Electricity Distribution Industry (EDI) Holdings; National Energy Regulator of South Africa (NERSA) Annual Reports

MINERALS AND ENERGY PORTFOLIO COMMITTEE
31 October 2007
ELECTRICITY DISTRIBUTION INDUSTRY (EDI) HOLDINGS; NATIONAL ENERGY REGULATOR OF SOUTH AFRICA (NERSA) ANNUAL REPORTS 2006/7

Acting Chairperson: Mr C Molefe (ANC)

Documents handed out:
EDI Holdings presentation
EDI Holdings Annual Report 2006/7 [available shortly at www.ediholdings.co.za]
National Energy Regulator Annual Report 2006/7 presentation
National Energy Regulator Annual Report 2006/7 [available shortly at www.ner.org.za]

NOT RECORDED

SUMMARY
Electricity Distribution Industry Holdings presented its Annual Report. Progress was being made with the implementation of Regional Electricity Distributors after Cabinet had decided that this method should be used. An important lesson from the first of these Regional Authorities, RED1 which was now being liquidated, was that a proper legislative environment was needed. EDI was close to reaching its targets in terms of employment equity and preferential procurement. The financial statements had received an unqualified report from the Auditor General. The financial position was healthy. Future plans were centred on the establishment of the Regional Electricity Distributors in consultation with government and other stakeholders.

In response to questions from Members, the use of consultants was justified due to the small size of the company and the unavailability of certain skills in the public sector. The company had a relatively large Board due to the need to accommodate the needs of various stakeholders, but there were only three executive members. Higher travel costs had been incurred due to the need to restructure the organisation. Many municipalities would lose money from the surcharges they currently placed on electricity supply, but legislation was pending which would make provision for this to happen.

The National Energy Regulator of South Africa was a recently established institution. It had completed the majority of its planned activities for the financial year. In terms of equity, they were well represented by black Africans but were struggling to attract persons from other racial groups. The gender representivity was half and half, but they were battling to recruit persons with disabilities. They had suffered a higher number of resignations. They had underspent by some R81 million, but this was due to their budget allocation being approved late. This had impacted on contracts, and some expenses which should have been due during the financial year, had been delayed. There were also problems with the payment of pipeline levies.

Members queried the high number of resignations. One reason offered was that many people from the former regulatory authority, the National Electricity Regulator, were involved. The most common reasons were remuneration, promotion prospects and management skills. New pipelines were being developed. In reply to a question over fines for Eskom relating to outages, a new system was explained where they could be fined up to R10 million per annum, determined over a three year cycle. Members urged more usage of rail transport as there was an increasing number of petrol tankers on the road. It was explained that costs in South Africa favoured road transport, plus it allowed for more flexibility so management favoured the road option.

MINUTES
Electricity Distribution Industry (EDI) Holdings presentation
Ms Phindile Nzimande (EDI Chief Executive Officer) apologised that the Board Chairperson was unable to attend as well as for the format of the presentation. They had received late notice of the format required, which was for a balanced scorecard approach. This would be used in future reports. The Annual Report had been compiled based on four pillars of good corporate governance. The mandate for EDI Holdings lay in the Energy White Paper of 1998 and the Blueprint on EDI Reform of 2001. These documents recreated the EDI.

The Board of EDI Holdings recognised the need for good corporate governance, and played various oversight roles. Several committees had been formed to satisfy these oversight roles which covered most of the normal business functions as well as an Ad Hoc Policy and Strategy Committee. EDI Holdings was striving to implement world-class systems of corporate governance.

Ms Nzimande said that the Cabinet had taken a decision on 25 October 2006 to institute a system of Regional Electricity Distributors (REDs). The definition of the six REDs had been determined. She sketched the progress on key enablers to their establishment. Serious concerns had been expressed about the governance of REDs. EDI Holdings had sought to establish legislation. This would be addressed by the RED Establishment Bill. The Bill would be a document of implementation, and the detail would all be in the regulations. Substantial progress had been made on the drafting of these regulations. An exemption had been gazetted on 5 April to ease the process of asset transfer. If the municipalities were ready to implement the policies then they could move on. Work had started at the Department of Minerals and Energy (DME). EDI Holdings was working with labour organisations on a basic agreement regarding the harmonisation of safety concerns. EDI Holdings were also working on a capital investment strategy. A surcharge framework had to be created as well. There was concern at local government level that there would a loss of revenue to municipalities. National Treasury was taking this further. The Municipal Fiscal Powers and Functions Bill was under development, which would allow municipalities to raise surcharges and introduce regulations.

