RED1 Status, Challenges & Legislative Requirements: RED1, briefings by Eskom, RED1 & Department

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Mineral Resources and Energy

14 February 2007
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Meeting Summary

A summary of this committee meeting is not yet available.

Meeting report

14 February 2007

Mr N Mthethwa (ANC)

Documents handed out:
RED1 presentation on the Current situation and the Way Forward
Eskom Presentation: RED1 challenges and legislative requirements
Department of Minerals and Energy presentation: Progress report on Cabinet decision
Letter from City of Cape Town to Committee

Audio Recording of the meeting

The Chairperson tabled a letter from the City of Cape Town indicating that it could not attend the meeting that morning, which also indicated that the City was not in a position to discuss matters as they were still under discussion internally. The Committee was concerned at the contents and the tone of the letter.

RED1 gave a presentation detailing the history of the Regional Electricity Distributor decisions; the Cabinet decision and the way matters had progressed in the past few months. It was clear that there had been substantial problems. The City of Cape Town had, during December 2006, written to the Regulator asking that the licences which had been issued to RED1 should not be extended, but instead should revert to the City. This was approved, and RED1 was now faced with closure. The various options were outlined. Salaries had not been paid and there was a dispute regarding those, with an instruction from the Mayor apparently having been ignored. There was no agreement on whether the City would be paying the creditors of RED1.

Members raised several concerns about the whole situation, and were particularly anxious about the salary issues. After extensive discussion, including a debate on whether the matter should be referred to the Human Rights Commission, it was decided that the City would be subpoenaed to appear before the Committee. Some Members of the Committee felt that the offices of the CCT were being abused and the restructuring process was being confused with individuals' rights, which was perhaps a matter to be referred to the Chapter 9 institutions. No vote or final decision was taken on this point.

Eskom gave a short presentation, focusing on the challenges and the lessons learned. Eskom was fully committed to the restructuring process, and already had a six region footprint operational. Eskom urged that
the enabling legislation required substantial and urgent effort. There were a number of uncertainties that needed to be resolved, including the municipalities in the REDs and the asset valuation and staff matters. Legislation should include effective regulatory and taxation frameworks. In answer to a question on time frames, Eskom confirmed that the time frames were being set by EDI Holdings.

The Department of Minerals and Energy agreed that the legislation was needed to ensure a proper focus and understanding of the planning processes, and to provide a guiding framework. A national electricity pricing system was needed, together with a strategy on investment, to achieve universal access while ensuring efficiency and sustainability. The drafting of the Bill had commenced, but some policy issues were still under consideration by a Task Team. A draft should be available at the end of the month. Governance issues were still to be settled. The Department would like local government to participate. Work on the national pricing system had commenced. There would be public consultation processes which the Department hoped to finalise before the end of 2007.

City of Cape Town: Non attendance at meeting

The Chairperson indicated that the City of Cape Town (CCT) would not be attending the meeting and had sent through a written message to the Committee. The responsible official at the CCT was involved in a Strategic Planning session. He tendered his apologies. The letter however went on to indicate that CCT was not in a position to discuss matters externally until there had been agreement with all the parties concerned. He wished to hear comment from the Members on the letter, which raised some concerns in his mind.

Mr C Molefe (ANC) shared the Chairperson's concerns. The process of electricity distribution restructuring was vital and he did not believe it was acceptable for CCT to say that it was busy with internal processes. Furthermore, this showed disrespect to this meeting, which was organised precisely to try to reach a collective approach. He would recommend that the apology not be accepted.

Mr J Combrinck (ANC) agreed with the comments, and seconded Mr Molefe's proposal.

Mr C Kekana (ANC) added that in view of recent problems with electricity supply and distribution CCT must surely have realised the importance of interaction with all government structures. He was dismayed that they had not availed themselves of the opportunity, indeed their obligation, to attend.

Ms N Mathibela (ANC) was concerned also at the fact that merely a letter was sent and nobody had appeared personally to explain CCT's position.

The Chairperson at this point requested and received confirmation that there was no delegate from CCT present. He commented that it had been quite clear the previous week that all stakeholders were required at the meeting, and he agreed that the Committee's views must be communicated.

