/ 3 May 2013

BHP Billiton defends its appointment

BHP Billiton South Africa chairperson Xolani Mkhwanazi.
BHP Billiton South Africa chairperson Xolani Mkhwanazi.

The mining giant BHP Billiton has defended the appointment of Mkhwanazi to its operations after his five-year stint at the energy regulator, during which preferential contracts were approved for the supply of electricity to Billi­ton's power-intensive aluminium smelters.

The contentious subject of Eskom's smelter supply agreements re-emerged after Media24 and the journalist Jan de Lange recently won a court battle to force BHP Billiton and Eskom to release the contracts publicly. They have been the subject of much ire for a South African public that has faced both a chronic electricity shortage since the beginning of 2008 and drastic tariff increases to finance the building of new power plants.

Billiton's smelters – Hillside and Bayside in Richard's Bay and Mozal in Mozambique – have benefited from substantially below-cost electricity during this period.

The government was warned in 1998 of the need to build new plants, or electricity demand would exceed supply by 2007. But state policy remained geared to attracting electricity intensive industry to the country, despite looming shortages.

This has called into question the choices of decision-makers who, at the time, permitted the sale of large amounts of cheap power when it was emerging that South Africa faced a shortage. Mkhwanazi was chief executive officer between 1999 and 2004 of the National Electricity Regulator (NER), which became the National Energy Regulator of South Africa (Nersa) in 2004 with the introduction of the National Energy Regulation Act.

The regulator was required to approve special pricing agreements under both this Act and its predecessor, the Electricity Act of 1987, as amended in 1994, according to an analysis of the contracts drawn up by the managing director of EE Publishers, Chris Yelland.

Power supply agreement
According to Eskom, the contracts for the first two potlines (the long rows of electrolytic units, or pots, in which smelting takes place) at Bayside and Hillside were conducted at a time when approval from the regulator was not required, essentially before 1994.

But of particular concern are the contracts for a third potline at Hillside, which was signed in 2001, and the Mozal smelter. The latter involved the establishment of a transmission company called Motraco, made up of the South African, Mozambican and Swaziland power utilities, which would sell power on to Mozal.

The power supply agreement between Mozal and Motraco was signed in late 1997, before Mkhwanazi was at the regulator, according to documents released after the court decision. But the agreement between Eskom and Motraco was signed during April and May 1999. The Mozal smelter was only powered up in early 2000.

Yelland said that Mkhwanazi would have had to approve the Hillside 3 contract, and had possibly had sight of the deal between Motraco and Eskom. It appears Mkhwanazi started at the regulator in January 1999, however the Mail & Guardian was not able to confirm this.

Mkhwanazi took up a position at the engineering firm Bateman after leaving the regulator in 2004. By February 1 2005, he had joined BHP Billiton as chief operations officer of its aluminium business in South Africa and he was appointed chairperson of its South African business in 2008.

Lulu Letlape, spokesperson for BHP Billiton, said in response to questions for Mkhwanazi, that a full board of directors approved the Hillside 3 negotiated pricing agreement in 2001, as submitted by Eskom. They applied "due process and specific criteria to approve this contract" Letlape said, and referred queries about the criteria to Nersa.

The company did "not believe that Dr Mkhwanazi's employment at BHP Billiton undermines good corporate governance practices", Letlape said. Contracts relating to Mozal did not go through his committee during his time at the regulator, she said.

Key decision-makers
Other key decision-makers at the time would have included Reuel Khoza, who chaired Eskom's board from 1997 to August 2005. Correspondence requesting comment from Khoza were not responded to by the time of going to print.

The Mozal contracts were renegotiated in 2010 but Eskom has applied to Nersa to have the Bayside and Hillside contracts reviewed. Nersa is currently preparing for the review, which it has indicated will be held in public in the coming months. Since 2008, BHP Billiton has mothballed two potlines at Bayside to address issues of electricity supply.

But BHP Billiton has determined that it will hold Eskom to the agreements, which Mkhwanazi has defended in the media, arguing that the company has not benefited from them unfairly and that they were negotiated in good faith. In a letter to Business Day he said the smelters in Richards Bay had made a significant contribution to the regional economy and the company had a responsibility to its employees, suppliers and shareholders.

Charles Geldard, regulatory specialist at Nersa, said the decision-makers of the day might well have approved the contracts based on appropriate forward-looking calculations and deemed that they were good at the time.

He stressed that the smelter contracts included interruptibility clauses, which allowed Eskom to cut power to the smelters at critical times, and the review process would examine the value of these to Eskom.