Regional Electricity Distributors (REDs); Liquid Petroleum Gas (LPG) pricing regulations: briefing

Energy

14 September 2009
Chairperson: Ms E Thabethe (ANC)
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Meeting Summary

The Committee was provided with a progress report on Liquid Petroleum Gas (LPG). The Department of Energy had drafted regulations on the pricing of LPG. In the proposed regulations the Department suggested more than a 30% reduction in price for LPG. The idea was to make LPG more affordable to the poor. The Committee called for haste over the issue.

The Department provided a progress report on the Regional Electricity Distributors (REDs). The Committee was explained the essence of the Constitution Seventeenth Amendment Bill which would enable the EDI restructuring. The Bill vested national government with new powers of intervention at local government level when it was necessary to achieve regional efficiencies and economies of scale for municipal functions. The plan was to restructure the EDI into six independent REDs by merging the distribution businesses of Eskom and local government. The restructuring was meant to address well recognised problems in the industry such as the highly fragmented structure of the industry, the wide disparities in electricity tariffs as well as the uneven spread of electrification across SA. Members were also given a breakdown of the RED model as well as the content of the Draft RED Establishment Bill. Many members including the Chairperson felt that the EDI restructuring and the formation of the REDs had dragged on for far too long. The Department told the Committee that the process should take eighteen months to effect which the Committee felt was unacceptable. The Department was asked to fast track the process as it was a matter of urgency. The Committee agreed to give the Department a week to report back to them on its progress in fast tracking the issue. In turn the Department asked if the Committee could influence the speed in which the Constitution Seventeenth Amendment Bill was dealt with in Parliament.

Meeting report

Liquid Petroleum Gas (LPG) pricing regulations
Mr Siphiso Makubela, Deputy Director General: Hydrocarbons and Energy Planning, Department of Energy, said that LPG regulation had been on the Department’s list of priorities. The concern was specifically the price charged to the consumer. LPG was mainly used by the poor for cooking purposes. He noted that the players in the sector were convinced that the current selling price was justified. Mr Makubela said that regulations had been drafted. It had come back from the State Law Adviser‘s Office with comments. The comments were minor and did not relate to the proposed figures by the Department. Hence there were no changes to the proposed figures which the sector would not be too happy about. Mr Makubela did note that there was more than a 30% reduction in the proposed price. He did not wish to divulge the exact figure and felt that the Department had been overly conservative over the reduction. It was considered the right thing to do. The smaller players in the sector would find it most difficult to adjust. The comments about service level agreements were also being looked at by the Department but this was separate to the pricing issue.

Discussion
Mr P Dexter (COPE) welcomed the response but asked for timeframes on the matter. It was considered a matter of urgency.

Mr Makubela responded that in terms of timeframes, the Department did not expect it to take more than two weeks until ready for promulgation.

The Chairperson agreed that it was a matter of urgency and that the issue should be speedily concluded.

Mr S Motau (DA) asked when the interaction with the industry was to take place if the process was to take place so speedily.

Mr Makubela responded that the interaction with the industry would not take longer than a month. The interaction would be on working rules and not on the regulations. The working rules were acceptable and covered issues such as retail margins and costs. The Department’s pilot project analysis had shed light on the need for a price reduction in LPG. Mr Makubela felt that the issue had been drawn out too long.

In response to the Chairperson request that the Committee needed a proper briefing on the matter, the Department agreed to do a briefing in the near future.

Regional Electricity Distributors (REDs)
Mr Ompi Aphane, Deputy Director General: Electricity, Nuclear and Clean Energy, briefed the Committee on the Regional Electricity Distributors (REDs). The briefing attracted representatives from EDI Holdings, the National Energy Regulator of SA (NERSA) and CENTLEC amongst others. Mr Aphane explained the essence of the Constitution Seventeenth Amendment Bill of 2009. It called for the amendment of the Constitution to enable EDI restructuring. The Bill sought to vest national government with new powers of intervention at local government level when it was necessary to achieve regional efficiencies and economies of scale in respect of municipal functions. Certain powers would however still be left with local government. Mr Aphane provided some background to and the motivation for the Bill. Cabinet’s plan was to restructure the EDI into six independent REDs by merging the distribution businesses of Eskom and local government. The REDs would be established as public entities and would be regulated in accordance with the Public Finance Management Act and the Electricity Regulation Act.

The restructuring was meant to address certain well recognised problems in the industry. These were the highly fragmented structure of the industry, the wide disparities in electricity tariffs as well as the uneven spread of electrification across SA.  Since the Constitution Seventeenth Amendment Bill was broad and general in its application to all municipal functions, it might be used to restructure other municipal functions in the future such as the water services sector. Members were given a breakdown of the REDs model. Eskom and municipalities would transfer their electricity distribution, assets, liabilities and employees to the REDs. Shareholding in the REDs by current asset owners would be in proportion to the value of the business transferred. REDs would be new companies jointly owned by Eskom, national and local government. Mr Aphane concluded by giving the Committee insight into the content of the Draft REDs Establishment Bill. The Bill would provide for the declaration of six electricity distribution and trading regions by the Minister of Energy. It would also provide for the incorporation of the REDs companies for each region. The rest of the Bill provided for the REDs model. (See document for detail.)

