/ 1 December 2010

Governance problems at Nersa — shades of Eskom?

Once again, public sector governance issues, and battles between the CEO, the board and the responsible minister have rocked South Africa. Eskom, South African Airways, Transnet, the South African Broadcasting Corporation— and now, in the latest saga, the National Energy Regulator of South Africa (Nersa).

On November 15, 2010, Chairperson Cecilia Khuzwayo indicated that the regulator had suspended its CEO, Smunda Mokoena, for “alleged gross transgression of Nersa’s code of conduct”.

Whilst official spokesperson Charles Hlebela would not be drawn on the specifics, an article in The Times on November 15 went a step further, quoting a source alleging that “quite recently he (the CEO) chaired a meeting completely drunk”, and that “he had a drinking problem that was getting out of hand”.

In the meantime, pending an internal investigation, Nomalanga Sithole, Nersa’s executive manager for corporate services, was appointed as acting CEO.

Then, only 10 days later, another bland press release issued by Nersa on November 24 stated without elaboration or explanation that the board had decided to lift the suspension and reinstate the CEO, and that the allegations against the CEO would now be investigated by the office of the Minister of Energy Dipuo Peters.

This immediately gave rise to perceptions of undue political interference, and that a “political” solution was being sought, rather than following an objective administrative and disciplinary process.

Nersa is a statutory body established by an act of Parliament (No. 40 of 2004: The National Energy Regulator Act, 2004) to make independent regulatory decisions in the electricity, piped-gas and petroleum pipeline industries.

In terms of the act, the minister of energy appoints the four full-time and five part-time board members of Nersa, and designates one of the part-time members as chairperson, another part-time member as deputy chairperson, one full-time member as CEO, and the other three full-time members as responsible for each of electricity, piped-gas and petroleum pipeline regulation, respectively.

Thus, although in practice the board may recommend the candidate for the position of CEO to the minister of energy, the final appointment of the CEO is the prerogative of the minister.

Undue influence
The act also states that the minister of energy may prematurely terminate the appointments of board members, including the CEO, but only under specified criteria. These include failing to act independently of any undue influence or instruction, and/or failing to act in a manner that is required and expected from the holder of a public office.

Whilst “undue influence” probably relates to matters of corruption or executive interference, a legal opinion indicated that “perhaps the context could be extended to the undue influence of alcohol. One would certainly expect that an appointment at this level would include the presumption that the CEO should act in a manner that is seen to be competent, which would obviously include competency of mind”.

It should be noted that in this case the board did not terminate the appointment of the Nersa CEO — it merely suspended him pending an investigation, which presumably would result in a report to the minister of energy, who could then make an informed decision on termination in terms of the act.

Former Nersa board member and head of infrastructure reform and regulation at the University of Cape Town’s Graduate School of Business, Professor Anton Eberhard, does not believe that the role of the minister as detailed above necessarily prevents the independence of Nersa. “Regulatory independence is about being able to make independent regulatory decisions (licensing, tariff setting, technical standards, etc.) without these being arbitrarily overturned by any other person or agency, except through pre-specified appeal mechanisms, for example the high court. Nersa enjoys this independence”, he said.

While the act indicates that if the chairperson is unable to perform his or her functions for any reason, the deputy chairperson must perform them until the minister designates another chairperson, it is silent on procedures if the CEO is unable to perform his or her function, for example due to suspension.

A legal opinion indicated that “procedurally, this would then depend on what disciplinary code is in place, and to avoid the risk of legal exposure and litigation, Nersa would need to follow its code meticulously — they certainly won’t want a legal claim against them for not following procedure and/or an unlawful termination.” In the energy sector, the current case of Jacob Maroga vs Eskom and the Minister of Public Enterprises springs to mind!

This new saga is perhaps symptomatic of ongoing governance issues resulting from unclear lines of authority, accountability and communication between the CEO, the board and the responsible minister in state-owned enterprises (SOEs) and statutory bodies.

For companies established in terms of the Companies Act, the shareholder(s) elect and appoint the board of directors, and the directors in turn appoint (and may dismiss) the CEO. The CEO reports to the board, and the board is responsible to the shareholders.

In the case of SOEs and statutory bodies, there are a number of grey areas. As the position of the CEO is effectively an appointment by the shareholder minister — and not the board — does the board have the authority to suspend the CEO and appoint an acting CEO pending an investigation? Who is the CEO accountable to, and does the CEO report to the board or the shareholder minister? May the CEO communicate directly with the minister, and may the CEO take instructions directly from the minister? Is the regulator truly independent of the minister, government and politics in its administrative and regulatory decisions?

There may indeed be considerations other than procedural issues at play in the rapid about-face and reinstatement of the CEO by the board. Nersa spokesperson, Charles Hlebela indicated to EE Publishers that “the five-year terms of the full-time regulator members, including the CEO, ended in September 2010”, and that “the minister had extended their terms till March 2011”.

Perhaps the reinstatement of the Nersa CEO is a pragmatic endeavor to avoid inevitably damaging and expensive litigation, extending over several years, resulting from the governance and accountability issues that have been experienced in other public entities such as Eskom. It may simply make sense to allow Smunda Mokoena to see out his contract in the next few months, and leave with his reputation intact.

Independence is essential
But whatever the case, Nersa is undoubtedly a critical regulatory body in the South African economy, and its ongoing independence is essential. Despite the criticisms and shortcomings of Nersa, the regulator is in fact the thin line between the customer and some very powerful monopolies. Therefore, surely we should all work to strengthen and support Nersa, and not to destroy it?

Nersa recently approved Eskom price increases of 25% per annum for three consecutive years, on top of a 32% increase the previous year. This week, Nersa will be heavily involved with the public hearings of the National Integrated Resource Plan for Electricity, IRP 2010.

One trusts and expects therefore that NERSA’s deliberations are characterised by sound judgement and sober mind.