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REDS UPDATE FOR SOUTH AFRICA
to the
SOUTHERN AFRICAN POWER INDUSTRY CONVENTION
AFRICAN UTILITIES
by
DEON LOUWRGM: RED ONEEDI HOLDINGS
30 MAY 2007
30 May 2007 Slide 2
Presentation Outline
Electricity Distribution Industry (EDI) Historical Context
25 October 2006 Cabinet Decision
Key Implementation Enablers and Their Status
What are REDs?
How Will We Get There?
Municipal Preparation Towards Incorporation into the REDs
Stakeholder Engagement
Conclusion
30 May 2007 Slide 3
EDI HISTORICAL CONTEXT
30 May 2007 Slide 4
Industry
Business
Residential
Scheduling
Physical Energy Flow
Financial Flow
Mu
nic
ipalitie
s
Metering & Billing
Currently, South Africa operates in the traditional mode of vertical integration with financial and physical flows following the same path
ES
KO
M
Current Electricity Supply Industry Structure
180180
30 May 2007 Slide 5
EDI Profile
Revenue : R33.5 bn ($4.86bn)
Customers : ~8.3 m
Staff : ~31 000
Asset value : ~R30 bn ($4.35bn)
Energy Purchases : ~110 TWh
Distribution Lines : >370 000 km
Distribution Cables : >210 000 km
R6.90 = $1.00
30 May 2007 Slide 6
Current industry structure is highly inefficient owing to fragmentation
Absence of economies of scale in respect of investing in assets, sharing of
facilities, services, people development.
Inadequate maintenance of networks
Estimated maintenance backlog: R5 bn accumulated over the past 10 years
Supply interruptions cost to the Economy: R2.9 bn to R 8.6 bn p.a.**
Inequitable treatment of consumers across the country
Significant variance in average tariffs by Distributors:
Range#: 19c/kWh – 71c/kWh (medium sized business)
16c/kWh – 60c/kWh (domestic customers)
Unfair discrepancies exist between Eskom Distribution and Municipal
Distribution purchasing tariffs from Eskom Transmission.
Key Challenges Facing the EDI (A1)
** Source: 2003/4 National Integrated Resource Plan (NIRP) ; # Source: NUS Consulting Study - 2005
R6.90 = $1.00
30 May 2007 Slide 7
Inconsistent Electrification Performance
Access to electricity: ~73 % (National)
Institutional misalignment adds complexity
Slow and Inconsistent Roll-Out of Free Basic Electricity (FBE)
Reliability of supply and the ability of the distributors to offer a basic and secure
supply to low income households differs markedly across the country
Current rollout is less than 40% of targeted community
Key Challenges Facing the EDI (A2)
30 May 2007 Slide 8
EDI Restructuring Objectives
• Planned and managed transition
• Future REDs to provide secure employment to their employees, provide skills development and training consistent with a high technology, modern distribution business
• Transition to be done within the context of a comprehensive human resources strategy and an agreed social plan
• Attract and retain competent employees
• Foster proper co-ordination of operations and investment capital
• Acceptable and sustainable levels of supply security and quality
• Improve quality of service and supply
• Future REDs to operate on a sustained, financially viable basis as independent businesses
• Improve the financial health of the industry
• Facilitate better price equality
• Sustainable electricity supply to low-income consumers, regardless of location, at affordable prices
• Provide low-cost electricity
• Achievement of government’s electrification programme
• Universal access to electricity for all South Africans• Ensure electrification targets are met
EDI Restructuring Blueprint Objectives (2001)Energy White Paper Objectives (1998)
30 May 2007 Slide 9
Early 1990s
Considerable Debate over EDI
1997
RED s Approach EndorsedERIC Report
1999
Cabinet ApprovedStart of Restructuring Process
End 1999
EDIRC Established
April 2000
Appointment of PWC
Aug 2000
Blueprint Approved by EDIRC
May 2001
Blueprint approved by Cabinet
July 2003
EDI Holdings established
July 2005
RED 1 established
Sept 2005
Cabinet decision
History of Restructuring
Oct 2006
Cabinet decision
30 May 2007 Slide 10
CABINET DECISION: 25 OCTOBER 2006
30 May 2007 Slide 11
Having considered technical submissions on:
The financial viability of the different RED models;
The institutional and governance arrangements for the REDs; and
How the various models respond to the restructuring policy objectives.
