Restructuring the Electricity Distribution Industry: public hearings Day 3

Energy

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

The Southern African Faith Communities and related organisations noted the growth in informal settlements. There were many benefits to electrification. The high cost of energy was forcing people to look for alternative power sources and illegal connections. Higher tariffs were being imposed as a result of non-payment. SAFCI argued that the basic electricity allocation should be increased. There were rumours that the electrification process was being stalled in some areas, as municipal officials might be held liable for any deaths due to illegal connections.

The Energy Intensive User Group represented some of the major users of electricity. Financial management was a particular area of concern. Those who paid their bills were being punished by higher tariffs to cover those who did not. There was a disparate tariff structure. Businesses were migrating to areas where they could find lower electricity charges, particularly in areas supplied by Eskom. This increased the burden on residents in the areas vacated by business.

The South African Local Government Association (SALGA) noted a problem with dual regulatory systems, and recommended that service level agreements needed to be put in place. Prices and tariffs were another problem area. The viability of municipalities had to be considered when tariffs were set. The Department of Energy needed to lead the process of designing an alternative structure for the industry.

The Chamber of Mines represented a range of mining companies of various sizes. It was an energy intensive industry and operations had to be suspended if there was a failure in supply due to safety issues. The industry consumed about R13 billion in electricity annually. Larger companies were supplied directly by Eskom, which understood their needs. Smaller mines were dependant on municipalities, and the quality of service was often poor. The Chamber proposed that electricity distribution be consolidated under a single public entity.

The City of Cape Town was concerned by the growing difference between Eskom and municipal tariffs. Customers of the City paid significantly more to subsidise domestic users than their Eskom-supplied counterparts. The City had launched a massive refurbishment programme and was doing well with training, but might not retain these people in a stronger economy. Cash flow was a major consideration for the Metro. Consideration should be given to subsidies on a national level. Eskom customers should be subject to a surcharge to cover the costs of municipal services. Consideration must be given to giving metros the sole right to distribute electricity within their boundaries.

The South African National Energy Development Institute said that several issues still needed to be addressed. New technology was available and should be used. Service delivery levels were declining and there was not enough focus on the consumer. There was a lack of reliable data.

Members questioned the fairness of using electricity revenue to subsidise other municipal services and the practice of cutting off electricity supply as a credit control measure. Electricity tariffs were placing constraints on the economy. Members were also concerned over the disparity of tariffs between Eskom and the different municipalities.

Meeting report

Southern African Faith Communities Institute (SAFCEI), Green Connection, Earthlife Africa submission
Ms Liz McDaid, Co-Ordinator for the Southern African Faith Communities Institute (SAFCEI), Green Connection and Earthlife Africa, said that electricity supply should be sustainable, reliable, clean and financially viable. There was a strict vertical integration model at present. It would not work like that in the future. New generation systems were being developed. Many households were generating some of their energy requirements through solar heating.

Ms McDaid said that informal settlements were increasing. Many of these people were using other forms of energy. It was not sufficient simply to offer free basic electricity while pushing up tariffs charged to other customers. Energy costs could be as much as 20% of a household budget. A two-tier system was currently in place but this needed to change. Basic houses were supplied without ceilings, forcing residents to use more energy to heat their houses. The system need to be revitalised without causing more hardship.

Ms McDaid said that the increase in tariffs was leading people either to disconnect themselves, or to make use of illegal connections. Increasing tariffs had a ripple effect through the economy. The customer base was shrinking, placing a higher burden on those remaining on the grid.

Ms McDaid said that there was a different pricing structure in the rural areas, where customers had to pay an additional network charge. She presented a table comparing increases in electricity costs to social and child support grant increases. People were requesting increases in grants to cover rising energy costs. Eskom was making a profit. The state had not collected some R8 billion rand in arrears, and this was resulting in a higher increase in tariffs. This was not a logical approach. An integrated approach was needed.

Ms McDaid said that use of electricity as opposed to wood fires, as an example, caused less pollution. Good lighting made it easier for students to study and succeed. Support to small business would contribute to economic growth.

