Restructuring of Electricity Distribution Industry: public hearings

Energy

24 July 2012
Chairperson: Mr S Njikelana (ANC)
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Meeting Summary

The Energy Institute noted that South Africa was a technology leader, but the age of electrical systems was leading to a disastrous situation in the future. Costs were increasing while revenue was decreasing. Budget cuts were affecting the amount of money being spent on maintenance. The system needed to be modernised to face the challenges of the modern world. Although some bold new ideas had been tried, the country was still facing the same problems it had been confronting for some time. Adequate investment was needed to keep the distribution industry in a position to service the people of the country. It noted that Eskom had been the target of unfair criticism.

The Department of Energy spoke about the size of the industry. The value of assets was approximately R260 billion. Government had attempted to restructure the industry by means of the introduction of EDI Holdings and six Regional Electricity Distributors, but this plan had failed. One of the reasons given was that municipalities insisted on their rights to distribute energy as enshrined in the Constitution.

Members raised a number of questions about the differences in performance between Eskom and municipalities. Backlogs in maintenance had arisen primarily due to uncertainty over the structural changes that had been planned. The practice of using electricity revenue to cross-subsidise other services was questioned as was the financial viability of many municipalities. Technical training had to be a priority.

Eskom said it had been willing to adapt to the structural changes in the industry. Its network was in good condition with most of its maintenance requirements having been addressed. They raised the value of forming partnerships to address the challenges in the industry. Eskom argued for an oversight committee to be formed to find solutions to the challenges.

The Department of Co-operative Government and Traditional Affairs had formed a unit to assist with municipal infrastructure. There were significant differences between urban and rural communities. In the later case, maintenance of infrastructure was particularly poor. Staff retention was difficult. The industry needed to be transformed. There were problems with high consumer debt and poor budgeting. The Department was concerned about the practice of municipalities cutting off electricity supplies in order to enforce credit control.

The National Energy Regulator of South Africa had the power to issue licences to power distributors and adjudicated on requests for tariffs. Conditions were applied, but the regulator could not revoke a licence at its own discretion, nor were the fines it issued legally enforceable. Distributing authorities were supposed to divert 6% of their revenue to maintenance but a huge backlog had been allowed to develop. Reporting standards were poor in some cases.

National Treasury supported the concept of ring-fenced funding. Municipalities had a combined surplus of more than R7.6 billion from electricity sales. Provision should be made for maintenance and capital projects. Funding to address the maintenance backlog could come from loans, but the state would not stand surety. The Development Bank of Southern Africa and private funders should be approached for assistance. Treasury supported the concept of two or more municipalities working together to provide a distribution service.

The Financial and Fiscal Commission argued that municipalities needed the resources to fulfil their functions. It was concerned about the affordability of services given price increases on all fronts. A massive investment was needed globally to refurbish electrical systems. The Commission could not comment on the proposed funding models in the absence of a more detailed presentation.

Members asked if there would be any compensation to municipalities if energy-efficient techniques were adopted, as the resulting reduction in consumption would lead to a loss of revenue. They were told that it was difficult to track what was done with the surplus from electricity sales as this all went into a general revenue pool. Grants were not fully utilised due to non-compliance with the associated conditions. Since the demise of the Regional Electrical Distributor model, there had been no viable alternative proposed.

Meeting report

The Chairperson welcomed Members and delegates and said the purpose of the public hearings was to make recommendations to Parliament on the future of the electricity distribution industry (EDI).

Energy Institute (Cape Peninsula University of Technology) submission
Prof Willem de Beer, Specialist Corporate Advisor, South African National Energy Development Institute (SANEDI) said that South Africa had been a technology leader in many aspects. Rolling black-outs, the like of which had never been seen before, had occurred from 2004. The situation had been dealt with. There was a plan to deal with the situation. Plans had been made to strengthen the national power grid. However, without a sustainable distribution infrastructure, services would not reach the customer. The distribution industry played a significant role in the economy of any country.

Prof de Beer said that customers would not pay for an interrupted service. Without infrastructure and effective building, the cycle of supply and usage would be disrupted. A substantial investment in infrastructure was needed. The average age of assets was 45 years. Costs were increasing while revenue was decreasing. Budget cuts impacted on maintenance in particular. Short-term contracts were acceptable, but the industry was being run on this basis without a long term vision.  Customer service levels were decreasing as was service delivery.

Prof de Beer said that various summit meetings had been held. Agreements had been reached but not fully implemented. EDI interventions related to the “business as normal” situation. Challenges started with leadership and management. Ineffective management of the revenue cycle was creating problems. Debts were written off and Treasury had to make up the difference. Paying customers were expected to carry the load of non-payers. There were major technical losses. In some cases, there was no further capacity for expansion.