Ms Nzimande went on to compare performance to their business strategy. The four strategic pillars used by EDI Holdings were industry leadership, RED creation, oversight and advocacy. Some of the highlights she listed included the refinement of the Financial Model, the creation of metropolitan REDs, the Cabinet decision of 25 October 2006 and the restructuring of EDI Holdings.

She presented a performance scorecard. It was not in the balanced format requested by the Committee, but did take into account the company’s business strategy. In terms of RED creation, the focus was on the metropolitan areas. Lessons had been learnt from the experience with RED1. The dissolution of this entity was now history. A project management structure had been set up to plan the metropolitan structures. Roadmaps had been created to chart the process. The restructuring was part of the industry leadership strategy. Best practices were being followed. Management systems were being established, and various activities were in place. In terms of advocacy, there was a focus on the management of stakeholders. The levels of knowledge were not good enough and intensive interaction was needed. Strategic relationships were being established.

The CEO said that the development of knowledge management was being repositioned. Policies were being developed. The oversight role was being developed. Human resources were being managed in line with the Public Finance Management Act (PFMA). The Auditor General had presented an unqualified report. Black Economic Empowerment (BEE) companies had provided 80% of EDI Holdings procurement. In terms of employment equity, 81% of staff were from previously disadvantaged groups. Human capital management was being achieved in accordance with plans. A staff retention plan was in place. A culture of performance was being established. They were moving towards a balanced scorecard.

Ms Nzimande said that the Cabinet decision had forced EDI Holdings to focus on the REDs. They had started with a design package deal, and all stakeholders were involved. Final agreement had been reached. Lessons had been learnt from RED1, which was now in the final stages of liquidation. One was that an environment of enabling legislation was needed. It was incomplete at this stage, and not aligned with requirements. She was optimistic that stakeholders would agree on the basis of negotiation. Appropriate lessons would be incorporated into the strategic approach. Some issues had been sidestepped.

Ms Nzimande said that transformation and equity programmes were in place. She gave a breakdown of the demographics of the staff. They were slightly short of targets, with blacks being 81% of staff complement (target 85%), females 67% (target 70%) and disabled staff 2% (target 10%). They were working hard to reach the Task standard. In terms of procurement, 80% came from BEE companies. Of these, 80% were 100% black-owned companies, 38% were greater than 50% black owned and 23% less than 50% black owned. Small Medium and Micro Enterprises provided 2.6% of procurement.

The CEO said there was a social investment programme, and the company was reaching out to the community. There had been a visit to a children’s home on Heritage Day and they would spend Christmas with the children.

Mr Thabo Mokoto (Chief Financial Officer, EDI Holdings) said that the financial statements had been unqualified. EDI Holdings continued to strive to achieve excellent financial management. R67.8 million had been received from the DME in transfers and subsidies, and had been fully spent. Effective internal controls were in place to monitor systems and processes. R78.5 million had been recovered from Eskom.

He said that no major assets had been acquired during the financial year (FY). However, an amount of 32% had been allocated to depreciation of assets. The investment had been increased to R72 million due to the Eskom funds. The investment was held by the Corporation for Public Deposits. The liabilities included an amount reflected as a government grant, which was the R78.5 million due from Eskom. The financial performance included interest received to the value of R1.4 million.

Mr Mokoto said that there had been a change of accounting policy during the current FY. The government grant had been treated as deferred income. In the new policy, this income was recorded on an accrual basis. As soon as the money was received it was recorded as income. The baseline funds from the DME had increased by 5%. There had been a 7.8% increase in expenditure. Operational expenses were mainly on consultants and travel. The cash flow was better, and there was an increased balance due to the Eskom payments.

