy.

Implementation

1. Institute inquiry into all aspects of Safari (DMEA and DACST appointed technical experts.)
2. Listing of all advantages and disadvantages of continued operation and immediate closure.
3. Policy decision by Cabinet on future of Safari (Cabinet).

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78 ISSUE

Human resources

The Atomic Energy Corporation employs highly skilled scientists. The restructuring of the AEC will inevitably mean retrenchment of these scientists and other staff.

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78.1 OPTION

Investigate the human resource implications of restructuring the AEC and make recommendations for the redeployment of staff in consultation with organised labour, the CSIR and the Science and Technology Ministry

Time frame

Immediate.

Consequences

Skilled human resources could contribute elsewhere to the economy.

Implementation

1. Set up forum including labour, the science community and the nuclear industry (DMEA).
2. Implement agreed-upon strategies (DMEA, AEC, DACST).

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79 ISSUE

Koeberg

Eskom acknowledges that the generating costs per kWh at Koeberg are higher than those from comparable coal-fired power stations in the Transvaal but points out that the station has not been operating under optimum conditions due to contractual obligations to the AEC and national grid requirements. Moreover, Eskom maintains that, in the event of closure, the cost of replacing the lost generating capacity plus that of closure would be higher than the present operating cost of Koeberg. Neither of these claims has been independently investigated. So far, Eskom has not released to the public technical details of its plans for decommissioning of the station or disposal of radioactive waste. There is general acceptance that full public disclosure and involvement are necessary in the search for a politically and economically feasible solution to the waste disposal problem.

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79.1 OPTION

Permit Eskom alone to decide whether Koeberg should continue to operate or not

Time frame

Indefinite.

Consequences

Little can be said about the financial consequences of this option, since little is known of the economics of Koeberg. However, this option implies that Eskom is left with deciding whether to continue operating the power station under present conditions, absorbing and cross-subsidising its costs, or whether to close it down. In other words, the task of reconciling the higher costs of Koeberg with its mission of providing electricity in the most cost-effective way', remains with Eskom (Eskom 1993a).

Implementation

Already implemented.

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79.2 OPTION

Establish a public enquiry into the economic and environmental desirability of continued operation of Koeberg. Implement recommendations

Time frame

To be finished by the end of 1996.

Consequences

The full costs of production of electricity from Koeberg should be established, including that of decommissioning and waste disposal and all externalities. These should be evaluated against projected electricity demand and future generation options as well as energy efficiency and demand-side management strategies.

Implementation

1. Institute independent enquiry, instructing Eskom to supply all requested data (DMEA appointed committee).
2. Full publication of results of enquiry (DMEA).
3. Facilitation of public debate by government (DMEA).
4. Implementation of findings (DMEA, Eskom).

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79.3 OPTION

Halt the operation of the Koeberg reactor subject to the outcome of an independent investigation that establishes its economic and environmental advantages over other options of providing electricity

Time frame

Immediate.

Consequences

Technical problems may arise with the removal of Koeberg from the national grid. Despite Eskom's apparent overcapacity, the utility maintains that closure of Koeberg would necessitate immediate replacement of the lost generating capacity; this matter requires clarification. Plans would need to be made for dealing with the (at least temporarily) redundant personnel. There would also be severe financial consequences, as mothballing a nuclear power station is expensive.

Implementation

1. Investigation of what steps, if any, would be required to mothball Koeberg (Eskom).
2. Shutdown of Koeberg, implementing whatever steps were identified in a. (Eskom).
3. Set up independent investigation, instructing Eskom to supply all requested data (DMEA appointed technical team).
4. Evaluate whether Koeberg offers advantages over other options (DMEA appointed technical team).

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79.4 OPTION

Oblige Eskom to publish full details of its plans for decommissioning and high-level waste disposal, and to finance and organise a series of public workshops at least in the Vaalputs/ Springbok and Cape Town Regions at which these plans can be discussed and criticised. Incorporate feedback from these workshops into future strategies

Time frame

Immediate.

Consequences

A possible consequence could be public acceptance of these plans and greater confidence in government and Eskom. Alternatively, it could be that public resistance to the plans highlights major problems in Eskom's strategy for dealing with decommissioning and disposal.