Ms McDaid said that government should plan for the future. Technology was improving. The current generation of pre-paid meters could not handle the free basic electricity allocation, and the poor were not getting what was due to them. A more flexible or a modular approach such as the use of renewable energy sources might lead to a small increase in the short term but would have long term benefits.

Ms McDaid presented some case studies. Solar home systems were more expensive than using mini-grids. Fossil fuels might be cheaper, but had to be mined and would eventually be depleted.

Ms McDaid said that costs could be recovered. A standard charge could be considered with cross-subsidisation at a higher level. She recommended that the free allowance be increased to 100 kWh, as was already being done in Ekurhuleni.

Ms McDaid said that the organisations she represented were all part of an alliance concerned with electricity issues. Part of the problems of governance was a failure to spend allocated funds. The National Electricity Regulator of South Africa (NERSA) needed to play a firmer role. There was a lack of roles and more education was needed. There was a problem with the availability of data on exactly how customers received their electricity. There was still a silo approach which hindered co-ordination. City officials could now be held liable for any deaths resulting from illegal connections, and she had heard that this was discouraging the city of eThekwini from electrifying its townships. Parliament needed to play a role in tackling the backlogs.

Ms McDaid had some recommendations. It was not practical to use the revocation of licences as a means of enforcing licensing conditions. A lack of co-ordination between municipalities and Eskom could lead to dangerous working conditions for technicians. Hidden costs had to be made transparent. Reporting and budgeting needed to be aligned.

Energy Intensive User Group (EIUG) submission
Mr Shaun Nel, EUIG Programme Director, said that there was agreement on many issues. There were 31 members of EIUG representing some 25 000 employees in South Africa and millions worldwide. They accounted for 44% of energy consumption in the country and made a significant contribution to the economy. There was a high degree of de-industrialisation in urban areas. Members were committed to using resources within the country.

Mr Nel said that the core problems were resources, finance and governance and process. In terms of resources, the electricity distribution industry (EDI) lacked both technical and management skills. The width and depth of the skills base needed to be increased. Such pockets of excellence that were in place should be used to benefit all municipalities.

Mr Nel said that financial management was a key issue. This affected affordability and pricing. It was clear that electricity revenue was used to subsidise other services. There was no common methodology. There was a high level of non-technical losses. Those who did pay were punished by higher tariffs to cover those who did not. Metering had to be accurate. There were a few municipalities that were close to NERSA approved tariffs, while others were significantly higher. This study did not address surcharges.

Mr Nel said the city of Tshwane charged 26% less than the Eskom rates, while Ekurhuleni was 41% higher than the Eskom tariff. Others were between these two extreme. Mark-ups ranged from 25 to 70%. Demand charges were loaded, making household solar heating systems unviable. There was no framework regarding surcharges. There was no return on installing solar panels. This issue needed to be addressed. Surcharges were used to match revenue shortfalls. Many small industries were begging to be supplied directly by Eskom to avoid municipal tariffs and surcharges. This resulted in inequitable tariffs. Business was migrating from higher priced municipalities, leaving the residents to pick up the burden. This impacted on the viability of municipalities and their ability to provide other services. Municipalities needed to appreciate the importance of growing their customer bases.

Mr Nel said that much of the discussion came down to the Constitutional rights enjoyed by municipalities. There was a perception that NERSA was ignoring excessive tariffs. The way in which data was compiled did not allow for proper comparisons. Issues of monitoring and compliance should be enforced. Standardised and best practices could be implemented. This would also allow for a free flow of skills across municipalities.

Mr Nel said that EIUG did not believe that an immediate restructuring process would be of any benefit unless there was proper monitoring. Many of the issues could be resolved within the industry. The needs of the future had to be considered.

Mr Nel said that the first step in any solution would be to have alignment between stakeholders. All three aspects of the electricity system needed to be updated. Whatever structure was proposed should be supported by the legislative framework.

Mr Nel said that a number of distinct work-streams should be identified. While restructuring was a long term process, it had to be done in the right way. Current resources should be utilised. A standard framework was needed regarding revenue issues. There could be collaboration with the private sector. This was already being done on an informal basis.