Ms Nzimande outlined EDI Holdings future plans. The environment for the REDs was being created, and the situation looked extremely promising. Constraints were being resolved. Forums had been established country-wide. Eighty municipalities had signed into agreements. They were working on final analysis of these agreements. A restructuring master plan was in place. Work was being done on legislation, definitions and regulations. A business case had been submitted.

She said there was a question of systems analysis. Board members and the CEO would only be appointed if certain things were in place. A consultation phase was required. A balanced scorecard would be compiled during the 2007/08 FY. They were looking to make it work. Loadings would include 70% for customer satisfaction, 10% for internal systems and 5% for leadership and growth.

Discussion
The Chairperson said that he was glad that EDI Holdings was seriously committed to the balanced scorecard concept.

Mr J Combrinck (ANC) congratulated EDI Holdings on their report. They were improving every year. He asked why there were eighteen Board members, who earned a combined salary of R4 million per annum, given the small size of the company. There was no indication of bonuses, and he asked if these had not been paid. There was also no mention of legal fees in the financial statements. The Minister of Finance had made a statement about his displeasure with the amount being spent on consultants, and yet EDI Holdings had spent R9.9 million in 2006 and had budgeted R15 million for the current FY. He asked why this was happening. He noticed that travel allowances had gone up to R2.6 million in 2006/07, and had increased to R6.6 million in the current year . He asked why this was happening. He noted that a loss of R42 000 had been written off.

Ms B Tinto (ANC) said that municipalities were crying that they were losing funds, and asked why this was happening. She asked if that was why municipal rates were being increased. She was happy to hear that the battle with the REDs was being won. She asked how far they were with the implementation of the process, and what had happened with RED1.

Ms N Mathibela (ANC) asked about disabled employees. The target was 10%, but the achieved rate was only 2%. She asked if this was due to a problem with recruitment. She asked how the lessons of RED1 would be used to assist the other five REDs.

The Chairperson was glad to see Mr Saleem Mowzer in the EDI Holdings delegation. Substantial progress had been made. He noted that the representatives of some political parties were absent, and mused if this was because they were scared off due to the unqualified report received by EDI Holdings.

Ms Nzimande acknowledged the praise of the Committee. EDI Holdings was a small company, and it was more cost-effective to hire consultants than to employ experts. The members of the Board were nominated by the company’s shareholders, and there was a fixed number of delegates for each shareholder. There were only three executive members, namely the CEO, CFO and Chief Operating Officer. Bonuses had not been paid by 30 March due to a timing issue. They were tied to the financial report, and were paid from April to July. She said there were no clever people in the organisation. Some skills were needed that were not found in the public sector, such as financial management. The use of consultants made it easier for the company to ramp its abilities up or down.

Mr Mokoto said that travel expenses had increased due the necessity to accelerate the restructuring process and related activities. There was uncertainty over restrictions on funding which had led to more travel. The disposal of assets was more a demonstration of better management of the writing off process.

Ms Nzimande said that price increases in local government rates were due to various factors, such as increased costs and inflation. Municipalities had been told they had taxation powers, and could set a levy on the price of electricity. Of 283 municipalities in the country, only 187 were responsible for electricity distribution. There was no Eskom surcharge. New legislation would enable all municipalities to impose a surcharge.

She said that work was being done on the launch of the REDs. Processes were in place and agreements were being concluded. She anticipated that the roll out would start in 2008, once legislation was finalised. This was a focus area, and EDI Holdings was working with various organisations. One of the major lessons from RED1 was that regulation was critical. They were assisting the DME in this regard. They realised that the organisation could be created and then told that transfer of funds and authority would only happen later. The process must be simultaneous. Some factors had to be in place to enhance the environment.

Mr E Lucas (IFP) said that a lot of work had been done. He was concerned about the restructuring process. The Western Cape had been left out. He asked what was being done about this. He asked if the RED system would be introduced in stages or in one big bang. He agreed that some Members of the Committee were not present, but he noted that the technology was up to date.

Mr C Kekana (ANC) wanted a general idea of the situation. He asked if a management strategy was in place. He asked if they were generally on track. He said there were blockages. Legislation was important, and he said that the process could not move forward otherwise. He asked when the REDs would be a reality. He asked if they would solve the supply problems. He compared the old to the new situation. Extra supplies and power stations were needed, or else the impact would be negative.