Mr S Louw (ANC) pointed out that the Committee had the power to subpoena the City to attend, and proposed that this be done as a matter of urgency.

The Committee accepted Mr Louw’s proposal.

RED1: The current situation and way forward: Briefing by RED1
Mr Saleem Mowzer, Chief Executive Officer, RED1 tabled, but did not present, the whole history of the decision to move to Regional Electricity Distributors (REDs) and the setting up of RED1, which was a Presidential Private Project, in essence intended as a pilot project. He noted that RED1 had been operating for 18 months. A Sponsor's Committee and RED Committee were established in 2005 to work towards the establishment of RED1. The required processes were followed by CCT prior to choosing the RED option. RED1 was established as a municipal entity on 31 May 2005 and it had commenced operations on 1 July 2005. It had been agreed that CCT and Eskom business would transfer first to RED1 within the Cape Town metropolitan area and that further phases would follow. RED1 entered into a number of agreements with the City and Eskom, a Board was appointed, a business plan and budget were approved for the following three years, and the transfer of the CCT Electricity Department was planned for transfer. However, the initial dates kept being shifted, and eventually, after more than 9 months’ delay, it was suggested that the transfer take place by July 2007. The transfer of staff and assets had never occurred.

Until this point there had been certain progress. Board members were appointed and Board Committees were established. A company secretariat was appointed, internal audit functions were sourced from the CCT's internal Audit Unit and the external audit was arranged through the Auditor General. Mr Mowzer tabled the Mission, Vision and Values and six strategic goals of the Board and indicated that the operational strategy and budget had driven those goals. The strategic operational plan dealt with the re-engineering of the business, network refurbishment and growth, set up maintenance plans (which had never existed before), and set the basis to rationalise the tariff. Agreements were signed with CCT and Eskom. Strategy requirements had been developed for 2010. A further operational, accountability and monitoring system had been developed. A 90-day recovery plan for outages was planned. The National Energy Regulator of South Africa (NERSA) conducted two audits. Other strategies included a human capital strategy, which attempted to harmonise the 27 local conditions of service, plans and due diligence on CCT staff. A Systems strategy was developed, and was implemented and approved by the RED1 Board and CCT, which, for the first time, was fully ring-fenced. This paved the way for a smooth transfer to RED1. RED1 had also adopted change management plans.

As part of the transactional business, RED1 had signed a Service Delivery Agreement, and put operating agreements in place. A licence was issued by NERSA, and both this and the agreements were due to expire on 31 December 2006. The agreements had all been conditional on transfer of business, and were interlinked with licence conditions. Although the asset transfer framework was still outstanding, other conditions had been met. Mr Mowzer stressed that the meeting of all the conditions was not within the hands of RED1 alone but was dependent on all parties.

RED1 had drafted an asset transfer framework, had developed various plans and strategies, and had engagements with other agencies, stakeholders, NERSA and state agencies. It had resolved to, and had taken substantial steps towards establishing a RED1 pension fund, which was a defined contribution fund whose rules would allow for all REDs to be participating employers. The Financial Services Board had now been asked to make this fund dormant, in view of the present uncertainty on RED1. The Wires Assets were to be transferred to RED1, and although due diligence was done, Eskom's suspensive conditions were not met, and all agreements had now lapsed.

In August 2006, CCT met with RED1 management and advised they had a number of preconditions before they would agree to transfer of staff and assets. These included Cabinet's approval of the six plus one RED model, that RED1's status as a municipal entity should not change, and a requirement that each staff member must consent to the transfer. In September it was agreed that RED1 would embark on having all the agreements extended, that NERSA be asked to extend the licence beyond 31 December 2006 to 1 July 2008, and that the planned CCT transfer would happen on 1 July 2007.

On 25 October Cabinet decided that there would be a six wall-to-wall RED model, rather than a six plus one, that REDs should be public and not municipal entities, and that NERSA would have jurisdiction over all of the Electricity Supply Industry.