Mr Nel said that a vision of the future industry was needed. Simply restructuing without such a vision would nto solve the problems. Leadership was needed from the regulator and the distributors.

South African Local Government Association (SALGA) submission
Mr Mthobeli Kolisa, Executive Director: Municipal Infrastructure Services, Environment and Climate Change, at SALGA, said that they had been invited to talk on three issues. The first was that of a dual regulatory system between NERSA and municipalities on suppy and distribution. The Electricity Regulation Act established a national regulatory framework. The Act regulated generation, transmission, distribution, reticulation, trading and the import or export of electricity. An amendment in 2007 defined the word "reticulation". A licence was needed for the provision of services. The municipality could decide how a particular function could be delivered. Options included an internal organisation, forming a business unit, or outsourcing to a body such as Eskom. This was the case with many municipalities. Consequences of this led to unfair treament of municipalities where Eskom was the distributor. There were consequences for municipalities. Electricity could no longer be used as a credit control measure. Municipalities were unable to raise income from electricity sales.

Mr Kolisa recommended that all external mechanism services providers must be decided through a Systems Act section 78 process. There must be service delivery agreements in place as a licence condition. Termination of supply of electricity as a credit control measure should be retained. National norms in terms of surcharges should be prescribed by the Minister of Finance.

Mr Kolisa said that the second area of concern was prices and tariff regulation. NERSA had the general power to regulate prices and tariffs, and to impose licence conditions. The Municipal Finances Management Act (MFMA) made it possible for municipalities to set tariffs. This resulted in an overlap. NERSA should not set tariffs that undermined the viability of municipalities. The timing of NERSA decisions often did not allow municipalities to comply with local government legislation.

Mr Kolisa recommended that the NERSA process shold adhere to the legislated municipal budgeting processes. Price determinations should be informed by municipal financial viability considerations, and differentiated according to the consumer mix in particular areas.

Mr Kolisa said there was a lot of negative analysis, but the electricity distribution system was still working. However, there were problems due to high inefficiency, inability to leverage economies of scale, inequitable treatment of consumers and municipalities and network outages. There were problems with maintenance and refurbishment. The infrastructure could not support growth. There were vacancy rates of up to 50% at municipalities, and skilled workers were ageing.

Mr Kolisa said that the EDI was negatively affected by historical factors. The fiscal framework of local government with its system of cross-subsidies also affected the industry. The environment in terms of policy and skills development was unfavourable. The right skills were not being produced.

Mr Kolisa said that there had been remedial attempts such as the aborted Regional Electricity Distributors (REDs). The Approach to Distribution Asset Management (ADAM) phase 2 was being implemented, but funding was not nearly sufficient.

Mr Kolisa said that theft of electricity was in increasingly concerning issue.

Mr Kolisa recommended that the Department of Energy (DoE) should lead a process of developing an alternative approach to the REDs to resolve structural issues. The implementation of ADAM Phase 2 should be supported with the necessary funding. The refurbishment backlog needed to be addressed. NERSA should review the principles, design and implementation of the Inclined Basic Tariffs (IBT).

Mr Kolisa said that municipalities had inherited a liability rather than an asset. SALGA recommeded that a national municipal infrastructure refurbishment fund, which would leverage private sector investment. National Government Information System (GIS) based databases should be established to collect and manage data.

Chamber of Mines submission
Mr Dick Kruger, Deputy Head: Techno Economics, said that the Chamber of Mines was an organisation of voluntary members representing some 90% of mining production and labour. They represented both mega companies as well as small scale miners.

Mr Kruger said that mining was an energy intensive industry. More than half of energy requirements were needed for ventilation, cooling and transport of miners. A power outage of ten minutes necessitated the evacuation of mines, and it could take an entire shift to ventilate the mine to a point of safety once power was restored.

Mr Kruger said that there were 1 110 mining customers. Total usage was 32 630 Gwh, which represented 15.5% of total sales. This equated to R12.9 billion. The industry had produced 125 million tons of coal for Eskom. While the major mines were serviced directly by Eskom, smaller mines relied on municipal supples. There were problems with fragmentation, disparate tariffs and failures in the distribution system.

