Restructuring of Electricity Distribution Industry: public hearings Day 2

Energy

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

The South African Insurance Association had noted a number of risks to the electricity supply industry, particularly the backlog in maintenance. The industry had a huge asset base, and coverage could not be borne solely by the domestic industry. There was a need for some form of self-insurance. There was no option in the local industry of covering business interruptions, as these were not unforeseen events.

Business Unity South Africa told Members that the generation industry was not growing substantively, and was being put under pressure by the distribution networks that were in a state of decay. Calling on business to save electricity was leading to reduced productivity. Expensive repairs were becoming necessary due to a lack of maintenance even though the required funds were available. There had been a decline in spending on electricity in recent years. Competition was the lifeblood of the economy, and the private sector had to be involved.

Professor Eberhard, an expert and member of the National Planning Commission, told Members that the Regional Electricity Distributor concept was dead and no adequate alternative had been put forward. The uncertainty in the industry had resulted in inadequate human and physical investment. The distribution system was experiencing huge problems. The constitutional rights of municipalities to distribute electricity had to be respected. Metros and large municipalities were generally doing a good job, but attention was needed in other areas. One institution, preferably the Department of Energy, should be held accountable for addressing the problems of the industry. He proposed a small levy on transmission costs in order to finance the backlog of maintenance that was needed.

Mr Deon Louw demonstrated the size of the distribution industry. He had concerns over the ages of both equipment and technical staff. He feared a collapse within three years. Tariffs had to be increased because of the need to increase generation capacity and to effect repairs. The expansion of the electrification system was pressurising the current network. A new approach was needed together with the introduction of new technology. Maintenance budgets were being targeted for other unplanned expenses.

Members agreed on the need for substantial investment under the oversight of the Department of Energy, possibly in the form of fiscal grants. Municipalities would need to be encouraged to adopt better practices. New technical staff would be needed, and Members were concerned about what had happened to technicians when power stations had been closed. There was concern over affordability and the lack of planning. They were told that it was difficult to attract students to electrical engineering and similar disciplines. With the right commitment, the maintenance backlog could be cleared in five years. Small businesses in particular were battling to remain viable given the dramatic increase in electricity tariffs.

The City of Ekurhuleni was experiencing various challenges. While there was a migration to pre-paid meters, there was a high prevalence of tampering. Measures were being introduced to counter this. Some 97% of revenue was recovered, a much higher percentage than the recovery rate in areas supplied directly by Eskom. The disparity in tariffs between the municipality and Eskom was a challenge. The backlog of bringing electricity to residents was being reduced.

Centlec provided an electricity distribution service to the city of Mangaung and several municipalities in the province. Losses had been reduced. It was delivering above expectation on the electrification programme. Its recovery rate was good and a lot of arrears payments had been collected. Various training programmes had been instituted. Tax was still an issue. Municipalities which were partners with Centlec made their assets available to Centlec but retained ownership. The winter tariffs imposed by Eskom were not justified. Eskom charged different tariffs in their various areas of operation.

The Association of Municipal Electricity Undertakings had been set up to explore solutions to the challenges in the industry. The most significant of these were inefficient asset management and ineffective infrastructure investment. There were also problems regarding vacancies and remuneration. There were problems in the way networks were managed. An example of co-operation between municipalities in KwaZulu-Natal was quoted. Many municipalities were ceding their distribution rights to Eskom.

Members were concerned that municipalities were not embracing energy saving techniques. They were told that this was not the case. There was also concern over the consequences of illegal connections. Legislation regarding copper cable theft was welcomed.

Meeting report

South African Insurance Association (SAIA) submission
Ms Debbie Donaldson, SAIA General Manager: Strategy and Planning, outlined the roles their members played in providing insurance to the electricity distribution industry (EDI). Risks could be grouped into environmental risks such as the impact on the environment and a lack of investment in maintenance of infrastructure, social risks such as the dual economy concept, crime and corruption, lack of transformation and real market growth and human capital skills, and governance risks such as information management, image and reputation and legislative and regulator capacity. A major risk was the lack of maintenance, which could compromise systems. The size of the risk was so large that some had to be taken up on external markets, and image and reputation became a key factor.

Ms Donaldson said that there was a systemic relationship between the different facilities. Multiple stakeholders would impact on each other. It was important to view the system as a whole.

Ms Donaldson said that SAIA played a major part in providing coverage for generation and distribution. Essentially they covered operational aspects, such as the infrastructure and the possibility of accidents. There was no coverage for business interruptions, unlike in the manufacturing sector. This was done in other parts of the world. Insurance was a tool for unforeseen events.

Ms Donaldson said that insurance was not needed if operators had cash on hand to replace assets. Current offerings were related to the ability of the operator to provide adequate cover. It was important to know what needed to be insured. There was a choice between self-insurance, local insurance cover and international markets. There was a massive infrastructure in South Africa, covering huge distances. The first question was whether there was an appetite to insure such a network. The insurance market was a specialised one, and expertise was needed.

Ms Donaldson said it was important to assess the need to cover business interruptions. Her understanding was that there were no reserves to cover such a possibility. Every design had a life cycle, and technology became redundant in time. Operators had to assess the cost of maintaining old generation technology compared to updating the system. Stakeholders did not know enough about the insurance industry. Independent operators would also need cover. Renewable energy providers were new to the market but would need coverage from day one.

Ms Donaldson said that planning for disaster recovery was a global concern. Another issue was resilient economic development. Homes and businesses should be self-sufficient. Affordability to consumers was a big issue. Investment would not be attracted if new technologies were not embraced. Economy of scale was an issue.