Prof de Beer said that the assets in place were not designed to face modern challenges. There were challenges with staff retention. The operating model was not the answer to face modern challenges. The majority of municipalities were struggling to pay their bills.

Prof de Beer said that the EDI challenges could be resolved internally given the will and good leadership. There were specific infrastructure challenges. Latest developments in technology had to be considered. Service delivery had to be improved. Resources had to be used optimally. Functional systems had to be used as models of best practice.

Prof de Beer said that there were two successful EDI holdings. There was no improvement elsewhere. The problem in distribution was getting worse daily.

Prof de Beer said that the electrical supply industry was an integrated one. The real challenge was when the link between the grid and end users was dysfunctional. There was no means of alerting the supplier to breaks in supply. He could not see how the distribution could be improved given the challenges in infrastructure. Distributors had to be more alert to the needs of customers. Asset management had to be addressed. A single national process was needed. A consolidated approach was needed to address funding challenges.

Prof Philip Lloyd, a writer and member of the Energy Institute based at the Cape Peninsula University of Technology (CPUT), presented an analysis of the meeting held on 21 February 2012 on the state of electricity distribution. Problems in the industry had been spelled out. The plan had been to distribute assets to the six planned Regional Electricity Distributors (REDs) in the country. This had not worked out for a number of reasons. The same problems were still been experienced.

Prof Lloyd said that EDI Holdings had done a good job with the Approach to Distribution Asset Management (ADAM), which had grown by about R2.5 billion since 2008. ADAM+ was now needed. All the structures were in place to work on this, but nothing had been done. A source of funding was needed for ADAM+. Municipalities reported in two different ways. This was a crazy situation. The National Energy Regulator of South Africa (NERSA) should administer funds using the equitable share formula.

Prof Lloyd said that the Department of Energy (DoE) was in a contemplative mode. The Department lacked the resources enjoyed by EDI Holdings. In 2010 Cabinet had asked the Department to address the regulatory challenges which affected the municipalities. Nothing had emerged from this.

Prof Lloyd said that 80% of municipalities had accepted the NERSA tariffs. This was important. NERSA had a well-established position. A formula was needed for rehabilitation costs.  Tariff income should be used to subsidise other costs. It should not be necessary to use cross-subsidies to pay other costs. Components of the electricity price should cover costs of generation and rehabilitation. There should also be some social cost. Municipal assets should be looked after.

Prof Lloyd said that Eskom was being treated unfairly. There was an offer to assist with technical skills and pricing. The Department of Co-operative Government and Traditional Affairs (CoGTA) had tabled a proposal in the same vein, and the two should be brought together.

Prof Lloyd said it was clear that assets should be better managed. Maintenance, rehabilitation and modernisation was needed. Funds must be better managed to finance these activities. Eskom was being seen as greedy. He did not think that this was true.  Eskom was originally only responsible for servicing areas outside municipal boundaries, but some of these areas had since been absorbed into expanding municipalities. A pricing model should be used based on other investment opportunities.

Prof Lloyd said that there was a complaint that Eskom was delaying electrification of new developments until there was an 80% occupancy rate. This was an unfair criticism. The provision of technical staff should be a licensing condition. He felt that there were sufficient qualified workers available. Proper remuneration was needed. There had been problems at municipal distribution level. Once ADAM funding was sourced this could be addressed. Municipalities had to take responsibility for non-technical losses such as electricity theft.

Prof Lloyd said that there was something missing from the debate. Nobody had raised the issue of an independent system marketing operator. This questioned the need for such an operator based on European practice. In discussion, it was felt that all the institutions were all in place. Action was needed. The question was about Eskom. It was doing a good job in distribution, transmission and generation. Eskom could be restricted to generation and transmission, at which they were working well. Pump storage did not generate electricity.

Department of Energy submission
Mr Thabang Audal, Chief Director: Electricity, DoE, said that Eskom was the main generator of energy, generating 97% of the country's electricity. It had the sole responsibility for transmission systems. As a distributor, it supplied electricity to 46% of customers and accounted for 58% of electricity sales. The balance of distribution was managed by 182 municipalities. Three groups of customers were defined: commercial and retail, residential and industrial. Distribution was the final phase of getting electricity to the customers. NERSA approved the tariffs for both Eskom and municipal distributors. The total value of EDI assets was R260 billion in 2008. There was an overhead cable network of close to 376 000 km, and 217 000 km of underground cabling. There were some 9.2 million customers, and the industry employed 31 000 people. However, the average age of the systems in use was over forty years.