On 8 November, CCT resolved that it should request NERSA to transfer back the licence, that the service delivery agreement should be allowed to lapse, that CCT would engage with EDI Holdings about the future of RED1, and that legal opinion be sought on the process. This was confirmed by a full Council meeting on 7 December 2006. Public hearings were held on 7 December and on 14 December. NERSA gave back the licences to CCT for six months. CCT's key objective was to run electricity as a department of the Council, and RED1 believed that this development would put the restructuring process back a number of years.

CCT was the only shareholder in RED1 and therefore was responsible for deciding upon the future of RED1.
The agreements had now lapsed, and it no longer held a licence. CCT could use RED1 as part of its corporatisation strategy, or it could offer shares in RED1 to EDI Holdings, in which case the RED1 Board would have to approve the transfer and EDI Holdings would have to consider the commercial risks of that move. There were management fees owing to RED1 by CCT. If it was wound up, RED 1 had the power to recover payments. If it were wound up on a voluntary basis, CCT would have to provide security for debts as part of the process. The Board of RED1 had not been paid for 18 months, and staff salaries had not been paid since January 2006 although valid contracts existed. RED1 had held meetings at a high level with CCT but there was still no agreement. RED1 believed that there were valid claims for constructive dismissal on the part of all staff. The management claims still owed by CCT to RED1 had been verified by the CCT's own internal audit unit as R 5.2 million. However, yesterday CCT said that despite the fact that they had required and given instructions for the valuation, it would not accept those findings of its own unit. Given that RED1 had obligations in respect of creditors, salaries, CCT would, if deciding to wind up RED1 put up security for continuing obligations for twelve months.

On 25 January a special meeting was convened by the Mayor, when these findings were presented, including the current financial position, when RED1 requested CCT to review the decision to wind up, and rather to negotiate an alternative solution within the broader restructuring process. That special meeting resolved that CCT must pay the amounts owing for the past 18 months, that CCT must process all payments on behalf of RED1, and that CCT tell RED1, by 28 February of the outcome of discussions with EDI Holdings. That was no longer an option because discussions had since deadlocked.

Therefore RED1 needed to commence retrenchment of staff and terminate all contractual obligations. It seemed that the options were either to transfer shares to EDI, or to embark on voluntary winding-up, on either a solvent or insolvent basis, or to retain RED1 as a dormant company, or to get a Court order for a compulsory winding up. RED 1 had no income, there was no operational reason to continue and staff have not been paid despite instructions by the Mayor and City Manager that this must be done on 23 January 2007. An urgent meeting had been requested by RED1 to resolve the impasse and outstanding salary issues.

Mr Mowzer tabled the challenges, successes and lessons learned by RED1. He did not deal with these in detail, save to say that he would like to stress that in the past 18 months RED1 had managed to reach agreement between Eskom and CCT to electrify areas that had previously never been electrified, had managed to have CCT spend 95.4% of its capital budget, as compared to its under performance in previous years, had achieved harmonisation of conditions of service, had set up a pension fund, had harmonised tariffs and had put in place plans for 2010. The lessons it had learned were that in future negotiations should be at a more advanced stage before companies such as RED1 were created, that there should be alignment of strategy between national and local government entities, that Eskom negotiations should be at national level, and that the restructuring time must be constrained to assist staff morale. Communications strategies needed to be improved, challenges of dual authority needed to be resolved, mechanisms for municipal regulation must be clarified and the Electricity Distribution Industry Restructuring legislation must be put in place urgently if restructuring were to succeed.

Mr Mowzer believed it was unfortunate that CCT had ended up acting contrary to the Municipal Finance Management Act and the Municipal Systems Act by exercising its shareholder status improperly in the RED1 business. CCT had resolved not to participate in the electricity distribution industry (EDI) restructuring because it did not support six wall to wall REDs. There would be negative financial impact on CCT's finances.

Mr Mowzer reiterated that RED1 had laid a solid foundation for transfer of the electricity business into RED1. The EDI restructuring could only succeed if municipalities and Eskom were compelled to participate. The restructuring Bill would have to be dealt with urgently and the distribution process would only succeed with a constitutional amendment. In relation to RED1, he suggested that it should be converted into a public entity, amalgamating Eskom and non-Metro municipalities, which, although not optimal, would be financially viable. He further suggested that National Government, through EDI Holdings, continue to engage CCT to participate in the process. Finally, the Department of Minerals and Energy (DME) should, with EDI Holdings, intervene to resolve the current impasse. He gave special thanks to the Committee for its support and commitment over the past 18 months.