The Cabinet approved the following:
That 6 wall to wall REDs be implemented;
That the REDs be established as public entities and be regulated according to the PFMA and the
Electricity Regulation Act;
That Eskom becomes a shareholder in the respective REDs for a transitional period and that
they reduce their shareholding over time;
That DME, through EDI Holdings, will oversee and control the establishment of REDs;
That a roadmap will be put in place to move from the current scenario into the future industry
structure
That a strategy needs to be developed to deal with capital investment requirements for the REDs
That EDI Restructuring legislation will be introduced; and
That a National electricity pricing system will be developed.
Cabinet Decision: 25 October 2006
30 May 2007 Slide 12
6 Wall-to-Wall RED Boundary Map
RED 1
RED 4
RED 2
RED 3
RED 6
RED 5
Provincial Boundaries
Cape Town Metro
Nelson Mandela Metro
(Port Elizabeth)
eThekwini Metro(Durban)
Ekhuruleni Metro
Tshwane Metro(Pretoria)Johannesburg
Metro
30 May 2007 Slide 13
Underlying Boundary Rationale (A1)
Size
Ensuring economies of scale
To ensure benchmarking
Critical mass in the competitive wholesale electricity market
Balance
Urban / rural balance
Rural electrification
Customer numbers (700 000 – 1.4m rising to 1.1m – 2.4m)
Load mix
Assets employed ratio
Income per household
30 May 2007 Slide 14
Implementation Costs
Minimization of network re-configuration requirements
Contain at least one existing distribution control centre
Contain at least one work management centre, one call centre and a reasonable
distribution of local stores / depots
Do not violate significant geographical boundaries / features
Financial Viability
Each RED is able to fund their:
On-going operations
Required new capital
Ability to service debt at a gearing level of up to 70%
Earn a reasonable return on equity on the business, at prices which reflect
efficient levels of underlying supply cost
Underlying Boundary Rationale (A2)
30 May 2007 Slide 15
REDs Statistical Information
2.4442.8332.1971.3061.9231.437Rbn5 Year Refurbishment Capital Requirement
PROJECTED
5.9575.1195.2681.9594.7755.169RbnRevenue
789953025707264950595069NoPersonnel
2.6345.7315.5372.6934.1543.581RbnAssets: Municipalities
6.3753.6523.4142.2972.6942.196RbnAssets: Eskom
13.73714,74512.9454.81811.67111.269TWhEnergy Sales: Municipality
7.6443.1866.5971.3124.1123.860TWhEnergy Sales: Eskom
819781889157651320536661936180977742NoNo of customers: Municipality
1234667506564636527496490363832279122NoNo of customers: Eskom
2004 FIGURES
RED SIX
RED FIVE
RED FOUR
RED THREE
RED TWO
RED ONEDESCRIPTION
R6.90 = $1.00
30 May 2007 Slide 16
KEY IMPLEMENTATION ENABLERS AND THEIR STATUS
30 May 2007 Slide 17
Key Considerations and Implementation Enablers (A1)
A proposal served at the Transitional LabourRelations Structure (TLRS) during January 2007 as part of the process of addressing the salary harmonisation
EDI HoldingsSalary Harmonisation Framework
The process is driven by Department of Minerals and Energy (DME) and indication from them is that the Electricity Restructuring Act is targeted for 2007
DMEElectricity Restructuring Legislation
The process is driven by National Energy Regulator of South Africa ( NERSA)
NERSANational Electricity Pricing System
The process is driven by Department of National Treasury (NT) and indication from them is that the Asset Transfer Framework is targeted for 2007.
On 5 April 2007 NT provided exemption from certain specific provisions of the Municipal Finance Management Act (MFMA) pertaining to asset transfer from Local Gov to the REDs to facilitate the EDI restructuring.