Ms Donaldson presented some recommendations. There should be private engagement through sustainable platforms. Business Against Crime had been a very useful vehicle to reduce the level of crime. Risk based planning should consider the maintenance of the current infrastructure, a systematic review of the risk and driving sustainable behaviour. Technical skills had to be deployed. A reliable maintenance program was needed. Predictability on issues within the control of the industry had to be ensured.

Business Unity South Africa (BUSA) submission
Mr Dennis Dykes, BUSA Chairman: Economic Policy, said that business was concerned about all aspects of electricity. The need to increase capacity was well documented. It was disappointing that there had been little development in terms of generation since the events of 2008. The transmission side was working fairly well, but there was concern that the distribution side was falling apart. He noted that 83% of the various chambers of commerce were concerned about the state of the distribution network. Distribution had an impact on generation where extra generation capacity was needed to balance losses. There were broad social implications. Job and investment opportunities were being lost, and the lost potential could only be guessed at. Business was being asked to cut back on production to save electricity.

Mr Dykes said that there had been a lack of maintenance of public assets and a lack of new investment. Allowing maintenance to be neglected led to expensive repairs. There had been a contraction in investment between 2008 and 2010. Money was available but had not been spent. This was inexplicable. There was a lack of skills, and a loss of institutional knowledge. Distribution was tied into local government finances.

Mr Dykes showed Members a graph reflecting on how expenditure on electricity and water had peaked in the late 1980s, but had declined steadily until 2008. A slight upturn had not matched the levels achieved in 1987. In the 1960s and 1970s, government spending on electricity and been approximately 4.5% of the gross domestic product (GDP). This had declined sharply by 1990 and had not recovered to the same level.

Mr Dykes said the current structure was not ideal. Municipalities distributed a large portion of the electricity generated, roughly the same amount as Eskom. Municipalities performed the functions of asset management, network operation and maintenance and customer services. There was scope for competition. He quoted the example of an incorrect billing at his home which had persisted for some time despite constant enquiries.

Mr Dykes said there should be a separation of responsibilities. This would allow for specialisation and improved efficiency. Competition was the lifeblood of an economy and should be encouraged wherever possible. It would eliminate inherent conflicts of interest. The private sector could participate in the sector and contribute towards better energy security. This was international best practice. However, municipalities would be reluctant to surrender the income they derived from electricity sales. Recent figures showed that electricity was a bigger source of revenue to municipalities than property tax. However, given more energy security, industry might be encouraged to erect a new factory, as an example, which would benefit the local municipality.

Mr Dykes pleaded that the private sector should be part of the solution. Financing would not be a problem if appropriate structures were in place. A sustainable business model was needed.

Prof Anton Eberhard submission
Professor Anton Eberhard, a professor at the University of Cape Town Business School, said that he was also a member of the National Planning Commission (NPC). The previous day he had felt overwhelmed by the scale of the problem being presented. He had decided to present a narrative rather than a graphic submission.

Prof Eberhard said that it was obvious that the Regional Electricity Distributor (RED) concept was dead. Cabinet had made this decision in 2010. There had been uncertainty in the industry. Cabinet had not, however, made any pronouncement on what should replace the REDs. The issue went back to 1993. The ANC had held a meeting on electrification issues, and the RED concept had been born there. One problem was never dealt with, and that was trying to wish away the fact that municipalities were given the right to distribute electricity. They were expected to hand over their assets to the REDs. RED1 had been established in Cape Town and a board was appointed, but the City of Cape Town had refused to hand over their assets.

Prof Eberhard said that the reasons for restructuring the industry still existed. There had been uncertainty for twenty years. This had resulted in inadequate physical and human capital investment. Many schemes such as bursaries and apprenticeships had been discontinued. A time bomb was ticking in the industry. Eskom might be working hard to generate electricity, but distribution was the problem. Failures in the distribution system did not make the same impact as the failure of a power station. The key solution was to rekindle investment.

Prof Eberhard recognised that a massive restructuring would not be possible given the provisions of the Constitution. The rights of municipalities should be enforced, even if they were outsourced. His proposals were the same as the NPC. Municipalities should be divided into three broad categories. These would be metros, medium sized, and the smaller, mainly rural municipalities. 20% effort should lead to 80% impact. Twelve major municipalities accounted for 80% of electricity consumption. Many rural municipalities were struggling and were not viable. Many of these could not actually handle distribution and had asked Eskom to take over from them. The town of Parys was one of these. The municipality of Mangaung had taken over the affairs of four of the smaller communities in their area.

Prof Eberhard pleaded that another steering committee would not solve the problem. Responsibility should be assigned to an institution which should then be held to account. The ever-increasing maintenance backlog was no reason for municipalities not to be held to account. He understood the problem with the National Energy Regulator of South Africa (NERSA) being unable to withdraw licences or enforce fines, but they could play a role by refusing to increase tariffs. Expenditure should be monitored to ensure that maintenance was conducted. A special intervention was needed to satisfy the current maintenance needs. This could be in the form of grants and loans. A small levy on transmission costs could be the source of this funding. It was difficult to monitor the Municipal Infrastructure Grant (MIG). The Integrated National Electrification Fund (INEF) grant could perhaps be used. There was a high compliance rate, with up to 98% of this capital budget being spent. The Department of Energy (DoE) should be held to account by this Committee. It was impressive that the Committee had taken this initiative.

