Electricity Distribution Industry Restructuring: briefing

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Cooperative Governance and Traditional Affairs

30 May 2005
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Meeting report

PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE

PROVINCIAL AND LOCAL GOVERNMENT PORTFOLIO COMMITTEE
31 May 2005
ELECTRICITY DISTRIBUTION INDUSTRY RESTRUCTURING: BRIEFING

Chairperson: Ms N Ntshulana-Bhengu (ANC)

Documents handed out:
EDI Chief Executive Officer’s PowerPoint presentation
EDI Holdings presentation: Part B Key Financial Considerations (please email
info@pmg.org.za)

SUMMARY
Members heard presentations on the proposed restructuring of electricity distribution to municipalities and the wider community. The position of EDI Holdings was elucidated highlighting key challenges and the rationale behind the proposal. The structure of Regional Electricity Distributors (REDs) was explained and the benefits to local government and consumers clearly expressed. The stances of the Departments of Minerals and Energy (DME) and Provincial and Local Government (DPLG) were presented to Members. Numerous questions were asked, including the level of consultation with communities, the impact of the restructuring proposals on the Municipal Systems Act, the role of DME in the process, potential impact on municipal services, the status of enabling legislation, the present response from municipalities to the plan and whether compliance by municipalities would be enforced.

MINUTES
The Chairperson informed Members that the meeting was a follow-up to 2 March 2005 where Members had agreed to invite relevant parties to discuss recent developments and consider a way forward. Therefore, SALGA, Eskom, EDI Holdings, COSATU and SAMWU together with the Departments of Provincial and Local Government and Minerals and Energy were present to evaluate progress and propose the appropriate legislative framework to drive the process. She asserted that the Minerals and Energy Portfolio Committee should chair the process due to the nature of the subject matter but agreed to continue as arranged until the issue was resolved. Representatives of the Trade and Industry and Finance Portfolio Committees were not present.

The reasons for the present meeting were elucidated including the need to explain existing concerns and assess the commitment of the various role-payers to the restructuring process. The process would benefit from clear legislative guidelines provided by new regulations and an evaluation of current problems and challenges including an appraisal of potential negative implications and proposed remedies.

EDI Holdings presentation
Ms P Nzimande (CEO) presented an overview of the identified challenges highlighting the need to address fragmentation in supply and payment structures. A key challenge would be to involve all stakeholders in deliberations and implementation.

Mr S Mashudulu (ANC) asked whether the presenter could explain certain concepts in a more simplified form and remain within the framework outlined by the Chairperson in the introduction.

The Chairperson appealed to presenting parties to acquire knowledge of requirements for respective presentations prior to the meeting to contribute to proceedings and avoid potential conflicts and misunderstandings.

Ms Nzimande explained the electricity distribution network involving both Eskom and municipalities and the maintenance of infrastructure including the introduction of REDs as central points for distribution. Six structures would be created anchored around Metros to address fragmentation and ensure equal treatment of consumers. Presently, 2000 different tariffs were applied across the country. Proposals would also seek to create economies of scale within electricity distribution facilities.

The Chairperson asked for clarity on surpluses and how benefits would accrue to municipalities. Individual stakeholders should devise appropriate responses to existing challenges and provide Members with sufficient detail to assist in the oversight role. Responsibility for responses should be delegated to the correct individuals in terms of knowledge.

Ms Nzimande stated that municipalities would not lose current surpluses and payment would be instituted to compensate for the new system by means of contract arrangements. Service level agreements would be established to ensure that municipalities could continue to use electricity distribution as a leverage on credit control. The credit rating of municipalities would not be adversely affected by restructuring and overhead costs would be compensated for. EDI Holdings would assist municipalities in ensuring that loans were repaid. Restructuring would occur in accordance with the dictates of the Municipal Systems Act and the Labour Relations Act. Salaries would be harmonised between Eskom and the municipalities over time. Tariffs would not increase dramatically and the intention was to maintain stability in the short term. REDs would be viable businesses focused on improved collection, efficiency and reduction of maintenance backlogs. Participation in the restructuring process was voluntary and progress remained slow at this juncture. The promulgation of enabling legislation would speed up the enrolment process. Eleven municipalities were currently engaged in restructuring discussions.

