Electricity Distribution Industry & Regional Electricity Distributors: Electricity Distribution Industry Holdings briefing

Energy

01 September 2009
Chairperson: Ms E Thabethe
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Meeting Summary

The Electricity Distribution Industry Holdings (EDI) briefed the Committee on the current Electricity Distribution Industry restructuring process, including the establishment and purpose of the Regional Electricity Distributors (REDs). The history of the process had been addressed in a previous meeting. It was decided to establish six REDs, each one straddling provincial boundaries but anchored by a metropolitan municipality. Municipalities and Eskom would transfer their electricity distribution businesses into the REDs, whose shareholding would be split between Eskom, National and Local Government. The municipalities should provide the service authority and REDs would be the service provider, with enhanced regulation by the National Energy Regulator. The relationships would be governed by service delivery agreements as contemplated by the Municipal Systems Act, and would contribute to Government’s aims of decentralisation and easier access for customers. The business principles were set out, and the business model would include wired and retail business. Municipalities would charge customers on electricity sales and dividends would reflect growth and performance. There was a Strategic Implementation Plan, which included five priority issues of protection of energy, trading surpluses and surcharges, compensation, credit rating guarantee, transfer of assets and liabilities, and board and governance representation. These issues had to be resolved for EDI to move forward. It was planned that any outstanding problems would be negotiated. 147 of the 187 municipalities had already signed. Because municipalities were operating without enabling legislation, it was important to get the agreements signed. There had already been ringfencing of Eskom and municipal distribution business, and this should be completed within the following year. Problems included ailing and aging distribution infrastructure and maintenance, backlogs, lack of asset management strategies or plans, insufficient investment in existing and planned networks, lack of regulation to enforce licensing of distributors, and limited coordination. A rescue plan had been designed to assist.

The EDI noted that electricity reticulation was a Local Government function. After extensive analysis, the Department was mandated to draft laws for the establishment of the REDs, and the Constitution 17th Amendment Bill would, once passed, enable National Government to further regulate the executive authority of municipalities in respect of Local Government matters. EDI planned to enhance stakeholder engagement, accelerate the restructuring, oversee delivery on milestones and ensure municipal readiness.

Members asked how EDI saw the role of Independent Power Producers, whether there was a standard definition of low cost electricity, where EDI would be located, what would happen to municipalities who were unable to manage electricity distribution, and what could be done to ensure faster implementation of resolutions. Members asked for further clarity on the obstacles that were preventing all municipalities from signing, asked
what would happen if no agreement could be reached, whether there was sufficient political will, and what was contained in the agreements and how revenue would be collected. Members asked how the restructuring would affect returns for the municipalities and achieve savings, noted that other forms of electricity should be encouraged, and accepted that some time would be required to implement the process altogether. Members also asked why the REDs would not be implemented prior to the 2010 World Cup, and suggested that EDI should, before the end of the month, define plans for sustained efficiency of REDs, and that there should be further engagement with EDI and the Department on the issue.

Meeting report

Electricity Distribution Industry Restructuring: Update Briefing by Electricity Distribution Industry Holdings (EDI)

Mr Duma Nkosi, Chairperson, Electricity Distribution Industry Holdings (EDI) Board introduced his delegation, who would present a detailed briefing.

Ms Phindile Nzimande, Chief Executive Officer, EDI Holdings, described the background and mandate of EDI, and clarified that its parent Department was now known as the Department of Energy.

Mr J Schmidt (DA) proposed that since the Committee had previously covered the history and background of EDI Holdings, during the workshop from 11-13 August 2009, the Committee should now only deal with any questions outstanding.

The Chairperson supported the proposal by Mr Schmidt.

Ms Nzimande agreed to omit the part of the presentation that had already been covered, but said that there were important areas of restructuring which needed to be addressed.

