EDI Holdings; National Electricity Regulator Annual Reports

Meeting report

MINERALS AND ENERGY PORTFOLIO COMMITTEE
2 November 2005
EDI HOLDINGS; NATIONAL ELECTRICITY REGULATOR ANNUAL REPORTS

Chairperson: Mr E. Mthethwa (ANC)

Documents handed out:
National Electricity Regulator - Annual Report 2004/05
National Electricity Regulator - Annual Report 2004/05 [available shortly at www.ner.org.za]
EDI Holdings Annual Report - 2004/05
EDI Holdings Annual Report - 2004/05 [available shortly at www.ediholdings.co.za]

SUMMARY
The National Energy Regulator and EDI Holding presented their annual reports. Members asked questions to the NER about Board attendance, the Employment Equity Act, the role of the disabled, new generation capacity, the transfer of staff and assets from NER to NERSA and the weak internal audit controls. EDI Holdings was asked for clarity on the restructuring process of the Electricity Distribution Industry, how advanced the national rollout of the five Regional Electricity Distributors was, the municipal surcharge and the additional funding required.

MINUTES
Discussion of National Electricity Regulator submission on Electricity Regulation Bill
Due to time constraints, discussion of the National Electricity Regulator’s (NER) submission on the Bill made at public hearings the previous day, had been deferred to this meeting.

The Chairperson asked for clarity on the independence of the Regulator versus its accountability; economic incentives and international best practices; the involvement of the Minister of Minerals and Energy in regulation; and the apparent lack of a uniform approach and consultation between the NER, Department of Minerals and Energy (DME) and ESKOM.

Prof I. Mohammed (ANC) wanted to know who made the decisions about transporting hazardous nuclear waste from Koeberg to Vaalputs through the cities. He asked if there was conflict of interest in that the Minister made decisions about the provision of electricity to the City of Cape Town as well as decisions involving the safety of the city. What areas of regulation should the Minister not be involved in and what did the NER mean with the statement that all energy-related legislation had to be aligned?

Mr. S. Mokoena, NER CEO, stated that due to the monopolistic nature of the electricity industry, a need existed for economic regulation. Generally, there were four principles of good economic regulation namely, independence, accountability, fairness and clarity of roles.

Government made policy and the Minister was delegated to make regulations, but it was inadvisable for Parliament to delegate to the Minister those elements of regulation that would change frequently. An example was the provision in the Bill that the Minister should prescribe the form of a license. The form of a license changed so frequently that it was unfair to give that responsibility to the Minister.

Essentially, the Minister should be responsible for policy matters and protecting the national interest. The regulator would best handle short-term and administrative issues. The Regulator recognised that the Minister played a critical role in the appointment and removal of the regulator members; making regulations and approving budgets. From an investor perspective, it was important that there was clarity about the roles of the Minister and the Regulator.

The issues of independence and accountability were very important and they were delighted that all decisions of the National Energy Regulator of South Africa (NERSA) could be taken under review by the High Court because investors were wary of the short term pressures that political office bearers faced to change the regulatory environment.

Legislation governed the conduct of the Regulator so that it could not act unilaterally. Accountability meant limiting its independence by submitting annual reports to Parliament and being transparent in its dealings with the public and stakeholders.

The main objective of economic regulation should be to incentivise efficiency. The current method of determining ESKOM pricing lacked efficiency and the Regulator was moving towards a multi - year process which would ensure that ESKOM achieved certain economic efficiencies.

Another challenge of economic regulation was the trade-off between predictability and flexibility, because the Regulator had to find a balance between heavy-handed and light regulation.

International best practices were useful tools, but should be adjusted to the material conditions existing in South Africa.

When NERSA was fully operational it would be governed directly by the Electricity Act, the Gas Act, the Petroleum Pipeline Act and the National Energy Regulator Act. These Acts should be closely aligned in order to avoid any confusion.

Mr. K Mothobi responded to the question regarding consultation by saying that the NER had been involved on a technical level with the development of the Bill together with other stakeholders such as ESKOM.

The National Nuclear Regulator (NNR) was responsible for the movement and storage of hazardous nuclear material; the NER was responsible for electricity generation.

The Chairperson said that he understood the Regulator’s frustration at not having the powers to implement effective sanctions. He asked how far incentives should go and commented that flexibility had to be approached carefully in order to avoid any unintended consequences.

Mr. Mokoena agreed and said that the acid test for incentives was the sustainability of the business versus the affordability of the service.

NER Annual Report presentation
Mr Mokoena discussed the profile of the NER, its strategic objectives, highlights, staff analysis, financial performance and future. He said that the major challenge was to steer the NER from an electricity regulator to an energy regulator.