Mr Kruger listed a number of problems with tariffs, maintenance and lack of progress in electrification. The Chamber had taken part in a number of consultative processes. It had supported the concept of the RED system, with large customers having a choice of supplier. The Chamber believed that a publicly owned independent entity should be established in terms of the Companies Act. It should be fully regulated by NERSA. Such a body should be managed professionally and be financially viable. Profits should be used to maintain and extend the infrastructure. The backlogs in maintenance should be cleared first.

Mr Kruger said that the Chamber beleived that there should be a reliable supply of elctricity at an acceptable quality. Electrification should be extended within its area of operation. Equitable tariffs should be implemented.

Mr Kruger said that there was uncertainty around the future of the EDI. This had resulted in insufficient investment in new distribution infrastructure and the maintenance of existing infrastructure. The Chamber recommended that a decision be made on a sustainable model for the EDI without further undue delay, and that this should be implemented through legislation.

City of Cape Town submission
Dr Leslie Rencontre, Director of Electricity, City of Cape Town, said that the first RED had been established in Cape Town. It covered the city and some surrounding times. At present services were provided in the metro by the City, with Eskom supplying some areas directly.

Dr Rencontre said that one of the challenges was electricity tariffs. The gap between the tariffs was growing. For small residential users, the City's tariff was 2% cheaper and for very large commercial and industrial customers the City charged 17% less. However, in the other price categories Eskom rates were cheaper. The difference for large residential users was 23%, small commercial users 25%, medium commercial 39% and large commercial 32%. There was a clear inducement for industry to relocate to Eskom-supplied areas.

Dr Rencontre said that the percentage increase was in fact decreasing, but there was an increased Rand value. The difference in the various customer brackets was due to cross-subsidisation. The ability to absorb these increases was dependent on the ability to implement cross-subsidisation.

Dr Rencontre said that Eskom had a 5:95% mix between residential and commercial customers. The split for the city was 40:60%. The amount needed to sustain the subsidy to Eskom residential customers required that the commercial and industrial customers needed to contribute 4.93 c/kWh while the city's customers needed to contribute 67.2c.

Dr Rencontre said that Eskom customers in Cape Town did not pay for streetlighting, nor did they contribute through the municipal surcharge. Services provided by the city benefited all its residents. He proposed that Eskom customers also be subject to the municipal surcharges. Ideally, all metro customers should be connected to the same distributor. An imposition of a 10% surcharge for all residents would still mean lower tariffs for Eskom customers.

Dr Rencontre said that the planned implementation of the RED system had not freed the municipalities from their maintenance obligations. NERSA had conducted an audit in 2007. A process of valuing assets had been undertaken. The City was now in a better position to manage its assets, including maintenance programs. A refurbishment program had been introduced to refurbish the medium voltage switchgear. This would cost R100 million per annum, and the program would last 38 years. The City did still not realise the full extent of the required capital costs. Only then could the funding be addressed. He expected that a program for the full network would cost in the region of R300 million per annum, but might be more. Smaller municipalities would struggle to extend their electrification programs.

Dr Rencontre said that the city was in a better position than others regarding the workforce. It employed 84 engineers at an average age of 49, 146 technicians (average age 41) and 316 artisans (average age 40). 100 apprentices had been trained recently, most of whom had been retained by the city. The city hoped to have trained 1 000 artisans by 2020. It was still a challenge for municipalities to retain trained staff, and he expected a loss of skilled personnell should there be an upturn in the economy.

Dr Rencontre said that electricity sales were a key factor in the city's cashflow. It was an important basis for raising capital and in credit rating. Electricity supply played a role in managing other municipal debt. There were 25 issues which he identified as deal breakers.

Dr Rencontre said that the legislative environment still posed challenges. There was still a difference between tariffs and costs. Most municipality tariffs were approved by Council, but were in line with NERSA guidelines. Problems would arise where there were differences. Approval timeframes were an issue. SALGA had raised the issue of signing service delivery agreements with Eskom. This was required by the Constitution, but Eskom had still not signed agreements with municipalities. There were differences between the chart of accounts required by National Treasury and the register of reporting matters required by NERSA.