Mr Deon Louw submission
Mr Deon Louw, Deputy Director: Electro-technical services, Overberg Municipality and an expert in the industry, presented a paper he had written together with Prof Willie de Beer. The EDI was an asset intensive business. The replacement value was R260 billion, incorporating more than 400 000 km of overhead lines and 210 000 km of underground cabling. The average age was 45 years. The sector employed 31 000 people. Of the staff, an average of 26% was over the age of 50 and only 12% under thirty.

Mr Louw said that there were pockets of good performance, but also of poor performance. Growth could not be sustained by current practices. There was evidence of significant under investment. Delivery was deteriorating in many areas. Supply interruptions cost the country between R3 billion and R8.6 billion, according to 2006 figures. Studies by EDI Holdings and the development of the Approach to Distribution Asset Management (ADAM) revealed a maintenance backlog of R27 billion in 2008, growing by approximately R2.5 billion annually.

Mr Louw said that the average life span of a distribution system should be 50 years. Good maintenance should aim to keep the remaining life span at 25 years. This meant that 2% of the network should be replaced annually. The current average age of the South African network was 45 years. He feared a dramatic collapse within three years.

Mr Louw demonstrated how the book value of the network had deteriorated. One could expect to have to pay some money to address teething problems in a new system, after which maintenance costs would be low. However, as the system approached the age of forty, maintenance costs escalated exponentially.

Mr Louw said that the problems facing the industry were the ageing infrastructure. Maintenance costs could be reduced by pulling out of the upward curve described earlier. Operational costs were compounded due to tariff increases to cover increases in generation capacity, funds being diverted to replace and refurbish assets and huge network expansion to low-income housing. Insufficient staff was being trained. There were also problems with the balance of financial, maintenance and network support technology as opposed to the skills of operational staff.

Mr Louw's prognosis was that there was a lack of a plan to address the problems in the distribution industry. The public tended to blame Eskom for all outages, while most of the problems were caused in the distribution network. The current performance of the EDI would not match expected economic growth. Performance in the EDI was deteriorating. A holistic approach was needed to address the challenges.

Mr Louw put forward some options. The first was to ensure the sustainability of the EDI to support economic growth and create job opportunities. Optimum use must be made of staff and technology resources. The ADAM plan had to be updated and implemented. Institutions with the ability to assist had to be identified.

Mr Louw reminded Members that the life cycle of the system was longer than the career of any politician. Decisions had to be made to cover the long term, as their impact would be felt long after the decision-makers had retired. It was necessary to move away from the “business as usual” approach and adopt new technologies. The approach used in the national electrification programme should be used as a guideline. Investment had to be correctly applied. Investment had to be monitored to ensure that refurbishment and maintenance backlogs were being reduced.

Mr Louw said that all senior officials in a municipality must be qualified to undertake risk management. A budget had to approved by May or June, but salary increases were normally negotiated at this time. The public service salary increase had been 6.5% rather than the budgeted 5%. Maintenance budgets were often used to make up such shortfalls. Each municipal service had some form of income. Municipalities often put a surcharge on electricity sales to subsidise other services. Cutting off electricity was an easier option to enforce payment.

Discussion
Mr J Smalle (DA) noted that the selection of risks had resulted in the reduction of the number of insurance products on offer. He asked how this affected the growth of business. Prof Eberhard had made it clear that time was limited and that a considerable investment was needed in the following six years. The DoE had to play an oversight rule. He was concerned how a short-term solution could be implemented. He asked if Eskom should play a bigger role. He was worried about how the smaller municipalities would be able to address the problem.

Mr L Greyling (ID) felt a bit more optimistic as there were some solutions being presented. Fiscal grants should be considered as a means of addressing the backlog. The municipalities had allowed this situation to occur, and he was concerned that they would continue to operate in the same way afterwards. He wanted to know how these municipalities could be forced to change their practices, or to hand over their distribution system to bodies such as Eskom, neighbouring municipalities or co-operative bodies. He asked if there should be any guarantee given to NERSA which would allow them to take action against municipalities unable to manage their systems.

Mr S Mayatula (ANC) asked how municipalities could be forced to do maintenance. There were different structures working in the same field, but a silo approach was being followed. NERSA had advocated loans being made to municipalities in difficulties. Some structure was needed for discussions.

Ms N Mathibele (ANC) wondered why the age of those in the industry was increasing. The same was happening in the mining industry. New people were not being groomed. BUSA had raised the issue of fixed investment as a percentage of total spending. She asked why the low levels mentioned had been reached.

Ms B Tinto (ANC) said that municipalities had inherited old infrastructure. She asked if EDI would co-ordinate the disparate municipalities, each with its own distribution network. Proper co-ordination was needed, even if there was no new committee.

Mr E Lucas (IFP) felt that the DoE should take responsibility. Many power stations had been closed and technicians had lost their jobs. There had been a perception that there was too much supply. Many homes had since been electrified and there was now a need. Municipalities were making money out of electricity sales without maintaining their systems. They should be brought to book.

Mr Smalle had spoken about the affordability to the consumer. The time period for the eradication of the backlog would impact on this. There had been a proposal of a 1% levy. The time period had to be calculated and the threshold level at which electricity prices would become unaffordable.

Mr D Ross (DA) said that the 1% levy over ten years was a good proposal. South Africa was on a fine line between being heavily taxed and being overtaxed. However, planning had been mismanaged between 1993 and the present. At the same time, municipalities had recorded R40 billion of unnecessary expenditure according to the Auditor-General. He asked if a formal proposal had already been put to the NPC.

