Electricity Distribution Sector: Department of Energy, NERSA & Eskom briefing; with Deputy Minister

Meeting report

The Chairperson said the meeting was to discuss difficulties surrounding electricity supply, as some areas still suffered power outages despite an excess capacity for electricity generation. The cause of this situation, which involved the distribution of electricity, would be addressed. The focus of the day would be strictly on electricity supply, and other matters could be discussed later.

 

Department of Energy (DOE)

 

Ms Thembisile Majola, Deputy Minister of Energy, said there was currently an excess generation of electricity, and this production was expected to continue to grow as the other units came on board. The issue of distribution was critical. The challenge in distribution was due to infrastructure problems, which required a substantial amount of funding. She hoped that the Committee would assist in removing obstacles in order to establish who was responsible for what when looking at the concurrent powers at a policy level.

 

Mr Thabang Audat, Director: Electricity Policy, DoE said there were three types of customers of electricity -- residential, industrial and retail. Distribution was the last stage of the production-to-supply process. Electricity distribution was undertaken by Eskom and 182 licensed municipalities, and municipalities accounted for 42% of sales revenue, while Eskom accounted for 58%. Municipalities contributed 41% of the revenue. Consumer access to electricity had increased from 34% in 1994, to 86%.

The challenges facing the sector were:

• bulk purchases by an increasing number of housing estates;
• increasing urban migration, leading to higher demand in urban areas, causing overload and illegal connections;
• embedded generation, when people decide to generate their own power; and
• energy switching when high end customers decide to switch to other type of power.

 

These four issues needed to be addressed for sustainability to be achieved in the sector.

Another challenge was the view of municipalities that their constitutional authority to solely distribute electricity was undermined by Eskom. Municipalities had also been questioning the National Energy Regulator or South Africa (NERSA) licensing process. Other challenges were the debt owed to Eskom by municipalities, and tariff differences between Eskom and municipalities. All the challenges were being looked into by an inter-Ministerial task team lead by the Department of Co-operative Governance and Traditional Affairs (CoGTA). Electrification challenges were due to a lack of human capacity which had brought about reliance on consultants, and this was a concern to the sector.

Interventions by the DoE

Schedule 2 of the Electricity Regulation Act (ERA) had been amended to allow an exemption from licensing for generators of less than I megawatt. This had been done to allow the increasing numbers of Small Scale Embedded Generators (SSEG) to be registered with NERSA so that they could be managed.

A study into the status of electricity distribution infrastructure had led to the development of the Approach to Distribution Asset Management (ADAM). ADAM had been developed to fast track some immediate interventions to address backlogs in infrastructure maintenance, refurbishment and strengthening. Mini ADAM, as part of a multi-phased programme, had been undertaken to allow the DoE to facilitate the provision of funding for these purposes. 

Nine municipalities had been identified as potential recipients of the R320m funding that had been deployed when Electricity Distribution Industry (EDI) was closed.

The ADAM funding mechanism had been proposed after discussion with various stakeholders. It had been proposed because the National Treasury was constrained in providing further grants, and a tariff increase was not an option. The ADAM funding model proposed funding through a central loan facility by raising capital at the national level -- through the 5% to 8% earmarked for maintenance, which was included in the Tariff -- and guaranteeing repayment.

An intervention, the Smart Grid project, had been funded by the European Union and the objective of the pilot was to develop a national policy.

Municipalities had to look at the electricity distribution industry’s structure so as to be able to determine their business model. The process of finalising funding and the implementation approach to deal with the electricity infrastructure maintenance backlog and refurbishment would be prioritised.

The problem of distribution was increasing because entities were not maintaining infrastructure.

ESKOM

 

Mr Mongezi Ntsokolo, Group Executive: Distribution, said Eskom had three licences. These were for electricity generation, distribution and transmission. The constitution was clear that distribution was not exclusive to municipalities. There were about 5.9 million customers, nine operating units in the provinces, and 15 213 employees with 305 customers network centres nationwide. Eskom provided industrial support in the form of learnerships and was partnering with distributors in the industry.