The Chairperson asked for an account of the potential impact on consumers as a result of restructuring. Members had to consider the negative consequences as public representatives. She declared that the presentation made little reference to the MSA and community participation requirements and issues such as tariff adjustments. Alterations to distribution networks and public notification should have been discussed. She claimed that the presentation dealt in an unbalanced manner with service provision to the detriment of consumer concerns. Input from commercial, industrial and residential consumers would have been invaluable.

Ms Nzimande concurred that further detail on the opinions of consumers should be provided to balance the scope of the presentation. Aa governing principle for EDI Holdings remained the intention to prevent any move in tariff prices in the short term. A process of harmonisation of alternative viewpoints would be garnered as part of the planning exercise.

Discussion
The Chairperson reiterated that consultation with consumers was vital not only to address concerns but also to assist in educating communities about the proposed changes to facilitate effective implementation.

Mr P Flusk (Deputy Director-General-DPLG) agreed that the lack of adequate community participation within the planning process remained a weakness that had to be rectified. He noted the absence of restructuring proposals on ward committee agendas and acknowledged the firm challenge in increasing the level of involvement by broad-based communities. The DME was producing a memorandum in conjunction with National Treasury that contained some rethinking on current strategy which could be communicated to Members upon completion.

The Chairperson stated that EDI Holdings should not be leading the restructuring process and DME should be the controlling agent.

Ms N Magubane (Deputy Director-General: Electricity and Nuclear Energy, DME) responded that DME had formulated the policy of restructuring and EDI Holdings had been created as an entity to implement the strategy. Restructuring would occur in consultation with other key stakeholders such as Eskom, SALGA and organised labour.

Mr B Solo (ANC) stated that Members needed to first understand the policy objectives of a particular department before implementation frameworks were explained. A recent DPLG workshop on restructuring had no representation from DME. Municipalities had not been informed of the envisaged process and much confusion remained. He advocated that DME reconsider the current approach to implementation.

Mr P Smith (IFP) referred to recent admissions by stakeholders that a lack of enabling legislation handicapped the process and asked whether DME would produce legislation to assist the process or whether the mode of voluntary participation would continue.

Mr W Doman (DA) stated that input from DPLG was necessary to establish their contribution to the process and the roles played by municipalities. Members should consider the interests of local government.

Mr Mashudulu noted that the MSA stipulated that the capacity of municipalities be assessed before any restructuring process was undertaken. Weaknesses in capacity should be addressed by consultation with capacitated municipalities or outside intervention. He argued that such an assessment had not taken place in such a way that it limited DME's ability to inform Members. Current legislation guiding DME in the restructuring process should be clearly outlined to Members.

The Chairperson stated that the responsibility of DME was to inform Members of the rationale behind EDI restructuring and the nature of the implementation procedure. DME had to establish mechanisms to facilitate communication with communities. EDI Holdings should be responsible for explaining the agreed implementation policies and programmes but DME must deal with issues around consultation and policy formulation. EDI Holdings should not have to justify its creation but should concentrate on implementation challenges. The responsibility to consult with communities did not lie with EDI Holdings but with the departments in question. The Committee should hold DPLG accountable for the failure in consultation and should find collective remedies to correct the shortcoming. The purpose of the meeting was to find weaknesses in the process and formulate solutions.

Mr W Patel (City of Cape Town) supported adequate consultation procedures when contemplating restructuring of any municipal service. Restructuring within the Cape Town Metro as the pilot site had been conducted in conjunction with wider municipal changes. Extensive communication had been undertaken in various forms of media including the mass media, advertisements and council sub-structures. Broad views from various stakeholders had been garnered including organised labour, SALGA and the MEC for Local Government in the Western Cape. MSA and PFMA legislation was adhered to and restructuring proposals were placed on ward committee agendas. Existing structures had been utilised to extend consultation and solicit comment. Impacts on consumers had been considered and no substantial changes to tariffs would occur in the short term. The level of tariffs would be re-evaluated on an ongoing basis to ensure affordability. The entire process was governed by the principle that citizens were the intended beneficiaries of restructuring.