The Chairperson asked if the refurbishment programme would present business and job opportunities. The country was at a crucial stage. Recommendations made by this Committee would be adopted in the House. The situation was scary and decisions had to be made based on valid information. He asked what the ideal cross-subsidisation strategy would be. He asked what cost implications would accompany the proposals made by BUSA. More would need to be done with fewer resources. There had been growth and confidence during the presidency of Nelson Mandela. The dip in investment had followed. He would like to see more detail to the proposals made by BUSA.

Ms Donaldson relied that business would not be covered for loss of business following flood or fire. The disruption to electricity was not regarded as an unforeseen circumstance. Where there was a high dependency on electricity, this risk would not be covered. Data was not kept on specific sectors but information could be provided later.

The Chairperson said there must be some insurance practices where there were R260 billion in assets.

Mr Louw said that training had been suspended for a time. However, there was a lack of interest in careers such as electrical engineering. As a result there were insufficient numbers of engineers and electricity. To compound this, there was insufficient staff to train the youngsters that were in the system. It was difficult to fill vacancies. After working at EDI Holdings for some time, he had taken a while to readjust to working for a municipality. Many current employees would soon be retiring together with their knowledge. The mandate for EDI Holdings was to combine the electrical staff and facilities into six regions in a major restructuring exercise. In some places, people were remote from the supply. Alternatives such as solar cells had been put in place, but these systems relied on batteries. While they were rechargeable, the batteries were no longer usable after about four years. It was still difficult to supply to remote regions. The average life cycle of the system was fifty years. One fiftieth, or 2%, of the system should be replaced annually. This would reduce maintenance and refurbishment costs. Even if the system had an average age of 25 years, the maintenance costs would be about R6 billion, but underspending on maintenance was at about R3 billion.

Mr Louw said that EDI Holdings had derived its information from consultants. Two independent bodies had reached a similar conclusion on maintenance costs. The ageing process was faster due to the lack of maintenance.

Mr Louw said that there was a mismatch between the vision of NERSA and the municipalities on tariffs. Lower income households should receive their electricity at cost or be subsidised by commercial clients. It was also more expensive to get electricity to the remote clients. Too much cross-subsidisation would be counter-productive.

Mr Dykes said that the major reason for the higher percentage of capital expenditure in the 1980s was due to an economic boom. Expansion was based on the expectation on stronger growth. Investment then collapsed during the late 1980s due to an economic recession. Sanctions had been imposed on the country after the Rubicon speech. Global recession had followed, exacerbated in South Africa by a severe drought. Investment in the private sector has risen afterwards, but there had been a continued process of disinvestment in the early 1990s leading up to the 1994 election. There had been increased public investment since then.

Mr Dykes added that there were explanations for reduced investment under the democratic government. This might have been a reaction to over-investment in the past. This should not have lasted until 2005. This was difficult to explain.

Mr Dykes said it was difficult to determine a single threshold level of affordability. Business spending on electricity had risen from 5% to 11%, and could rise to 15% within the forthcoming five years. Expansion was being halted as a result, particularly in the mining sector which was highly energy intensive. There were other factors, but the ability of business to absorb additional costs was declining. Small businesses had less flexibility and were thus more severely affected by rising costs. Investment in the private sector could be achieved over the long term with reduced financial costs, but there would still of necessity be an impact on tariffs.

Mr Dykes said that everything in the private sector in particular resulted in some trade-off. Impact assessments needed to be expanded. However, electricity was crucial. The new model referred to a pragmatic solution. Given the state of the distribution industry, the least disruptive solution was needed. It was important to put the right incentives in place. Long-term security was needed. Urgent action was needed, even if the solutions were not ideal. A more detailed explanation would be provided shortly.

The Chairperson said that when the key players got together to finalise policy, they should have as deep a sense as possible of all the factors involved.

Prof Eberhard responded on the role of Eskom. They already had distribution licences within the jurisdiction of 107 municipalities. They received frequent requests to assist poorer municipalities, but did not want to be seen as bullying their way into the sector. Some of the metros and larger towns could also assist their poorer members. The backlog in maintenance had to be separated from ongoing products. NERSA had to play a role in this. Adequate reporting was needed. NERSA had the teeth to enforce this. They could insist on municipalities conducting maintenance and controlled tariff increases. Conditions could be placed on any grants.

Prof Eberhard confirmed that no new committee was needed, but there was a need to provide some co-ordination. NERSA and the DoE could be held to account. The NPC might have a role. Having spoken with Dr de Beer, his estimate was that the backlog could be dealt with over a five-year period. This would be manageable. The NPC published a draft plan in November 2011. There was then a seven-month period of engagement with stakeholders. The final plan would go to President Zuma on 15 August. The analysis and proposals presented to Members were definitely part of the plan. The plan deliberately did not go into details of implementation. This phase would follow once the plan was accepted by Parliament.

North West government submission
The delegation from North West government was not present. A written submission was provided to Members.

City of Ekurhuleni submission
Mr Fred Fryer, Director: Revenue Services (Energy), City of Ekurhuleni, listed the city's energy-related challenges. These were reducing unplanned outages and electricity theft, reducing bulk purchases, finding and retaining skilled staff, ensuring revenue objectives were achieved, finding funding to address backlog in providing electricity to all its residents, finding a solution to the problem of Eskom supplies within the boundaries of the municipality and the difference in Eskom and municipal tariffs. In July 2011 the account to Eskom, which was paid, was R890 million. The bulk purchase account for 2012/13 was R6.7 billion, from which the city would generate R10 billion. Electricity sales had peaked in 2007 and had stabilised since then. Non-technical losses were at 5.2%. The worst area was Brakpan. There were some projects to address this.