Mr Audal said that EDI Holdings was established in 2003. There were other tasks, one of them being the assessment of the status of assets. There was a huge problem in the distribution industry. In 2005 RED1 was established in the Western Cape, but was wound up within a few months. One of the reasons was the powers given to municipalities by the Constitution. In December 2010, Cabinet decided to wind up EDI Holdings. This did not solve all the problems. The focus of the Department was to resolve these problems.

Mr Audal said that the plan had been to introduce six REDs. Municipalities had certain constitutional rights to distribute electricity. He explained the concept of reticulation as opposed to services. The Electricity Regulation Act regulated the industry. The regulator was empowered to licence operators in all three aspects: generation, transmission and distribution. Municipalities would be required to apply for a licence in accordance with the Act. One of the conditions was the maintenance of systems. Service delivery levels were stipulated in the Act. In 2007 the Regulator had sampled some municipalities. EDI Holdings had followed up on this. The backlog in terms of maintenance was R27 billion, increasing by R2.5 billion annually. Cabinet had ruled that a program to rehabilitate assets must be conducted. The backlog affected various government departments.

Mr Audal said that five options had been identified to address the backlog. Of these, the option of providing loans to municipalities was the most likely one. A phased rehabilitation model had been developed. National Treasury still had to approve the plan. Cabinet had decided not to continue with the RED plan. The R27 billion backlog involved other stakeholders.

Discussion
Mr J Smalle (DA) said that the role players had to be identified for addressing the backlog. He would be interested to compare statistics on the sale of electricity between Eskom and municipalities, and their respective success in recovering costs. He asked what Eskom was putting into the distribution network, and what was being contributed by local government. Current maintenance issues did not seem to be addressed. He asked if the Department would support ring-fencing of a budget. Many local government bodies did not have the expertise to address energy and funding issues. The public needed to get its money's worth. He asked why NERSA was not being forced to implement licence agreements. DoE was failing to apply the necessary pressure, and the end-consumer suffered as a result.

Mr L Greyling (ID) said that urgent action was needed. A holistic approach was needed. He was surprised to hear that the right institutions were in place. He disagreed with this opinion. The infrastructure inadequacies were a major barrier to effective distribution. It was clear that a number of incentives were preventing the problem from being properly addressed. A number of municipalities had decided not to invest in maintenance given the pending transfer of these assets to REDs. There was a perverse incentive not to push for efficient energy usage given the revenue available to municipalities. The use of electricity tariffs to subsidise other activities was not sustainable. Municipalities had largely ignored the guidelines issued by NERSA. Licences should be revoked if maintenance was not done. This option had never been used. Many small municipalities were not viable as electricity distributors. Perhaps they should be grouped into clusters, and outside operators could be considered. There was a distribution network inadequately configured to deal with future challenges. He wanted to know what progress was being made in creating modern distribution networks.

Mr D Ross (DA) felt that consumers could not afford ever-increasing electricity tariffs. He agreed that the fourth option of loans to municipalities as presented by Mr Audal should be examined. Municipalities were already battling to manage their finances. He had made some proposals to the Development Bank of South Africa (DBSA) on various civil works. Municipalities had to be financially viable. Serious interventions were needed. A distribution oversight network was needed.

Mr J Steenhuizen (DA) said that simply throwing money at problems would not be the solution. He mentioned an example where a challenged municipality had not been able to spend a large portion of its budget. An electrician from Port Elizabeth was responsible for the maintenance of the electricity supply for Umtata. Municipalities should be developing infrastructure. Technical capacity at a local level was needed.

Mr K Moloto (ANC) asked if it had been established what the reasons were for non-compliance, and the reason for under-expenditure. It was correct that users should pay for services but could they afford to pay for further increases. Municipalities had raised a surplus of some R7 billion on electricity supply. He asked if this had been used for electrical services. He asked why RED1 had been wound up even before the Cabinet decision.

Mr Audal asked that the questions about NERSA tariffs should be left for them to answer later. Phase one of ADAM testing had been ongoing. Part of the model was establishing a committee representing the interests of the Department, DBSA and the municipalities. There would be conditions on the distribution of funds.

Mr Audal said that there had been many questions regarding a lack of skills at municipal level. A modelling exercise had not been conducted as yet. National Treasury would provide guarantees on the loans to municipalities. There would be provision within the terms to ensure that recipients were able to repay the loans. It was not just a case of throwing money at the problem. Allocations to municipalities would be ring-fenced.

Mr Audal said that certain municipalities had not met some of the conditions. NERSA would then step in with financial penalties, and an eventual revocation of licences. This was not happening. Many municipalities were already in dire straits financially, and further financial penalties would exacerbate their situation.

Mr Audal had not heard of the extra R7 billion alluded to. This surplus had never been discussed.

