Regional Electricity Distributors: Briefing by City of Cape Town, EDI Holdings & Eskom; PetroSA Meeting Request by Democratic Al

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Mineral Resources and Energy

01 June 2005
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Meeting Summary

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Meeting report


1 June 2005

Mr E Mthethwa (ANC)

Documents handed out:
EDI Holdings Presentation

The Committee was briefed by the City of Cape Town, EDI Holdings and Eskom on the status of the establishment of Regional Electricity Distributor One (RED1) in the Cape Town metropolitan area. In essence, the presenters informed the Committee that RED1 was on target to be launched on 1 July 2005, but that it would be limited to the Cape Town metropolitan area. The rest of the originally envisaged RED1 would join in twelve to eighteen months’ time.

Members were somewhat concerned at the voluntary nature of the REDs establishment process with municipalities having the option currently not to participate. The Department explained that this urgently required legislation to remedy it. This Bill was currently with the State Law Advisors awaiting certification. A Bill would be tabled in Parliament in August 2005. The so-called EDI Restructuring Bill was being drafted and would factor in the lessons learnt from the RED1 establishment process. This Bill would come before Parliament in 2006. Other issues that were raised included the long-term stability of electricity prices; the replacement costs of aging infrastructure; provision of free, basic electricity for all and the extension of electricity services to areas that were currently under-serviced.

In other business, the Committee considered a formal request from the Democratic Alliance that it call PetroSA before it to respond to media allegations that it had donated R11 million to the ANC via a Black Economic Empowerment (BEE) company. After some discussion, the Committee resolved that PetroSA would appear before it as soon as the committee programme allowed but at least no later than September.

Before the briefings could start, Mr H Schmidt (DA) submitted a letter to the Chairperson in which he formally requested the Committee to call PetroSA before it to respond to media allegations that it had donated R11 million to the ANC via a Black Economic Empowerment (BEE) company. In response the Chairperson ruled that the request would be discussed after the briefings.

City of Cape Town briefing
City of Cape Town (CCT) Executive Mayoral Committee Member for Trading Services, Mr Saleem Mowzer, said that since he had last appeared before the Committee on 5 November 2004, substantial progress had been made in establishing RED1. The CCT Council had on 31 May 2005 resolved to continue with the establishment and RED1 would be launched on 1 July 2005 as originally targeted by the President.

The CCT had complied with the requirements of Section 78 of the Municipal Systems Act, and Section 84 of the Municipal Finance Management Act. In terms of Chapter 8 of the Municipal Systems Act, they had agreed that RED1 Pty Ltd. would be appointed the electricity supplier of choice to Cape Town for an initial period of 25 years. Other recent developments included an independent financial investigation into RED1’s impact on the City’s finances; the launch of community consultation and the finalisation of the ring-fencing of the City’s electricity services.

The City Council on 31 May 2005 agreed to a Service Delivery Agreement with RED1 that would form the legal basis for the future relationship. A Transfer Agreement would be concluded in the next twelve to eighteen months, but in the interim period, an Operating Agreement between the City and RED1 would commence on 1 July.

Outstanding challenges for the City in the RED1 process included balancing the needs of residential and industrial customers; communications; co-operative governance and establishing sound project management.

SA Electricity Distribution Industry briefing
Ms Phindile Nzimande, CEO, said the industry’s restructuring vision centred on consolidating the SA electricity distribution industry (EDI) into six, financially viable regional electricity distributors. A sound governance framework would improve and sustain the economic viability of the EDI; improve overall reliability; facilitate the fair treatment of all customers and would build a foundation for economic development throughout the country. Agreement had been reached that the REDs would be municipal entities with certain exemptions that were required to create a more conducive environment to achieve the objectives of restructuring.

The key attributes of the Operating Agreement between RED1 and the CCT on the one hand, and RED1 and Eskom on the other, would be that services would be provided by the City and Eskom. The latter two entities would report to RED1 on performance issues and regulatory requirements; the City and Eskom would remain responsible for new investments and servicing new customers, while RED1 would develop a tariff framework subject to the City’s tariff policy and regulatory approval by the National Electricity Regulator (NER).

The eventual Transfer Agreement would provide for full business transfer from the City and Eskom to RED1; the incorporation of all municipalities and RED1 delivering all services.

Government would soon introduce EDI Restructuring legislation that would establish regulatory and governance frameworks especially for REDs; address dual regulation issues and that would provide legislative guidance and parameters for the establishment of REDs and transfer of Eskom’s distribution business units and municipalities’ reticulation functions into the REDs. The shareholding structure of REDs would consist of municipalities as majority shareholders and Eskom and national government would hold the balance of shares.