Mr J Rasuela (DME) stated that the regulatory framework guiding the electricity sector would be reviewed as a clear framework was needed. A Bill would be introduced in June that would clarify issues relating to restructuring and the role of EDI Holdings. Consultation with stakeholders did occur but improvements were necessary. The Minister conducted annual roadshows in all provinces where specific information pertaining to electricity provision was discussed and questions raised at an informal level. Formal consultation occurred at Nedlac and certain intergovernmental forums.

Ms Nzimande stated that EDI Holdings could learn from the Cape Town experience and improve consultation. EDI Holdings consulted with SALGA on a regular basis.

Ms Magubane acknowledged a misunderstanding regarding the requirements of the presentation and offered to return in the near future with detail on the reasons behind the restructuring and the objectives.

Mr Smith expressed gratitude that enabling legislation would be drafted and asked whether DPLG had been involved in the process and was happy with the content. The transversal nature of the Bill demanded a joint approach to formulation. He asked when the Bill would be placed before the Committee and warned Members that the stipulations of existing legislation should not be ignored.

Mr Mashudulu asked for feedback on the exact status of the Cape Town pilot project as no clear timelines had been identified.

The Chairperson stated that the Committee did not seek to denounce consultation processes that had occurred but sought to highlight the importance of community participation and making suggestions to improve the overall efficacy of consultation. She asserted that no discussion of restructuring had taken place within her particular ward committee of Ashburton. The parliamentary process had been the only vehicle of notification for her. Parliamentary constituency offices throughout South Africa should have been notified which, in turn, would have informed ward committees. No consultation with civic movements had occurred. Organised structures were in place to facilitate communication and the labour movement should be involved. She contended that incidents of violence within local government were caused to a large extent by poor communication and the concomitant lack of understanding of processes. Communication was key to establishing a common point of view.

Mr Leshabane (SALGA) stated that SALGA had been party to the formulation of the original blueprint strategy but had lost influence during the past two years. Meetings had been held with provincial governments and municipalities recently where reasons for the plans had been elucidated and intentions discussed. A series of workshops had been instructive and numerous concerns had been identified. The challenge was for municipalities to internalise and understand the reasons behind restructuring and EDI Holdings should engage local government in this regard. Community participation was compromised by the failure to involve ward committees in consultative procedures. A consistent message should be disseminated to avoid confusion.

Mr M Swathe (DA) asked for clarity on the need for restructuring, the status of accompanying legislation and the nature of consultation. He noted a clear urban bias towards the establishment of REDs and asked whether a conference outlining restructuring could be held for the benefit of local government.

The Chairperson reminded Members to consider the issues from a development perspective as public representatives. The benefits of restructuring should be clearly explained to consumers in order to secure support for the proposals. DME and EDI Holdings representatives should outline the problems currently experienced by consumers to justify the advantages of the new system. The opinions of both rural and urban communities should be absorbed into planning. The Masakhane campaign of the mid-1990s should be resuscitated which advocated community ownership of municipal services and the promotion of rights and responsibilities of all entities. Annual themes could be created such as housing and electricity distribution to direct the campaign activities.

Mr Flusk stated that the Ministers of the respective departments should be approached to drive the improvement of the consultation process. Lessons from the Cape Town experience had to be considered and ward committees would be incorporated into further initiatives. DPLG would protect the interests of municipalities and DME should lead the implementation of the overall strategy. Masakhane should return to the DPLG agenda and discussions would be held with sector departments in this regard. The lack of adequate communication contributed significantly to outbreaks of unrest in certain municipalities and improved communication had resolved certain cases.