She then turned to describe the Regional Electricity Distribution Industries (REDs). There were six, and each wall-to-wall RED straddled provincial boundaries and was anchored by one metropolitan Municipality. These municipalities included Ekurhuleni, City of Tshwane (Pretoria), Johannesburg, Cape Town, eThekwini Metro (Durban) and Nelson Mandela Bay (Port Elizabeth). These REDs were new companies into which both municipalities and Eskom would transfer their electricity distribution businesses, with shareholding being split between Eskom, National and Local Government.

It was intended that the Municipality would provide the service authority and the RED would be the service provider, with enhanced regulation between these services and the National Energy Regulator of South Africa (NERSA). The relationship between REDs and municipalities would be governed by the Service Delivery Agreement, as contemplated in Section 81 of the Municipal Systems Act (MSA). Each RED would also enable Government’s social policy such as decentralisation and customer contact centres, and be obliged to offer free basic electricity where appropriate.

Three pillars of policy for sound business by the REDs included service of customers equally well and at realistic tariff levels, by lowering interest charges, efficiencies in non-payroll related areas, and reducing bad debt accounts.

The RED business model included wired and retail businesses. Wires business related to machines and cables, was asset and capital intensive and strongly regulated, being geared for serving one to many. Retail businesses covered customer care and accounting, geared towards competition and with less regulation. Both types of businesses shared corporate and support services.

The method through which municipalities would receive continued revenue streams from electricity sales would be through a surcharge to customers on electricity sales and dividends from the relevant RED, subject to financial performance and within the approved policy of the relevant RED. Dividends would reflect growth and financial performance of the Municipality. Stakeholders would be affected in that regard. Surcharges would be paid at intervals that would not disrupt cash flow, with dividends being paid annually.

The Strategic Implementation Plan (SIP) was presented by EDI as a response to Cabinet’s decision for restructuring in 2006. This included National goals, the plans and performance of the REDs, impact assessment on stakeholders and customers, the transition path from 188 to 6 asset owners for industry consolidation and stabilisation, and negotiation and codification of key issues of ‘The Deal’.

’The Deal’ referred to proposals on certain commercial parameters and concerns that had been raised by a number of stakeholders in order to conclude negotiations. Of the twenty-three deal issues, five were prioritised as high contention for resolution. These were protection of energy, trading surpluses and surcharges, compensation, credit rating guarantee, transfer of assets and liabilities, and board and governance representation. These issues had to be resolved on a national level for EDI to move forward.

EDI planned to utilise the Issue Management Matrix at Local Government to resolve and standardise negotiations according to their contention. Some issues would require mediation, whereas others would require to be managed by policy solution, one-on-one negotiation or other recommendations, depending on the capabilities of the players.

To date, preliminary negotiations had been undertaken with stakeholders. EDI was moving towards semi formal negotiations for implementation of the SIP. National goals had been developed, scorecards had been finalised, the deal project had been finalised, the transition path and roadmap had been developed, and some transition issues had already been finalised. The impact assessment report was ready for discussion with key stakeholders.

EDI had succeeded in obtaining the consent of 147 out of 187 municipalities to sign the Accession to Cooperative Agreement, as at 28 August 2009, which committed the municipalities to restructure, cooperate and take the necessary steps to ensure that they would be ready for the restructuring programmes. The remaining municipalities were expected to sign shortly.

Owing to the fact that municipalities operated without enabling legislation, it was important that the various players of the regions signed the Agreement. A critical participant mass of 80% of the industry was required by Section 78. The balance of the players could be rolled out over a period. Eskom distribution had already ring-fenced from the rest of Eskom, and was operating along the 6 future REDs lines, while 56 municipalities were currently ring-fencing their electricity redistribution businesses. Ring-fencing identified services and staff capacity that related to electricity, based on a methodology that had been agreed upon with Local Government. It was scheduled to be completed within the 2009/10 period. This particular Agreement process had enhanced understanding of electricity distribution generally for staff at municipalities.