Mr Fryer said there were about 6 000 demand customers. Their consumption was monitored on-line. Their usage was about 65% of total sales. Soaring prices made it more attractive for organised criminals to devise schemes to steal electricity. Pre-paid meters were being attacked. He presented a photograph of vandalised pre-paid metres as evidence. There was even tampering on high-end meters. Tampering with meters was done on a professional basis.

Mr Fryer said that there was a shift towards pre-payment. Customers bypassing meters often used excessive amounts of electricity. There were several advantages to using pre-paid meters. There were approximately 200 000 pre-paid customers. New meters were being introduced which would make them more resistant to tampering.

Mr Fryer said that the recovery rate on customers billed by the city was currently at 97% compared to a 27% recovery on those areas of Ekurhuleni directly supplied by Eskom.

Mr Fryer said the costs of rebuilding vandalised networks was at about R16 000 per property. There was demand for customers to move towards direct Eskom supply due to the higher possibility of avoiding payment.

Mr Fryer presented the five tariff blocks. The four lowest usage costs had equal tariffs as those levied by Eskom.

Mr Fryer said that the customer base would be increased by 41% should the city supply all electricity customers within their municipal boundaries. Operational expenditure might increase due to the prevalence of vandalism in those areas. Revenue in the Langaville area had increased from an average of R1.13 per month to R138 per month after extensive intervention.

Mr Fryer said that the city still had a backlog of 121 000 formal and 165 000 informal households to be electrified. The estimated coast was R4.8 billion. R800 million was needed for network upgrades, R20 million for street lighting and R75 million for high mast lighting. The total capital budget was R16.4 million for lighting, R173 for network costs, R21.5 million for revenue collection, R138 million for electrification, R27 million for energy efficiency projects and R21.7 million for corporate management. This was a total of R398.7 million.

Mr Fryer said that power lines were being laid underground to reduce the threat of cable theft and illegal connections. There was still a gap between Eskom and municipal tariffs. At a 30% load factor, the municipal rate was 114c/kWh as compared to the Eskom rate of 84c. There was a trend to reduce the gap between the two tariffs and NERSA should continue this trend.

Centlec submission
Mr Leon Kritzinger, Acting Chief Operations Officer, Centlec, said that Centlec was an SOC company established as a municipal entity in April 2004 in the Mangaung Local Municipality. It covered the area from Bloemfontein south to the Orange River and east to the Lesotho border. It also assisted municipalities in the rest of the province. They were based on an ordinance of 1962 which allowed for municipal co-operation.

Mr Kritzinger said that Centlec was created to maximise shareholder value. It was there to ensure good governance. The Cabinet resolution of 2010 had posed a bit of a problem. New industry leaders were needed to address the challenges. Tariffs were very diverse at that time. A number of structures were in place. Their objectives were to provide low cost electricity for all customers, to provide a reliable service, to meet electrification targets in a cost-effective manner, to meet employment, economic and social interests, and to operate in a financially sound manner.

Mr Kritzinger said that some of the towns had suffered losses of up to 35%. This had been reduced to 12%. Delivery on electrification projects was 101%. Collective bargaining and economy of scale principles had been put in place. The same quality of service was being provided in the smaller municipalities. They had put their own financial system in place. Accountability had improved as the company collected its own tariffs. They were moving towards a clean audit where the lack of documents had been a problem in the past. The collection rate was 82% and R191 million in arrears had been collected. An asset management system had been put in place. A risk management system had been put in place. The skills shortage had been addressed. In 2012 22 students had graduated with B Tech degrees from the Central University of Technology.

Mr Kritzinger said that new technologies were being embraced. Customers were able to take a photograph of their meters using their cell phones and sending that to Centlec. These could be used as evidence of meter tampering. Security systems were in place to ensure the integrity of readings and billing via cellular technology. Customers could monitor their energy usage patterns and take remedial steps where necessary. Meter inspections had historically been done on a door-to-door basis. A system had been developed which gave a real-time graphical display of the different consumers and meter types.

Mr Kritzinger demonstrated the program. 49 000 accounts in arrears had been reduced to 32 000. A display could be given showing the outstanding balance on any particular stand. Historic trends could be displayed. This enabled the company to get to the root of problems.

Mr Kritzinger said that the training centre could accommodate 70 students. To date 1 418 students had completed training programmes. He presented a detailed breakdown of the various programmes. Some of this had been accomplished with government grants. There had been a decline in the numbers as grants had been terminated after the first year of study, resulting in students not completing the programme. Practical training was also given.

Mr Kritzinger said that the first lesson learned was that there was no need to make Constitutional changes. Municipalities could remain as the service authority, but appoint a service provider either internally or externally. It was not a complicated arrangement. There was a legal agreement between the two parties. The mandate was in the Integrated Development Plan (IDP). There were measurable targets in place.

Mr Kritzinger said there were challenges. The INEP mechanism could be used, but municipalities received a smaller allocation than Eskom. This caused a problem. If there was a shortfall, the municipality needed to find extra capital. The municipalities involved retained their assets, and they had to provide the funding for upgrades which were performed by Centlec. The municipalities were also expected to provide suitable vehicles for use by Centlec. The company was still negotiation with the South African Revenue Service (SARS) regarding a tax exemption. Centlec was still liable for taxes, and this 30% came from tariffs paid by the communities.

Mr Kritzinger said that Eskom was still supplying in some areas. The Eskom rate was cheaper. Eskom had slower response times, and the community did not distinguish between the two service providers. The Eskom surcharge of 235% during winter months could not be justified.