Implementation

1. Publication of Eskom's plans (Eskom).
2. Holding of workshops (CNS).

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79.5 OPTION

Launch an independent investigation into the effect of radio-active emissions on the environment, the health and safety of workers and surrounding communities at Koeberg

Time frame

Immediate.

Consequences

Public confidence in government and Eskom or public resistance with calls for the closure of Koeberg.

Implementation

Set up independent enquiry and publish results (CNS).

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80 ISSUE

Vaalputs

The Vaalputs waste repository in the Northern Cape region is currently used for disposal of low- and intermediate-level nuclear wastes, mainly from Koeberg, but also from other sources. It is owned and operated by the AEC, which charges Eskom for its services at a rate that just covers costs, while operations at the facility are monitored by the CNS. The AEC views Vaalputs as a potential site for long-term disposal of irradiated fuel and other high-level radioactive wastes, but Eskom at present has not committed itself to using the facility for this purpose in the next forty years. At present the site is not capable of dealing with high-level waste, and considerable development would be necessary to enable it to do so. The AEC is reluctant to invest the necessary capital for this purpose without a firm commitment from Eskom that it will utilise the facility. There have been claims from the surrounding communities that they were not properly consulted, and that they have not benefited from the construction of Vaalputs. As yet, no national high-level nuclear waste management strategy has been developed, nor has a site for the long-term disposal of such waste been identified.

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80.1 OPTION

Vest responsibility for operating and maintaining Vaalputs with the CNS, which charges Eskom and other clients for all demonstrable expenses incurred with the running of the facility according to prudent management practices, while also monitoring environmental and health and safety aspects

Time frame

From 1996 onwards.

Consequences

This option has the effect of removing from the AEC its ownership of and management responsibility for Vaalputs. Because of its importance, a waste repository is a national concern, and it is not usual in countries with developed nuclear industries to vest responsibility for similar sites with bodies that are active participants in the nuclear market and produce nuclear waste in their own right. The advantage of this approach is that it removes any potential conflict between making profit and environmental safeguards, while the disadvantage of this opinion is that the body which regulates it also becomes charged with maintaining it. The CNS would need considerable strengthening. Eskom would have to be instructed to cooperate with the CNS in developing the facility.

Implementation

1. Effect transfer of Vaalputs to CNS.
2. Inducement of Eskom to cooperate with CNS in development of national facility.

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80.2 OPTION

Vest responsibility for operating and maintaining Vaalputs with a new, non-profit, government-instituted body (eg, the National Radioactive Waste Facility), who charges Eskom and other clients for all demonstrable expenses on the basis of sound business principles and practice incurred with the running of the facility, with the CNS monitoring environmental and health and safety aspects

Time frame

From 1996 onwards.

Consequences

This option also has the effect of removing Vaalputs from the ambit of the AEC, vesting responsibility for the national facility with a new national body, whose interests - by statute - will be the national health, rather than profit margins or nuclear advocacy. However, in contrast to the above option this one has the added advantage of separating the functions of manager from those of regulator, while its disadvantage is that a new body needs to be created. As before, Eskom would have to be instructed to co-operate with the body in developing the facility. The possibility should be investigated of funding such a body from Eskom's fund for decommissioning and waste disposal.

Implementation

1. Legislation establishing body that will manage Vaalputs (DMEA, Parliament).
2. Transfer ownership to new body.
3. Induce Eskom to co-operate with new body in development of national facility (Minister).

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80.3 OPTION

Vest responsibility for managing, operating and financing Vaalputs with Eskom, under the supervision of the CNS

Time frame

From 1996 onwards.

Consequences

The approach described here is in line with the cradle-to-grave' principle whereby a given industrial undertaking is deemed financially responsible for all environmental impacts associated with its product - in this case nuclear electricity. Under this option, Eskom would have to absorb the full costs of disposal of waste from Koeberg, yielding a more accurate reflection of the true costs of electricity from the power station.

Implementation

Legislation transferring Vaalputs to Eskom (DMEA, Parliament).

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80.4 OPTION

Permit AEC to own and operate Vaalputs but under supervision of the CNS

Time frame

Continuation.

Implementation

1. CNS establishes safeguards.
2. Regular CNS inspections instituted.

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Last modified: 14 July 2010 12:00:10.