Safety, energy theft, energy losses and the ability to extract efficiency from operations were some of the problems faced by Eskom. However, universal access to electricity could be achieved by 2020. Eskom distribution’s maintenance regime was both preventive and corrective. Also, Eskom did not support having a separate infrastructure funding model for the Municipalities.

Ms Ayanda Noah, Group Executive: Customer Services, said 41% of ESKOM’s revenue came from municipalities so it was essential that municipalities paid their bills. There were seven customer service centres which were all virtually operated. Payment arrangements were made between municipalities and Eskom, but they were not honoured by most municipalities.

One of the challenges experienced by Eskom was that there had been a slight reduction in sales. Some of the challenges of the municipalities were lack of metering, theft and challenges on proper tariffs for customers, huge vacancies and changes in personnel. The municipalities had asked for a rationalisation of the tariff categories, and these had been reduced to three from 11 to cater for the needs of municipalities in the rural areas.

Initially, Eskom had charged interest of 5% + prime on late payments (after 15 days of invoicing). This had been reduced to 2.5% plus prime, and the number of days before interest was charged had been increased to 30 days. The impact of these changes was yet to be tested.

There had been rezoning which had caused an overlap between the areas covered by municipalities and those covered by Eskom.

She said the municipalities believed that they had the exclusive right to electricity distribution and that Eskom should sign a service level agreement with them if it wanted to operate. She added that Eskom had a licence to distribute.

NERSA

 

Mr Christopher Forlee, Chief Executive Officer (CEO), said NERSA welcomed the opportunity to share some of the work that it does. NERSA had been established in 2005. The regulators consisted of nine members – five part time, and four full time. It was important that NERSA was neutral in decision making and consistent in its activities. Section 4 of the ERA outlined its mandates. Among its other mandates, NERSA licensed/registered regulators and monitored compliance with license conditions.

Mr Mbulelo Ncetezo, Executive Manager: Electricity Regulation, said that although about 6% of the electricity tariff should be used for repairs and maintenance, most municipalities spent below the earmarked amount. Current municipal tariffs were approved on an annual basis and upon application by the licencees. The process was required to be finalized by 15 March annually, to be implemented by 1 July of the same year, but most municipalities did not meet the deadline. The tariff depended on a percentage of the price increase approved by Eskom, based on the Multi-year Price Determination (MYPD) process. NERSA approves Eskom’s allowed revenue and price increase applicable to municipalities and gives guidelines to municipalities on increases and benchmarks.  Licencees apply to NERSA for approval of their tariffs.

He highlighted the challenges faced by NERSA as the difficulty in meeting the 15 March deadline due to the late applications by municipalities and the late application for Eskom’s revenue. Some other challenges were late submissions, inaccurate information, high staff turnover and lack of capacity. Some municipalities also believed they were not obliged to charge tariffs approved by the NERSA. 

Some of the mitigation strategies embarked on by NERSA were conducting workshops to assist municipalities on how to complete forms for tariff applications and conducting audits to ensure that municipalities operated efficiently. Audits were conducted on annual basis to ensure that licencees complied with regulatory requirements. Other challenges faced by licencees were the lack of a master plan to cater for future demand, decaying infrastructure due to a lack of maintenance, and the non-availability of strategic and routine spares.

He said Municipalities had to change their business models to decrease their reliance on electricity revenue, because it would be impacted by the SSEGs. He also advocated the need for electricity distribution industry reform. Despite the challenges, NERSA was achieving its mandate in the regulation of the municipalities’ electricity supply.

Discussion

 

Mr J Esterhuizen (IFP) said for every 10% increase in tariffs by Eskom, demand decreased. NERSA wanted to reward Eskom for instability. Eskom was currently losing more than 5 000 GigaWatts (GW) per month. He asked for strategies to address this trend.