The target date for establishment of RED1 was 1 July 2005. RED1, Day One would see the City of Cape Town and Eskom’s Western Region delivering services on behalf of RED1 in the metropolitan area of Cape Town. The incorporation of other municipalities into RED1 would occur twelve to eighteen months after 1 July 2005.

The main remaining challenges were legislative alignment, voluntary participation by municipalities and overall stakeholder support.

Eskom statement
Mr Thulani Gcabashe, CEO, said he did not want to repeat the previous briefings but wanted only to make a short statement. He said that Eskom was happy with the model adopted by government for establishment of the REDs as it would provide a good foundation for EDI restructuring. Already in 2003, Eskom had internally restructured its seven distribution regions into six divisions roughly aligned with the boundaries of the proposed REDs and had decentralised Head Office functions to the six business units.

Eskom had participated in all stakeholder forums on the establishment of RED1 and was ready to implement the Operating Agreement on 1 July. Eskom had two outstanding issues that needed to be addressed. First, Eskom did not want the REDs to become part of municipal government structures and they needed to be ring-fenced and completely independent. Second, a formula had yet to be designed to compensate Eskom for the transfer of some of its assets to the REDs. The company would soon embark on a R93 billion capital expansion programme and could not afford any compromise of its financial integrity.

Mr H Schmidt (DA) asked whether RED1 was a "watered-down" version of the entity originally envisaged as it would now consist of only the Cape Town metropolitan area. He also asked what exemptions would be granted to REDs and whether the transfer of assets into the REDs would be once-off or phased.

Mr Mowzer replied that Cape Town had to look at what could be achieved before the Presidential deadline. He did not agree that RED1 was "watered down" as the metropolitan area comprised 70% of the services that had been initially targeted for RED1. He added that a phased approach to implementation had been agreed with all role players.

Ms Nzimande added that a cautious and phased approach had been agreed on because of the complex nature of the RED establishment process. The original deadline for the establishment of RED1 had been announced because it created confidence and certainty in the industry that government would follow through on its plans. However, consultation and ring-fencing of the various business units took longer than anticipated. REDs would be exempted from certain governance requirements simply because there were so many municipalities involved in the process of integration. She indicated that compensation for asset transfers would take the form of shares, loans and equity that would be drawn down over a period of time.

Mr C Molefe (ANC) commented that, although Cape Town might be ready for 1 July, it had a problem with communications as most people did not know about the establishment of RED1. He also wanted to know if local councils had the ability to decline participation in a RED and whether they could withdraw from it at a later stage. Finally, he enquired about potential "panic" among electricity distribution employees about their futures when they were transferred to the REDs.

Mr Mowzer replied that the City had complied fully with the requirements for public consultation prescribed by local government legislation. In fact, in most instances, the City had gone beyond the legal requirements. Notwithstanding, he agreed that communication remained a challenge as the City’s ward committees had only recently been established. The City Council would shortly report to these committees on the RED process.

He added that municipalities currently participated voluntarily in the REDs process. This was a weakness that Parliament had to address through legislation. Already, the George Municipality had indicated that it did not want to form part of the eventual RED1. This was not acceptable. Ms Nzimande said the fact that municipalities could join voluntarily was a key risk to restructuring that required legislative intervention. The distribution industry was viable, but all municipalities had to participate for it to remain so. She also said that change management formed part of the restructuring process and that there was no need for panic among existing employees. In fact, the new structure promised them a better future with better conditions of employment.

Mr E Lucas (IFP) enquired about the role of the NER in relation to the REDs; whether the REDs would be able to maintain low-cost electricity provision over time and how the REDs would fund new capital investments in the aging infrastructure they were about to inherit.

Mr Mowzer felt the NER would play an important role in licensing REDs and setting electricity tariffs in a more relevant and critical manner. Ms Nzimande commented that the NER would be better placed to regulate the distribution industry after restructuring. An unidentified NER official added that the NER had been part of the restructuring process from the start and that it would in future execute its regulatory mandate over the REDs.

Mr Mowzer stated that no job losses were expected during the launch of RED1. In future, the RED management and Board would have to determine its staff requirements after a full audit of its needs. Ms Nzimande pointed out that the distribution industry suffered from massive skills gaps and that existing employees could not simply be lost. A social plan was in place and job cuts would be the very last resort.

Mr Mowzer said that electricity tariffs had to remain affordable for the poor and free basic services had to be extended to those that did not receive them at the moment. The replacement of aging infrastructure was a big challenge, but the REDs would have to carefully plan for this. The City of Cape Town would not abnormally increase its rates to fund RED1’s capital requirements. In addition, the City had made it clear that it expected RED1 to provide access to electricity in those areas that were currently not serviced. However, the extension of electricity services to rural areas remained problematic.