The NER had commissioned an electricity industry risk assessment which had identified the need for new electricity generation capacity as one of the biggest risks facing the country.

The NER Board had approved a 4.1 % increase for ESKOM at the nominal rate of return of 11%. This increase had been implemented on 1 January 2005. The NER had developed a draft high-level review of the multi-year price path for generation, transmission and distribution. It had executed 61% of its planned activities for the reporting period. The NER’s actual expenditure came to R59 million leaving it a surplus of R4 million. The NER had laid a good foundation for the establishment of NERSA and had met all its strategic objectives.

Mr Mokoena stated that the NER would like an opportunity in future to brief the Portfolio Committee on progress with the establishment of NERSA. The Minister would officially launch NERSA on 22 November in Johannesburg. The NER also wanted to brief the Committee on the new multi-year pricing determination for ESKOM.

Discussion

Mr. C Molefe (ANC) said it was problematic that the Annual Report had been received only a day before the discussion. Some issues were highly technical and the report had to be studied beforehand to ensure proper oversight. He asked whether any jobs would be lost in the transition from the NER to NERSA; whether there was any guarantee that NERSA would utilise the newly-refurbished NER building and whether there was any possibility that assets could be hidden or misappropriated during the transition.

Prof Mohammed (ANC) asked for clarity on the Auditor-General’s report that revealed internal control weaknesses in the areas of Human Resources, Financial Management and Asset Management. Why had no breakdown of Coloured and Indian employees been provided?

Mr. Matlara (ANC) asked whether the NER employed any persons with disabilities and whether its young staff members were being developed.

Adv. H Schmidt (DA) wanted to know the causes for the sharp increase in operating expenditure and the resultant lower surplus.

Mr. E Lucas (IFP) asked for explanation of the high staff turnover at the NER, and whether fronting in Black Economic Empowerment (BEE) procurement had been experienced. He also wanted to know if action had been taken against board members that had attended well below 50% of meetings.

Mr. Mokoena responded that the NERSA Act clearly stated that a board member who missed two consecutive meetings without providing an adequate reason to the chairperson had to vacate office. The NER had been hit by fronting and had to cancel certain contracts.

It was the prerogative of Parliament to instruct the Executive to report more regularly. The Public Finance Management Act (PFMA) provided that the NER had to report to the Minister on a quarterly basis. He agreed that the submission deadlines for annual reports were unfortunate and the Committee should have got it earlier.

The PFMA required the Minister to list and de-list organisations. The listing of NERSA and de-listing of the NER was a very rigorous process. The transfer of the same staff from the NER to NERSA had already taken place and both organisations would coexist in parallel for some time. The transition had been underpinned by a change management and communication strategy.

The Regulator reported on the four racial categories when it presented its employment equity report in terms of the Employment Equity Act.

Developments like electricity industry restructuring, the process around new generation capacity, the Multi-Year Price Determination and the establishment of NERSA had all contributed to increased operating expenses and a lower surplus.

Ms. Sithole indicated that the NER complied with the Employment Equity Act; however they had been unable to recruit a physically challenged person. She stated that most of the young staff members were professionals and technicians and were highly sought after by the private sector. Another reason for the high staff turnover was the move from the NER to NERSA because a lot of staff members were uncertain that they would be employed by NERSA.

Mr. Komphela (ANC) questioned the manner in which the NER had dealt with the Employment Equity Act and felt that the fact that only orthodox methods of recruitment were used contributed to the failure to employ a physically challenged person. He was also concerned that the annual report did not state where the 65 customer education events had been held. In future, the NER had to state its BEE partners and from which provinces they came. He also wanted to know whether the NER had assisted neighbouring countries such as Zimbabwe and Lesotho to develop the same technical expertise and capacity as South Africa.

Mr. Matlare (ANC) asked whether there was any mechanism to replace the two part-time members of the board who had resigned.

The Chairperson wanted to know if the NER had concluded its audit of the ten largest municipalities in the country; what made up the 39% non-executed activities; by how much had levies been growing; what was meant by the re-evaluation of land and whether audit problems had been recurring?

Mr. Mokoena stated that full disclosure had been made in the audit report that the CEO had made the decision to defer the required revaluation of land and buildings from March 2005 to the end of October 2005 when the building improvements were completed. He agreed with the comments made by Mr. Khompela on the Employment Equity Act and promised that they would provide details of the customer forums and the geographical spread of the BEE companies.

On the issue of regional co-operation, the NER chaired the African Forum for Utility Regulators and they shared information and assisted other countries to establish regulators. In the Southern African Development Community (SADC), the Regional Electricity Regulatory Association chaired by Namibia played a very important role.

With regards to the resignation of the two board members, the Minister had decided against appointing replacements as the board would not exist for much longer.