Dr Rencontre suggest some alternate models. The National Planning Commission (NPC) had put some models forward. Eskom and most of the metros were the most sustainable authorities. It was a question of whether the country could afford smaller municipalities to fail. There was a question of whether electricity distribution should be removed from all municipalities except the metros. Consideration should be given to giving metros the sole distribution role within their boundaries. The needs of energy intensive users had to be considered, and the provsions of the Constitution.

Dr Rencontre proposed that there should be a national consideration of the level, targeting and source of subsidies. The Eskom cross subsidy should be renewed in review of their bulk tariffs to municipalites. Municipal surcharges should be introduced for Eskom customers. Consideration should be given to municipalities taking over all distribution networks whithin their areas. Capital expenditure requirements should be determined.

South African National Energy Development Institute (SANEDI) submission
Dr Willie de Beer, SANEDI Specialist Corporate Advisor, had heard many concerns and recommendations over the previous few days. He was wearing a black tie because there would be mourning if the issues were not addressed. Much attention had been paid to the generation side. If one looked after the assets, expected life cycles of fifty years could be exceeded. An Energy White Paper had been developed in 1998 followed by various other policy documents. The rude awakening came in 2008.

Dr de Beer asked what had happened since the late 1990s. There had been considerable effort put into generation. There was a better understanding of the challenges of asset management. The restructuring process had been stopped. The number of well-performing distribution authorities was decreasing. There was increase in service delivery protests. The target of 2014 for universal access of electricity would not be met. There were significant skills challenges.

Dr de Beer said that the scorecard on EDI progress was looking bleak. There were some areas of satisfactory progress, but problems in most spheres. In 2008, the media had made a statement regarding the perceived national emergency posed by power failures. He asked if another situation like this was needed to lead to action.

Dr de Beer said that there were various challenges to be dealt with. Remedying the backlog would not lead to lower tariffs. There would either be a decline in the situation, or action was needed to address the problems. He praised the Committee for this initiative.

Dr de Beer said that there was a major opportunity to invest in the infrastructure. The dependence on old ways of investment had to be revisited. Many decisions had to be taken on various types of equipment. It was amazing that there was very little view of the needs of the customer. Job creation could follow as well as reduced peak time demand levels and other benefits.

Dr de Beer said it was important to manage change. A vision was needed. There had been valuable debate during the hearings. Performance feedback remained a problem. Performance could not be measured without proper data. There was already a lot of knowledge in the country. Plans should be modified to allow continuous improvement.

Dr de Beer said that electricity was the lifeblood of the world. Many world suppliers had moved away from the concept of an integrated organisation. A smarter approach was needed. Grid intelligence was lacking. Proper sensors in the meter should inform the supplier that the power was down. In most cases new technologies could be factored into design at limited cost. Opportunities had to be grasped. A smart grid network was needed. This could reduce costs without taking jobs away. The regulator could never do its job without reliable data.

Dr de Beer put the case for grid modernisation. This could result in a reduction in energy usage, grid peak savings and reduction in the emission of greenhouse gases. A blanket approach was not needed.

Dr de Beer said it was generally acknowledged that EDI Holdings was no more, but there had been no talk of a better solution. The City of Cape Town had made good progress with ring-fencing and benchmarking. There was still a "them and us" mentality. Proper flexibility was needed. The infrastructure backlog had to be dealt with. The current maintenance needs must be satisfied. The EDI must be positioned to meet future challenes. Reform would not happen without clear guidelines.

Dr de Beer said that the identity of the supplier had to be determined by many municipalities. The abilities of NERSA were restricted. Many people were looking at assets rather than looking after them. He had seen many poorly maintained buildings and roads in the country. He questioned the national will to maintain assets.

Dr de Beer said further analysis paralysis was not needed. Solutions needed to be found within the current Constitutional framework. The EDI transformation needed to be facilitated. All work, experience and knowledge had to be leveraged to take the country forward. Asset management should be conducted with limited transfer of assets. Cherry-picking must be avoided. The customer base of lower income customers would be increased, but the situation should not be allowed that poorer customers were left behind. Any cross-subsidisation must be transparent. This device would always be needed. Individuals had to be held accountable.

