Electricity Distribution in South Africa: Departmental and entity briefings


21 February 2012
Chairperson: Mr S Njikelana (ANC), Mr C De Beer (Northern Cape, ANC) & Mr F Adams (Western Cape, ANC)
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Meeting Summary

Various departments and entities briefed the three Committees, sitting jointly, on the Electricity Distribution Industry (EDI) in South Africa.

The Department of Energy noted that electricity distribution was undertaken by Eskom and 187 Municipalities under the distribution license issued by National Energy Regulator of South Africa (NERSA). Municipalities accounted for approximately 40% of sales revenue and 60% of customer base. EDI had an asset replacement value of R260 billion, had 375 957 km of overhead line, 216 927 km cable and 9,2 million customers. Its average asset age was over 40 years and it had approximately 31 000 employees. Regional Electricity Distributors were established after a Cabinet’s approval of the transition process in 1999, EDI was established in 2003, and one RED was established in 2005 but wound up after 18 months. In 2008, EDI had done a study into the maintenance, rehabilitation and strengthening of distribution backlogs, showing the backlog then to be at R27.4 billion. An inter-departmental task team was established, and various
funding options were considered. In 2010, Cabinet approved a new focus on addressing the challenges affecting municipalities, as well as the winding up of EDI Holdings. The proposed Distribution Asset Management Programme was being prepared.

The Department of Cooperative Governance and Tradition Affairs (COGTA) said that it was crucial to ensure financial viability and sustainability of local government. Municipalities
depended on electricity for revenue but under invested in infrastructure, and this could not continue. The backlog, estimated at R27 billion in 2008, was increasing by R2.5 billion every year. EDI had, since 2003, accumulated useful knowledge, and it urged that this should not be abandoned or lost. Many of the models proposed remained relevant and should be revisited, and financing models were presently under discussion with National Treasury. Skills development and retention needed to be addressed. There was a need to look at municipalities’ capacity to maintain infrastructure, to get policy certainty and stakeholder commitment.  COGTA was presently finalising the Municipal Infrastructure Support Agency (MISA), hopefully to be a government component, which would look at broad services such as water, sanitation and electrification. Its 80 engineers and technical experts would assist municipalities with infrastructure planning, execution and monitoring and evaluation.

The Financial and Fiscal Commission (FFC) noted that infrastructure could be a key driver of growth, but noted significant backlogs, underspending of capital budgets, low spending on repairs and maintenance and low technical capacity. A 2009 World Bank study on municipal infrastructure finance, estimated that local government would require R500 billion over the next 10 years to meet its infrastructure investment needs. Although current demands for electricity were being met, there was a need for major capital investment in new infrastructure for both generation and transmission. Distribution was beset by inadequate operations, maintenance capacity, lack of skilled personnel, and ageing infrastructure, worsened by poor maintenance in the past. Municipalities currently funded repairs and maintenance from their operating budgets. No alternatives had been decided upon after closure of EDI Holdings. There were risks of compromised service delivery, higher repair costs and distorted linkages in the economy, which would impact on productivity and profitability of companies, and increased backlogs. The FFC urged that reform must be comprehensive and unified, and must address the entire electricity value chain, through a differentiated approach that recognised variances in performance of different distributors. FFC outlined its previous recommendations to government, which still held good, including more funding, working with NERSA, and national and provincial government assistance to municipalities to isolate and correct poor revenue collection, as well as incentives to environmentally efficient practices. Government should also actively pursue more spatially compact cities.

The South African Local Government Association outlined the provisions of the Electricity Regulation Act, and the Constitutional rights and obligations of municipalities in regard to electricity reticulation. Most municipalities had “inherited” Eskom as a distributor, and this led to dual treatment that did not benefit municipalities. There were no service level agreements between Eskom and municipalities, and where Eskom was a distributor, the municipalities received no income from electricity distribution. The SALGA National Conference resolved that all decisions on service providers should be decided through proper Council processes, and service level agreements would in future be required. There were legislative overlaps about prices and tariffs, and SALGA set out its interpretation, intended to allow for implementation of both pieces of legislation. The industry showed a high degree of inefficiency, with low investment rates in municipalities, critical vacancies and leakage of Free Basic Electricity to non-qualifying households. Even when the Department of Energy (DoE) was mandated to conduct a review, insufficient funding was given. SALGA recommended alternative approaches to REDs, lobbying for funding for refurbishment, and continued engagement with NERSA on tariffs. The requirement of 80% occupancy of housing developments before electrification must be dropped, and the Minister of Finance would be asked to prescribe norms and standards for municipal surcharges. Rehabilitation should not be the task of municipalities alone and SALGA proposed that a national municipal infrastructure refurbishment fund be created.

The National Energy Regulator of South Africa (NERSA) outlined its mandate, powers and duties. It noted that although it regulated 188 electricity distribution licensees, from 175 Municipalities, Eskom and 12 private distributors, tariff rationalisation and harmonisation were lacking. Most municipalities did not ringfence electricity, and incorrect information was often furnished to NERSA. There was a three month difference in year-ends of Eskom and municipalities, and non-alignment also with the NERSA tariff determination process timelines. NERSA was trying to harmonise the tariff structures. It conducted distribution compliance audits. The guideline increases allowed 6% of revenue for maintenance, which could be increased if motivated. Tariff levels varied to try to recover costs, but municipalities added surcharges, and free basic electricity varied across municipalities.