Mr Audal said that municipalities had certain powers. These had been invoked when RED1 had been established.

Eskom submission
Ms Ayanda Noah, Group Executive: Distribution, Eskom, said that Eskom was an obedient child. It had aligned its seven region structure to correspond with the six REDs.  It had been part of RED1. It could not divorce itself from the industry. It had signed a Memorandum of Understanding (MOU) with CoGTA. This had been discussed with EDI Holdings. Practical action was needed. SANEDI had given a list of some eight summit meetings, but nothing new had transpired from these meetings. Eskom had reorganised itself again, this time aligned with the nine provinces. These structures were being capacitated. One of the key pillars was being active in the distribution industry together with its partners.

Ms Noah said that 4.2 million homes had been electrified between 1991 and March 2012. Eskom had 9.2 million customers. There was a total backlog of R27 billion, which included Eskom's systems. A corporate plan had been put together going as far as 2017. A large part of the budget of R68 billion would go towards distribution. Eskom did not have other services which it needed to subsidise. The network was generally in a good condition. The standards of the networks in the former homelands were not as good as that of the Eskom network. The company was spending a lot of money on maintenance, and 98% of maintenance needs had been addressed.

Ms Noah said that the low voltage philosophy was driving a large portion of the costs. A maintenance philosophy had been devised recently. The number of customers was increasing since 1991. Customer network centres had been put together to service customers. The number would be increased to cope with the increased number of customers

Ms Noah said that EDI Holding had been closed in 2010. This had not solved the industry's problems. The Auditor General (AG) had spoken in the previous few days on the challenges facing municipalities. When the decision to move to the RED system had been made, spending on maintenance had ceased. This had led to the maintenance backlog. Reports from CoGTA and the South African Local Government Association (SALGA) confirmed concerns over issues of leadership and local government. It was an embarrassing situation that money was not being spent appropriately. A lot of analysis had been done, but would not change the situation. Action was needed.

Ms Noah said that a lot of issues regarding EDI had not been resolved. A pragmatic approach was needed. All the information had to be put together to devise a plan. If Eskom and municipalities were to pool their resources, a lot of discount could be obtained for the purchase of equipment in bulk. A shared vision was needed. Strengths and capabilities should be pooled. She agreed that there would be an advantage if smaller municipalities formed themselves into clusters or were adopted by metros. Money was available. Active partnering was a model for joint service delivery. History suggested that there was a lack of appetite for large-scale restructuring. A model was needed for asset redistribution.

Ms Noah said that an oversight committee should be established to monitor joint initiatives. A flexible structure was needed to address problems.  A start could be made with two or three struggling municipalities. Under-collection of service fees was a problem. One of the good things from the EDI process was the alignment of technical standards.

Ms Noah had some recommendations. The first was that the DoE, NERSA, Eskom, SALGA and other role players should form a joint committee. A neutral chairperson was needed to prevent perceptions of bias. This could identify key issues and mobilise resources. The industry had to be ambitious. The MoU had been signed on 6 June 2012. This was targeted at working together to find solutions.

Department of Cooperative Government and Traditional Affairs (COGTA) submission

Mr Ongame Mahlawe, COGTA Acting Head of Municipal Infrastructure Support Agency (MISA), said that COGTA recognised the challenges faced by local government. Different categories of municipality faced different challenges. Urban municipalities faced challenges relating to urbanisation. The twelve major cities housed 42% of the country's population, and this number would increase in the future. There were high levels of capital expenditure and economic activity but low levels of infrastructure. Their rural counterparts faced major challenges of funding and viability, and were unable to retain skilled personnel. This was where the worst backlogs were to be found. Comprehensive infrastructure was needed.

Mr Mahlawe agreed that transformation was needed rather then restructuring. Institutions had to be aligned with the various spheres of government, even at national level. Municipalities had contributed 50% less to capital expenditure since 2006. Consumer debt was high. R76 billion was owed to municipalities, of which R12 billion was for electricity alone. Tariff planning was an issue. Planning was lacking. The quality of budgeting was poor. Electricity structures had to be prioritised. A decisive approach was needed. The issue of cutting off electricity supply to persons indebted to municipalities for other services had to be addressed. All agreed on the need for new infrastructure. The international norm for non-technical losses was 3.5%, a number not being achieved in South Africa. Maintenance was regarded as a discretionary expense. Poor households should be protected from price increases. There was no agreement on municipalities ring-fencing electrical services. The issue of the misalignment between the financial years for municipalities and other levels of government had to be addressed.

Mr Mahlawe said that MISA was developing a unit to focus on electricity issues. Co-operation was needed with Eskom. A multi-disciplinary team was needed to look at issues at both a technical and political level.