Mr Molefe stated that this report made it clear why CCT had chosen not to attend the meeting. Staff had not been paid, and RED1 had effectively been sabotaged by CCT. RED1 had been committed to restructuring and complied with their mandate. This emphasised the need to have a clear explanation from CCT. Perhaps the two-week period suggested was too long as the matter seemed more urgent. He stressed that RED1 was a Presidential pilot project to transform the industry, and in view of its collapse there would be further difficulties to those previously disadvantaged.

Mr C Kekana (ANC) concurred that it was alarming and disturbing to hear this report. CCT had obviously already resolved on the matter. Electricity restructuring was a national agenda item, and this Committee had a responsibility to protect the national interest. It was regrettable that the problems arose at about the same time that leadership of the City Council changed and he found it unacceptable if the new leadership was not committed and honest in discussions and deliberations.

Adv H Schmidt (DA) pointed out that it was NERSA who decided to give the license back to Cape Town, and that this was a factual and not a political decision. Therefore the Committee should investigate the reasons why NERSA did so. There had already been reasons advanced that the asset transfer framework had not been finalised. There were strict conditions for transfer of assets. If national departments do not do what they were supposed to do assets could not be transferred. In addition, Cabinet had changed its mind, and all these matters had exacerbated the situation. There was no explanation given why the Eskom suspensive conditions were not met, and this should also be interrogated. He urged that NERSA be asked to give its stance. He was sorry that this meeting had not been joined with that of the Committee on Public Enterprises, which was currently discussing matters with the Eskom Board and the Department of Public Enterprises (DPE).

Mr Mowzer reiterated that CCT and RED1 had an agreement that RED1 would apply for the extension of the licence. When Cabinet took its decision on the six wall-to-wall REDs, CCT, without consulting RED1, wrote to NERSA to ask that the licence be revoked. CCT had already decided not to participate in the EDI process. Because all the agreements would lapse on 31 December, NERSA had very little choice in the matter. He would like CCT to state whether it was committed to EDI restructuring, and why the agreements were not extended in accordance with the arrangements made for 1 July 2007.

Mr E Lucas (IFP) commented that this issue must be resolved, especially since RED1 was intended to show the way forward, and its inability would have a serious effect on the rest of the country. He was particularly concerned about non-payment of wages, particularly in view of the mayoral instruction. He asked whether Mr Mowzer would be prepared to come back to the Committee when the other stakeholders were also present.

Ms B Tinto (ANC) thanked Mr Mowzer for setting out the problems so comprehensively. She agreed with Mr Lucas, and believed that the fact of non-payment was a violation of human rights. Staff was entitled to be paid even if there were problems between the Mayor and staff.

Mr S Vundisa (ANC) saw CCT's actions as having frustrated RED1. He agreed that it was urgent to have an explanation from CCT.

Mr Mowzer replied that he would not comment on the observations, but welcomed the input. In regard to the question on the asset transfer, posed by Mr Schmidt, he noted that in theory the Minister of Finance was to promulgate a framework for transfer of assets from municipalities or public companies. Whilst that had not happened, municipalities had already established municipal entities and had transferred assets and staff. The CCT and Johannesburg City Council had done so. Although RED1 agreed that it was important for the framework to be promulgated – and in this regard had already submitted a draft to CCT as a basis – it had not believed that the lack of the framework was a total block. RED1 had indicated to National Treasury (NT) that the Municipal Finance Management Act (MFMA) allowed for exemption of an asset transfer framework. CCT held that the lack of framework was an essential precondition.

Mr Mowzer answered Mr Schmidt's comment on the Eskom suspensive conditions by indicating that RED1 had met with Eskom and agreed that the conditions would be elevated for discussion to the Department of Minerals and Energy (DME), but this had not been resolved. In light of Cabinet's decision, and the fact that the agreements had lapsed on 31 December he did not think that those conditions were any longer relevant.