A comprehensive analysis of the ailing distribution infrastructure in early 2008, based on the NERSA Audit Report of 2007 and current EDI findings, identified the average and below-average under performance of the various distributors in the country, and an infrastructure backlog in electricity of around R25.7 billion. This significant backlog was due to lack of asset management strategies or plans, insufficient investment by municipalities and Eskom in existing and planned distribution networks, aging electrical networks, whose average age was forty years, inadequate routine maintenance, lack of regulation to enforce licensing of distributors, and limited coordination amongst utilities to tackle national problems. All these components showed that municipal capacity to execute was limited by staff skills, technical services and funds. A rescue plan led by EDI, called the Approach to Distribution Asset Management (ADAM) was designed to stem this bleeding within the industry.

The 2001 Blueprint, which envisaged participation of all distributors in the country was designed to resolve issues of distribution on a national level. However, in terms of Section 4B of the Constitution, electricity reticulation was a Local Government function. After extensive analysis, the Department was mandated to draft RED establishment law to deal with the obstacles. The proposed 17th Constitution Amendment Bill was drafted to amend Section 156 of the Constitution to enable National Government, through national legislation, to further regulate the executive authority of municipalities in respect of Local Government matters. This would include asset management, protection in terms of regional efficiencies, and economies of scale. The Bill was introduced to Parliament on 13 August 2009, was approved by Cabinet on 15 April 2009 and was published for comments from 17 June to 16 July 2009. REDs’ establishment legislation was currently under development by the Department and would be finalised once the Amendment had been passed.

The EDI plans for the immediate period included continued stakeholder engagement to develop and refine solutions, acceleration of the restructuring process, oversight of the delivery of milestones in the six wall-to-wall regions and municipal readiness in terms of compliance with Section 78 of the MSA, and ring-fencing, and continued hosting of the National Energy Reponses Unit (NERT) from 2008. EDI remained committed to ensuring that the country was ready to respond to any challenges.

Mr Nkosi said that the Board was compatible with the EDI Restructuring Report and that the key stakeholders, such as the municipalities and Eskom, were important in terms of the Agreements. The Department was in the process of discussions with the Board of EDI about engagement with stakeholders, and it was hoped that all stakeholders would sign the Agreement and that the Department would support and endorse proposals so that the EDI could go forward with implementation. 

Discussion
Mr J Schmidt (DA) stated that on 5 August the Minister published a Regulation stating that she had the power to award tenders for Independent Power Producers (IPP) to buy electricity. He asked how EDI saw the role of IPP, especially now that private companies could also now buy power from IPP. 

Ms Nzimande answered that generally distributors were concerned about supply from a single source of power. Therefore the development and arrival of IPPs would be welcomed in terms of diversity and security of supply. REDs would buy from IPPs if it made commercial sense. A tight regulatory framework was necessary to ensure that the supply processes were fair.

Mr Schmidt said that one of the EDI’s objectives was to prioritise low cost electricity to all consumers. He asked what EDI’s meaning of low cost energy was, as there seemed to be differing opinions on it, particularly from Minister Manuel, Eskom and consumers in the poorer areas, and whether plans were in place to address price increases.

Ms Nzimande said that in the White Paper of 1998 the country committed itself to low cost electricity to attract investors and maintain community development. However, the cost of supply was not similar across the country, and was related to where the consumers lived. REDs would take into account what was affordable for consumers and apply for tariffs to the Regulator accordingly. EDI had in fact proposed ideas to National Government of what ‘low cost electricity’ actually meant with regard to the categorisation of customers. It sought to be able to implement those ideas in the future.

She noted that Eskom would be the wholesale supplier and EDI aimed to regulate the REDs in terms of the cost and pace of increase of tariffs.

Mr Nkosi added that the Department may wish to address the opportunity of new alternative sustainable sources of energy, given that coal was being depleted and there were environmental issues related to it. The topic of alternative sources of energy for long term supply was a big issue that would involve argument and debate around the cost of investment for new technology. This may affect the price until there was sustainable supply. 

