Eskom CEO charges ahead with unbundling
It is unheard of for a monopoly to break itself up voluntarily, but that is what Eskom CEO André de Ruyter is doing. And by all accounts, at some speed. If the state can keep up -- from a regulatory perspective -- SA will have an Independent Transmission
If Eskom CEO André de Ruyter has his way, the separation of Eskom into three legal entities will be partially complete by December 2021 and fully complete by December 2022.
This is a bullish agenda, even by the standards of optimistic market observers, but it’s one that recognises the urgency of the task.
The restructuring of Eskom is essential if South Africa is to open the door to financing for the procurement of new energy, particularly green and alternative energy supplies.
“Transition and green financing is readily available in the local and foreign market for Eskom to utilise,” De Ruyter says.
“However, private investment in generation requires independence in transmission and market generation. Without this, we will not attract the confidence of investors. This is the rationale for dividing up Eskom.”
De Ruyter was speaking on a webinar on the subject of South Africa’s Independent Transmission Grid System and Market Operator (ITSMO), organised by Nedbank and EE Publishers.
Eskom has begun the process of splitting the entity into three, with divisional boards and MDs appointed for Transmission, Generation and Distribution and about 9,500 employees already transferred into these entities. This is a necessary first step.
The functional separation will be complete by March 2021, with the legal separation of Transmission complete by December 2021, and Generation and Distribution by December 2022.
The creation of an ITSMO, with the TSMO as a stepping stone, is the most profound step in the reform of the power sector and of Eskom, says Professor Anton Eberhard, director of the Power Futures Lab at UCT’s Graduate School of Business, who was speaking at the same event.
“This establishes a platform for the procurement of least-cost power, and removes Eskom’s conflict of interest as a generator and power producer.”
While a subsidiary of Eskom, the TSMO will manage SA’s transmission grid independently and will assume responsibility for the system operator, power planning, procurement and buying functions.
However, it will have a fully independent board, appointed by outside parties.
“This will ensure complete independence in operations and governance,” says De Ruyter.
In the longer term, De Ruyter is not averse to hiving the TSMO off as a separate stateowned entity. However, until the tricky subject of Eskom’s government-guaranteed debt worth R370-billion is resolved, this is not possible.
“At this point, with respect to our covenants with lenders, it is important not to create any fear of a default situation. What we have here is a cost-efficient and riskaverse solution, given our debt.”
Once the market rules are confirmed, the Independent TSMO can be established, he says.
This a mammoth task with numerous policy, legislative and regulatory issues to be completed. De Ruyter is aware that the timeline is subject to risk, given that these steps are outside of Eskom’s control.
What is important, he says, is that “this train has left the station. The process is irreversible, which will reassure investors.”
Eskom’s vertically integrated monopoly structure is obsolete, with South Africa virtually the last outpost. At least 106 countries have unbundled their utilities, Eberhard says, including all of the BRICS countries.
The sooner that Eskom is unbundled the better. “Eskom imposes massive costs on South Africa’s economy, not the least of which is that it facilitates rent-seeking and corruption,” he adds.
That De Ruyter and his team have come this far, and have proposed as ambitious a timetable as they have, came as “music to my ears”, says Dr Miriam Altman, economist, strategist and a Commissioner on the National Planning Commission in the Presidency.
“Monopolies do not willingly break themselves up. You do not see that very often, or ever.”
However, she warns, it is important to have the market rules established well in advance.
This is advice based on her experience as a strategic adviser to Telkom during its turbulent transition from monopoly to market player.
It’s natural, in the face of market competition, to want to protect your own interests. It was only an adverse court judgment in 2008 and an equally adverse Competition Commission ruling in 2013 that pushed Telkom’s leadership at the time to see the potential benefits in optimising each business unit.
“Once the process was under way, we could see the benefit and opportunity. But it was not immediately apparent,” she recalls.
Thus not for one moment does she underestimate the complexity of the process that Eskom and the Department of Public Enterprises have undertaken.
Market reform, which includes commercialising a monopoly, is not a small thing and requires extraordinary state capacity, she says. Getting the rules, market norms and regulations – which force the incumbent to toe the line – is absolutely critical. “For this reason 2021 is an enormous target.”
Public Enterprises Minister Pravin Gordhan, also speaking at the webinar, is confident that Eskom is heading in the right direction. “There is evidence of considerable movement since President Ramaphosa announced the intent to split Eskom in 2019. Obviously, the proof of the pudding is in the eating, but André [De Ruyter] has told us what is happening and the process is now under way.”