Mr Kritzinger said that private companies could make decisions based on benefits. Money could be spent in the short term for long-term benefits. Current legislation did not allow municipal bodies to do this. Another problem was that Eskom had different rates in different areas. An average rate for some of the rural towns was some 28% higher than that in the Mangaung municipalities. Centlec was prepared to take over the supply in these areas, but Eskom refused to relinquish their status. This was not in the national interest.

Mr Kritzinger said that while some assets were old, there was some old equipment that was still in perfect working order. A fund was needed to replace equipment when it broke down. He saw the logic of having money in the bank to replace broken equipment, but not the logic of replacing serviceable equipment.

Mr Kritzinger said that the majority of his budget was for bulk purchases. If salaries could not be more than 30% of the total budget, then certain key vacancies could not be filled. Capital requirements were tabled each year, but were scaled down by National Treasury (NT). A mechanism was needed for special business cases.

Mr Kritzinger said that there was a major problem in areas where there were different tariffs. Centlec was assisting the municipalities. Cutting or restricting electricity supply could be used to enforce rates payments. Eskom did not have this option. An alternative arrangement would be to allow the surcharge on electricity purchases in the Eskom-billed areas. This would allow the municipalities to derive revenue for other services even though they did not receive electricity revenue. The electrical supply in these areas should be transferred to the municipalities.

Mr Kritzinger said that Centlec maintained a 24 hour call centre. When electrification projects were done, consulting engineers and other costs would absorb 20% of the funds. This could be saved where Centlec was able to operate. In Ficksburg Centlec had been able to provide cables to replace stolen cables at a cheaper rate, as they were able to buy in bulk.

Mr Kritzinger said that the Ordinance of 1962 was being used. The model was that the system was anchored in the major metro in each province. The challenges should be addressed on a national level.

Mr Msiyang, a Board member of Centlec, said that the issue of proclaimed areas was a problem. There were more inhabitants in the informal settlements than in the suburbs. These persons were all using electricity and they needed to be connected to the network. If this was not done then the community would make use of illegal connections. People in areas supplied by Eskom took their frustrations to their Councillors rather than to Eskom. There was no policy preventing Eskom from installing street lighting. It was unfair that municipalities had to pay for the free basic electricity supplied in Eskom areas. Beneficiaries were overloading the system. Eskom was providing a 20 Amp supply while formal residential areas received 60 Amps. City Power in Johannesburg had re-established its training centres and more of this was needed. Pensioners needed to be recalled in order to train the next generation. It had been proven that non-technical losses occurred mainly in Eskom areas. All the townships, except some within the Tshwane municipality, fell under Eskom. Debts were being written off every year. The size of the REDs was simply too big.

Discussion
Mr Smalle was uncomfortable that issues were being raised. Accusations were being raised without the accused being present to defend themselves.

The Chairperson said that Centlec could not respond on behalf of municipalities. Members were not there to throw stones.

Mr Greyling was hearing that Eskom was not cross-subsidising other municipal services. He asked what cost should be levied on non-recoverable services such as street lighting It did not necessarily cost municipalities anything to provide free basic electricity. Eskom was subsidising domestic customers from the fees charged to major industrial customers. Households did not qualify for the Megaflex rate, so it was unfair to compare this tariff to domestic tariffs.

Mr Smalle asked if the increase in revenue in Ekurhuleni had resulted from using cut-offs to leverage payments, or in the increased usage of pre-paid meters. He asked if the slower economic growth was due to reduced major investment. He queried the 235% winter surcharge, as the figures quoted did not indicate such a large difference. He could also not make perfect sense of the figures for maintenance. He asked what happened to current staff in the municipalities when Centlec took over the distribution. He asked if there was any exit strategy.

Mr Ross said that the downward trend of non-technical losses in Ekurhuleni was praiseworthy. He pointed out that it was NERSA that approved tariffs. NERSA seemed to understand the problems faced by municipalities. He asked what percentage of revenue was being spent on maintenance of infrastructure. If the 1% proposal could be implemented, he asked if this would reduce pricing. Centlec was serving the southern and eastern parts of the Free State. He asked if there was any chance of Centlec servicing struggling municipalities just to the north of Mangaung. The municipality's financial statements had come under fire from the Auditor-General (AG). He asked if there were audited financial statements for Centlec.

Ms Mathibele asked if Centlec only trained current employees, or if they took on untrained staff. Job advertisements always called for experience, and this excluded graduates and school-leavers. She asked what consequences followed the vandalisation of meters, and what the costs of repairs were.

Mr Mayatula did not understand the cost of vehicles.

The Chairperson said that Eskom had good intentions but there were negative consequences. Ekurhuleni about the figure of zero relating to energy efficiency projects. On a study visit, Members had seen many houses which could not be connected to the electrical network. He asked what benefits were being derived from the model they were using. Centlec had referred to collective bargaining powers offsetting some of the challenges, especially regarding times to address outages. Rural municipalities were especially challenged. He asked what the cost of implementation and management of the computerised management system was. He asked why the cost of vehicles was listed separately. They should be part of the package. He asked why there were still differences in standards of service delivery.

Mr Kritzinger said it was difficult to determine a basis for cross-subsidisation. Three bulk customers provided 50% of the income, while 90% of customers were domestic users who produced 42% of the income. There was a major cost implication to upgrading a 20A supply to a 60A supply. The labour costs had been at about 30% in the past, but now exceeded the cost of materials. It was not feasible to upgrade domestic supplies. Eskom had a cost levied for street lighting. These were applied where lights were installed. Even then there were different tariffs. When the lights were not working, complaints went directly to the mayor. The municipality funded the lights from rates and taxes. Centlec had a service agreement with the municipality to service the lights. They would not work if the Eskom network was down.

