Viability of National Red (Regional Electricity Distributor): hearings

MINERALS AND ENERGY PORTFOLIO COMMITTEE
21 June 2006
VIABILITY OF NATIONAL RED (REGIONAL ELECTRICITY DISTRIBUTOR): HEARINGS

Chairperson: Mr E Mthethwa (ANC)

Documents handed out:
National RED- Eskom Holdings Limited submission
Energy Intensive Users Group (EIUG) presentation
Energy Intensive Users Group (EIUG) submission
CENTLEC- Municipal entity of Mangaung Local Municipality submission
Chamber of Mines presentation
Chamber of Mines submission
COSATU, NUM, NUMSA & SAMWU submission
eThekwini Metro Council submission
City of uMhlathuze submission
Eskom submission:

SUMMARY
The Committee started public hearings on the viability of a National RED (regional electricity distributor). Eskom, the Chamber of Mines and EUIG were supportive of the National RED. However other organisations such as CENTLEC and eThekwini were not supportive of the National RED. Instead they supported the original Cabinet resolution of 2001 of the six wall-to-wall Metro REDS. It was suggested that the roll-out of the local REDS should be allowed while the six wall-to-wall is in the process of formation. The trade unions represented by the Confederation of SA Trade Unions were strongly opposed to the 6 Metro REDS plus 1 National RED model as a whole. It was in favor of a national electricity distributor which was firmly in the hands of government. The fear was that the model would lead to corporatisation which would be to the detriment of the poor. The City of uMhlathuze was also opposed to the formation of a National RED. It was felt that there was still no confirmation of how the concerns of successfully run municipalities would be addressed.

MINUTES

Eskom submission

Mr T Gcabashe, Chief Executive Officer (CEO) and Mr M Ntsokolo, Managing Director: Distribution presented a very comprehensive overview from the formulation of the Electricity Distribution Industry (EDI) restructuring blueprint objectives up until the inception of the six Metro REDS (Regional Electricity Distributors) plus one National RED model. Mr Gcabashe noted that the proposed conceptual design of the National RED and the six Metro REDS fully supported government requirements and White Paper objectives for EDI restructuring. The National RED was envisioned to be an effective consolidation vehicle for non-metro municipalities that did not fall within the jurisdiction of the six Metro REDS. It was stressed that under the current model a minimal amount of restructuring effort would be required to immediately address the problems of rural distribution. Eskom was confident that the National RED would significantly contribute towards the meeting of the target of universal access to electricity by 2012. The Eskom national footprint would be used as a basis for the National RED and it was envisaged that significant benefits through economies of scale and skills would be the end result. Mr Gcabashe emphasised that the financial position of municipalities would not be adversely affected as they would receive fair compensation for the sale to or lease of assets by the National RED. They would in addition also receive appropriate compensation for surpluses. The Committee was presented with a breakdown of figures on the financial viability of the National RED. The only concern was that the positive figures were based purely on assumptions. Mr Gcabashe concluded by stating that Eskom was of the firm belief that EDI Holdings was best placed to manage the restructuring process.

Discussion
Adv H Schmidt (DA) asked for clarity on the possible evolution of the National RED from being a subsidiary of Eskom up until such time that it could become a separate entity. He also asked why Eskom could not perform the functions envisaged for the National RED since it was in any event to be a subsidiary of Eskom.

Mr Gcabashe said that Eskom would be used as a basis for the National RED for the first 3-5 years. A division within Eskom would thus form the basis for the National RED. It was hoped that the National RED would be incorporated into a separate entity in the long term.

Mr B Solo (ANC) referred to Eskom’s assertion that there would be minimal changes to network configuration if the current model was implemented fully. He was concerned because customers always had serious complaints about exorbitant costs and disruptions in supply.

Mr Gcabashe conceded that network changes were inevitable given the changes in boundaries. Disruptions for customers were thus a given. He also explained that national tariffs were charged depending on the class of customer. It was noted that tariffs were uniform within a specific class of customer.

Ms N Mathibela (ANC) asked if the National RED would be a permanent entity. She also asked what plans were in place to meet electrification targets by 2012.

Mr Gcabashe said that the National RED could possibly be ever evolving. He agreed that the pace of electrification needed to be speeded up. Mr Gcabashe stated that capital funds needed to be allocated to speed up the process.

Mr W Spies (FFP) stated that the Metro RED for Johannesburg would be similar to the City Power municipal entity that was currently in place. He asked how the envisaged Metro RED would be better than City Power. He referred to Eskom’s assertion that transfers would not affect 70% of employees of municipalities. What would happen to the remaining 30%? Were they to be retrenched or transferred?

Mr Gcabashe said that City Power was indeed similar to the proposed Metro RED in that it was formed from an amalgamation of municipalities. He however felt that the Metro RED would be able to perform the functions as was required. He pointed out that more staff would be needed in the metropolitan sector. Staff could thus possibly be transferred where they were needed.