Electricity Distribution Holdings(EDI) former Chairperson outlined the work that EDI Holdings had done  from 2003 to 2010, particularly the Approach to Distribution Asset Management (ADAM) to address infrastructure challenges. It conceded that the current business model for electricity distribution was not sustainable, as there was insufficient capacity and investment in EDI infrastructure and skills, leading to underperformance. EDI Holdings too raised the challenges of ageing infrastructure and the backlogs, saying that urgent national intervention was required. It believed that ADAM would still be an excellent basis for a turnaround initiative, but this needed cooperation of all key industry players and leverage of existing stakeholder structures and institutions.

The Association for Municipal Electricity Undertakings (AMEU) offered technical support to SALGA, had been involved in the EDI restructuring and had been in favour of the REDs. It outlined the challenges, including additional challenges of supply chain management, theft of electricity, illegal connections, non-ferrous metal theft, and bulk Eskom tariffs. It believed that ADAM funding was required, but even if this were made available, distributors would still struggle. Other issues that needed to be addressed included training of staff, cross boundary supplies, revenue collection and license conditions.

Eskom noted that it attended to generation, transmission and distribution of electricity, and was licensed by NERSA. It had a total electricity sale of 114 043GWh and more than 4.7 million customers, providing electricity directly to 45% of all end-users in South Africa. It had direct customers (industrial, commercial, mining, agricultural and residential) and redistributor customers (mostly municipalities). The cost per unit calculations were outlined. Eskom planned to spent R68 billion on capital expenditure in the next six years, of which R14.5 billion would be dedicated to refurbishment, in the hope that the backlogs would be eliminated over ten years. Its statement of challenges reflected what other presenters had said, but it focused on systems capabilities, disparate tariffs and customer services, and employee skills and conditions of service. Eskom proposed assistance to municipalities, including technical skills development, pricing and tariff structure, energy losses management, contact centre access and setup, investment, network and master planning, maintenance and operations and demand side management. In addition other areas were formal integrated risk management process, technical standards, credit and revenue management (knowledge sharing) and business and financial management support. 

National Treasury said it continued to provide significant support to local government, and noted that municipal budgets had to be funded and realistic, maintenance of existing assets needed urgent attention, and own funding of capital budgets needed to increase. Cash reserves were depleted, and there was general under-pricing of municipal services and unrealistic revenue projections. Operating expenditure was too high, and was driven by non-priority spending, and some capital budgets were too ambitious with too little real spending on repairs and maintenance. There was increased reliance on grants, with own contributions at less than 50% of total capital spending, and high consumer debt. The tariff determination process was outlined. National Treasury supported the formula proposed by NERSA. Municipalities were encouraged to design appropriate structures for tariffs with a good balance between low income and other customers. National Treasury was trying to achieve transparency in electricity budgeting and expenditure, whilst NERSA was to introduce standardised reporting, and NERSA, Eskom and SALGA were to address implementation challenges with respect to Inclining Block Tariffs. There was an ongoing review of the current local government fiscal framework, coupled with reforms already made to the local government equitable share to direct additional resources to small and poor municipalities. The review of the EDI Holdings external audit was to be done at end March 2012.

Mr D Louw, an expert in electricity distribution, reiterated many of the challenges with the distribution industry, and noted that although there was a plan to address generation challenges, there was none to address distribution-related challenges. ED industry performance had declined so it could not meet projected economic growth or create sustainable jobs, and an integrated and holistic approach was needed. Skills, recruitment and technology all had to be addressed. This would require visible and committed leadership and firm decision-making, to pursue
appropriate technology solutions and create a more intelligent grid which would improve service delivery.

Vhembe District Municipality outlined its programme, Operation Tshedza, for acceleration of delivery of services to over 20 700 households before end June 2013. This would be done using Integrated national Electricity Programme (INEP) grant funding. The backlog was being reduced by about 9 000 households per year, but this needed to be greater to avoid negative impacts on learners and residents, as well as the ecology.

Centlec was a municipal entity wholly owned by the Mangaung Local Municipality, which provided an electricity distribution service in the Free State to five local municipalities. It had five areas of focus, including supply, backlogs, skills, skills and profitability.

Members asked how many municipalities adhered to using 7% of revenue on maintenance. They were critical of overly-high surcharges and asked who was regulating these charges and how it was monitored. The specific mandate of NERSA was queried. They believed that the funding of municipalities through tariffs on electricity was not sustainable, and queried why electricity charges were cross-subsidising other services. Members also asked about timeframes to address the issues, wondered if the Ministers would be held accountable for the strategies, asked where the 80 COGTA engineers had been deployed, and suggested a refocus of SALGA on training of Councillor oversight.
They enquired if the inter-departmental task team was functional, what it was doing, and when the Memorandum to Cabinet would be finalised.

Meeting report

Electricity Distribution in South Africa: Departmental and entity briefings
Chairperson's Introductory Remarks
The Chairperson noted that the briefings were made to the Portfolio Committee and two Select Committees, and noted that the current dire state of electricity distribution meant that a comprehensive intersectoral approach was needed.

Department of Energy (DoE) presentation
Ms Nelisiwe Magubane, Director General, Department of Energy (DoE) said that electricity distribution was the final stage in the delivery of electricity to end users. It was undertaken by Eskom, 187 municipalities and a few private distributors under distribution license issued by National Energy Regulator of South Africa (NERSA). Municipalities accounted for approximately 40% of sales revenue and approximately 60% of customer base, with Eskom taking up the remainder.

The Electricity Distribution Industry (EDI), according to 2008 figures, had assets of about R260 billion (asset replacement value), 375 957 km of overhead line, 216 927 km of cable and 9,2 million customers. It was an asset intensive business. Most assets were aged at 40 years and over. There were about 31 000 employees.

