The National Energy Regulator of SA (Nersa) should be abolished. Why? Because in combination with the Eskom electricity supply monopoly it has caused electricity shortages, disruption of life and economic damage.
It does so through the market-distorting mechanism of price control. Minimum prices — as with minimum wages — cause supply surpluses, and maximum prices — as with electricity — cause supply shortages. Nersa wants the government to repeal the law of supply and demand.
SA established the Electricity Supply Commission (Eskom) as an astonishingly successful autonomous enterprise in 1928. Until the 1990s it operated without interference. It was not told who to serve, what to charge, or how to manage the enterprise. It became a world-class institution that consistently provided the world’s cheapest reliable electricity.
That changed in the early 2000s when Eskom was required to serve consumers who could or would not pay. The government created Nersa in 2005 to impose price control with the power to ban competition, which it did.
In terms of the 1996 White Paper on Energy Policy and Nersa control, Eskom was not allowed to build new capacity — funding was supposed to be from private investors, but Nersa’s prohibitive conditions forced them to close their offices and leave the country. This made the first blackouts in 2008 as inevitable as they were predicted.
Nersa forces suppliers to charge less than is necessary to supply power sustainably. Price controls undermine the viability of an enterprise and are one of the most damaging aspects of government interference. In his seminal book Knowledge And Decisions economist Thomas Sowell cites research results on a more important but unappreciated implication of price control.
Most of the damage done falls outside the targeted industry. Price controls mean prices can no longer function as sources of good information — price signals — so that people cannot allocate spending and investment rationally according to real priorities. Sub-optimal allocation means there will be too much or too little spent on every alternative, so that compounding damage and waste permeate through the economy, as is clear in SA.
Our courts ruled against Nersa allowing price increases in some municipalities. Obviously, if price controls are bad it makes no difference whether Nersa, the courts or others impose them. The management of electricity supply companies should be free to operate unimpeded, especially the determination or negotiation of prices with customers.
Eskom should be liberated again. It should be free, as it had been for 100 years before Nersa, to operate freely and, in future, competitively. Electricity monopolies were the norm. The world has moved on, but not Nersa, to competitive electricity markets. Nersa should no longer be allowed to throttle competition and supply.
Another bad idea is monopolies, particularly state monopolies subject to political control. All problems are more likely to be solved if many compete to find solutions. Electricity supply and distribution should be open to everyone to compete for consumers. Newly appointed home affairs minister Leon Schreiber of the DA, an expert in the field of institutional performance in Africa, reported research findings that political control is by far the primary reason for institutional failure in Africa.
The increased corruption that political control enables and encourages is only one reason for these failures. Another reason is that interference destroys effective management. Fortunately, the electricity market recently opened to entities beyond Eskom, and huge increases in electricity supply immediately followed. Unfortunately, these new suppliers also risk being undermined by Nersa. Why not let the market competition reduce electricity prices instead?
One of Eskom’s biggest problems is its inability to collect payment for electricity from many municipalities. Municipalities have trouble collecting payments from consumers due to the inability of some users to pay, and a culture of nonpayment. Staff are intimidated when trying to disconnect users for nonpayment and illegal connections are ubiquitous. Some municipalities have given up trying.
The solution is to open distribution to free competition from large grid and small localised suppliers. That would unleash creative market power to ensure supply payment collection. To survive, Eskom and private firms would depend on efficient delivery and revenue collection. They would have the motivation that is lacking in municipalities.
The government might resist scrapping Nersa initially because it is supposed to protect those who supposedly cannot afford electricity. Nersa’s official mandate is politically sexy. However, price controls and statutory monopolies are far more damaging than, for instance, consumer subsidies. However, when there are limited resources — and there always are — there is a cap on how much a government can give to the poor, as well as other tough trade-offs such as whether to fund healthcare or electricity.
Given the cruel effect of blackouts, flatteringly called “load-shedding”, and now “load reduction”, Nersa has been so incontestably catastrophic that it should be scrapped. It has failed to perform the functions for which it exists and is unnecessary for the purpose. It causes electricity shortages, damages the economy and reduces the quality of life for all, especially the poor.
Nersa reduces access to power by the poor and the country’s ability to produce the jobs, services and products they need.
• Louw is CEO of the Freedom Foundation and Izwe Lami. Zietsman is a statistician and senior researcher.
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