National Energy Regulator of SA (NERSA) submission

Mr Thembani Bukula, Regulator Member: Electricity, NERSA, said that the body had been established by the National Energy Regulator Act. In terms of the distribution industry, their roles were to licence operators and to regulate tariffs, where 99% accepted the recommended tariffs. NERSA had to take action when a licensee did not comply. NERSA could not apply for a revocation unless the operator applied with twelve months notice. This is what RED1 had done. Alternatively, NERSA would have to apply to the high court for a revocation. If the operator was not complying with the conditions, then all NERSA could do was issue a notice and if remedial measures were not taken, a fine could be imposed. This was not being done as not paying a fine imposed by NERSA was not a criminal offence.

Mr Bukula said that NERSA was doing the best it could, given the limitations imposed on it by the legislation.

Mr Ronald Chauke, Head of Department: Reform, NERSA, said that NERSA had licensed 189 operators. Of these, 175 were municipalities and thirteen private operators. Conditions were imposed. NERSA was also charged with determining guidelines for tariffs.  A number of factors were considered in granting increases. Different price structures were in force for both Eskom and municipalities to enable some cross-subsidisation.  A distribution compliance framework had been developed. There were a number of challenges in the way municipalities reported. There were problems due to the poor state of distribution networks. Some municipalities, especially in the rural areas, did not have ring-fenced funding for electrical business. Old infrastructure required much maintenance. There were no formalised maintenance practices. Tariff harmonisation was needed. There were challenges in implementing the recommendations made in technical reports. In 2008 the maintenance backlog was estimated at R27 billion. There was a challenge with the misalignment of provincial and municipal regulations.

Mr Chauke said that corrective action plans were not being effected. There were issues on the legislative front regarding the dual regulatory reporting system. The misalignment of the financial years contributed to this. Different oversight roles might lead to unexpected consequences. Data requests often did not return satisfactory answers.

Mr Chauke said that various interventions had been taken. On the tariff side, a minimum of 6% of electricity revenue should be used for maintenance. Operators could motivate requests for increases above the guidelines.

Mr Chauke said that its recommendations were that legislation should be reformed to address areas of misalignment. They recommended that a central portal should be established for the transmission of information. Information needed to be verified and communicated. There was a need for roles and responsibilities to be clearly defined. This would assist with the transformation of the sector. An MoU should be established between the different stakeholders. A steering committee was needed to smooth the different requirements.

Discussion
Ms G Borman (ANC) was concerned that silos had been broken down since 2009, and yet the presenters were still identifying a need for joint discussions. It was a pity that the Department of Public Enterprises was not present, nor was the Department of Human Settlements. A lot was being spent on infrastructure. She asked what the relationship was with the Presidential Infrastructure Coordination Commission. This should contribute to a joint effort. She felt that some simplification was needed to prevent multiple bodies looking at multiple issues.

Mr Ross asked how much of the R14.5 billion for refurbishment would go to adopted municipalities.  He asked if it would be viable to open up the market to independent power producers (IPPs) to break up the Eskom monopoly. He asked what effect the introduction of IPPs would have on prices. The inter-departmental task team was long overdue. He asked if decisive leadership was needed from the responsible Ministers.

A Member said that competition was healthy for consumers. NERSA regulated electricity tariffs, and yet prices were escalating every year to the point of unaffordability. He asked if NERSA was able to stop this upward spiral. He asked why it took so long to revoke a licence.

The Chairperson reminded Members to keep their questions relevant to the agenda.

Mr Smalle asked how much of the refurbishment costs incurred by Eskom went to new technology. Eskom had mentioned some discrepancies and he asked how this information was channelled to CoGTA. He asked how complaints were registered.

Mr Greyling agreed that a differentiated approach was needed. There was a need to concentrate on certain municipalities. He asked if the reference to underpricing of services also related to electricity. Eskom was contradicting itself by saying there was a need for a major overhaul, but at the same time saying that there was no appetite for such an overhaul. The National Planning Commission (NPC) should perhaps be involved in this process. The right institutional planning framework was needed.

Ms N Mathibela (ANC) asked if there would not be more havoc if municipalities insisted on their constitutional rights to sell electricity. There was a skills shortage, and she asked why skilled persons from EDI Holdings had not been deployed where needed. In her constituency there had been problems when it was realised that the electrical installations had been faulty. She asked who would cover the costs of this.

Mr T Bonhomme (ANC) agreed with the inputs, but felt that the recommendations made by CoGTA were vague. There were no time frames, nor had any person been identified to carry the recommendations forward.

Ms B Tinto (ANC) said that long-term planning was needed.