A transitional process for electricity distribution was approved by Cabinet in 1999, and Cabinet approved the establishment of Regional Electricity Distributors (REDs). It approved the EDI blueprint in 2001 and EDI Holdings was established in 2003. One RED was established in 2005, but was wound up after 18 months. In December 2010, Cabinet took the decision to wind up EDI Holdings.

Mr T Audat, Acting Chief Director, DoE, gave an overview of EDI. The legislative mandate governing the sector was Section 156 and Chapter 7 of the Constitution, as well as the Electricity Regulation Act 4 of 2006 (the ERA).

A study
conducted by EDI Holdings in 2008 on the status of distribution infrastructure revealed that the maintenance, rehabilitation and strengthening backlog for distribution was at R27.4 billion. Assets needed urgent and immediate rehabilitation and investment to reverse the downward spiral. A Business Plan was developed by EDI Holdings, introducing a holistic Approach to Distribution Asset Management (ADAM). He noted that the total backlog, then, of R27,4 billion comprised of R2,7 billion maintenance, R8.2 billion refurbishment and R16,4 billion needed for short term strengthening (See attached presentation for breakdown of investment requirements per region).

An inter-departmental task team had been established, which comprised of National Treasury, National Energy Regulator of South Africa (NERSA), Department of Cooperative Governance and Traditional Affairs (COGTA), Department of Public Enterprises (DPE), Department of Energy (DoE), Department of Justice and Constitutional Development (DoJ) and Department of Economic Development (EDD). Various funding options were considered, including a fiscal allocation, Municipal Infrastructure Grant (MIG), increased tariff allocation per entity, increased multiyear price determination allocation, loans to municipalities (from development finance institutes), grant/donor funding, or a mix of these options.

Cabinet’s decision in December 2010 was that focus must be directed to addressing regulatory challenges affecting municipalities (including network rehabilitation). EDI Holdings would be wound up, under an administrator. A Cabinet Memo was being prepared on the rehabilitation of the distribution network, to request approval of the proposed ADAM programme, and approval of the initial pilot phase using the remainder of the restructuring multi-year allocation.

Department of Cooperative Governance and Traditional Affairs (COGTA) presentation 
Mr Ricardo Hansby, Deputy Director General, Department of Cooperative Governance and Traditional Affairs said that the problems in the electricity sector were unique. COGTA was particularly concerned about affordability of electricity to the poor. COGTA had a mandate to ensure that local government  served communities. The financial viability and sustainability of municipalities was vital. For some time municipalities had depended on electricity for revenue, yet under-invested in infrastructure that provided the source of income, and this anomaly could not continue.

Mr Hansby said that there were service delivery challenges in electricity distribution. The discourse on the EDI was not new, but some of the past discussions were still relevant. He repeated that the infrastructure backlog was at R27 billion, and it was estimated that this backlog was increasing by R2.5 billion per year, which meant that it could be as high as R35 billion in 2012. EDI Holdings was established in March 2003, to lead the restructuring of the industry, and had, over the last seven years, accumulated a body of knowledge including a business plan for ring fencing the industry and ADAM. He urged that the experience, skills, capacity and body of knowledge should not be lost in the new process. The whole objective was to provide low cost electricity to all consumers, equitable tariffs for each customer segment, and reliable and high quality supply and service to all customers, to support government’s social and economic development plans. COGTA played a role in supporting sector departments to meet electrification targets, and supported municipalities to meet their targets for basic services, whilst more broadly contributing to employment and economic development.

He said the Cabinet resolution to establish six REDs as public entities that would ensure accessible, affordable, reliable and sustainable provision was important. Many of the models remained relevant and should be revisited as part of the current debate. However, at operational level, a financing model for the industry was needed. Intergovernmental fiscal relations would play a critical role, and COGTA was currently debating issues with National Treasury (NT), in preparation for a Fiscal Intergovernmental Relations Summit, to determine the fiscal model. There was also a need to address skills development and retention, and to develop a framework to strengthen the capacity of municipal distributors to maintain infrastructure. Now that DoE was taking up the ADAM programme again, the process should move forward. He added that benchmarking and monitoring between distributors would be needed, to avoid differing standards and infrastructure development.

Mr Hansby concluded that lessons should be learned from the RED that had been closed. Many of the skills from EDI Holdings had been lost, and were not reabsorbed into the sector. Policy certainty and stakeholder mobilisation for a shared vision were vital. There was broad consensus on the restructuring exercise, but there was a need for financial resources to support transformation, including serious discussions with all roleplayers. The focal areas of ADAM should remain. He noted that COGTA had set up the Municipal Infrastructure Support Agency (MISA), and Cabinet approval was awaited to establish it as a government component.  MISA would look at broad services such as water, sanitation and electrification, in line with the ADAM principles. It had about 80 engineers and technical experts, who would assist municipalities with infrastructure planning, execution and monitoring and evaluation, whilst COGTA would coordinate all stakeholders, who would be led by DoE.

Financial and Fiscal Commission (FFC) presentation
Mr Bongani Khumalo, Acting Chairperson, Financial and Fiscal Commission, noted that infrastructure was a key lever for accelerating growth, but there were significant backlogs, underspending on capital budgets, low spending on repairs and maintenance and generally low technical capacity to guide implementation of infrastructure projects. A 2009 World Bank study on municipal infrastructure finance, estimated that if the local government sphere was to meet its infrastructure investment needs, it would require R500 billion over the next 10 years (divided into R180 billion for new infrastructure, R80 billion for backlogs and R240 billion for rehabilitation).