Mr Mowzer confirmed that he would be happy to come back for further discussions in Parliament.

Mr Mowzer wanted to add that on the question of finances, at the time that RED1 was established, CCT would not pay over the management fee of R10 million to RED1 because it did not have systems in place. RED1 implemented a system and opened a bank account, then asked for payment. At this stage CCT said it required invoices, as CCT would pay service providers directly, and although CCT undertook to pay staff salaries through the corporate payroll nothing was paid. CCT had effective control over the budget and finances of RED1.

Mr Kabelo Mothobi, Executive Manager, Corporate Affairs, NERSA commented on the proceedings so far, at the request of the Chairperson. He said that Mr Mowzer had correctly and fully dealt with many of the issues. There were conditions set out that were not met. At the time of review, NERSA had to look at its mandate and decide the best course of action in the interests of the industry and consumers. The Regulator had an open process, and all parties made representations that were taken into account when reaching a decision. In view of the conditions not having been met, the contracts having lapsed, and the shareholder, CCT, having indicated that it was not happy to pursue the RED1 process, RED1 then did not have the capacity to discharge the licence conditions and obligations. Thus it was in the best interests of all concerned to transfer the licence back to CCT.

Mr M Matlala (ANC) said the situation was unfortunate.

Mr W Spies (FF+) added his concerns to the non-payment of salaries. Although it was not the function of the Committee to put CCT “on trial” in its absence, it should take steps to ensure that the orders already given were carried out. CCT should certainly be called on to explain itself. He felt that much of the problem arose from the EDI restructuring principles, linked with the constitutional principle that electricity distribution was to be a municipal competence. Despite best efforts, there was still a gap to be bridged in municipal competencies, and he suggested that this Committee must seriously seek clarity on what exactly was the import of that constitutional requirement on electricity distribution. The issue had never been clarified. There was no sense in trying to apportion blame to political parties or make claims that transformation was being sabotaged, when the real issue should be settled to allow planning for the future.

The Chairperson, Mr Molefe, Mr Lucas, Mr M Nene (ANC) and Ms Mathibela reiterated their concern that people had not been paid.

Adv Schmidt pointed out that there were different payment methods, and said that there was no indication that these salaries would not be paid at some stage. He felt that the explanation given by CCT for its non-attendance at the meeting was to the effect that until internal processes had been completed, there was nothing that could be explained to the Committee. He believed that this was their point of view, and that there was not sufficient justification, by this alone, to claim that they were anti-transformation.

The Chairperson disagreed, indicating that the whole restructuring process of EDI was influenced by this attitude.

Ms Dolly Mogatle, Chairperson, EDI Holdings, commented that the issue of salaries was no less than a crisis, and could not be ignored. A plea had already been made to CCT to separate the issues of RED1 obligations and the salaries that were clearly owed. Whatever the legal or technical issues about the establishment operation, these could not be blamed on the employees, who had a legitimate expectation to be paid. Salaries had been paid up to 31 December so there could not be any claims that CCT was not responsible for them. It was one month's salary that was at stake. Mr Mowzer himself was affected directly. The Board, which had served for 18 months, had received no fees. The matter had again been discussed the previous evening and the Mayor had stated that she would be seeking a court order on the question of the obligation to pay the salaries.

Mr Mowzer confirmed that the non-payment had nothing to do with payrolls or systems, as Adv Schmidt had commented. The Mayor indicated the salaries should be paid by 26 January. They were deposited to the correct accounts, and then withdrawn from EDI Holdings.

The Chairperson noted that although the restructuring was a voluntary process, the Committee might have to take a different stance in order to ensure that the national obligations were satisfied. He agreed that the issue of salaries, and ignoring the Mayor's instruction, was extremely important. He felt that this could even be classed as a human rights matter, and should perhaps be referred for investigation to the Human Rights Commission. He felt that there had been political agendas guiding CCT's actions. CCT had the financial resources to pay. The RED1 staff was being used as pawns.

Mr Louw agreed that there was a serious violation of human rights, as no doubt families were being affected. This was quite unacceptable.