Ms Magubane stated that electricity distribution should be stable and free from outages. Restructuring would contribute to a reduction in black-outs. Restructuring would also facilitate an increase in infrastructure investment thereby contributing to enhanced quality of supply. Electricity tariffs in rural areas tended to be more expensive due to the distance from distribution points and cross-subsidisation in urban areas. Restructuring would minimise disparities in electricity tariffs and contribute to development initiatives. The provision of free basic services would benefit from restructuring and electricity infrastructure would be extended to a wider rural consumer base. The extension of electricity distribution would enhance economic growth efforts and job creation.

The Chairperson welcomed the comments from DME as addressing key issues raised by Members. Responses and proposals should be firmly lodged within a clear understanding of the social context in order to produce relevant strategies and justifications for restructuring. The proposal to reduce variable tariffs made sense and contributed to wider acceptance by Members towards the initiative.

Mr E Paulus (COSATU Parliamentary Office) noted a concern regarding financial implications for municipalities as a result of restructuring. The presentations did not refer to potential negative consequences of restructuring and proper engagement with communities was necessary to achieve buy-in. Municipalities were categorised differently with accompanying variations in surpluses and restructuring could adversely affect the ability to provide services. COSATU had initially called for the establishment of a national distributor as opposed to the envisaged EDI Holdings business model that focused on economic criteria to the detriment of social concerns. The relationship between REDs and collective bargaining would have to be explained as REDs would operate independently. The direct and indirect costs of restructuring had not been clearly explained and proposed regulations to govern REDs should be outlined.

Mr R Ronnie (SAMWU) argued that elements of the MSA were being ignored and the distinction between service providers and service authorities had been obscured. The National Framework Agreement for Municipal Restructuring stipulated how restructuring should proceed. Municipalities had to consider the implications of REDs including costs and could then also consider an external provider to compare benefits. The acceptance of the RED model would require a cost benefit analysis to determine the impact on the municipality. He stated that most problems raised in the meeting could be resolved by mechanisms other than REDs such as division of revenue and capacity-building. Municipalities had the right to consider the merits of the proposed system that could not be imposed upon them. The exclusion of some municipalities from the REDs could create anomalies in practice and affect functionality. The concerns of individual residents had to be included in planning and decision-making.

Mr Mashudulu asked whether Eskom was present to provide input particularly with regards to the indigent policy that reduced the voltage available to the poor and perpetuated inferior living standards.

Mr Flusk responded that the indigent policy of Eskom was an important question that required an answer. An audit of municipalities was underway to determine the nature of indigent policies to empower DPLG in proposing remedies.

Mr M Ntsokolo (ESKOM) stated that the policy regarding the indigent had changed and the circuit breaker would not be downgraded for free basic electricity. Eskom supported the principles behind restructuring and had been involved in planning from inception. The benefits would be impressive promoting a reliable and sustainable industry. Tariffs would be rationalised and free basic service would not be overlooked. Staff career issues would be carefully considered and restructuring would not occur at the expense of reliability. REDs could not be regarded as municipal entities in order to function effectively and the required changes to municipal legislation would be considered. The role of Eskom in profit generation would not be compromised by restructuring, and neither would municipal service provision be adversely affected.

Mr Smith asked how the legislative process would unfold and what impact there might be on constitutional principles and MSA regulations. He asked whether the process would remain on a voluntary basis or whether legislation would enforce compliance.

Ms Nzimande replied that restructuring would proceed within existing legislative frameworks but certain limitations had been identified that required slight alteration.

The Chairperson asked whether DME and DPLG could provide a document to Members detailing general questions and answers accumulated during consultations with stakeholders to enhance understanding. Details from NEDLAC discussions would also be informative. The presentations had contributed to heightened understanding of the unfolding process. A follow-up meeting with COSATU and other organised labour groups was necessary to hear alternative models to the EDI restructuring proposal. Participants had acknowledged a general weakness in consultation with recipients and engagement should occur with constituency offices to improve communication. Members had to consider the relationship between the MSA and policy statements. DPLG and DME should devise a new approach to community consultation including current thinking on the indigent. The impact of restructuring on workers had to be considered and DME had to ensure that worker interests were not ignored. Continuous engagement with all stakeholders would be encouraged and a follow-up meeting would be held in the near future.

The meeting was adjourned.

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