Mr S Radebe (ANC) asked if EDI would be physically located in the municipal offices or in offices of its own.
 
Ms Nzimande answered that the guiding principle for REDs’ accommodation would be efficient accommodation that was accessible to the communities they served. REDs would align with municipalities and optimise what currently existed. In areas where there was no presence, EDI would look at investing afresh to ensure that communities were served by the REDs. That would be addressed once the operation had been looked at more closely.

Ms N Mathibela (ANC) congratulated EDI on its work and asked what would happen to municipalities who were unable to manage electricity distribution.

Ms Nzimande said that in terms of Section 7, the premise of restructuring was that all current distributors had to move forward and accept the Agreement, so that EDI could start standardising measures and implement restructuring for the benefit of the country.

Mr E Nchabeleng (ANC) asked what the Portfolio Committee could do to ensure faster implementation of resolutions, as negotiations had started in 1991.

Ms Nzimande said EDI would require the Portfolio Committee’s support in enabling legislation. The absence of legislation had contributed to this delay, and it had not been possible to use existing legislation as there were big gaps. EDI had to work through the issues with the stakeholders such as municipalities, who were not constitutionally bound to participate in the process, and Eskom was not prepared to part with assets into Municipality revenue. EDI believed that new legislation would provide fair ground for participation. Stakeholders were working closer than ever before and implementation was also much closer than ever before.

Ms B Tinto (ANC) asked the CEO to elaborate on the obstacles that were preventing the outstanding 40 municipalities from signing the Agreement.

Ms Nzimande said that the number would not quite reach 187, as some participants had outstanding legal issues. The signing by municipalities was a process of negotiation, not an issue as whether municipalities wanted to participate.

Mr S Motau (DA) asked what would happen if the five highlighted ‘Deal breakers’ did not resolve their issues.

Ms Nzimande said that EDI planned to set out a negotiating environment for different levels of negotiation for disputes, where the Ministerial Committee on EDI, and South African Local Government Association (SALGA) would have the final say over resolution of issues. The RED establishment sought to codify these negotiations, which would be more flexible than an Act.

Mr J Selau (ANC) asked how EDI anticipated dealing with issues of collecting revenue, especially as different regional areas had different types of problems.

Ms Nzimande said that the Municipality and Eskom did well in collection of accounts receivable, but the problem was that there was no communication or sharing on collection of revenue between the centres. EDI aimed to standardise regulations so that good practices could be replicated across the country and aimed also ensure community consultation and involvement in order to better identify communities that really could not pay, as opposed to those that were attempting to avoid paying their dues.

Mr E Lucas (IFP) believed that some municipalities in the past had not behaved in the interest of the consumer. He asked how restructuring would affect the returns for the municipality and achieve savings for the consumer. He also said that since coal was a product of South Africa, electricity should be offered at its best price rather than being compared to first world prices. He believed it was very important to introduce and encourage other forms of electricity because competition would benefit the consumer.

Mr Nkosi said that in terms of savings, there was an important project linked to the entire energy process. There were a number of issues that enhanced saving, such as quality of service. In the recent past there were issues of cable theft and illegal connections that affected quality of services. In Thembisa in about 2002 there was substandard electricity supply, no account or record of what was used and owed by customers, and also no guarantee that those households using electricity would pay the Municipality. EDI could now account for those parameters with less loss around inefficiencies. Savings included safety and quality of services, as well as people paying less, due to using electricity better.

Mr P Dexter (COPE) asked if there were 187 different agreements, or one basic agreement amended to suit each Municipality, and if they were different, he asked what was the nature of those variations.

Ms Nzimande said that the agreement was a Memorandum of Understanding (MOU), a single agreement, which was initially signed by SALGA, Eskom, NERSA and the Department. Now, municipalities were agreeing to cooperate with restructuring by signing the Agreement. The differences were in the actual negotiations. The Issue Management Matrix assisted with standardisation where possible, and allowed local conditions to be taken into account.