Adv Schmidt noted that the payment due arose from an employer/employee contractual labour relationship, for which the appropriate forum would be the Labour Court. He was worried that an emotional decision was being taken on a matter in which the full facts were not known. The Committee should not interfere with payments of salaries, which were a contractual and employment issue. He would certainly favour calling in CCT to discuss the problems, with EDI Holdings, RED1 and other stakeholders, in order that the legal issues could be clarified. However, he would not support any decision that the Committee be involved on salary issues.

Mr Kekana indicated that CCT, in failing to attend and present its views, had placed the Committee in a difficult position. Electricity outages affected all, and were the outcome of service delivery failures. A failure to pay staff could have wider implications on service delivery. Whilst the Committee might not know for certain which structure was legally responsible for salaries, it could and should express its concern on the situation. Officials must be disciplined if they were not carrying out the orders. He suggested there should be a follow up whether a declaratory order had been sought from the court.

Mr Mahlaba expressed his concern at the tone of the letter, which he felt almost suggested that the Portfolio Committee had no right to be apprised of the situation until the matter had been resolved internally. This was disrespectful.

Mr Spies stressed that whilst he was not in any way defending the non-payment; he agreed that the Human Rights Commission was not the right forum. He proposed that the Committee could take the matter up immediately to try to ensure that the salaries were paid, either from City Council funds, or with National Government intervention. Referring the matter to the Human Rights Commission would not speed up the issue of payment, nor solve the immediate problem.

Adv Schmidt felt that there were legal issues which the Committee could not decide. It was clear that someone must pay, but there was no certainty whether it must be the CCT. He agreed that CCT must appear and explain itself, but that the Committee could not make any orders as to payment before that explanation was received.

Mr S Vundisa (ANC) wondered why the employees had not previously taken action themselves.

The Chairperson said it would be ideal if the Committee could resolve that payment of staff salaries must take place. Adv Schmidt should note that the CCT had already not availed itself of the opportunity to explain itself, which would have been at this meeting, maintaining that these were matters dependent on resolution of an internal process. This could not be so, as the restructuring was a national issue, not an internal one. The urgency of the matter had already been made quite clear. If the Mayor had issued an instruction, then she must follow this through. The human rights issues concerned the abuse of the office, whereby processes of restructuring were being confused with individuals' rights. The abuse of office was a matter for the Chapter 9 institutions.

The Committee resolved that CCT be subpoenaed to appear.

RED1 Challenges and requirements: Eskom Briefing
Mr Jacob Maroga, CE: Designate, Eskom, indicated that much had already been covered by the RED1 presentation.. He stressed that Eskom had a duty to ensure that disruption was minimal. Half of its employees worked in the distribution side of the business, and were therefore directly involved in service provision. Staff was critical to restructuring. 60% of Eskom's revenue went towards ensuring the viability of the industry. Eskom was fully committed to the restructuring process. Eskom itself had already restructured from seven to six regions when the Cabinet decision was taken, and so that footprint was already in operation and Eskom was prepared already to be an anchor point.

Mr Mongezi Ntsokolo, Managing Director: Distribution, Eskom said that after the Cabinet decision was taken in October to adopt the six wall- to- wall REDs, Eskom was then concerned with the suspensive conditions. It had to deal with business imperatives such as valuing of assets and transfer of people. He tabled the background, the work done with RED1, key areas of the operating agreements and transition plan, and suspensive conditions.

Mr Ntsokolo noted that enabling legislation was required to give certainty to the process, and this now required substantial and urgent effort. The voluntary participation in EDI restructuring did create uncertainty in terms of the future realisation of the business case. There was as yet no certainty about which municipalities would fall within the REDs and therefore the numbers and viability could not be assessed. This must be resolved so allow for better planning and budgeting. The asset valuation and compensation framework needed to be put in place. Eskom believed it would only be fair to fix values taking into account the condition of assets in the field, so that proper reward and penalties applied as a result of the management and maintenance of the assets. Staff related issues needed to be resolved prior to the transfer to ensure that staff had confidence in the process. Realistic time frames had to be set to take into account the complexities and practicalities of the process.

Eskom's ring fencing in preparation for the six Public Entity REDs was already at an advanced stage. Key restructuring enablers needed to be set up. The enabling legislation to support the process should include effective regulatory and taxation frameworks. Eskom gave its commitment to actively supporting and participating in the EDI restructuring process.