Discussion
Mr Dexter asked if the intention was to deal with the EDI issue, why the proposed constitutional amendment was drafted in such a broad fluffy way when it should have been more specific.

Mr Aphane understood electricity and water reticulation to be imbedded in the Constitution. The constitutional amendment proposed was considered the best option as it represented a less radical change of the Constitution.

Mr J Schmidt (DA) remarked that it looked as though national government wished to get involved in local government affairs. He noted that the Department and EDI Holdings seemed to hold differing views on certain issues. According to the Department, local government would keep its powers in terms of its equitable share and surcharges. EDI Holdings, on the other hand, said that it would collect the funds and make payouts to local government. He felt that the difficult stuff was being left with local government and the easy things were going to be done by EDI Holdings.

Mr Aphane responded that there was no contradiction around surcharges. A distinction needed to be made about municipal mandates. National Treasury would have the power to regulate surcharges applied by municipalities. In the REDs model there might be more instruments that could be used to compensate for the loss of income on surcharges. The idea was not for municipalities to lose their revenues. The Department was aware of losses that could be suffered by municipalities. He said that municipal infrastructure had degraded to such an extent that it had reached a point of no return. The intention was not to leave the difficult stuff with the municipalities.

Ms N Mathibela (ANC) said that if municipalities were still to have powers, would they not continue to overcharge consumers. She asked how the matter was going to be monitored. Municipalities did not charge according to actual usage. They estimated the consumer’s usage.

Mr Aphane said that municipalities were overcharging in certain areas, that is, electricity in order to make up for under recoveries in other areas, that is, water. Municipalities overcharged in electricity in order to make up for losses in water for example.

Mr S Radebe (ANC) said that the Department had stated that Eskom would be the only stakeholder in the REDs but according to EDI Holdings, municipalities would have shares in REDs as well. He referred to REDs allocations and asked whether municipal boundaries would be taken into consideration. If not, it could cause problems. He asked if tariffs were going to be monitored in order to prevent poor people from being taken advantage of. It was considered ever so important as information at the Committee’s disposal had showed that NERSA failed to monitor tariffs charged by municipalities. He asked what guarantees were there that EDI Holdings would comply with tariffs.

Mr Aphane pointed out that initially everybody that contributed assets towards the REDs would hold shares in them, including municipalities and Eskom. The shareholding of Eskom in REDs should decrease over time, allowing for municipalities to hold the larger percentage of shares in REDs. This gradual reduction of Eskom’s shareholding was necessary because of the legacy that Eskom currently owned much of the distribution infrastructure. Municipal boundaries would be disregarded in terms of the service to be provided by the REDs. Electricity was not provided according to municipal boundaries. This was a cross subsidised function. Municipal boundaries were respected in so far as benefits and distribution were concerned. Tariff setting was a function that vested with NERSA. NERSA was independent in its regulation of Eskom but had reduced powers when it came to municipalities, as municipalities were themselves entitled to regulate. There was a conflict of interest between the NERSA and municipalities; in as far as municipalities regulated themselves.

Mr Aphane said that Free Basic Electricity was one way of protecting the poor. However, there was a general sense that this was not a sharp enough instrument to protect the poor from price hikes, because of the different ways that municipalities implemented free basic electricity. The use of block tariffs was preferable because this allowed for a reduced tariff for those identified as vulnerable, regardless of increases in the Eskom tariffs. Different users should be placed in different categories according to their consumption. NERSA had to implement this and this was one of the reasons that NERSA’s ability to regulate had to be strengthened.

Mr J Selau (ANC) said that from the briefing it would seem that the implications of the Bill were more than just the establishment of the REDs. He asked how the Constitutional Seventeenth Amendment Bill would impact upon other areas of local government. Would there be different legislation for different areas in local government? He asked the Department to comment on the compulsion to appoint REDs.

Mr Aphane replied that whatever has been said only applied to the electricity sector. There were, however, problems with service delivery of water as well and there would be separate pieces of legislation for the different services. The compulsion to appoint REDs referred to their appointment as service providers in the distribution phase of the value chain. Distribution was different from generation.  And electricity generation was not a municipal function.


The Chairperson was more concerned about timeframes as the Department seemed to be very relaxed.

Mr Aphane said that the constitutional amendment was in Parliament. He hoped that there would be a quick turnaround. It was felt that by early 2010 the REDs Establishment Bill would be ready.