Mr R Mavunda (ANC) said an issue that cut across all the presentations was that municipalities did not have the capacity to run their own affairs, and that they relied on consultants. Some of the consultants were former employees who were unqualified and inexperienced. The presentations lacked interventions to correct the identified problems. There was a need for the sector to come up with a strategy to bridge the gap created by the lack of capacity. The challenges with filling in forms and providing the necessary information may be due to the presence Section 56 managers in the municipalities who, though being in the municipalities for a long time, lacked the skill to deliver on their duties.

Ms G Nobanda (ANC) asked why NERSA was issuing licences to the municipalities, despite non-compliance. Eskom should explain why it did not support the funding model.

Ms T Gqada (DA) asked what the DoE was going to do to avoid continuous reporting of maintenance problems next year. Why was Eskom not in support of the ADAM funding model? She asked for clarification on the proposal of the mini-ADAM that would not bring about an increase in the tariff. She said the training of the learners was good for capacity building, but asked where the learners went after their training. Did Eskom did not have challenges of people leaving for better opportunities like the DoE and the municipalities? The challenge of people leaving must be looked into, because the municipalities were spending more money than they should. She also asked if Eskom was losing money, how much it was losing, and if it was able to maintain its own infrastructure. Did NERSA agree that municipalities should adopt the ADAM funding model?

Ms Z Faku (ANC) asked for clarity on the challenges caused by the SSEGs, and how they got their electricity supply. Challenges such as illegal connections and security problems were not new, but what strategies were in place to combat them? She also recommended that CoGTA should also be called to attend the meeting with other entities.

Mr Esterhuizen asked Eskom to provide information on coal volumes to ensure accountability on the efficiency of the entity.

Mr Mavunda said that Eskom was not carrying out its credit control in the correct manner. He asked for an update on maintenance issues, and if Eskom had small scale suppliers.

Responses

Mr Ncetezo said credit control was related to the efficiency in the municipalities, and there were benchmarks for losses in the municipalities. Eskom had submitted this information, which had been checked and confirmed to be correct. Although maintenance was a problem, NERSA was ensuring that the 5% earmarked for infrastructure maintenance must be spent on it. The SSEGs were portable solar power panels often set on the roof tops, for which Eskom could not charge the owners. Distribution licences had been issued before NERSA came on board. NERSA was not issuing any new licences, but was involved in amendment licences, monitoring and enforcement. NERSA could not comment on whether it accepted the ADAM funding model, because it had not discussed the model.

Ms Noah said she rushed through her presentation, but there were four slides on active partnerships.  Instead of focusing on policy problems, for which Eskom did not have an answer, it had resolved to partner with the municipalities. There was partnership support in the form of training at the municipalities to help them determine the correct tariff, and on how to cut energy losses.

Eskom was working with the municipalities to deal with challenges. There was a technological solution -- a split metering device which limited unauthorised access to the public and increased safety, which was often compromised through illegal connections. Eskom also disconnected illegal connections, but often met with opposition. In order to avoid illegal connections, it was important to speed up electrification in proclaimed areas.

Mr Ntsokolo said Eskom was also losing staff, but the rate of attrition was acceptable. Building capacity was a challenge, but it was managing it. Eskom took in more learners than it could absorb, and these left to work with its suppliers and municipalities. The SSEGs would be managed when Eskom knew its size and they would need to pay for Eskom’s standby services.

Ms Noah said Eskom had strategies relating to the municipalities’ debts. It had offered to help municipalities to collect debts on their behalf, and also to help in installing metering to minimise losses. Four pilot projects had been started, and one already had an approval. Eskom would make feedback available o the intervention to the Committee.

She said Eskom had a world class system, and its standard customer service turnaround plan provided information to the appropriate units to effect maintenance as soon as possible.

Deputy Minister Majola said consultants were a problem to both Eskom and the municipalities. The DoE had been working with Eskom in the rural areas. Although the DoE made the policy, from its perspective there was a problem with monitoring and compliance, and this called for NERSA’s involvement.. She recommended that NERSA should return to the Committee to educate everyone on how the tariffs were determined.

The meeting was adjourned.