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MINERALS AND ENERGY PORTFOLIO COMMITTEE
23 June 2006
VIABILITY OF NATIONAL RED (REGIONAL ELECTRICITY DISTRIBUTOR): HEARINGS
Acting Chairperson: Mr E Mthethwa (ANC)
Documents handed out:
National Energy Regulator of South Africa (NERSA) powerpoint presentation
The First Regional Electricity Distributor (Red 1) submission
The First Regional Electricity Distributor powerpoint presentation
Southern Cape Karoo Electricity Forum (SCKEF) submission – parts one & two
Southern Cape Karoo Electricity Forum powerpoint presentation
Association of Municipal Electricity Undertakings (AMEU) submission
Association of Municipality Electricity Undertakings powerpoint presentation
South African Local Government Association (SALGA) powerpoint presentation
South African Local Government Association submission
Independent Municipal and Allied Trade Union (IMATU) submission
Solidarity power-point presentation
The National Energy Regulator of South Africa commented that they had not been given sufficient time to give a considered response. It summarised the Electricity Distribution Industry (EDI) processes. NERSA was concerned that the National Regional Electricity Distributor (RED) would not be financially viable, and was also concerned about issues of independence, supporting reports and proper modelling. If government wished to proceed, then NERSA tabled some mitigating conditions that it urged should be accepted.
RED 1 similarly could not recommend the establishment of a National RED It also believed the National RED would result in higher costs, would not minimise end-user costs and would not address the objectives of EDI restructuring If government should decide to proceed with the National RED, then CCT had listed a number of principles which it urged should apply to the transfer of business to the REDs.
Southern Cape Karoo Electricity Forum did not recommend establishing a National RED because of its impact on Category B municipalities who were already operating viable and sustainable distribution. Any remodelling should meet the EDI Blueprint, and metro REDs should take the lessons learnt from RED 1 into account.
Association of Municipal Electricity Undertakings reported that it could not support the National RED as it did not consider it financially viable, was unsure if the Cabinet’s concerns had been addressed, was concerned about governance and the effect on non-metro municipalities that already offered effective and efficient electricity services AMEU therefore proposed that Cabinet should reaffirm its May 2001 decision.
SALGA believed that the impact of the National RED would differ between category B and C municipalities. Any proposal should allow viable category B municipalities to form their own REDS. It was believed that a “quick-fix” national RED would not support long-term objectives.
IMATU doubted the efficiency and viability of a National entity, which would require immense resources and increase the burden on -consumers. District and local municipalities would also be threatened if the income that they derived from electricity generation was lost to the National RED.
Solidarity did support creation of the National RED, believing that it would be viable as a support structure with national cross subsidies to meet the needs of the rural areas and smaller towns. It believed that use of the Eskom infrastructure would be the best solution.
Members asked questions relating to regulation of the National RED, the transfer planned by RED1 for July 2006, and Solidarity’s assertion that the National RED would meet staff needs and employment. Solidarity was asked to expand upon various aspects of their presentation that did not agree with other submissions. The constitutionality of Eskom controlling a National RED was queried. The Committee noted that the process was not concluded but that all institutions supported an early decision on policy that should meet South African consumers’ best interests.
National Energy Regulator of South Africa (NERSA) submission
Mr S Mokoena (CEO; NERSA) said that NERSA, owing to insufficient time to consider a response, could give a submission that reflected the preliminary view of the secretariat. NERSA would want to comment on the National Red when they received the necessary documents from the government. The submission would address the national RED (RED 7), to ensure that restructuring processes were met and to give an overview of development and effort in restructuring. The EDI restructuring process was tabled, and the models evaluated. The recommendations made by the Electricity Working Group (EWG) in 1998, which were adopted by Cabinet, were tabled. In essence, these proposed consolidation into the maximum number of financially independent distributors, standardisation of tariffs that should be cost-reflective, and increase in efficiency. The new proposal differed substantially from the recommended processes that had already taken place. There was no proof that the National RED would be financially independent, the REDS were not balanced, there was no supporting report and no evidence of detailed modelling. NERSA was concerned that problems would emerge with the lack of financial viability of the National Red, uncertainty regarding ownership and governance, lack of regulation of the National RED, and problems with municipal levies. NERSA submitted some mitigating conditions under which it could become more viable and deal with the concerns detailed above. It also addressed concerns and gave possible solutions to tariff rationalisation, and voluntary participation by municipalities.