The Chairperson said that one of the challenges was asymmetrical reporting. He asked what medium was used to forward data to CoGTA. He asked for elaboration on the challenge of misalignment of information.

Mr Moloto asked what informed the ranges for the cost structure for tariffs. He asked if there was any accounting when above-recommendation increases were granted. He assumed that municipalities accounted for the use of revenue, which would allow for monitoring of funds.

Mr Bukula said that National Treasury used a certain figure based on salary increases. Increases for power generation were based on the costs of generation as supplied by Eskom. The current inflation figure was used in adjusting other costs. Municipalities used different tariffs. Extra increases might be motivated by factors such as the need to recruit technical personnel. In this example, the technicians had not been forthcoming and therefore the tariffs had been cut in the following year. The accounting method used by Eskom did make allowance for the accumulation of a surplus. The range was between 10 and 15%. Municipalities were not homogeneous. There were different proportions of industrial to domestic consumers.

Mr Bukula said that the law stated that the licensee must apply for revocation of a licence, and twelve month's notice must be given. Reasonable time must be given for a non-compliant licensee to take remedial measures, and the payment of a fine was not covered in the law.

Mr Chauke said that the MoU would be supported for consideration by other stakeholders. Data returns were transferred electronically. Support was given to assist municipalities in completing the spreadsheet. CoGTA recommended that policy makers should get together to see where the clashes occurred and come up with solutions. Statistics South Africa should be used as a central source of information. Information on how tariffs were determined could be provided to Members.

Mr Bukula said that the focus should not be on why NERSA approved increased tariffs, but on why applicants made such requests.
 
Ms Noah said that Eskom was a full participant in the advisory committee. Monies earned were ploughed into Eskom infrastructure. It was difficult to answer questions on a possible unbundling of Eskom. Future price increases above the inflation rate had been reduced because of the impact of large increases. In the past, price increases had been below the inflation rate. The tariffs at present were not cost-reflective. There was a section dealing with research. New technologies were being used in the refurbishment process, such as a gas-insulated station in the Western Cape. Progress had to have a starting point. Commitment was reflected in action and not words. Consolidating municipalities would involve section 179 of the Constitution, which was related to employees moving from one sector of government to another. There would be changes to salaries, benefits and conditions of service. Staying on the municipal level should not result in such problems. Details were needed on a future increase in costs.


Mr Mahlawe said that the silo phenomenon was still a problem in government. This was unfortunate. More stringent measures were needed. Parliament might need to play a role in the distribution of electricity. The political principals must account to Parliament. The differentiated pricing approach applied to all municipal services. Cutting electricity to persons in debt for other municipal services would lead to different opinions. The second issue was ring-fencing. There was no agreement on this. Municipalities were already over-indebted. The question was whether they would be able to make repayments on such loans while already struggling to provide services with their existing funds.

Mr S Mayatula (ANC) had a sense that municipalities had their hands tied. NERSA were foot soldiers.

Mr Bukula said that the inputs on alignment had been considered in changes to legislation.  The inconsistencies with the Municipal Finances Management Act (MFMA) had been considered. Legislation was intended to do certain things. A rethink was needed on current legislation.

National Treasury submission
Ms Wendy Fanoe, Chief Director: Intergovernmental Policy and Planning, National Treasury, said that several financial issues had been raised that day which had not been contemplated when the presentation was compiled. She was surprised to hear that National Treasury was against ring-fenced funding. The truth was to the contrary. When a service was allocated to a municipality, it still had to be delivered according to national standards. The Minister of Energy could prescribe norms and standards for maintenance. Municipalities must keep separate balance sheets reflecting income and expenditure related to electricity reticulation services. A municipality could allow for 10% non-technical losses. All of the metros were in compliance with this except Johannesburg, which had an 11% loss.

Ms Fanoe said it was a good indicator to look at bulk electricity purchases. The six metros bought 65% of all bulk sales to municipalities. The next six largest municipalities took another 11%. Electricity sales within the metros were triple that provided directly by Eskom. She presented a breakdown of consumption by the different sectors and types of customers.

Ms Fanoe continued that municipalities had an aggregated amount of R7.6 billion in revenue after payment for electricity and an amount of capital expenditure.  Repairs, maintenance and refurbishment costs must be calculated as part of budgeted income.

Ms Fanoe gave a breakdown of the tariff increases requested by municipalities and granted by NERSA. In the current financial year, R10.5 billion had been allocated to poor households. This included provision for alternate energy sources for households without access to electrical infrastructure. The current subsidy related to R208 per month. The estimate of 50kWh amounted to only R41 per month according the guideline for block 2 tariffs as issued by NERSA.