Mr Kritzinger said that allocations for free basic electricity were made annually based on the equitable share formula. These were calculated at Eskom rates, but the municipality had to provide the supply to customers at below cost price. When the price increases were announced, an average was used. The tariff consisted of eleven components. While Eskom had been granted a 34% increase, his bill had increased by 48%. The average summer account from Eskom was R68 million, while the winter account was R135 million. This did not make sense if the network was under constant pressure. NERSA was aware of these issues.

Mr Kritzinger said that there had been cases of poor workmanship on installations. The correct safety clothing was not used. Where municipalities had staff, Centlec would take them on board. Some bridging training might be needed. Protective clothing was bought from the operational budget. These persons were then part of Centlec. The service delivery agreement made provision for the establishment of depots. Trained personnel were then available at those depots.

Mr Kritzinger listed a number of towns where Centlec had assisted. Eskom had taken over the network in Vrede at a nominal price of R1. The town no longer derived any electricity revenue. This was neither fair nor sustainable. Centlec had visited Parys twice. On both occasions their meetings had been cancelled due to strikes.

Mr Kritzinger said there were two types of training. There was in-service training, while bursaries were awarded for university or technikon studies. There had been liaison in the past with the mayors of southern Free State towns. Members of these municipalities could then qualify as technicians or artisans. Their number was included in the figure of 1418.

Mr Kritzinger said that in terms of the service level agreements, municipalities retained their assets. Municipalities still received the Division of Revenue Act (DORA) grant. They needed to generate capital funding. Vehicles were serviced from ring-fenced funding, but needed to be replaced at times. The municipality then needed the capital to buy a replacement. The vehicle was operated by Centlec, but remained a municipal asset.

Mr Kritzinger said that the Inclining Basic Tariff (IBT) tariff had resulted in a loss of income of R30 million. NERSA had strictly applied three tariff blocks. The bulk of customers in the southern part of the province were in blocks 1 and 2. There were not enough customers in the higher blocks to subsidise those in the lower blocks.

Mr Kritzinger replied that Eskom saw any supply of 11 kV or 22 kV as rural. When there was a failure on a rural network, NERSA's agreement with Eskom did not specify any time for restoration. Centlec worked on one and a half hours in all its areas. A government information system (GIS) had been set up with a contractor in Bloemfontein. He was employing young people with no work experience. They were constantly being challenged to produce solutions to new problems. The youngsters had developed the cell-phone billing system. There was no cost implication. The enthusiasm of these youngsters was admirable.

The Chairperson was surprised that the system had not been shared with the rest of the country.

Mr Fryer replied credit control leverage had contributed to increased revenue. Another factor was better security for the meters preventing interference. Many businesses had increased their efficiency in response to higher tariffs. There was spare capacity in some areas. Some customers were relocating to areas with more spare capacity. Maintenance spending was in the region of 4%, which is not where he would like it to be. Maintenance budgets had been targeted when extra funds were needed. The backlog was about R1 billion. It could be eradicated within five years. At present, though, it was still growing.

Mr Fryer said that there were two scenarios regarding vandalism. In some cases staff could access vandalised equipment. Penalty tariffs were applied with permanent disconnection the final resort. Areas like Langaville were more problematic, but split meters were an option there. Ekurhuleni had initially opposed split tariffs, but the IBT was now the same. Problems had been experienced as the money had to come from business and industry customers. 65% of revenue came from one or two major customers. A small increase to them generated a lot of revenue. A lot of education was needed to explain the tariff structures for pre-paid purchases. In an online vending system, there could be problems if the data chain was interrupted. Customers were inadvertently pushed into higher tariff rates as a result. It often went unnoticed. The IBT was for the low-end customer. If the customer used more than 900 units, the customer could use tariff B.

Mr Fryer said that Ekurhuleni was not sure of what grants it would receive. This might have been the reason that the zero rate for energy efficiency projects had been displayed. The cost of the hybrid model was R16 000 per stand. This made revenue collection sustainable. A delinquent customer would bypass the meter, but the connection could be terminated in this case.

Mr Kritzinger said that the peak tariff was 197.70 in winter compared to 55.31 in summer. Off peak times were 37c in winter compared to 23c in summer. This contributed to costs all round.

Association of Municipal Electricity Undertakings (Southern Africa) (AMEU) submission
Mr Sandile Maphumulo, Head: Electricity eThekwini Municipality and representing AMEU, was not representing the South African Local Government Association (SALGA) on this occasion. AMEU had been established in 1915 and provided technical advice to SALGA. In the process of establishing REDs, AMEU had supported the model. They had been deflated when the RED model had been rejected.

Mr Maphumulo said that municipalities had distributed electricity since 1882. There were now 175 municipalities licensed to distribute electricity. There were large variations in size. Much had been documented by EDI Holdings.

Mr Maphumulo said that AMEU had been tasked to explore solutions for the revitalisation of the distribution industry and solutions for the rehabilitation of the infrastructure. A lot of the work done by EDI Holdings indicated that the industry was nowhere near where it should be. This was due to ineffective asset management and insufficient infrastructure investment.

Mr Maphumulo said that challenges included a lack of skills. Revenue management was ineffective. Customer interaction systems were ineffective. Network management systems were ineffective.

Mr Maphumulo said that EDI Holdings had assisted 28 municipalities with ring-fencing of funding before it was wound up. There were six focus areas, namely capital investment, network maintenance, service delivery, skills and experience, quality of supply and customers and revenue.