NERSA concluded that although it had no final details on the national RED< it would prefer the six RED model based on sound restructuring principles. If, however, the policy makers still wished to proceed, NERSA would support them but would urge the adoption of their conditions. Policy finalisation was critical and urgent and delays could limit potential investors and increase restructuring costs.
RED 1 submission
Mr S Mowzer (CEO; RED 1) reported that RED 1 was established on 31 May 2005. It commenced operations in July 2005 and so far had signed a service delivery agreement, drawn plans for transfer agreements, obtained a licence from NERSA, and planned to transfer electricity in July 2006. Lessons learned from the RED 1 establishment were tabled, and City of Cape Town(CCT) had followed a steep learning curve in dealing with a company the size and nature of RED 1. If more municipalities were involved, the greater the difficulties would be in obtaining consensus.
RED 1 could not recommend the establishment of a National RED because no municipality would be the ‘parent’ and 187 municipalities will be involved. It believed that the 6 wall-to-wall RED model was the most viable model. The continued presence of Eskom in the distribution sector was a problem, and the obligation on metro REDS to purchase from the National RED would also cause higher costs, would not meet the objectives of minimising cost to end-user, would limit competition opportunities and would not address the objectives of EDI restructuring
If government should decide to proceed with the 6 Metro REDS plus a national RED, then CCT had listed a number of principles which should apply to the transfer of business to the REDs. Details were contained in the presentation.
Southern Cape Karoo Electricity Forum (SCKEF) submission
Mr M Rhode (Director: Electricity, George Municipality) summarised the background to the matter. He stated that SCKEF did not recommend establishing a National RED because of its impact on category B municipalities who were already operating viable and sustainable distribution. SCKEF suggested that viable municipalities be permitted to form REDs and incorporate neighbouring municipalities in a cluster. Any remodelling should meet the EDI Blueprint, and metro REDs should take the lessons learnt from RED 1 into account.
The approach taken by SCKEF was tabled and compared fully with the EDI Holdings and PWC Report. They submitted that the six Metro REDs were the best model. The reasons why SCKEF believed that it was viable were set out and explained fully in the presentation.
Association of Municipal Electricity Undertakings (AMEU) submission
Mr P Fowles (AMEU delegate) reported that AMEU was a major stakeholder in the industry and had actively supported government’s vision to restructure the EDI into six distributors. AMEU could not support the National RED as it did not consider that it was financially viable, was unsure if the Cabinet’s concerns had been addressed, was concerned that the governance could not be managed, pointed out that a number of non-metro municipalities already offered effective and efficient electricity services and there was no evidence that a National RED will be more effective than the 6 wall-to-wall REDs.
AMEU therefore proposed that Cabinet should reaffirm its May 2001 decision to proceed with the establishment of six REDs, and create an enabling environment where some incentives were given to relevant municipalities to merge with an appropriate metro RED.
The Chairperson noted that the committee took particular interest in RED 1’s views because they were the first regional electricity distributor.
Mr J Combrinck (ANC) asked why every presentation predicted that the National Red would not be financially viable. He also asked who would regulate the National Red.
Mr Mowzer replied that the accessible information clearly showed that the National Red will not be viable, and it would have to be financed, for instance, through cross-subsidies. The numbers were not yet certain, since the cabinet has not made its decision. The 6 Metro REDs, on the other hand, were clearly financially viable.
A NERSA delegate added that there were no comprehensive regulations regarding governance and responsibility for the National RED.
Mr Mowzer, answering a request for elaboration on the transfer planned for July 2006, reported that the date for finalizing the transfer was changed to 31 December 2006, and RED 1 hoped to meet this target. The National Treasury department had still not approved the asset transfer, but RED 1 was in contact with National Treasury. The cabinet would have to make a decision on the National RED issue shortly so Eskom and CCT could restructure rapidly and get back to business.