Ms Sasha Peters, Researcher, Financial and Fiscal Commission, outlined that the generation industry was satisfactory to meet current demand, but major capital investment in new infrastructure would be needed to ensure that demand could be met over the next five years. Risks included ageing infrastructure, completion of new projects and coal supply. The transmission was currently satisfactory and could meet current demand, although again major capital investment was required to meet needs over the next five years. Distribution was problematic, as there was inadequate operations and maintenance capacity, shortage of skilled personnel, and ageing and overloaded infrastructure. The municipal infrastructure was poorly maintained, with lack of capacity to meet demand. A failure to make significant investments would have major impacts on the national economy.

Mr Khumalo said that after Cabinet had decided to wind up EDI Holdings, there was no indication of any alternatives. The FFC currently did not know what the way forward would be, and restructuring remained as an outstanding issue. He repeated the DoE estimates of the backlog, and said the 2011 SAICE Infrastructure Report Card estimated that backlogs grew by R1.6 billion per annum.

Presently municipalities funded repairs and maintenance from their operating budgets. This led to compromised service delivery, higher subsequent repair costs and strain on public finances, and distorted linkages in the economy which impacted on productivity and profitability of companies. The backlogs and stalled restructuring had created policy uncertainty and affected investment in the sector.  Following previous reform attempts, it was now realised that reform should not be undertaken piecemeal but should address the entire electricity value chain of generation, transmission and distribution, must address root causes of the challenge, and must follow a differentiated approach that recognised variances in performance of individual electricity distributors. Municipalities needed to be taken on board from the start.

Mr Khumalo noted that FFC had previously recommended that government should implement a fully comprehensive national infrastructure maintenance strategy, especially for those infrastructure classes with a high impact on unemployment and poverty. It also recommended dedicated maintenance objectives, and that government should work with NERSA to put in place a financing framework that dealt effectively with electricity pricing. Increased funding should be directed towards infrastructure programmes that were linked to basic services, including water, health, electricity, roads, transport and communication, and there should be an increased and stable flow of funds for maintenance, rehabilitation and addressing of backlogs in the long-term. Expenditure should be reprioritised towards repairs and maintenance. National and provincial government should assist municipalities to identify the primary cause of poor performance in billing and revenue collection, and then design appropriate remedial strategies. He noted further than since climate change induced increases in electricity infrastructure expenditure, government should consider providing a performance-based conditional grant to municipalities that rewarded or incentivised environmentally efficient practices, including minimisation of electricity losses, elimination of illegal connections, and achieving energy savings by customers. FFC also recommended that government should actively pursue development of more spatially compact urban forms for cities, for efficient electricity infrastructure distribution.

South African Local Government Association (SALGA) presentation 
Mr Chris Neethling, Member of National Executive Council, South African Local Government Association, outlined the provisions of the Electricity Regulation Act (ERA), in relation to generation, transmission, distribution, reticulation by municipalities, trading and the import and export of electricity. A distribution license and a trading license were required for the distribution and sale of electricity to end-users. He then noted that section 156 of the Constitution gave executive authority to municipalities for certain local government matters, and one of those was electricity reticulation. The Municipal Systems Act (MSA) also outlined municipal services. (See attached presentation for full details).

Most municipalities “inherited” Eskom as a distributor and NERSA simply issued Eskom with a license to distribute in a given area, without a Municipal Council decision being taken on service delivery mechanisms, in line with section 78. This was an area of dual regulation, and it led to unfair treatment of municipalities in areas where Eskom was a distributor. There were no service level agreements between Eskom and municipalities, resulting in municipalities being unable to use electricity as a credit control measure in such areas. Where Eskom was a distributor, municipalities did not get any income from electricity distribution, despite the fact that electricity revenue could be a key source of funding. The SALGA National Conference had resolved that all decisions on providers of municipal basic services must be taken through a Section 78 of MSA process, and that service level agreements must be signed, which must include use of electricity supply as a credit control measure, and cover implementation of a revenue surcharge.

Mr Mthobeli Kolisa, Executive Director, South African Local Government Association, noted that there was a further overlap between the ERA and Municipal Finance Management Act (MFMA), in that both Acts dealt with the imposition of tariffs, even though the ERA concentrated on tariffs charged by licensees and the MFMFA dealt generally with municipal tariffs. There was an apparently anomaly, but SALGA had opted for an interpretation that gave full force and effect to both Acts. It accepted that NERSA determined the tariffs and that municipalities, must simply “levy” those pre-determined tariffs, in the sense of imposing them, rather than determining them. SALGA then requested NERSA not to undermine the financial viability of municipalities, and to ensure that determinations were done within a time that allowed municipalities to comply with local government legislation for tariff setting. Unfortunately, this had not yet yielded positive results. NERSA had not completed the process begun in the last year, of issuing consultation papers on the tariff determination process and on the Inclining Block Tariffs (IBTs), despite SALGA having raised its concerns on both. NERSA also had not yet issued a public guideline regarding municipal tariff increases, or a final determination in respect of process. This negatively affected municipal budgeting processes.

SALGA believed that the EDI was characterised by high inefficiency, owing to fragmentation, inequitable treatment of consumers, inequitable treatment of municipalities in areas where Eskom was a distributor and where municipalities were distributors, and noted that network outages as a result of distribution failures were on the increase. Investment rates in most municipalities were very low, the infrastructure could not support growth initiatives and national projects such as electrification, security of supply, and demand side management. There were critical vacancy rates of around 50% at electricity departments in municipalities. There were leakages of Free Basic Electricity (FBE) to non-qualifying households and negative effect of tariff increases on poor consumers. Cabinet subsequently took a decision to discontinue the process of creating the REDs, and mandated DoE to review the whole electricity value chain and address the challenges. Although DoE had initiated the ADAM programme, it was severely under-funded.