In terms of new electricity generation capacity, the Regulator had played a critical role in the recommissioning of old power stations and was closely involved in National Resource Planning whereby new generation capacity needs were predicted for the country.

The NER had concluded the process whereby an independent technical auditor had been appointed to conduct the audit of the ten municipal distributors. The report would be published by March 2006. All their activities had not been accomplished due to a number of policy changes by government which had necessitated shelving of some projects.

Ms. Sithole responded that the NER was a knowledge institution which had a number of programmes in which they trained staff members; an example being the candidate regulators programme where they recruited university graduates and trained them in the different sections of the NER.

They had a high turnover of staff because most employees left for other regulators where they could utilise their NER training.

The audit problems were new. In terms of policy, all assets had to be valuated every three years. This included the NER building which had been deferred until the refurbishment work had been completed.

She attributed the problems in the audit report to a systems problem in that two different, unsynchronised accounting packages were used by the Human Resources and Finance sections. ESKOM paid 98% of the levies (amounting to R61. 1 million), while the remaining 2% came from small generators.

EDI Holdings Annual Report presentation
Ms. Dolly Mokgatle, Chairperson of EDI Holdings presented the 2004/05 annual report assisted by the CEO, Ms. Nzimande. The company had been established in March 2003 with the objective of facilitating the restructuring of the Electricity Distribution Industry in accordance with the requirements of the Energy White Paper of 1998 and subsequent Cabinet decisions.

The report dealt with the progress towards establishing the first Regional Electricity Distributor (RED) in Cape Town, the launch of the Transitional Labour Relations Structure, approval of RED 1 by the Cape Town Metropolitan Council, finalisation of the RED governance structure, development of industry discussion papers and development of a financial model to evaluate the impact on key stakeholders.

The target of establishing six financially viable and sustainable REDs in South Africa by January 2007 and creating an enabling environment to streamline and fast track service delivery was the biggest challenge.

The highlights on the financial statements were that EDI Holdings still awaited the approval of additional funding from the DME and National Treasury, as it was unlikely that the company would be able to achieve its strategic goals without additional funds. An internal audit review found that internal control systems required corrective measures.

Discussion
Ms. N Mathibela (ANC) said the provided breakdown of employees was unclear. She asked how safe gas stoves were after fires had destroyed numerous houses in Cape Town.

The Chairperson raised the issue of the regulation of municipal surcharges and the meaning of "contestable customers". He also asked why EDI Holdings wanted more funds.

Ms. Nzimande referred Ms Mathibela to the annual report which indicated the various race groups in the company. She would break down the numbers for the disabled and youth and provide it to the Committee.

The DME would have to answer the question about liquefied petroleum gas as EDI Holdings was confined to electricity.

On regulation of surcharges, EDI Holdings would like to see guidelines being set for municipalities so that uniform tariffs applied throughout the country. If the municipalities wanted to tax electricity services to derive income, it would have to be done according to national legislation driven by National Treasury.

Contestable customers were defined as those consumers that used more than 100 gigawatt hours per annum on a contiguous site. Such customers currently supplied by ESKOM would remain within the ESKOM stable until the regulatory environment for the introduction of contestability had been settled. This was dependant on the restructuring process.

On additional funding, the Auditor-General had been concerned that the Minister of Minerals and Energy had approved funding to be spent on restructuring projects. EDI Holdings had allocated R2.4 million to set up the REDs over the next 5 years. This had been approved by the DME.

The Chairperson asked when more REDs would be launched and did they envisage any problems with the asset transfer in March 2006 to RED 1.

Ms. Nzimande stated that they were talking to municipalities about more launches from February 2006 onwards. The RED I transfers and operational integration would occur shortly. Mr. S Mowzer, CEO of RED 1 indicated they had reached agreement with the City of Cape Town to transfer assets and about 2 400 staff into RED 1 by 1 March 2006. He said that in terms of the transfer and operational agreement between RED I and ESKOM they would transfer over a 12 to 18 month period which could start anytime between 1 July 2006 and 31 December 2006. An application had to be made to National Treasury to approve the asset and staff transfer into RED 1. They needed a response from National Treasury by January 2006 in order to effect the City’s transfer by 1 March.

In terms of the new Cabinet resolution and the modelling that had been done they believed RED 1 would be financially viable and sustainable. It constituted 75% of the electricity businesses in the Western part of the country. The City of Cape Town had completed ring fencing and an audit of all staff and assets that would transfer into RED 1. They were busy putting their case to National Treasury.

The Chairperson stated that the importance of restructuring could not be over-emphasised and the initial building blocks were now in place with the establishment of RED 1.

The meeting was adjourned.