Ms Fanoe said that allocations for new connections were increasing. Historically over 90% of the conditional grants had been spent. There were conditions attached to the Integrated National Electrification Programme (INEP) grant.

Ms Fanoe added that NERSA now had a better understanding of tariffs thanks to the D Forms. National Treasury was introducing a number of financial reforms. Municipalities had to report on what was being allocated to new infrastructure and to refurbishment. Municipalities should allocate at least 40% of their capital budgets to the renewal of existing assets, and at least 8% to refurbishment and maintenance.

Ms Fanoe said that section 230 of the Constitution did allow municipalities to make long term loans. This had to happen within a given legal framework. National government would not stand surety for any such loans. The lender would have the option of legal recourse should repayments not be made. There was no legal basis for provincial or national government to loan money to municipalities. The DBSA could play a critical role in this regard. Private co-funding was an option. Bond pooling was another option. The Minster of CoGTA could direct two adjacent municipalities to establish joint service delivery agencies. This was happening in the Mangaung area and was working well. She mentioned the example of small municipalities contracting the Water Boards to provide a service on their behalf, and the same could be done with electricity.

Ms Fanoe tabled some proposals. Regulatory clarity could be improved. National Treasury was building capacity for provincial treasuries to assist with financial controls in the smaller municipalities. The DoE should monitor and enforce the implementation of NERSA approved tariffs and expenditure against budgeted maintenance. Public knowledge and understanding of the importance of refurbishment and maintenance had to be increased.

Financial and Fiscal Commission (FFC) submission
Mr Bongani Khumalo, FFC Acting Chairperson and Chief Executive Officer, said that the assessment made by Prof Lloyd had been an important contribution. It was important that municipalities had the necessary resources to deliver services. Clearer feedback from DoE on the strategy would have been appreciated. A funding model had been prepared at the meeting in February.

Mr Khumalo said that it had been difficult to access data. The available data was at a very high level.

Ms Sasha Peters, FFC
Senior Researcher: Local Government, said that the three phases of electricity provision could not be assessed in isolation. A World Bank study in 2009 estimated that R500 billion would need to be spent on infrastructure investment, of which R240 billion would be needed for refurbishment. The FFC was pleased to note a greater emphasis on alternate energy sources. Historically municipalities had created surpluses from their services. This would be eroded as costs increased. Municipalities might have to absorb increases, while increased tariffs would lead to greater non-payment.

Ms Peters said that there were general increases in all government services. Affordability was a factor as consumers were faced with increases on all fronts. There was less spending on maintenance. The electricity sector had also been plagued by policy uncertainty. There had been a declining investment in electricity compared to other services. The implications were that service delivery would be compromised. Higher repair costs would strain public coffers.

Ms Peters said that some lessons had emerged from the previous EDI reform attempt. Reforms should not be piecemeal. The root causes had to be addressed. The solution had to be suited to the nature of the challenge. Distribution was being managed reasonably well. A fear of loss of revenue had made municipalities oppose the RED system. There was a case of whether an outsourced agency would represent a good business case. Municipalities were not complying with licence agreements, and it was a question as to how an agency would cope. The selected option would have to be practical and workable.

Ms Peters said that the maintenance problem would not be solved without a simultaneous restructuring. Blue-print options had to be revisited. An analysis of costs and benefits was needed using current conditions. Forward thinking was needed. Demand management and energy efficiency had to be considered, such as a performance based conditional grant. This could reward new technologies. Maintenance plans should be enhanced. Regulations should be enforced. The FFC was conducting research on the adequacy of funding.

Mr Khumalo appreciated the opportunity to participate in the process. The most important missing link was access to the proposed funding model. The FFC needed more detail in order to make an input. A written response would be provided once FFC had the chance to study the document. They would like to see what was happening in individual municipalities.

Discussion
Mr Ross asked National Treasury for their recommendations on legislative changes. He asked how allocations could be improved. Members had been waiting for a while for funding reports.

Mr Moloto asked if there would be assistance for municipalities to form partnerships to service bonds. He asked if the information provided by municipalities would enable Members to exercise oversight. He asked what role surcharges could play.

Ms Mathibela referred to the backlog growth of R1.6 billion per annum. She asked if this trend would continue.

Mr Mayatula said that there was a constant referral to legislation. He asked if there were any concrete recommendations.

Mr Greyling commented on the recommendation for incentive grants. There was currently a Division of Revenue Act (DORA) grant for the improvement of efficiency in the municipality's own expenses such as street lights. While electricity was a revenue source, there was little incentive to reduce consumption. He asked if there was any proposal for compensation for reduced sales in the event of consumers adopting more energy efficient practices.

