reds update for south africa presentation.pdfpresentation outline electricity distribution industry...

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


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


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


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


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)


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


KEY IMPLEMENTATION ENABLERS AND THEIR STATUS


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


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


WHAT ARE REDs?


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)


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)


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


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


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


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


Relationship Governance

NERSA LicenceRED BoardNational Energy Regulator of South Africa (NERSA)

Business Plan

Performance Contract

RED ManagementRED Board


Asset Transfer Agreement

RED BoardEskom Holdings


Service Delivery Agreement (SDA)

RED Board (Service Provider)Local Government (Service Authority)


Shareholder Compact

Business Plan

RED BoardNational Government

GOVERNANCE INSTRUMENTRELATIONSHIP PARTNERRELATIONSHIP OWNER


HOW WILL WE GET THERE


RED Establishment Roadmap


MUNICIPAL PREPARATION TOWARDS INCORPORATION INTO THE REDs


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)


STAKEHOLDER ENGAGEMENT


Regional Governance Structure


CONCLUSION


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

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