NERSA had introduced inclining block tariffs (IBT) to try to provide relief to low-usage customers, in the face of increasing electricity prices, but there were many shortcomings, and rigid application of these had led to loss of domestic revenue, calculated at about 25%, (or 10% when calculated against total revenue). The SALGA National Conference resolved that SALGA should engage with DoE to develop an alternative approach to the REDs, support implementation of ADAM, but also lobby for more funding to address the refurbishment backlog. SALGA would continue to engage with NERSA on  principles, design and implementation of IBTs, and improve municipal participation in the anti-electricity theft campaign. SALGA would also lobby that there should not have to be 80% occupancy of housing developments before electrification. It wanted DoE to amend the policy to provide the full cost of connections in areas serviced by both Eskom and municipalities. SALGA would also lobby the Minister of Finance to prescribe the compulsory national norms and standards for imposing municipal surcharges in terms of section 8(1) of the Municipal Fiscal Powers and Functions Act.

SALGA summarised that municipalities had inherited old infrastructure that already was due for replacement, and which was a liability rather than an asset. This infrastructure had served only a minority of the population of South Africa prior to 1994, largely along racial lines. Rehabilitation of old infrastructure should not be left to municipalities alone. SALGA would lobby for establishment of a national municipal infrastructure refurbishment fund, which also would be used to leverage private sector investment).

National Energy Regulator of South Africa (NERSA) presentation
Ms Phindile Nzimande, Chief Executive Officer, National Energy Regulator of South Africa, outlined the background and legislative mandate of NERSA (see attached presentation for full details). It was to was to licence and/or register generators, distributors (including municipalities), traders and importers and exporters, as well as to regulate prices and tariffs, monitor compliance with licence conditions and issue rules designed to implement the national government's policy framework, the Integrated Resource Plan (IRP) and the ERA.

Municipalities’ electricity supply businesses were included under the ERA. Section 27 of that Act imposed specific obligations on the municipalities to conform to technical and operational requirements for electrical networks, as determined by NERSA. The primary means of regulation was through licence conditions.

Mr Thembani Bukula, Full time Regulator Member: Electricity, NERSA, noted that NERSA regulated  188 electricity distribution licensees, broken down into 175 Municipalities, Eskom and 12 private distributors. There was a lack of tariff rationalisation and harmonisation. The electricity business was not ring-fenced in most municipalities. Old electricity infrastructure required major maintenance and refurbishment. The non-existence of formalised maintenance practices had contributed to the R17 billion backlog. There was a dual regulatory reporting system between National Treasury and NERSA and inconsistent information provided to NERSA, such as D-forms incorrectly completed by municipalities, or good information not provided at all. Financial year ends for different stakeholders were not aligned, with a three month time difference between Eskom and municipalities, and the MFMA budget processes and NERSA tariff determinations were not aligned.

NERSA had a project to harmonise tariff structures. An Electricity Distribution Maintenance Summit (EDMS) was convened in 2008. Distribution compliance audits were carried out to check conformance with regulatory requirements. The guideline tariff increase was that 6% of revenue could be put to maintenance, but an above-guideline increase could be given, if properly motivated. Tariff levels varied, to try to achieve cost-recovery, between commercial, residential and industrial customers. Levies and surcharges were added by the municipalities, and this could result in up to 100% mark-up.  Free Basic Electricity (FBE) and IBT implementations also varied across the different municipalities. Bad debts and poor revenue collection also impacted on tariff levels.

Mr D Ross (DA) asked how many municipalities adhered to the guideline of around 7% of revenue being used for maintenance of facilities.  

Mr Hansby responded that COGTA had some sense of spending patterns of municipalities on capital expenditure, and although he did not have the figures available now, he would send them to the Committees. Most municipalities probably did not adhere to that guideline. 

Mr Ross asked if an application could be made to National Treasury to align the financial years.

Mr Bukula said that NERSA had made such a proposal to National Treasury and it was hoped to achieve alignment to ensure that all entities who distributed electricity had the same financial year end.

Mr Ross stated that municipalities should be made accountable because they sometimes imposed surcharges of 100% to 125% on electricity.

Mr Bukula said that NERSA had found that costs ranged between about 60% to 70% of ringfenced funds. About 30% of the cost typically related to power purchase, with another 30% going to maintenance, shared services and manpower costs. The 60% to 70% was determined by the price of electricity charged by Eskom, and a 25% increase by Eskom resulted in a 20% increase by municipalities. Inflation was another factor that influenced electricity increases, but municipalities had not complained about the national guide issued by National Treasury. However, all 187 municipalities were different. NERSA would have to approve each one separately. 80% fell within the guideline while the other 20% had made motivations and were then approved. NERSA would not want to increase the regulatory burden and dictate that each municipality should apply for a tariff increase. 

Ms Magubane added that the DoE was working with National Treasury to ensure tighter regulation around surcharges.

Mr L Greyling (ID) observed that funding municipalities through tariffs on electricity was not sustainable.

Ms Magubane said that there was no incentive to reduce the cost of energy, because this meant that the revenue of municipalities needed to also reduce. This was a challenge. It must be remembered that municipalities needed enough revenue for service delivery.

Mr Hansby added that if the electricity function was removed from municipalities, this would not fix the problems, and intergovernmental fiscal relations was the major issue that had to be addressed.

Mr Greyling asked why electricity tariffs should be used to subsidise other services such as water.

Mr Hansby replied that services needed to be priced appropriately, and billed properly, so that one did not subsidise others.  Most municipalities were forced to rely on electricity as a source of income because there were no other alternatives, but some municipalities had been permitted to do so, even if they could create savings by introducing efficiencies in other areas.

Mr Khumalo said that FFC took the view that if the policy decision was taken that electricity charges should not be used to subsidise other services, then the system must respond to this, and grants to the local government sphere should increase.