Mr S Vundisa (ANC) asked what guarantees existed that the finances of municipalities would not be negatively affected. He also asked for clarity on the ownership of Metro REDS.

Mr Gcabashe reiterated that municipalities would be compensated for the lease or sale of assets. They would in addition also be appropriately compensated for revenues that had been lost. The Metro REDS would be owned by metropolitan governments.

The Chair stated that the National RED was being presented as a panacea to transformation. He noted that much had been said about the advantages of the National RED but not much had been said about its disadvantages. He asked how economies of scale would be advantageous to customers and how the economies of scale created by six Metro REDS measured against those created by seven REDS which included the National RED.

Mr Gcabashe said that Eskom was by no means asserting that the National RED was a panacea to transformation. He said that the capacity to implement was what was lacking. The electricity was available; the only problem was its distribution. Mr Gcabashe stated that it was hoped that the National RED would be able to assist in this regard. He pointed out that he was not aware of any disadvantages associated with the National RED. The issue was about public and municipal entities. He said that it would be difficult for Eskom to function as a municipal entity. The aim was for the National RED to fast track the restructuring process.

The Energy Intensive Users Group (EIUG) submission

The EIUG is a voluntary association of large electrical energy users. Members were involved in mining, minerals beneficiation and heavy industry and consumed 40% of electricity sold in SA. The association was represented by Mr I Morissen, Chairperson. The EIUG position was that REDS should be financially viable and sustainable. It was felt that the REDS should be public and not municipal entities. Mr Morissen said that the model of six Metro REDS had always had the EIUG’s support and if government felt the need for a seventh National RED, it could count on the EIUG’s support once again. It however felt that enabling legislation was needed as a matter of urgency.

Discussion
Adv Schmidt commented that the EIUG seemed to support the REDS provided they were financially viable. He asked how the EIUG would be affected by the REDS.

Mr Morissen answered that if the National RED was effective it would serve the needs of the EIUG.

Mr Schmidt shared Mr Morissen’s sentiment that the REDS should be public rather that municipal entities. He felt that they would be more efficient. Municipalities were currently experiencing numerous problems.

CENTLEC (Pty) Limited submission

The submission was conducted by Mr T Lobe, CEO: CENTLEC, was the electrical department of the Mangaung Municipality and it did not support the National RED. Mr Lobe said that CENTLEC supported the drive to form the REDS provided that it was viable and feasible. It was however of the view that Category B municipalities should be allowed to establish Local REDS irrespective of the end-state of six wall-to-wall Metro REDS or seven inclusive of the National RED, it was felt that scope for Local REDS existed. The rationale was that service authorities and consumers would benefit from Local REDS’ economies of scale, stronger purchasing power, reduced fixed overheads and facilities to the benefit of all. The proximity of Local REDS would also allow for customised customer services. Mr Lobe said that there were concerns about the financial viability of the National RED. The issue was also whether the formation of a National RED would address the concerns raised by Cabinet. CENTLEC additionally also had concerns about staff of municipalities and the tax implications for them once the Metro REDS had been formed.

Discussion
Mr S Louw (ANC) asked if CENTLEC agreed with EDI restructuring objectives.

Adv Schmidt asked whether CENTLEC considered itself as an alternative to REDS or whether it supported their formation.

Mr Lobe responded that CENTLEC was not proposing a deviation from the wall-to-wall Metro REDS. CENTLEC was proposing that Class B municipalities be allowed to function in a similar manner as the Metro REDS, only on a smaller scale.

The Chair opened the floor to non-Members.

Mr Mphumulu (a municipal representative) said that he was of the view that a great deal of work needed to be done on network configurations for ring fencing. He asked for a response from Eskom. He also asked whether the Metro REDS would become a customer of the National RED.

Mr Ntsokolo (Eskom) conceded that there would be network configuration changes that would be needed. The idea was to follow natural and not political boundaries. The viability of the National RED did not depend on the Metro REDS being its customers. Metro REDS would buy electricity at existing tariffs which were regulated. Existing subsidies would also continue.

Mr V Reddy (a municipal councilor) asked where the additional capital funding required for the electrification process would come from. This question was not specifically answered.

Chamber of Mines (COM) submission

Mr D Kruger, Assistant Adviser: Techno-Economics made a very brief submission. The COM supported a National RED that was technically competent, functioned as a commercial operation and had cost reflective tariffs. Mr Kruger noted that tariffs needed to be rationalised, service quality needed to be improved and there was a need for an independent regional distributor.
The COM recommended that modeling should be done in consultation with stakeholders and that the restructuring should take place within a proper legal framework.