National TreasuryPromulgation of Asset Transfer Framework
to enable effective and orderly transfer of
assets from local government and Eskom to
the REDs
StatusResponsibleKey Implementation Enabler
EDI Holdings developed a position paper for submission as input into the NERSA process
NERSANational Tariff Harmonisation Framework to
ensure rationalisation of tariffs nationally
This issue will be addressed in the EDI Restructuring Bill
DMEGovernance of the REDs
30 May 2007 Slide 18
Key Considerations and Implementation Enablers (A2)
Will be attended to through the RED Establishment Business Case
DME /
EDI Holdings
Infrastructure Investment Strategy
StatusResponsibleKey Implementation Enabler
City of Cape Town cancelled all contracts between RED 1 and themselves. EDI Holdings is currently in negotiation with City of Cape Town
EDI HoldingsConsolidation of RED 1 in the Western Cape to
ensure that the pilot is a success.
The principles are being covered in the Municipal Fiscal Powers and Functions Bill to be promulgated during 2007
National TreasurySurcharge Principles Framework
30 May 2007 Slide 19
WHAT ARE REDs?
30 May 2007 Slide 20
New companies into which both municipalities and Eskom will transfer their electricity
distribution businesses
Shareholding to be split between Eskom, National and Local Government
Service providers of choice to the service authorities:
Municipality remains service authority and RED becomes Service provider
REDs will collect surcharges in accordance with the Municipal Fiscal Powers &
Functions Bill on behalf of the municipalities and pay it over to them
REDs will pay dividends to shareholders subject to financial performance
Relationship between RED and municipalities to be governed through the Service
Delivery Agreement as contemplated in Section 81 of Municipal Systems Act
Streamlined relationship reducing duplication and creating clear accountability
Better regulation with role clarity between service authorities, service providers and
the National Energy Regulator of South Africa
Future REDs (A1)
30 May 2007 Slide 21
Decentralised geographical service delivery
Enable Government’s social policy, e.g. electrification and free basic electricity
Single institution
Focus on service
Consistency in operating policies and application across RED geographical area
Development and application of best practices
Support Government’s objective of universal access to electricity by 2012
Become more efficient and able to service customers equally well, at realistic tariff levels
through:
Lower Interest charges due to improved access to capital markets
Efficiencies in “non-payroll” related areas, i.e., general costs
Accounts Receivable. Using best practices in a reasonable, good faith effort approach
to reduce bad debt accounts
Future REDs (A2)
30 May 2007 Slide 22
Municipal Revenue Stream
Municipalities will continue to derive income from electricity sales within their area of
jurisdiction
The income will be based on the current audited revenue generated from electricity
sales and transferred to the municipality to support other services
The method through which municipalities will receive a continued revenue stream from
electricity sales would be through:
A surcharge to customers on electricity sales
Dividends from the relevant RED, subject to financial performance and within the
approved policy of the relevant RED
Surcharges collected by the RED will be paid over to the relevant municipality on a
basis agreed to between the relevant municipality and the RED
30 May 2007 Slide 23Slide 23
RED Future Business Model (...1)
Bundled but clearly demarcated wires and retail businesses
Wires business key characteristics:
Asset intensive
Capital intensive
Geared for serving an one to many relationship
Monopoly business with strong regulation
Retail business key characteristics:
Customer driven
Trading in energy
Products and services aligned according to market segmentation
Business geared towards competition and less regulation
Shared corporate and support services to wires and retail
Focus on buy in of services to avoid stranded costs and duplication
Business model to be customised to complement the geographical composition of the
RED area of jurisdiction
30 May 2007 Slide 24Slide 24
RED Future Business Model (...2)
RED Corporate Office
Policy and Direction
Governance and Compliance
RED Planning and Resource Allocation: Resources (Finance; HC; Systems; Shared Services Management etc.)