Dr de Beer said that the DoE was the most appropriate authority to identify the infrastructure backlog. The EDI did not have the current capacity to deal with backlogs, and any financial plan should be implemented over a period of time. There were various funding options. Eskom was dealing with some of its own backlog, and the full estimate of R27 billion might not be needed. SANEDI had launched a project. Maintenance had to happen parallel to day-to-day activities.

Dr de Beer said that metros with the ability to operate as a sustainable business and provide support should be identified. If a municipality could not pay its current bulk account, they could not take on more responsibility. Not all the metros and major municipalities could assist others. The metros and municipalities who could provide assistance should be linked with the relevant Eskom depot. Proper cost centres must be maintained.

Dr de Beer said that service delivery agreements were essential. Proper reporting was crucial. Compliance was essential.

Dr de Beer said that a vision was needed for the generation and distribution industry. Much of the data collected could not be used. A standard accounting approach was needed. A common view on refurbishment was needed. Clarity was needed on what technology was needed. Some generic issues did need to be sorted out, such as legislation and backlogs. Training needed to be revived. Accountability and responsibility had to be assigned. A co-ordination mechanism was needed that would report to the Committee. Tariff harmonisation was needed. The current practices were unsustainable. Business was still unusual at present.

Discussion
The Chairperson said that the discussion had triggered an extensive reaction. Members had been sensitised to the situation.

Mr D Ross (DA) was impressed by the submissions. A lot of progress had been made. Practical problems had to be fixed. A combined funding approach was needed. Cross-subsidisation was a standard business principal. The proposed 1% transmission levy had merit and should be discussed with National Treasury. The City of Cape Town had reminded Members of the importance of cash flows in municipalities. Bill collection was sadly neglected in many areas. On oversight visits overseas, he had also seen municipalities unable to conduct maintenance. The Development Bank of South Africa (DBSA) should become agents for underresourced municipalities. It was a pity that they had not been present to deliver their submission. The service delivery dialogue was important. Eskom had said that they would adopt some municipalities, and this was a step in the right direction. He asked if the EIUG members were being subsidised by other customers. Some contracts were at special tariffs. Small, medium and micro enterprises (SMME) should be sustained. A municipality had to function correctly. He had heard of five star guest houses that no longer could afford to switch on their heaters. Long-term spending needed to be discussed.

Mr L Greyling (ID) agreed with the City of Cape Town on the need to address the difference between municipal and Eskom tariffs. He asked if it was correct that electricity sales should subsidise other services. He asked if the current tariffs for water, sanitation and other services were covering the costs. He spent a lot more on electricity that on other services. It was probably true that metros should take over distribution in their areas. It might work for some but not for others, given the poor rate of payment in a place like Soweto. He asked if net metering could be done with the current system. He asked if there was any possibility of two-way metering or metering according to peak and off times. He was alarmed that persons not paying their rates should have their electricity cut. Other measures should be in place.

Ms G Borman (ANC) said that Members were fortunate to have shared the expertise of the presenters. On the issue of informal settlements, the facts were needed on the issue of illegal connections and the accountability of city officials. The facts regarding the issue with eThekwini were needed. Municipalities argued that they needed to cross-subsidise. She asked how there could be such a huge difference between the different municipalities on demand charges. Cross-subsidisation was a fact of life, but transparency was needed.

Mr J Bonhomme (ANC) said it was not fair to hold current consumbers liable for the mistakes of the past.

The Chairperson asked if the private sector should play a role in the subsidisation process. The focus on the role of Parliament was an important insight. He asked if the Constitutional questions raised by SALGA had not been raised before. The Chamber of Mines could have elaborated more on the proposed model. More substance was needed on their input. He thought that all mines were supplied by Eskom. He asked how Cape Town planned to cross-subsidise new green technologies. He asked how Eskom had a larger mix of commercial customers in the Cape Town metro. The metro had suggested that the NPC model be adopted. Planning was done by Departments and by the NPC. It must be clear where each body found its niche. He asked Dr de Beer on the need for asset transfer, and what unforeseen consequences might arise.