Mr Molefe asked about the security of supply. He said there was progress, but asked why the remaining municipalities had not signed the agreements. He asked if it was a question of culture, or if they would join up later. There were benefits. He asked where the metros were.

Ms Nzimande replied that the Western Cape had not been left out. There was a regulation engagement forum on which the premier of the province and the municipal mayors were represented. A steering committee had been formed under the guidance of the City of Cape Town, and there were sponsors meetings. A committee had been formed to establish the RED. The Board favoured a phased basis for the introduction of REDs. Some fine tuning of systems would be needed. She said the plans were on track, and there was now more certainty. Legislation had been sorted out which had provided a firm foundation. She said that more municipalities were taking things up. There was a lot of interaction. Huge progress was being made.

The Chairperson said that he was glad that all the questions had been cleared.

National Energy Regulator of South Africa (NERSA) presentation
Mr Simunda Mokoena (CEO, NERSA) thanked the Committee for the chance to present its Annual Report. The Chairperson of the Board sent his apologies as he was unable to attend. It appeared that the invitation to present to the Committee had been received on 26 October, but he and his team had only become aware of it the previous day, and thus they were unable to comply with the format requested by the Committee.

The predecessor body had used a balanced scorecard to rate their performance. Due to the transition from the previous regulatory body to NERSA, they had had to compile two scorecards for the previous FY. There were two important elements. There were nine electricity regulatory bodies, five of which operated on a part-time basis and the remaining four on a full-time basis. NERSA had a staff complement of 143 approved positions.

Mr Mokoena presented the vision and mission statements, and briefly outlined the values and regulatory principles. The body’s mandate was predicated by four items of legislation, and the mandate informed the strategic objectives. The legislation was the PFMA together with the Regulatory, Electricity, Gas and Petroleum Pipeline Acts. Strategic objectives were also informed by government policy. The four industries were covered while there was also some crosscutting.

The CEO outlined the overall performance. They had planned 404 activities during the FY, of which 46 had been removed from the planning. Of the balance, 78% had been executed. There had been restrictions due to the high staff turnover, late approval of the budget, late payment of pipeline dues and reprioritisation.

He said that highlights of 2006/07 included a revised structure that had been approved. They had attended the World Forum on Energy Regulation. On the other hand, fifty employees had resigned due to a number of factors. NERSA wished to ensure that staff attended local and international courses. A skills audit had been done, and they were awaiting the results. Some training modules had been developed, but it was a tedious process to get these accredited. Analysis showed that they were exceeding equity targets in terms of Africans, but it was a challenge to attract persons from other race groups.

In terms of gender, he said that the position was virtually 50/50, with 56 female employees and 55 males. The staff had been 56% female the previous year. The figures for people with disabilities were not shown in the presentation, as this was an area of underperformance. The only professional disabled employee had left NERSA the previous year, and there were there currently no disabled persons in service.

Mr Mokoena said that internal procedures were in place. There had been eleven independent audits. A three-year price determination process was underway. They had started work on a regulation account manual. They had developed rules for licence applications and inspections of pipelines. There were nine licences for gas pipelines and 44 for petroleum pipelines. There were draft regulations for compliance measures for storage facilities and pipelines. There was an agreement on a pipeline from Mozambique.

NERSA supported government initiatives in terms of socio-economic development. Particular areas of interest were the access to electricity for the poor, and the infrastructure for the nine host cities for the 2010 Football World Cup. Internal processes were in place, and reporting and budgeting procedures were flawless. Policies were in place, but there were inherent risks. These were mainly in the human resources (HR) sector with specific concerns for recruitment of personnel and payroll issues, the disaster recovery plan and the issuing of licences. The main objective was to ensure that the image of NERSA would be seen in a positive light.

He said that NERSA had started in July 2006. A letter had been sent to the Committee discussing their views, and draft regulations had been circulated. Reports had been submitted on time. They had attended a Ministerial Lekgotla for State Owned Enterprises. They had produced many consultative papers.

