Financial Implications of Electricity Restructuring for Municipalities: briefing

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Cooperative Governance and Traditional Affairs

01 March 2005
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PROVINCIAL AND LOCAL GOVERNMENT AND PUBLIC ENTERPRISES PORTFOLIO COMMITTEES
2 March 2005
FINANCIAL IMPLICATIONS OF ELECTRICITY RESTRUCTURING FOR MUNICIPALITIES: BRIEFING


Chairperson: Ms N Ntshulana-Bhengu (ANC)

Documents handed out:
National Treasury briefing
EDI Holdings Financial Impact Assessment
Eskom PowerPoint presentation

SUMMARY
Members met to hear briefings on the proposed restructuring of electricity distribution by representatives of Electricity Distribution Industry (EDI) Holdings, Eskom and the National Treasury. Questions raised by Members included the availability of accompanying documentation to presentations, the lack of enabling legislation, ownership structures of Regional Electricity Distributors (REDs), possible private sector involvement; the impact of staff rationalisation, and appropriate structures to facilitate progress. A meeting of relevant committees would be held within one month to devise meaningful strategies.

MINUTES

Electricity Distribution Industry Holdings briefing

Ms P Nzimande (CEO) provided an overview of the restructuring process regarding electricity provision within municipalities. Guiding principles and the structure of proposed Regional Electricity Distributors were discussed. The financial impact on municipalities was highlighted including risk mitigation, overhead costs, stranded costs, VAT implications and transaction costs. The key aspects of the Service Delivery Agreement were emphasised and a business case analysis was recounted.

Optimum governing structures were explained including the distinction between national objectives and financial viability. The continuation of free basic electricity provision was also discussed. The terms of the Co-operative Agreement were outlined identifying the key stakeholders. The purpose of the agreement was to prepare the restructuring path.

The Chairperson asked for input from the South African Local Government Association relating to electricity restructuring.

A SA Local Government Association (SALGA) representative stated that the relevant representative was currently at the Finance Committee meeting.

Mr Y Carrim (ANC) responded that SALGA had expressed concerns last year regarding the restructuring process and should have ensured that a competent representative was present. The representative should have been present to hear the EDI presentation in order to render appropriate responses.

The Chairperson asked if SALGA was aware of the meeting and whether adequate preparations had been made.

The SALGA representative affirmed prior knowledge of the meeting but claimed insufficient membership present to attend both meetings.

The Chairperson asserted that SALGA continued to suffer from insufficient preparation while performing an important implementation role. Co-ordination within SALGA had to be improved.

Mr S Mshudulu (ANC) concurred that SALGA played an important co-ordinating role within government and its input on electricity restructuring was vital. The objective of the meeting was to facilitate responses from SALGA which now appeared compromised.

Other Members also requested that the appropriate SALGA representative be present.

The Chairperson stated that a disruption of the other meeting was not advisable. Input from ESKOM was requested highlighting the advantages and disadvantages of the proposed restructuring.

Eskom briefing
Mr T Skinner presented input from ESKOM regarding restructuring of electricity. No documentation was available for the Members to peruse.

Mr B Solo (ANC) noted the lack of documentation supporting the ESKOM presentation which made cross-reference difficult. The ideal parliamentary practice was to have documents available for Members to study prior to the meeting in order to prepare.

Mr Carrim stated that this issue should be raised with the Chairperson's Forum as the meeting had been planned well in advance. Any Power-point presentation required accompanying documentation.

The Chairperson concurred that such happenings indicated a lack of respect towards Parliament and might be construed as the withholding of important information. Members were forced to make decisions from an uninformed position that was problematic.

Mr T Skinner discussed the financial implications for municipalities and the risk to economies of scale. The avoidance of stranded costs was crucial as electricity currently provided a significant component of income for municipalities. Financial analysis had to focus on the amount of subsidy provided to other services by electricity income and the revenue requirement to maintain electricity provision. Tariffs for electricity could not be increased while methods to decrease dependency on funding had to be devised. General implications of REDs for municipalities were discussed including the opportunity to improve service delivery. REDs would be structured in accordance with national government objectives including employment issues and financial viability. Free basic electricity provision had to be increased to reach more consumers.