Mr Kolisa (SALGA) added that other services were water, sanitation and refuse removal. If consumers refused to pay for water, sanitation and refuse, there would be severe impacts on public health, so it was relatively safer to limit the increases to electricity, where discontinuance of service for non-payment would impact only the individual customer.

Mr Greyling asked who was regulating what municipalities could charge.

Ms Peters replied that the Municipal Systems Act required that tariffs should reflect the cost reasonably associated with delivery. This implied that the cost of maintenance should be included and NERSA made provision for this. However, it was doubtful whether that component went to repairs.

Mr D Smalle (DA) asked if NERSA should intervene on surcharges being imposed by municipalities.

Mr Bukula replied that NERSA merely determined the tariffs but had no power to enforce them at present. Some municipalities might add 2c per kilowatt hour, whilst others might add 5c. They merely had to advertise the increases in the Government Gazette, for the required time, before being allowed to implement.

Mr Smalle asked if there were time frames to address the challenges, and asked if the Minister would take responsibility if the strategy failed.

Mr Hansby replied that the turn around strategy was the basis upon which the delivery agreement on Outcomes Nine was developed, and the delivery was incorporated into the Minister’s performance agreement, so the Minister would be accountable for performance on the local government turnaround strategy.

Co-Chairperson Mr de Beer asked where the 80 COGTA engineers had been deployed.

Mr Hansby replied that most of them were sent to vulnerable rural municipalities, where the need was greatest. There was a target to support 100 municipalities, and this was in line with the Cabinet decision to support 21 rural municipalities.

Mr de beer suggested that SALGA should review its training on oversight functions of councillors.

Mr Kolisa replied that SALGA was looking into this. The initial training was focused on creating understanding of local government amongst the newly elected councillors, and this would be followed up with other focal areas, including how oversight was done.

Mr K Moloto (ANC) asked which legislation governed the surcharge, and why it did not limit them.

Ms Magubane said that DoE was engaging with NERSA to try to find ways of strengthening the regulatory regime, as a short term measure. The DoE was open to suggestion on how shortcomings in the ERA could be addressed.

Mr Moloto said that SALGA’s points had been raised in previous meetings. SALGA had previously stated that NERSA, when making its determinations, tended to compare the municipalities’ cost structures with those of Eskom, and SALGA had given its view that this was incorrect and unfair. He asked if SALGA was still of that view.

Mr Kolisa replied that there was an urgent need to address the fiscal framework for local government. Without this, any other action would merely addressing the symptoms, and not the cause of the problem.

Co-Chairperson Mr Njikelana asked if the inter-departmental task team was still functional.

Ms Magubane said that it was. It was addressing how revenue would be sourced for service delivery.

Mr Njikelana asked when the Cabinet Memorandum would be finalised.

Ms Mabugane said it would be finalised before end-March. DoE would like to go to Cabinet with concrete proposals around the funding mechanisms.

Electricity Distribution Holdings Chairperson’s presentation
Mr Duma Nkosi, Chairman, Electricity Distribution Holdings said that since the establishment of EDI Holdings in 2003, extensive work was done in recruiting competent resources, developing a comprehensive understanding of the electricity distribution industry, establishing the EDI performance baseline and future benchmarks, and developing solutions and a business model which could lead to a sustainable EDI. In addition, stakeholder engagement structures had been set up, and EDI Holdings had facilitated the ring-fencing of distribution by Eskom and 57 municipalities, in preparation for the industry consolidation. Its development of ADAM in 2008 was to address EDI infrastructure challenges.

EDI had been generating revenue. However, the current business model was not sustainable and the number of good performers were decreasing at a rapid rate. In addition there was not sufficient investment in the EDI infrastructure, and skills and resources were in many instances not available to ensure effective asset management. Another major challenge was that the recruitment, training and retention of skills and technology was not effectively used to enhance performance. EDI was under performing if measured against realistic industry standards

Mr Nkosi noted that electricity distribution infrastructure was ageing, and he put the average age of infrastructure at 50 years. The infrastructure investment backlog was growing at a rate of R2.5 billion per annum. Meantime, the EDI infrastructure performance was getting worse. The ring fencing and benchmarking work done by EDI Holdings indicated that only a small percentage of EDI asset owners were increasing their investment in the assets. In the majority of cases the investment shortfall was significant and growing, and urgent national intervention to address the condition of infrastructure would be needed.

Without such national intervention, Mr Nkosi warned that South Africa was “heading for disaster” in electricity distribution. He noted that ADAM provided an outstanding basis from which to work, and introduce a national asset turnaround initiative. There was no need to “reinvent the wheel”. There were already technology options available that could assist in improving the performance of the EDI. The closing of EDI Holdings left a vacuum in the EDI and its focused approach and management were now diminishing. He reiterated that the infrastructure situation could be saved by urgent intervention, but this would need cooperation of all the key industry players and leveraging of the existing stakeholder structures and institutions.

Association for Municipal Electricity Undertakings (AMEU) presentation
Mr Michael Rhode, President; Association for Municipal Electricity Undertakings, noted that this Association was established in 1915, and offered technical support to SALGA. It was involved in the EDI restructuring process from 1992 to 2011 and had supported the RED model. AMEU agreed that the electricity distribution industry was in need of infrastructure investment, but also suggested that other areas needing attention were supply chain management, electrification, tariff Issues, shortage of skilled staff, theft of electricity, illegal connections and non-ferrous metal theft and bulk Eskom tariffs.