Mr Maphumulo said that more than 50% of municipalities invested less than 5% of their revenue in capital projects. Capital spending was well below budget. Investment plans were not clearly defined.

Mr Maphumulo said that in terms of skills and expertise problems, there was a high vacancy rate at half of the municipalities. Remuneration was below market rate. There was no formal staff development at many municipalities. Performance management systems were not evident. Training was not a priority. Municipalities were struggling to attract and retain staff. Competitors, including Eskom, targeted those with critical skills. The work force was ageing.

Mr Maphumulo said that there were also problems at a network level. There was too much reliance on manual management systems. Maintenance plans were lacking. Spending on maintenance was not in line with NERSA guidelines. Many municipalities had no long-term refurbishment programme. He illustrated these shortcomings with a detailed list taken from the findings of EDI Holdings.

Mr Maphumulo said that Eskom's distribution arm was not running as smoothly as indicated. There was also a backlog in maintenance on their network. Municipalities were unable to manage distribution businesses. NT had set a benchmark of losses at 10%. All the metros were within the target except Johannesburg, which had 11% losses. Municipalities were not spending their funds allocated for electrification although the situation was improving. Centlec was an example of a service delivery agreement that was functional. Municipalities were battling to get Eskom to sign similar agreements. The collection rate was low where there was no provision for punitive measures. It was perception, and not fact, that municipalities were not embracing energy efficiency measures in order to protect their income. Projects were being undertaken. Theft of copper cable was a major concern. Resources had to be used to repair the network. 99% of municipalities implemented NERSA tariffs.

Mr Maphumulo listed short term interventions. Stronger players in the field should assist the weaker ones. This had happened in the case of a request for assistance from the uMsunduzi municipality which had been responded to by eThekwini and Eskom. The town had experienced no outages during the winter. This could be a model for the rest of the province. This should not be seen as a take-over.

Mr Maphumulo said that in the medium term, interventions were needed to clear the maintenance backlog. Merely providing the funds would not be enough. Some fundamentals needed to be in place. The skills issue needed to be addressed. It was unthinkable that municipalities could operate without the necessary mixture of engineers, technicians and electricians. This talent should not be lost to Eskom or other operators.

Mr Maphumulo said that the Constitution gave municipalities the right to manage electricity distribution. Of 234 municipalities in the country, 180 were licensed distributors. The rest had ceded this right to Eskom. Scale of economy needed to be maintained. The Municipal Finances Management Act (MFMA) made provision for services to be contracted to an external operator.

Mr Maphumulo confirmed the maintenance backlog of R27 billion. In many cases legacy systems had been inherited. The increase in the backlog was preventing Eskom and municipalities from addressing the maintenance requirements. The proposed ADAM funding could work if all the players had sufficient capacity.

Mr Maphumulo said that the same restructuring mistakes did not have to recur. AMEU was concerned by the silence following the demise of EDI Holdings. He was pleased that the Committee was addressing the issue. These hearings would provide the needed clarity. The ADAM report had the details of struggling municipalities. Some municipalities did have enough capacity to help their peers. Ring-fencing of funds was a condition for the granting of a distribution licence. AMEU recommended that municipal entities be formed, accountable to the relevant municipality.

Discussion
Ms G Borman (ANC) said that there was an indication that all municipalities were unwilling to embrace energy saving technologies. She did not believe that this was the case as some municipalities were making efforts in this regard. Copper theft had now been made a crime. This practice had to be stamped out. Illegal connections were sprouting in the informal areas. Children were dying in the process of setting up these connections.

The Chairperson said that Eskom was a member of AMEU. He had thought that their meetings would be based on consensus. He questioned the lack of capital investment plans. He asked how the lack of access to data was affecting planning. He asked when the assessment of challenges had been done. The silo system should be dismantled, but it seemed that this feeling still prevailed. Skilled personnel from EDI Holdings had been retrenched. He asked why they had not been redistributed. Some evidence was needed on the assertion that municipalities were reluctant to embrace energy efficiency techniques was a perception rather than fact.

Mr Maphumulo did not think it was true that municipalities were not embracing energy efficiency techniques. Much had been done in conjunction with Eskom. Most municipalities had rolled out renewable energy projects that would help the environment. He welcomed the legislation regarding copper theft. The energy had been crying out for this. There had been engagement on illegal connections. A recommendation had been made to the Minister that informal settlements should be electrified using DoE funds. There would be conditions attached. This could not be done on private property as it could be seen as encouraging land invasions.

Mr Maphumulo said that Eskom was a member of AMEU. Their involvement had seen a significant number of issues being resolved. There had been interventions in terms of training and boundaries. There were tough discussions but resolution had been achieved in most cases. The organisations were like one on the East Coast. There were no issues.

Mr Maphumulo said that capital investment plans had referred to the work of EDI Holdings. Some municipalities were not doing what they were supposed to do. Proper ring-fencing would answer many of the questions. The issue of monitoring of licence conditions became a challenge. Service delivery could not happen overnight. The efficiency of billing systems varied between municipalities. In eThekwini they had demonstrated to NERSA that IBT tariffs were not viable. He did not wish to answer the question on the redistribution of former EDI Holdings personnel. When ADAM was rolled out then these people could be used at the municipalities. Opportunities to work with Eskom had been exploited to work for the betterment of the community. AMEU had created an office dealing with energy efficiency some time ago, but Eskom would be better placed to give an answer to this question.

The Chairperson said that the issue of Eskom kept cropping up. They would be interrogated at later meetings.
 
The meeting was adjourned.

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