Mr J Combrinck (ANC) wanted to know how the establishment of the REDs would affect customers that currently bought electricity direct from Eskom.

Mr Gcabashe responded that Eskom would continue to directly supply certain key customers when the REDs were established. However, they would become "contestable" customers in future and would have a choice whether to buy from Eskom or the REDs.

The Chairperson asked the Department of Minerals and Energy (DME) to indicate its timetable for the new EDI restructuring legislation that was required. He also asked why certain large customers were supplied directly by Eskom.

An unidentified DME official stated that the urgently required legislation was currently with the State Law Advisors awaiting certification. A Bill would be tabled in Parliament in August 2005. The so-called EDI Restructuring Bill was being drafted and would factor in the lessons learnt from the RED1 establishment process. This Bill would come before Parliament sometime in 2006.

Mr Gcabashe stated that the large customers had varying needs and requirements, including large-scale technology support that Eskom was ideally suited to provide. The understanding had always been that these large customers would be subject to wholesale tariffs, but they would have a choice of supplier in future.

Prof I Mohammed (ANC) asked whether Eskom would require substantial tariff increases over the next few years to fund its expansion programme. The Minister of Minerals and Energy had said this would not be necessary during her recent budget vote debate, but Eskom had previously said the opposite.

Mr Gcabashe reminded Members that the NER set electricity tariffs and that he did not think it appropriate to comment on the tariff adjustment process that was currently underway. However, he did not expect massive increases in the price of electricity over the short-term.

Mr W Spies (FF+) wanted to know if a privately-owned mining village that currently received its electricity directly from Eskom would in future have a choice of supplier between Eskom and a RED.

Mr Gcabashe reiterated his earlier response that existing Eskom customers would in future have a choice of supplier.

The Chairperson closed this part of the meeting by stating that it was clear that legislation dealing with the voluntary nature of the REDs process was urgently needed. He added that Members had a duty to inform the community of the REDs during their constituency work and that the Committee would meet regularly to receive progress reports from all role players.

Democratic Alliance request for investigation
The Chairperson noted that during the previous week he had received a letter from non-committee member, Dr P Rabie (DA), requesting the Committee call PetroSA before it to account for media allegations about a R11 million donation to the ANC. At that point, the media was "hounding" the Chair for comment but he did not think the DA’s request was "genuine" as the issue had not been raised in the Committee itself. Today, Mr Schmidt had made an identical request.

He pointed out that PetroSA and its parent company, the Central Energy Fund (CEF) regularly appeared before the Committee to account for their actions and finances. They would again be required to do so this year. He stated that the Committee had agreed on a work programme and that he was not amenable to changing it at the last minute to accommodate the DA’s request. A meeting with PetroSA would be arranged in future where they would have to answer any questions.

Mr Spies commented that the Committee should be careful not to create the perception that a blind eye was being turned to the allegations. He asked if the Committee would soon meet with PetroSA. If not, the Committee had to issue a statement saying when the meeting would occur.

Mr S Louw (ANC) insisted that the Committee maintain the integrity of its programme and that it should not act "haphazardly" based on media allegations. He conceded that the issue was serious, but proposed that the Committee wait until PetroSA appeared before it before making a judgement.

Prof Mohammed commented that if a serious mining accident were to occur, the Committee would not hesitate to immediately call the Chamber of Mines before it, regardless of the programme. He added that he was not in a position to judge the seriousness of the funding allegations, but if they were, the Committee’s programme should not be an obstacle.

Mr Schmidt pointed out that the Committee’s programme had always been subject to regular changes. In fact, a copy of the latest programme distributed at this meeting stated clearly that it was "subject to change". The Committee’s programme was clearly not an issue. Calling PetroSA before the Committee was important to establish the facts. In fact, the Committee’s draft work programme up to September did not provide for a meeting with PetroSA and he wondered if such a meeting would take place only "next year".

Mr Louw argued that this Committee was not the appropriate forum to discuss PetroSA’s financial dealings as this was a function of the Standing Committee on Public Accounts (SCOPA) when it reviewed spending by public entities.

The Chairperson agreed that there was some confusion about the proper Committee that should deal with the PetroSA issue. But, he was adamant that PetroSA would appear before the Committee to account for its financial management. The Committee would then decide whether the matter should be referred to SCOPA. He reiterated that the programme would not be changed on the basis of media allegations, but assured Mr Schmidt that PetroSA would appear before September.

Mr Schmidt responded that the issue was too urgent to wait three months. The Chairperson stated that it would be best if he and Mr Schmidt "agreed to disagree", but he gave the undertaking that the Committee would look for the earliest opportunity to meet PetroSA. This would happen no later than September.

The meeting was adjourned.


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