Engineering (Wires)
Retail (Customer Service, Tariffs, Energy Trading etc)
Integrated National Electrification Planning (INEP)
Free Basic Electricity and Electrification Policy
Industry association and service provision agreements
Areas
Policy implementation
Establish local needs and requirementsIntegrated development planning (IDP)
Align and oversee execution of Electrification and FBE
Geographical integration and implementation of service delivery
Depots
Execution of technical service related activities as defined per Depot to ensure effective customer service
30 May 2007 Slide 25
To regulate the provision of electricity reticulation services by a RED on behalf of a municipality
SDA
Regulates the operation of networks, tariffs, quality of supply and customer management
NERSA Distribution Licence
For sound corporate governance guidelines for boards
King II Report
To regulate the relationship between shareholder
Shareholders Agreement
Regulates governance of companies as well as other aspects of running companies
Companies Act
Regulates governance and financial management of public and state owned entities
PFMA
OBJECTIVEPRINCIPAL LEGAL INSTRUMENT
The principal legal instruments which will govern the operation of a RED when established will be:
Governance of REDs
30 May 2007 Slide 26
Roles and Responsibilities
Develop and implement strategies to create shareholder value
Ensure effective business operations and compliance
Ensure effective service delivery
Appoint resources and ensure effective resource management
RED Management
Ensure compliance with the shareholders compact
Establish RED Policy, Direction and Compliance requirements
Develop and implement strategies to create shareholder value and to ensure effective service delivery
Ensure governance, legal, regulatory and policy compliance
Appoint Executive Management
RED Board
Establish and contract shareholders compact with RED Board
Monitors the performance of the RED
Define socio and economic requirements
Define business performance expectations
Appoint the Board and CEO
Shareholder
RESPONSIBILTYROLE
30 May 2007 Slide 27
Relationship Governance
NERSA LicenceRED BoardNational Energy Regulator of South Africa (NERSA)
Business Plan
Performance Contract
RED ManagementRED Board
Shareholders Agreement
Asset Transfer Agreement
RED BoardEskom Holdings
Shareholders Agreement
Service Delivery Agreement (SDA)
RED Board (Service Provider)Local Government (Service Authority)
Shareholders Agreement
Shareholder Compact
Business Plan
RED BoardNational Government
GOVERNANCE INSTRUMENTRELATIONSHIP PARTNERRELATIONSHIP OWNER
30 May 2007 Slide 28
HOW WILL WE GET THERE
30 May 2007 Slide 29
RED Establishment Roadmap
30 May 2007 Slide 30Slide 30
MUNICIPAL PREPARATION TOWARDS INCORPORATION INTO THE REDs
30 May 2007 Slide 31
Requirements for Participation of Municipalities
Signing of the Accession Agreement for participation in the RED
All major national role players have signed a Co-Operative Agreement to give full
support to the creation of REDs. The Accession Agreement is the way that
municipalities would also sign into the original Co-Operative Agreement
Municipal Systems Act: Section 78 Process Completed (toolkit available)
Section 78 enforces a four stage approach through which municipalities can alter
the way that a municipal service is delivered may be altered
Ringfencing Completed (toolkit available)
Ringfencing is the exercise that a municipality undertakes to identify and isolate
the total electricity business within the municipality
Due Diligence Completed (EDI Holdings support)
30 May 2007 Slide 32Slide 32
STAKEHOLDER ENGAGEMENT
30 May 2007 Slide 33
Regional Governance Structure
30 May 2007 Slide 34
CONCLUSION
30 May 2007 Slide 35
Conclusion
EDI Holdings welcomes the certainty created by the Cabinet decision to create 6 wall to
wall REDs as Public Entities, regulated under the PFMA
EDI Holdings have the following merging processes underway
Creating a merger within each RED such that a critical mass of the “to be” RED is
achieved on DAY ONE
Ensuring that there is a sufficient footprint of the business incorporated to cover
most of the “to be” RED geographical area
EDI Holdings will continue to work with all stakeholders to ensure fast-tracking of the
restructuring process in order to ensure the realization of the restructuring objectives
THANK YOUTHANK YOU
www.ediholdings.co.za