South African Local Government Association (SALGA) submission
Cllr Z Hlatshwayo (SALGA delegate) read aloud the SALGA submission. Municipalities were variable in their capacity to discharge their constitutional mandate. The level of governance, resources, capacity and systems differed from one municipality to another. The impact of the National RED would differ between category B and C municipalities. Category B municipalities were currently operating viable and sustainable services. Any proposal for the creation of a RED should allow viable category B municipalities to form REDs and, together with the Metro REDs, incorporate neighbouring municipalities into the REDs. SALGA supported the transactional approach to creating REDs in the interest of the country and discouraged a quick-fix National RED that would lead to problems in the long term.
Independent Municipal and Allied Trade Union (IMATU) submission
Mr R Verster (IMATU delegate) read aloud the IMATU submission. IMATU was of the view that there was no need to differentiate between the so-called Metropolitan REDs and the envisaged National RED. Any deviation from the institutional and governance structures would not be supported by the Constitution. It sincerely doubted the efficiency and viability of the entity since it would encompass the entire country, except those areas that fell inside metropolitan municipalities boundaries. The entity would require immense resources and create an immense burden on an already weary end-consumer. The future viability of district and local municipalities would also be threatened when the income that they derived from electricity generation was lost to the RED. IMATU was against the establishment of the national RED.
Mr B Blignaut (Solidarity delegate) stated that Solidarity confirmed its support for the overriding objectives of the restructuring process. It supported low equitable electricity tariffs for all consumers. It noted the differing aspects of the support of economic growth and social development between metros and the smaller towns and rural areas. It would support a structure giving emphasis to rural and metro electrification and meeting legitimate interests. Solidarity believed that that cross-subsidies between consumers would assure financial viability of the 6 metro REDs and National RED.
Solidarity did believe that the National RED would be the best approach, as it was of the view that it would address the different employment security and career needs of staff in the non-metro areas. It believed it would be viable as a support structure, with national cross subsidies, and would meet the needs of the rural areas and smaller towns.
A committee member noted that Solidarity had spoken about rural areas and yet it was not at the heart of the submission. She also asked why Solidarity did not support the 6-RED model.
Solidarity believed that the National RED carried the interest of rural areas because it made use of Eskom’s infrastructure, which was the nation’s best.
Mr M Molefe (ANC) asked Solidarity to explain its statement that a National RED would be ‘especially aligned to the needs of staff and employment in the smaller towns and rural areas’.
Mr D Hermann (Solidarity Deputy-General Secretary) answered that 30 000 employees were affected by the restructuring and that the labour forums were frustrated by the lack of information and the proceedings of government so far. Another solidarity delegate said that a National RED would represent people in all regions.
Mr S Louw (ANC) asked Solidarity to elaborate on their argument that cross-subsidies created viability, when almost all other presenters raised cross-subsidies as a challenge.
A delegate from Solidarity said that the restructuring would be the biggest in South Africa’s history, and the purpose was to find a viable structure. The rationale of going via Eskom’s structure was that Eskom had a track record. Since 1994 maintenance had not been a priority in municipalities. If all six REDs bought electricity from the National RED the National Red would be viable, but the six Reds must however pay more for the electricity than they did at present.
An Eskom delegate added that the issue was complex, and would involve four main areas, regardless of which was chosen. These were the issue of mandatory or voluntary purchases, and the issue of cross-subsidies. He pointed out that in the current system rural areas were subsidised by metropolitan areas. The matter of scale would determine whether it was efficient to have 187 distributors. Finally financial viability was a major concern.
Ms N Mathibela (ANC) noted that City of Cape Town was still struggling with RED 1.
Mr Verster raised the question of whether it was unconstitutional to put a National RED under the control of Eskom and, if so; what should be done.
Mr Fowles (AMEU) said that the whole discussion about restructuring had been based on affordable electricity. This was, however, the third time a National RED had been suggested, and it was still not viable. It was time for government to think of the best way forward.
The Chairperson noted that the process was not concluded but there seemed to be a consensus that there was a need to draw up a policy in the nation’s best interest as soon as possible.
The meeting adjourned.
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