Rehabilitation of the electricity infrastructure required backlog maintenance and refurbishment, and municipal capital funding. Municipal operating expenditure increases and municipal tariff increases imposed by NERSA often limited the ability of municipalities to put a minimum of 5% of operating expenditure to network maintenance. ADAM funding was required. EDI Holdings had proposed the creation of a central fund to assist in the reduction of the estimated backlog. Even if this funding were made available, municipal distributors would still face challenges, because of supply chain management issues, delays, and shortage of skilled staff. Other key issues that needed consideration were theft of electricity and copper, and recruitment and retention of staff, training of staff, cross boundary supplies, tariffs, supply chain management processes, revenue collection and license conditions.

Eskom presentation
Ms Ayanda Noah, Group Executive: Distribution, Eskom, said that Eskom’s business lay in three main areas: generation, transmission and distribution. Eskom was licensed and regulated by NERSA and ran a ring-fenced business. It had a total electricity sale of 114 043 GWh and more than 4.7 million customers (including transmission customers) as at 30 September 2011. It provided electricity directly to 45% of all end users in South Africa. In addition to its direct customers (industrial, commercial, mining, agricultural and residential consumers), Eskom also provided to redistributors, comprised mainly of municipalities who sold electricity to end customers.

The Electricity cost per unit was calculated by factoring in generation costs, in cents per kWh, transmission (at high voltages), a contribution for asset use and technical losses, distribution (at high to lower voltages), plus administration and billing, by type of service received. NERSA approved the costs and returns recovered from tariffs.

Ms Noah repeated the figures given previously for maintenance backlogs, and said that Eskom planned to spend about R68 billion on capital expenditure in the next six years. Of this amount, about R14,5 billion would be dedicated to refurbishment, and the spending on refurbishment aimed to eliminate the backlog over a ten-year period. She observed that although the EDI restructuring process had been formally suspended, the issues that this process sought to address still existed.

The electricity industry in South Africa was confronted by major challenges such as network maintenance and refurbishment, disparate tariffs and customer services inconsistency, shortage of skills and retention, and security and quality of supply. There were inadequate systems capabilities to operate and maintain the network, and to service customers. There was also a shortage of facilities to service the customer, and the network infrastructure and some electricity departments operated on a low level of maintenance maturity.

She expanded on the challenges of disparate tariffs and customer service. Municipalities offered a base set of electricity delivery services, but there were gaps, leading to inequitable customer experiences. The disparate municipal electricity surcharges led to tariff discrepancies across and within the municipalities. There were high levels of staff attrition in the EDI, due to lack of attractive career paths, and low levels of investment in the critical technical and financial skills training. There was also lack of standardisation on staff compensation arrangements and labour-related issues.

Increasing electricity demand placed pressure on security and quality of supply. Reactive rather than proactive maintenance increased distribution losses. The ageing infrastructure also increased intensity of maintenance and associated costs.

Eskom proposed assistance to municipalities, to assist them with technical skills development, pricing and tariff structure, energy losses management, contact centre access and setup, investment, network and master planning, maintenance and operations and demand side management. Other areas where it could help were formal integrated risk management process, technical standards, credit and revenue management (knowledge sharing) and business and financial management support.  

National Treasury (NT) presentation
Ms Marissa Moore, Chief Director: Public Finance, National Treasury said that municipalities were required to support economic growth, provide basic services, support development, and strengthen governance and the stewardship of resources. The whole local government fiscal framework was designed to finance municipalities, and this included the municipal electricity distribution function. There was a need to reach an appropriate balance between own resources, grants and borrowing, as also the right balance between investing in new infrastructure and maintaining existing infrastructure.

National government continued to provide significant support to local government. There had been massive real growth in national transfers, significant policy reforms and targeted capacity and systems support. She outlined some of the key issues impacting on municipal performance. Municipal budgets must be funded and realistic, to avoid depletion of cash reserves, maintenance of existing assets needed urgent attention, and own funding of capital budgets needed to increase, although they should not be so over-ambitious that they could not be realised. General under-pricing of municipal services was bankrupting municipalities, and revenue projections were unrealistic as they were not based on requirements of the MFMA. In addition, operating expenditures were too high and driven by non-priority spending. The maintenance problems were exacerbated by lack of key technical skills, such as qualified managers, engineers and technicians, and weak asset management systems. Spending on repairs and maintenance was inadequate to maintain assets, and reactive repairs proved more costly than planned maintenance. There was increased reliance on grants. Municipalities, other than metros, were not leveraging private finance to fund economic infrastructure.

Municipalities’ own contributions were now less than 50% of total capital spending. There were high outstanding consumer debts; in December 2010, municipalities were owed a total of R62.3 billion, an increase of 10.8% compared to the previous year. Municipalities were under-pricing their services, because they were not following the MSA principles for tariff setting. She noted that whilst it was not considered too politically sensitive to cut spending on maintenance, this failed to recognise the disastrous impact on the reliability of services.  

Ms Wendy Fanoe, Chief Director: Intergovernmental Policy, National Treasury, said that MFMA Circular 58 outlined the fact that municipalities and NERSA should work together, to ensure that approval of electricity tariffs did not disrupt the compiling of municipal budgets or compromise community consultations on the budget. She set out the time frames, and noted that the Minister of Finance would, on ‘good grounds’, consider NERSA’s final municipal determination after 15 March. Municipalities were urged to examine the cost structures and apply to NERSA for electricity tariff increases that reflected costs and ensured financial sustainability, since the Eskom price would increase by 27% on 1 July 2012. National Treasury supported the use of the formula proposed by NERSA for calculating municipal electricity tariff increases. Each municipality needed to design an IBT structure that was appropriate to its specific circumstances, and that also ensured an appropriate balance between ‘low income customers’ and other domestic, commercial and business customers, and the financial interests of the municipality

Ms Fanoe said that norms and standards on municipal surcharges needed to be guided by the impact on the sector. The possible macro-economic implications of such surcharges to both the municipality and its financial viability, and to the user, must be considered. In addition, it was necessary to consider the impact on future policy initiatives, such as Electricity Demand Side Management, and a historical analysis of the current processes to determine the phasing periods. National Treasury was undertaking budget reforms to provide for transparency in electricity budgeting and expenditure. Regulations had been introduced and a Standard Chart of Accounts was being developed. NERSA, in collaboration with the Accountant General, was to introduce standardised reporting on the municipal electricity function. NERSA, Eskom and SALGA were to address implementation challenges for IBTs. A review of the current local government fiscal framework would complement reforms already introduced, including the reform of the local government equitable share over the last few years, which had directed additional resources to small and poor municipalities, and had enabled municipalities to provide FBE to poor households.