Ms Thabethe asked why the process was dragging when there were only the constitutional amendment and the REDs Establishment Bill.

Mr Aphane responded that the constitutional amendment was already in Parliament with the Justice Portfolio Committee. The outcome of it would be an input into the REDs Establishment Bill.

The Chairperson said that things needed to move along.  It seemed that the Department was delaying the process.

Mr Aphane pointed out that the constitutional amendment was a Section 74 amendment. It would have to be sent to the NCOP too for consultation. The NCOP would in turn take it to their respective provinces for consideration. The process was now in the hands of Parliament and not the Department. He felt that 18 months was a safe timeframe for the completion of the process. Due process needed to be followed.

Mr Motau said that there seemed to be a great deal of skepticism over the constitutional amendment. He asked whether the establishment of the REDs would make electricity cheaper. If it was not the case, then it was simply bad law. He asked how municipalities were going to be assisted. What was the point of doing things if it was going to be revenue neutral?

Mr Aphane responded that electricity should be cheaper in order to benefit the poor. Some of the electricity tariffs were not based on a sound economic basis. With the introduction of REDs it was hoped that the distribution of electricity by municipalities would be better regulated. The proposition was based on value and economics. The whole point of the exercise was to alleviate poverty. At the moment municipalities were dictating tariffs. He stated that the aim was to achieve revenue neutrality. The Department had suggestions on how to deal with loss of revenue. 

Mr E Lukas (IFP) asked what lessons had been learnt from RED 1. He hoped that the same mistakes would not be repeated. He referred to the liabilities and employees of Eskom to be transferred to the REDs and asked whether it was a good idea. He said that if NERSA was out of line, then automatically the REDs would be out of line. Would the REDs have an influence over pricing?

Mr Aphane referred to the employee transfers and said that the Labour Relations Act would be looked at. The intention was not to have job losses.

Mr Radebe said that the intention of the EDI restructuring was for electricity supply to be more effective and to be cheaper. He asked what the expected time of arrival of REDs was. EDI Holdings had put forth the date of January 2010. He asked what the role of the Department was in all of this. What would be the impact of the 40% increase by Eskom? EDI Holdings maintained that electricity would be cheaper under the REDs.

Mr Aphane said that it would be prudent to work with an 18 month timeframe for the REDs. He respected the urgency of the issue but did not wish to make promises that he could not keep. 

Ms Mathibela asked if lessons had been learnt from the RED1 experience. She asked whether the public participation process was starting afresh.     

Mr Aphane replied that the public participation process was a requirement in terms of the Constitution. Perhaps not on the same exhaustive level as it had been done before. He added that lessons had been learnt from the RED1 experience.

An EDI Holdings representative agreed with the Committee that the process needed to speed up. He conceded that the issue had been delayed.  The restructuring was being done to improve quality of delivery and to look at the range of tariffs being charged.

The CEO of EDI Holdings, Ms Phindile Nzimande, added that the REDs would collect surcharges on behalf of municipalities and pay it over to them. Dividends would also be paid but at a later stage. Payment of dividends would depend on performance. The idea was to harmonise differing tariffs over time. Electricity would remain the domain of municipalities. All the REDs were doing was to provide a service to them.

Ms Thabethe was not happy with the 18 month timeframe. She felt that the issue needed to be prioritised. The Chairperson said that matters could also be fast tracked in Parliament. She believed that REDs was the solution to the problem. The 18 month timeframe was considered unacceptable and the Chairperson felt that the Department was dragging its feet. Ms Thabethe noted that the Committee required a progress report on the issue from the Department before Parliament adjourned in November 2009.

Mr Makubela proposed that the Department consult with the Portfolio Committee on Justice. The Committee would be informed by way of a letter on the progress being made and what the plan for fast tracking the constitutional amendment from Justice was.

The Chairperson asked what the proposal meant considering that the Justice Portfolio Committee was one of the busiest committees in Parliament. The Committee wished to have the process fast tracked as the REDs needed to be realised.

Mr Makubela responded that the Department would do its level best to fast track the process. He however asked for assistance from the Committee as the Department was unsure as to how to influence the parliamentary process. The Department would come back to the Committee over the issue after it had done some consultation.

The Chairperson asked when the Department intended to get back to the Committee. 

Mr Makubela stated that he could not give an exact date as the Minister would have to be consulted. The matter was now in the parliamentary process.

The Chairperson was adamant about a timeframe being set and said that the Department should inform the Minister that the issue needed to be fast tracked.

Mr Makubela felt it best that the Committee should decide on when the Department should report back to the Committee.

Mr Motau suggested that seven days was ample time. The Department should report back to the Committee on the 22 September 2009.

The Committee agreed.

Mr Radebe said that the report should be detailed and had to be specific.

The meeting was adjourned.

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