Managing expectations and opposition to the restructuring of Eskom

For more than a year, in order to secure ongoing funding, there has been an urgent need to provide the local and global financial communities with assurances that there is a credible Eskom recovery plan in place that is supported by government and the treasury.

To this end, Eskom presented a long-awaited turnaround plan and new business model to its board, its shareholder representative, public enterprises minister Pravin Gordhan, and the Cabinet, at the end of November 2018.

At a media briefing on the state of the power system in early December 2018, Eskom CFO Calib Cassim advised that Eskom’s plan was to ring-fence the three main business areas of Eskom – generation, transmission and distribution – for accounting purposes.

This was to gain a better understanding of what was going on within the monolithic, vertically integrated utility. In addition, it would prepare Eskom internally for whatever the shareholder may have in mind for the restructuring and/or unbundling of the utility.

Then, later in December 2018, the presidency announced the establishment of a task team of independent advisers. The task team would review Eskom’s financial and operational recovery plans, and its proposed new structure and business model, and advise the government on the various options for restructuring the utility.

It is well-known that several members of the task team have long favoured the unbundling of Eskom into three, independent, state-owned entities covering generation, transmission and distribution. This would indeed be in line with official government policy, as detailed in the 1998 Government White Paper on Energy Policy.

It was speculated that due to the dire state of Eskom’s financial and operational position, the task team favoured acting with greater urgency than that demonstrated in the utility’s proposal to simply ring-fence generation, transmission and distribution within Eskom as internal accounting units.

The task team briefed the ANC Lekgotla on 19 January 2019 on the core proposal that Eskom be unbundled into three, independent, state-owned, legal entities covering generation, transmission and distribution. It has been reported that the proposals received broad support at the ANC Lekgotla.

However, within days, trade unions Num and Numsa voiced strong opposition to the proposals and announced mass action and a strike during the week of the national and provincial elections, scheduled to take place sometime in the second quarter of 2019.

It thus seems obvious that there is an urgent need to address both the expectations and demands for urgent change at Eskom, as well to manage opposition and resistance to restructuring, which is perceived by labour as a first step towards privatisation and job losses.

To many, the first priority would be to create an independent, state-owned, transmission system and electricity market operator from the former transmission group at Eskom, to ensure non-discriminatory access to the transmission grid on level playing fields by all generators, without the current conflicts of interest.

In due course, the generation company could then be further unbundled into a number of independent generation companies, each competing for access to the grid on economic grounds.

Likewise, the distribution company could be restructured, along with municipal electricity distributors, to form a smaller number of stronger, financially and operationally viable, wall-to-wall, regional electricity distributors.

The question, of course, is how best to achieve this: either in a bold approach by unbundling Eskom as a first step into three independent state-owned legal entities; or by first establishing the three legal entities as subsidiaries of Eskom Holdings; or in a phased approach with the first step being to establish Eskom Transmission as a subsidiary company within Eskom Holdings, with generation and distribution remaining as is within Eskom.

Some argue that the latter option would be a somewhat timid and half-hearted approach, with the president probably giving organised labour assurances that there would be no job losses. The transmission grid would still be controlled by Eskom, while generation and distribution, both of which are in a critical state of disarray, would remain within Eskom.

Furthermore, there are valid questions as to whether a phased approach, in which it could take a year or more to establish a transmission grid company that is truly independent of Eskom, is realistic and appropriate in light of the dire circumstances facing Eskom and the associated risks to the economy.

Others argue that the latter option would be more pragmatic, and that a phased, two-step approach for Eskom Transmission would better manage the process, with the intended end-state still remaining a fully independent, state-owned, transmission company, system operator and electricity buyer function.

Initially, it is argued, the transmission company should be set up a subsidiary of Eskom Holdings, with a separate board to drive the migration of relevant people, systems, assets and debt into the new company. Proponents see this as the most practical way to move quickly and gain momentum, with no new legislation required.

This approach, it is believed, would avoid the fate of the former ISMO (Independent System and Market Operator) Bill, a legislative approach which got bogged down and ultimately buried in all kinds of debate on detail, in efforts to try and resolve any issues arising upfront.

The phased, two-step approach would further allow the new transmission company, initially established within Eskom, to get on with the challenges of further restructuring, and to separate from Eskom in due course into a self-standing company, with the state as its ultimate shareholder.

It is hoped that this approach would provide a clear and sufficient signal to financial markets and lenders that the government is indeed serious about setting the electricity supply industry and Eskom on a new and sustainable path.

At the same time, it is hoped that this will manage the fears of labour, and assure them that the establishment of a separate, state-owned, transmission grid company and market operator will not simply lead to privatisation and job losses. DM