The CEO said that stakeholders would be consulted before any documents were adopted, and public hearings would be held to improve the quality of documents produced. They would also help to determine the pipeline tariff methodology. There had been many engagements regarding customer service.

Mr Mokoena mentioned some highlights. One had been the report on the Western Cape outages. Others had been the Multi Year Pricing Determination procedure. An operational model had been adopted. There was a delay in the awarding of licences. Some had been registered at predetermined dates.

Turning to financial aspects, he said that levies had been published both for gas and petroleum pipelines. The Electricity Act had been repealed. Public comment would be elicited on levies, and this would go to the Minister. NERSA had received a clean report from the Auditor General. Ring fencing methods had to be applied. Costs for any particular matter must come from that industry.

The CEO said that low points included the delay in the approval of pipeline levies. There was the challenge of implementation with the Petroleum Pipelines Levies Act. It was easier with the gas pipelines. The Regulator had underspent. It had been months before the budget had been approved, and spending had been held back. This had led to a surplus of R81 million. There had been a case of fraud which had seen R620 000 lost. There was also a case of theft which had been discovered in April, amounting to between R50 000 and R80 000. There had been a payroll fraud of R700 000 which had spanned two financial years, although the crime had only lasted one month in the 2006/07 FY.

Ms Carlyn Keulder (CFO, NERSA) gave some financial details. The budget was R163.4 million, and R167.7 million had been spent. She added that there had been additional income. As Eskom had transferred R138 million, of which R86.4 million had been spent. This was from late levies and staff issues. Of NERSA’s spending, 47.5% was on staff. Service providers such as consultants and auditors had cost R11.6 million. Regulatory members had cost R6.1 million. The capital expenditure budget was R6.5 million, of which R4.4 million had been spent. There was also a committed expenditure of R1 million which was due to be paid at the end of the year.

She said that no levies had been received during the new year. They had since recovered some electricity costs. The balance of assets were land and buildings, which amounted to R21 million. The total assets had increased to R143 million. There was still outstanding debt on the pipeline. Some contracts had been placed late, which resulted in some expenditure not having occurred yet.

Mr Mokoena said that NERSA had taken over from the previous National Electricity Regulator (NER). The staff position had now stabilised. It was a challenge to recruit disabled people with specialist skills. The development of regulations was being consolidated. They were establishing themselves as credible stakeholders. The Auditor General audit report on their annual financial statements was unqualified.

Discussion
Mr Combrinck said that there were ten matters which had been changed in the report. He wanted to know why fifty staff members had resigned, and if these were skilled people. He asked if Eskom had been fined, and if so, to what amount.

Mr Kekana commented on the outages which had been experienced for the whole of the previous winter. It was the same situation with the pipelines. The impression was being created that South Africa was on the verge of collapse.

Ms Mathibela asked how they could have received an unqualified report since R700 000 had been stolen.

Adv H Schmidt (DA) asked how the restructuring of EDI Holdings had impacted on NERSA.

Mr Lucas noted that people were leaving NERSA, and asked at what level they were. He asked if there was any way of solving the supply problem, especially with the 2010 World Cup on the horizon. He asked if NERSA could explain the way forward.

Mr Mokoena replied that they did have a CFO. Her appointment had been imposed externally. By the end of May the first quarterly report had to be submitted to the Minister. This was the basis for interaction with the Auditor General. At the end of July, management issues were raised in a letter. This year was the first time that these corrections had been reported. It was a new way of working. A lot of reports were due before the end of July.

He said that the R700 000 loss had been due to fraud. The thief had used methods which went undetected for some time. He had eventually been discovered and a disciplinary hearing had been held, after which he was dismissed. The information had been forwarded to the Police, and the court case was due to start on 23 November. Some of the stolen money had been recovered.

The CEO said that there had been a study into the resignations. The three most prevalent reasons were remuneration, poor promotion prospects and management skills. Regarding the promotion prospects, NERSA was a knowledge institution. There were flat levels of staff hierarchy. They had approved a new model of a dual career path, which would be implemented. People could be regarded as specialists in their field without having to become managers in order to earn promotion. He said that the average number of resignations in a year was eleven, but fifty had left in the 2006/07 FY. He felt that this was attributable to a change in management style and transformation. NERSA was in a transitional phase, and the bulk of resignations were from staff of the former regulator, the National Electricity Regulator.