Discussion
Adv Schmidt commented that an uninterrupted electricity supply was probably paramount to the COM. He asked what legal impediments the COM envisaged.

Mr Solo referred to the COM’s recommendation that consultation with stakeholders was needed. He made the point that the REDS model had been placed in the public domain for comment. Mr Solo asked for commitment from the COM to participate in the process and whether the COM supported the National RED model.

Mr Kruger responded that currently no legal framework existed. He noted that in mining there were no short-term projects. Projects were for the most part medium to long term. The mining sector needed clarity on what the future would hold as far as prices and conditions were concerned. The COM at present supported the National RED. The COM committed itself to participation in the process even though it felt that it was sometimes left out of the process.

Confederation of SA Trade Unions (COSATU) submission
Mr Sidney Kgara (Deputy Coordinator, COSATU Parliamentary Office), accompanied by Fred Gona, Noel Coetzee, Oupa Komane, Eric Albrecht and Sibifso Kumalo, said the point of departure for the trade unions was that electricity should be seen as a basic need and thus should be regarded as one of government’s basic service delivery items. The trade unions felt that the national electricity distributor should remain a public entity and should not be privatised. The national government should retain its equity in it. The concern was that the 6 + I REDS model would lead to a standalone and deregulated distribution sector which was open to competition. The fear was that this would eventually lead to corporatisation. Hence, the trade unions emphatically rejected the 6 + 1 model in its current form and called for a national distributor that would be able to move assets and resources to where it was needed by municipalities. It was felt that government was losing sight of its aim to eradicate poverty via electrification.

Discussion
Mr Solo reacted that the very philosophy behind the establishment of the REDS was poverty eradication. It was felt that municipalities in general were struggling to deliver at present. He suggested that the trade unions and Eskom should engage on the matter.

The response given was that there was increasing confusion over which model was the best, i.e. the 6 REDS or the 6 + 1 REDS. It was felt that in considering the models there had been a distinct shift in government policy. The formation of EDI Holdings was given as an example of this shift. The issue remained how the restructuring would benefit the poor.

The Chair asked why the trade unions considered RED 3 to be posing challenges. He asked whether other REDS did not have similar challenges. It was also asked why the trade unions suggested that RED 1 be treated as a pilot project.

Fred It was explained that RED 3 was a predominantly rural area faced with a lack of economic activity. The reality was that the Metro was battling financially. The point was made that if there had been a national distributor in place assets and resources could have been channeled to those municipalities in need. The progress made with RED 1 was not known and a progress report would shed light on the matter. It was felt that Eskom did not have all the answers. The comment was made that Eskom in any event only did what government told it what to do.

Mr Louw pointed out that municipalities often had varying tariffs. He asked whether the public was footing the bill.

The delegation responded that disparities in tariffs had always been around. The example was given that in 1991 1KW of electricity cost 10 cents in Sandton whereas it cost 23 cents in Soweto.

eThekwini Municipality submission

Mr H Whitehead, Head of Electricity, made the submission. The municipality had mainly two issues that it wished to raise. The first was that in the absence of a government approved policy on cross-subsidisation within the EDI, the financial viability of the proposed National RED should not be at the expense of the end customers in the six Metro REDS. The six Metro REDS should be on a level playing field with the National RED in order for all electricity customers in SA to be treated fairly. It was felt it was unacceptable that the six Metro REDS should be the customers of the National RED and be forced to absorb distribution related costs of the National RED.
The second issue was that of “contestable customers” which consume more than 100 GWh per annum on a contiguous site. It was unacceptable that these customers would be “cherry picked”
by Eskom Key Sales or the National RED. These customers should thus fall within the jurisdiction of the Metro RED within which they were located.

City of uMhlathuze submission

Mr D van Wyk and Mr H Reynolds represented the city. They felt that the creation of a National RED was a major deviation from previous recommendations and therefore had vast implications. Tariff differentiation would not be adequately addressed in a National RED and the municipal tax base would be eroded. Governance of a National RED and tax issues remained unresolved and could cause problems in the future. Although the process of establishing REDS was underway, there was still no confirmation of how the concerns of successfully run municipalities would be addressed. The bottom line was that the city did not support the formation of a National RED.

Discussion
Mr Spies asked how municipalities that were successful in delivering services should be dealt with. He pointed out that problems were compounded when a struggling municipality was merged with a successful one.

Mr Matlala responded that the idea was for the financially better off municipalities to assist the struggling ones.

The Chair noted that in the past municipalities were designed to benefit persons in urban areas. He said that when looking at a successful municipality, one should bear in mind that there were many factors that contributed to its success. The Chair commented that the city had a strong industrial base and thus had a strong municipality.

Mr van Wyk responded that the city was to a large extent industrial but that it also had households and rural areas. He proposed that there should be a natural evolvement of municipalities that delivered well.

The meeting was adjourned.