Mr Schmidt asked what time frame was envisioned for the first RED establishment once legislation was passed through parliament.

Mr Dexter asked if lack of political will at National level to address the entire industry problem, including EDI, had possibly slowed the process of implementation of policies. Since there was no disagreement between political parties in the meetings of this Portfolio Committee, he asked for comment and recommendations on what needed to be done to ensure proper debate to ensure implementation of the policies.

The Chairperson said that the Justice and Constitutional Development Portfolio Committee was dealing with the Constitutional Amendment. Therefore, it was important to have a good working relationship with that Committee, as the amendment would affect this Committee also. She believed that it was currently a key issue. RED could not be implemented without Constitutional Amendment, since without this the REDs would face the possibility of court action instituted by the municipalities. She was dubious as to whether there was lack of political will at National level. She asked if Mr Maqubela from the Department could explain where government was dragging its feet.

Mr Nkosi said that it was important to bring back the principle of one government with three spheres. Other spheres of government, particularly National Government, did have a responsibility to deal with the matter. With the Constitutional Amendment talking to an issue as important and as serious as energy, no spheres of government could afford to take the stance that it was not their problem. He suggested the Portfolio Committee or department dealing with the Constitutional Amendment should assist in terms of internal processes.

He further explained that an entire decision-making process across spheres of government where there was agreement by authorities was unlikely to take less than 18 months. The EDI supported the Committee’s concerns and was committed to trying to shorten the process in terms of decision making and implementation of REDs wherever possible. It would also continue to share information on the challenges.

Mr Tseliso Maqubela, Deputy Director General, Department of Energy, said that there was indeed political will on National level. The Department had the backing of the Executive in that the Constitutional Amendment had been approved by the Cabinet, and furthermore, had proceeded to prepare the RED establishment legislation, assuming that it would be passed by Parliament. Thereafter further legislation had been drafted, which would be brought before the Committee once the Constitutional Amendment had been passed. The Department realised that South Africa had already waited too long for this process, and wished to prevent further delays once the amendment to the Constitution had been effected.

The Department requested leeway from the Committee where possible to delay actual implementation of new activities before 2010, because currently the system of preparations for the World Cup was stretched to its limit. All legislative work needed to be done upfront, but the nuts and bolts issues perhaps needed to be deferred to minimise the possibility of the process leading to disruption and then being used as a scapegoat should anything go wrong at the 2010 World Cup. He believed that setting aside eighteen months for finalisation was a prudent approach, assuming of course that the Constitutional Amendment was passed.

The Chairperson asked Mr Maqubela to explain what the disruptions relating to 2010 could be, in view of the intention of REDs to assist in energy efficiency, integration and coordination.

Mr Maqubela answered that the people involved in the RED establishment programmes were the same people that were responsible for the World Cup process. The problem lay with a shortage of skills and technical capacity in the Energy sector. There was concern that if the two processes were to run concurrently, the engineers’ focus would be split too many ways.

The Chairperson responded that a shortage of skills could not be the sole reason for the delay in implementation, and said that this answer was not very convincing.

Mr Nkosi suggested that it may be helpful for the EDI and the Department to engage on an ongoing basis to give continuing input on whether there was a likelihood of shorter time lines for implementation.

Mr Radebe said that he understood that RED used the same skills as the Municipality and asked what the plan was for shortage of skills. He asked EDI to define plans for sustained efficiency of REDs before the end of the month, so the Committee could address this challenge.

The Chairperson said that Members should understand that the wheels of government turned slowly. She acknowledged the good work and presentation from the EDI. She suggested that the Committee should engage with the EDI and the Department of Energy for advice on the process and the issue around shortage of skills. Meetings with NERSA and Eskom would commence the following week.

The meeting was adjourned.

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