Ms Fanoe summarised that there would be a review of the EDI Holdings external audit at end March 2012, ADAM asset rehabilitation of R27 billion and NERSA’s review of 1c per kWh.

Presentation by Mr Deon Louw
Mr Deon Louw, described as an expert on EDI, noted that the industry was asset intensive and customer-centric, was a large employer and significant player in the economy of South Africa. Despite pockets of good performance, there was a need for urgent investment. The current practices in the EDI were no guarantee for business sustainability and economic growth. There had been significant under-investment in people development, infrastructure and asset management, deterioration of electricity related service delivery in many areas, and supply interruptions cost the economy between R2.9 billion to R8.6 billion per year.

He summarised the 2008 findings of EDI Holdings. He said that although there was a plan to address the generation related challenges, there was no integrated strategy or plan in place to address the distribution related challenges. Current performance of the industry would not be able to cope with the projected economic growth or create sustainable jobs. The performance of the EDI was deteriorating at a rapid rate, and service delivery would become an even bigger challenge in future. If South Africa was serious about finding a sustainable solution to the electricity challenges, then the whole industry would have to adopt an integrated and holistic approach, with support from government, all industry players, business and citizens.

Any option chosen should ensure the sustainability of the EDI, should support economic growth and create job opportunities. It was essential that staff recruitment, training or development and retention be addressed. Technology must be leveraged to enhance service delivery and to improve customer service, revenue management and network performance. He called for an update of the ADAM programme, its adoption and rollout as an integrated multi year plan. It would be necessary to identify the entities and institutions with capacity to provide assistance and consolidation. He concluded that visible and committed strategic leadership, sponsorship, firm decisions, and support from every participant were needed. It would be essential to move away from “business as usual”, and pursue  appropriate technology solutions to create a more intelligent grid that could improve service delivery. A similar approach to the national electrification programme would be advisable. Finally, it was essential that the infrastructure funding allocation be defined, that money earmarked for that infrastructure must be appropriately used and monitored to ensure that the backlog was reduced.

Vhembe District Municipality presentation
Ms Florence Dzhomjere, Executive Manager, Vhembe District Municipality, gave a presentation on Operation TSEHDZA, a programme being run for acceleration of the delivery of electricity services to households in the Vhembe District Municipality. This programme also hoped to achieve universal access to electricity by the 2014/15 fiscal year, thus contributing to the attainment of the United Nations’ Millennium Development Goals. Access to modern energy services would also unlock or stimulate other opportunities for the benefit of the communities in the Vhembe District Municipalities.

The programme aimed to deliver electricity services to more than 20 700 households in the Vhembe District Municipality, before end of June 2013, using Integrated National Electrification Programme (INEP) grant funding allocations. Presently, about 90 000 households in the Vhembe District Municipality were without access to electricity services, and at the moment the backlog was being reduced at less than 9 000 households per year, which would only allow for universal access beyond 2020. This high backlog was impacting negatively on the education of learners and the attainment of the MDGs in her municipality, whilst continued use of firewood for fuel was contributing to soil erosion and desertification. Vhembe District Municipalities did not have electricity distribution licenses; these had been granted to the former Louis Trichardt and Messina towns. Eskom was undertaking operation, maintenance and revenue collection.

In addition to direct benefits, the increased electrification programme would encourage partnerships with other government departments, municipalities, parastatals and the private sector, to achieve shared objectives and to support the government’s job creation agenda by employment and training opportunities in the Programme.

Centlec presentation 
Mr Lungile Bombela, Acting Chief Executive Officer, Centlec, noted that this entity was established in April 2004 as a municipal entity wholly owned by the Mangaung Local Municipality. It provided an electricity distribution service in the Free State to five local municipalities (Mangaung, Kopanong, Naledi, Mantsopa and Mohokare). Now that Cabinet had taken a decision to halt the restructuring of the EDI industry by EDI Holdings, new industry leaders would be needed to address EDI challenges, along with a new strategy and approach and a new willingness and commitment by stakeholders to address EDI challenges was needed. Centlec provincial footprint had five focus areas, namely to ensure reliable supply, eradication of electrification backlogs, skills development, an increasing of  Artisan output, and profitability. It suggested that the enabling legislation would be the Constitution, Ordinance 8 of 1962, the Provincial Lekgotla Resolution and Section 76 of the MSA.

The Co-Chairperson noted that time constraints prevented further questions. Instead, written questions and responses would be exchanged. Some entities may be invited back for further input. He noted that there were further initiatives that needed to be galvanised. It was important to look at how they were informed and communicated, to prepare for a final durable and sustainable programme that would ensure a restructured EDI.

He noted that the Committee had achieved much from this meeting, and all experiences presented were important. The Chairpersons would discuss matters further, taking into account all the issues that had been raised, and decide how the Committees would proceed.

The meeting was adjourned.

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