Dr de Beer replied that funding options were varied, and could be used in combinations. This could tap into potential surpluses and donations. This would reduce the burden on the end customer. This is why he had suggested a combined approach. The customer, unfortunately, would always pay for past mistakes in the form of taxes or levies. The backlog had to be addressed from an Integrated National Electrification Programme (INEP) type grant from DoE. Funding could then be tailored according to the beneficiary. The 1% levy proposal was based on a study that had been done. Everybody in the country would then contribute, not just those in a particular area. In the time of EDI Holdings, a lot of thought had been given to asset transfer. There were very few reliable asset registers.

Dr de Beer said that there was also doubt about what would be needed to make the assets useable. Transfers should be done where needed. A model could also be adopted where there was an asset owner and an asset operator. This might work in the short term, but a better long-term solution was needed. National Treasury had crafted a procedure, but this had come too late to transfer assets to RED1. There was a revolution in the rest of the world where data was transferred via electical cabling. This was a source of revenue. There were opportunities with renewal energy sources.

Dr de Beer agreed that more detail could be given on technology, especially regarding two-way communication with the customer. The whole municipal funding model should be reviewed. The debate would have to be taken on at some stage. Municipalities needed funding to provide the services expected of them.

Dr Rencontre replied that if there were different categories of customers, there was a cost to provide the customer and a cost the distributor was paying. Cross-subsidisation was used to balance the costs to the different categories. The surcharge would be used to subsidise other services. It could be seen as a form of tax. The water, sanitation and other service rates were cost-effective. The question of municipalities taking over Eskom networks was a debate for the future. He was not sure of the difference between NPC and Departmental planning. There was not much flesh on the reports of the NPC. There were a number of constraints on meters. Cost was a consideration. Safety was an issue with installation. Consideration was needed on credit control measurers. Electricity cut-offs were an option, but there were softer measures. Threats were often more effective. High end residential properties were carrying more of a burden of subsidising poorer households. Such higher end residents might turn to solar or other energy sources, and thus reduce their electricity bills. This would impact on the ability of the city to cross-subsidise. Tariffs were based on energy useage. Eskom classified municipalities as commercial and industrial customers. The city's poor customers were effectively subsidising those of Eskom.

Ms McDaid replied that the issue was with the backlog. She compared electricity to Telkom, whose customers paid huge service charges and relatively low charges for calls. Municipalities were also moving towards billing customers for connection rather than rely on useage. Municipalities might increase network charges in response to declining sales revenue. Increases in the electricity price triggered general price increases. The proposed levy to address the backlog would be a risk. Urbanisation was increasing with a resulting increase in informal settlements. There were a few forms of illegal connection. Backyard dwellers might buy electricity from the householder, sometimes unwittingly through illegal connections. Eskom might offer them a lower rate. She had been made aware of a reluctance in eThekwini to electrify the townships as city officials might be held liable for injuries resulting from illegal connections. Cape Town had taken a more co-operative approach.

Mr Nel said that EIUG's members were invariably paying higher rates and therefore subsidising poorer users. There was a feeling that residents existed to service municipalities. This was the same feeling that said that making everybody equally poor would lead to equality.

Mr Ian Morison, Chairman of the Committee representing Mechanical and Electrical Engineers, Chamber of Mines, said that smaller municipalities did not always have the capability to provide reliable, high quality power. Eskom understood the needs of the mines better, and maintained a critical outage register.

Mr Kolisa said that negotiations would be held with National Treasury. SALGA was aware of the constitutional provisions. The best mechanism for recovering the costs of electricity had been chosen. Most municipalities were satisfied with current arrangements. Some agreements for Eskom to supply municipal areas were not in accordance with these norms. The question of realistic tariffs for other services had been raised. In most cases, the cost of water deliveries covered the cost of supply. Payment for municipal services was poorer where Eskom supplied electricity. The use of electricity cuts was effective as it was was difficult to impose penalties in any other way. It was an important tool in the revenue collection process.

The meeting was adjourned.

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