Mr Rod Compton (Regulator Member, NERSA) said that the Act at the time had said that NERSA must give Eskom time to sort out supply problems. If this was not done in a reasonable time, then they could take Eskom to court. The maximum fine was a mere R500. They would not pursue this course of action. Under the new system, there was a penalty of up to R10 million per annum based on the time for which supply was lost. There was an incentive for good performance. Fines would go into a special fund. Some projects had been cancelled. The model of having six REDs was more difficult to that of having six major municipalities and one RED. This would not have been fruitful. A better plan was needed to deal with outages.

Mr Combrinck asked where the Chairperson of the Board was. He joked that he might think that the Committee was not important enough.

Mr Mokoena said that he was in Johannesburg.

Mr Combrinck said that while on a road trip to Kimberley, he had noticed that at least half of the trucks on the road were petrol tankers. He asked what was being done to get the industry to use rail as the transport method of choice. The number of vehicles made the roads that much more dangerous. He commented that if Eskom was not funded, then there would be no electricity. If they were allowed a three-year period of grace before being punished, then they would be tempted to delay rectifying problems.

Adv Schmidt repeated his question about the impact of EDI Holdings restructuring on NERSA.

Mr Kekana said that more tanker trains were needed to support the move to use rail transport. He assumed that they would have to use what they had in the meantime, perhaps with a small upgrade. The main alternate was road transport. Perhaps the tanker trucks should only use the road at night. It was a worrying factor.

Mr Mokoena said he had tendered the Chairperson’s apologies. He had always led the delegation to present the Annual Report himself since the 2003/04 Report. The Chairperson presented himself on matters where he though matters were at his level. There was an external focus of leadership regarding staff recruitment. The focus was on matriculants and graduates. They took on unemployed people with these qualifications. He thought that they had budgeted for ten of these trainees in the current year. The number which could be accommodated was dependent on resources. As the energy regulator, long-term forecasts were made. Long-term restructuring was underway. There was a Memorandum of Understanding with EDI Holdings. There was joint project management. They wished to bring all the parties together. If the focus was on the establishment of REDs, then NERSA would change its focus accordingly. NERSA viewed itself as a critical player.

Mr Crompton discussed the question of road or rail transport. Rail should be cheaper, as was the case in the rest of the world. He wondered what the difficulties were in South Africa. There were three considerations. Firstly, the licences for road vehicles were very liberal, and in his personal opinion were of the lowest in the world. On the contrary, rail tariffs were high. In the past the emphasis had been on maintaining large stocks of fuel, but companies tended to follow a “just in time” approach currently, positioning supplies as they were needed. Road transport was more flexible and therefore more in tune with the modern approach as there was no requirement to maintain large stocks. The DME was moving towards having minimum stock levels. He did not see any solution to the problem.

Regarding pipelines, he thought the lead times of seven to ten years were a bit long. The pipeline from Mozambique should be completed during 2009, and the other pipeline in the third quarter of 2010. This was an interim period, and there were great concerns. Transnet was having a problem in balancing its costs. Any fuel shortage had significant impacts. The Department of Transport regulated road transport.

Mr Thembani Bukula (Regulatory Member, NERSA) said that entry to the electrical supply industry was controlled by licences. Six or seven suppliers were being considered. Any fines for Eskom would be levied on an annual basis, but would be determined over a three-year period. It was better to look at this issue over the longer term. If the R10 million fine was indicated, then it would be imposed, but he felt that the position would improve over the longer term.

Ms Keulder said that there was a CFO, and it was herself. The Office of the Auditor General had changed its style. Final information should now be available by May. This could be done. She stressed that the fraud had been spread over two financial years. The component in the 2005/06 FY had been R620 000, and the AG had raised an emphasis of matter. Only R80 000 had been stolen in the 2006/07 FY, and this was not a big factor for the Auditor General.

The Chairperson said that the reason for this meeting was procedural. If he had his way, then the two entities would not have had to appear as they had unqualified audit reports.

The meeting was adjourned.