Progress reports on implementation were provided including detail on capital expansion and sale of assets. Less profitable areas within REDs would be subsidised by more profitable districts. The conversion of municipal Information Technology systems into co-ordinated structures would require innovation and change management would be crucial regarding human resources.

National Treasury briefing
Ms W Fanoe (Director: Local Government Finance Policy) stated that municipalities remained service authorities while Eskom provided service. Therefore, municipalities remained responsible for electricity reticulation. Financial implications for municipalities would vary according to size of electricity contribution to the budget. Electricity was a significant contributor to municipal budgets. A technical task team had developed a framework of principles to underpin restructuring including constitutional requirements, personnel implications and possible additional revenue demands. National Treasury planned to produce a report by April 2005 outlining potential impacts and providing recommendations.

Discussion
Mr P Smith (IFP) asked for clarity on the statement by EDI claiming a lack of enabling legislation to drive the process and whether legislation was required. Greater detail was needed on the ownership of REDs and the beneficiaries. He asked how municipalities would substitute for the loss of income from electricity and whether REDs would compensate. The system was operating on the basis of voluntary compliance and clarity was sought on the consequences for those which declined.

Mr S Manie (ANC) asked whether REDs would have private sector involvement. He asked whether municipalities would participate in proportion to current electricity distribution figures. Possible rationalisation of employees appeared counter to national government objectives of employment creation. He asked whether infrastructural development was envisaged to accommodate poorer regions.

Mr B Solo (ANC) asked whether REDs would be directed at rural areas to address backlogs. He asked whether financially weaker municipalities would be targeted in collaboration with the Department of Provincial and Local Government recommendations.

Ms Nzimande responded that the original intention of the Department was to publish enabling legislation but the Bill in question remained a work in progress. Therefore, the process operated in accordance with voluntary compliance dependant upon the goodwill of participants. REDs were owned proportionally by the participating municipalities and Eskom that would determine cashflow. An agreement was needed to combine financial arrangements and co-ordinate revenue streams. The private sector would not be involved at this stage but the possibility could not be discounted. National Treasury was intimately involved in the discussions and planning phase.

Staff rationalisation would only occur after all municipalities had been incorporated into a RED with an average of 30 municipalities per RED. However, rationalisation would not be considered at this stage. REDs would approach a region on an economy-of–scale basis and additional infrastructure would only be developed to enhance a RED holistically rather than to the benefit of a single municipality. The task team would devise an appropriate mechanism to handle pension funds and benefits in a mutually acceptable manner. The intention was to increase the number of participating municipalities in co-operation with SALGA.

Mr Smith stated that enabling legislation should have been produced in the beginning to govern the process. Final agreements on revenue streams, for example, were unrealistic given the failure to finalise the basic structural framework.

The Chairperson indicated that statements from the participants during the presentations revealed gaps in agreement between them implying a lack of adequate consultation.

Eskom replied that the pension fund issue would be dealt with mutually between EDI and Eskom.

Ms Nzimande replied that all arrangements would be arrived at through negotiation. A transitional labour relations structure was in place involving five trade unions.

Mr W Dorman (DA) stated that the initial RED pilot project involving Cape Town could not technically be considered a RED as only one municipality was involved. The voluntary nature of involvement could lead to cherry-picking within regions with unviable municipalities ignored.

Mr M Lekgoro (ANC) highlighted contradictions around the desire to encourage competition within the sector while also expressing the need to limit options in creating economies of scale.

Mr H Bekker (IFP) commented on the projections involving the provision of free basic electricity and questioned whether deep rural areas had been overlooked. The prohibitive costs of electricity installation for the indigent were stressed requesting clarity on how the RED system could rectify this.