The Chairperson commented that many of the issues would already have been questioned by the Committee following the earlier presentation.

Adv Schmidt noted that there had been planning. He asked what the time frames were, and when the process should start and end.

Mr Moroga replied that EDI Holdings had been set up to deal with the restructuring time frames, and Eskom was participating with EDI to assess the time frames; therefore it did not have its own agenda or views outside that process. Eskom had therefore not set any time frames itself.

Progress report on Cabinet Decision by Department of Minerals and Energy (DME)
Ms Nellie Magubane, Deputy Director General, Electricity, DME reported that Cabinet approval took centre stage in this whole process. Cabinet realised that there would be a short and long term effect on planning. Eskom would be a shareholder for a while, but would eventually have to phase itself out of the distribution chain to ensure that local government played a major part in the future of electricity distribution, which was in line with local governments' mandate as a service authority in providing distribution services. Cabinet had also noted the need for the EDI restructuring legislation. It was a voluntary process but the legislation was needed to ensure a proper focus and understanding of the planning processes. The legislation was intended to be a guiding framework for how to restructure the distribution industry. There also needed to be a national electricity pricing system in order to achieve uniformity on tariffs, because the systems were interconnected. This did not mean all tariffs would necessarily be exactly the same, but rather that there would be a uniform method to determine pricing. Cabinet reconfirmed that EDI Holdings would oversee the establishment of the REDS. It also said they would need support, so there needed to be a strategy on how the investments would be made. Universal access must be achieved whilst ensuring the industry was efficient enough to provide services to all. A roadmap was needed to move from the current state to the final RED model.

The Department had done some drafting on the EDI Restructuring Bill, but there were still policy issues, which were being dealt with by an intergovernmental task team, including National Treasury, Provincial and Local Government, Public Enterprises and Minerals and Energy. A draft should be available at the end of the month for sharing with stakeholders. There would be an intensive communications and roadshow strategy to table at provinces and municipalities to ensure all had a good understanding of the policy decisions.

Issues included in the policy would include Eskom and local government compensation for infrastructure, the way Eskom reduced its shareholding in the REDs, and governance and control of the REDs. During the transitional period in which Eskom would still be participating, there needed to be a model for a governance system, and decision on governance also in the long term. The REDs would include from 30 to 50 municipalities and clearly it would be far too cumbersome to try to allow all to sit in at the Board. A governance model was being sought that would be acceptable to all without hampering efficiency. DME would like local government to participate in the REDs, and to this end was considering incentive schemes for participation. The asset transfer framework also needed to be addressed. Eskom had been established by specific legislation containing precise descriptions, and the transfer of assets would have an impact on that legislation.

DME had already started work on the National Pricing System, having run workshops with Eskom, NERSA and municipalities. A framework document was being prepared and would be shared with stakeholders. The Department was looking at current pricing methodology to identify the weaknesses, and was also investigating the best method for cross subsidies. These existed at present, and would in all probability need to occur in future, but must be transparent and effective. The costs should also be transparent, because electricity was a regulated commodity. Finally all systems must ensure the long-term sustainability of effective power supply.

DME summarised that the legislation would be framed around the Constitution, and must assist municipalities to execute their constitutional mandate on electricity. Because DME needed to expedite this, there would be public consultations, and DME aimed for finalisation before the end of the year, to meet the Cabinet instructions.

The Chairperson indicated that there were many aspects which appeared as common threads. The enabling legislative framework had been mentioned, and the Department had confirmed that this was already being worked on. The Committee agreed that these areas must move smoothly forward.

Mr Spies made the point that there should perhaps be a reconsideration of Eskom's role and whether the route being adopted was adequate to ensure restructuring. At present many were not participating fully in the process and the Committee would need to consider the matter seriously. He suggested that Members should already begin to study these aspects. He noted that the Minister would be holding road shows and said that it would be useful for Members to be present when the Minister visited their own constituencies. To this end, the Committee secretariat should work closely with DME and ensure that Members were apprised of the dates.

The meeting adjourned.



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