The Chairperson asked if the FFC had raised these issues before. He asked how departments were co-operating. The stalled process was affecting investment. He asked if there was any way to quantify this. The revenue of municipalities should not be compromised. He asked if any other alternatives had been advanced. The issue of cross-subsidies had to be addressed. He asked if there were any other innovative solutions. He asked what character the proposed multi-services organisations could assume.

Mr Smalle said that a third party might be a bigger municipality or Eskom. Given the lack of technical people, he asked if this was an option to consider. He asked what incentives could be provided to better performers.

Mr Ross said that there had been a proposal for a once-off conditional grant. Distribution was a practical problem.  There was a backlog in both generation and distribution. Financial institutions must give guidance as municipalities could not finance the required maintenance. This proposal had been discussed at length in the past.

The Chairperson asked if the figure of R7 billion was just for electricity, and if there was any way in which this surplus could be explained.

Ms Fanoe said that the surplus was the difference between revenue and expenditure budgets. The largest expenditure was for bulk purchases. There would be more certainty once municipalities had their budget. A good understanding of the total cost was needed. Not all costs to provide a service might be considered such as incidental staff costs. Estimates might also not be accurate. The surplus was put into a general revenue pool, which made it difficult to track. It could not be assumed that the money was wasted. However, electricity revenues might be milked to boost general revenue.

Ms Fanoe said that an expenditure review would be forwarded to the Committee. There were conditions attached to a grant. There had never been a clear policy directive on demand side management. The Department passed on the grant. There were many requirements and the grants were often under-utilised as a result. The norms and standards had not yet been implemented. National Treasury had realised at an early stage that municipalities could manipulate the tariff even if the surcharge was limited. A number of reforms were being developed. One of these was to provide better information. Some municipalities provided good data and others poor to none. A written input would be made.

Ms Fanoe said that the current situation was that progress had been made on budget reforms. There were indications as to the extent and capability of municipalities to conclude good loans. There were a number of norms and standards. Every Department had a different role to play. National Treasury was responsible for Treasury standards. Service delivery requirements were up the responsible sector.

Mr Khumalo said that FFC had raised some of these issues before, but there had been no response from government. Issues had been raised earlier in the year with the Director-General (DG) of the DoE. There had been no follow-up. The FFC was not part of the task team although the value of their contribution had been pointed out. Electricity played an important role in local government. They would need to see the detailed proposal. On the issue of conditional grants, detailed information had to be the basis. It should not be a permanent feature of the system. The problem had arisen from certain situations. If the infrastructure was not maintained, and there were backlogs on all fronts, information would be needed in order to determine priorities.

Mr Khumalo said that what was glaringly missing was the direction to be taken after the termination of the RED and EDI process. Task teams had been set up. Whatever decision was taken, the red lights had already been flashing. Those assumptions needed to be revisited. Regarding legislation, a constitutional amendment had been proposed. The details of this proposal would be supplied to the Committee.

Mr Khumalo said it was correct that the backlog was growing by R1.6 billion per year. This figure came from the engineering body. None of the municipalities was spending more than 5% of revenue on maintenance.

Ms Tanya Ajam, FFC Commissioner, said that procedural recommendations had been made but there was no substantive proposal to reform the distribution industry. The legislative constraints on NERSA should be considered, such as the inability to withdrawing licensing at its own discretion. There was a good initiative to work with the AG. But this only dealt with auditing, and there were other considerations such as service delivery. Rehabilitation would always be needed as all structures had finite lifespans. A lot of planned maintenance had been deferred. There was a disproportionate emphasis on capital expenditure as opposed to maintenance. The FFC was not sure that a conditional grant would be part of the solution of encouraging alternate energy sources. The grant could instead be used to finance green initiatives. It should be considered. Conditional grants might not meet all these needs.

Ms Ajam said that multi-jurisdictional authorities might assist in sharing skills. The DoE said that national government could guarantee lending, but National Treasury was correct to say that national legislation did not provide for this.

Ms Peters said that municipalities were allowed to employ multi-jurisdictional authorities. If the metros were distributing electricity well they should continue. The multi-jurisdictional alternative could assist smaller municipalities that were not doing so well. At present municipalities reported at an aggregate level and not by sector. This made it difficult to assess the level of investment in specific aspects. The municipality of eThekwini was not in favour of restructuring. There was a general lack of support from the consultation into which FFC had entered.

The Chairperson said there was a difference between transformation and restructuring. The introduction of the RED system had been a strategy introduced as a catalyst that might have generated other strategies. He expressed his discomfort with the absence of SALGA and DBSA. The Committee had had to remind them of the meeting, but they had not attended. The cost of delivery was being put at risk. Some questions had not been answered, but could be done so in writing.

The meeting was adjourned.


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