Ms M Gumede (ANC) expressed dissatisfaction with Eskom’s customer relations characterised by lack of consultation and community feedback. Cut-offs occurred without any notification and predominantly during the consumer’s absence. She proposed that Eskom introduce pre-paid meters at all points.

The Chairperson concurred that debt collection policy and public education were inadequate. The Municipal Systems Act required municipalities to include community input in policy development. The current variable provision of services to different municipal areas appeared to prematurely inhibit the REDs’ ability to provide a uniform service.

Mr Smith stated that Eskom made a significant policy statement in stating a desire to move away from the use of surpluses in electricity payments and starting to charge true costs. The advent of REDs could have a detrimental effect on certain municipalities and a positive outcome for others. He asked how a rate acceptable to all would be devised.

The Chairperson noted a similar situation developing with water provision where water became more expensive for certain areas. She asked how the balance would be achieved within REDs.

Ms Nzimande replied that currently 17 municipalities were involved in the co-operative agreement but SALGA was involved in expanding the list. Discussions were underway with municipalities to explain the objectives and garner support.

The Chairperson asked whether valuable time and resources could be expended attempting to convince municipalities of the merits.

Ms Nzimande acknowledged the challenge and stated that regional project managers had been appointed to approach municipalities and oversee implementation.

The Chairperson stated that the existence of relevant legislation could result in less time-wasting and more productive use of resources.

Mr Manie recognised the difficulties for EDI in the absence of enabling legislation and proposed that Members consider recommendations to improve the process. The existence of a compulsory arrangement would be beneficial. The restructuring process required the participation of all relevant bodies to be successful. A more simplified process had to be devised broken down into manageable components highlighting the overall objectives.

The Chairperson proposed that Members focus on the foundation phase to produce meaningful initial steps. Confusion prevailed due to insufficient preparation. A lack of common understanding existed between DPLG, SALGA and the municipalities. The way forward would involve establishing conducive conditions and promoting a compulsory arrangement.

Ms Nzimande stated that municipalities and Eskom would be accountable for the service as joint shareholders. REDs would not cut across municipal boundaries although some provincial boundaries would be compromised. Other municipalities would be included within RED 1 over a two-year period without major disruption to current service provision. An apparent contradiction existed between monopoly and competition but a phased approach would apply with initial protection of created entities followed by increased competition. A common approach regarding surpluses would be imposed after careful analysis. Tariffs would be rationalised across regions in collaboration with the relevant regulatory authorities.

Mr Y Carrim (ANC) acknowledged the size of the task at hand and the accompanying challenges. The accuracy of facts and figures was difficult to determine without independent research material. The presentations were too sweeping in nature with greater clarity and order required. National Treasury had to be more closely involved and the absence of the Minerals and Energy Portfolio Committee should be rectified. The reasons for restructuring were not clearly outlined with some ambiguity. Voluntarism could not be relied upon and steps should be taken to resuscitate the Bill in question and establish progress. SALGA had to play a greater role while the Committees could include provincial governments. Members should consider where the process stood and what steps could be taken to advance restructuring. A meeting would occur between the Public Enterprises, Finance, Minerals and Energy and Provincial and Local Government Committees within one month and various sub-committees would be established to co-ordinate the response. The presentations raised a number of debatable issues that would be discussed at a later stage. The projection for a report from Treasury seemed optimistic given the current confusion.

The Chairperson acknowledged the co-operation received from EDI in the past with continuous updates from the CEO to the Committee. Follow-ups would be held with SALGA and the NCOP to discuss the way forward.

Mr Manie recommended that the substantive issues be separated from the procedural in order to understand the motivation behind the restructuring. Legislation should revolve around substantive issues. A guideline framework document was necessary to manage the process. Members should ensure participation across the board.

Mr Carrim requested that presenters within the task team compile a joint document outlining the key issues involved and the role and responsibility of each entity to assist with the production of a programme of action.

The meeting was adjourned.

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