Eskom’s Submission on possible solutions to Electricity Distribution Industry (EDI) challenges

Eskom’s Submission on possible solutions to Electricity Distribution Industry (EDI) challenges Presentation to the Portfolio Committee on Energy Ayanda Noah: Group Executive Distribution 25 July 2012

Contents • Introduction and Background • Looking after our own assets • Industry Challenges • Key Lessons Learnt from the previous EDI process • An Alternative Approach is required • Where to start? • Discussions

Introduction and Background • Eskom took significant strides in preparing the Distribution business for its intended role in the previous EDI restructuring dispensation that was subsequently terminated by Government. • Eskom is committed to playing an active role in resolving industry issues • Eskom recently signed an MOU with CoGTA in terms of the “Adopt an Municipality” initiative and is committed towards making a significant contribution towards this. • Our Distribution Division mandate underscores our commitment based on the awareness that we need to contribute towards resolving industry issues even outside of any formal EDI restructuring processes “Distribution’s role is to service the customer, provide reliable electricity by building, operating and maintaining distribution assets, while also acting in the national interest by actively partnering with the wider industry in resolving distribution industry issues and enhancing stakeholder relations”

Distribution: Division profile Scope and mandate To service the customer through provision of reliable electricity by building, operating and maintaining distribution assets, while also acting in the national interest by actively partnering with the wider industry in resolving distribution industry issues and enhancing stakeholder relations Organisation structure Asset base • 4.7 million customers nationally • Nine provinces made up of • Zones with Customer Network • Centres • 311 831 km reticulation lines • 47 509 km distribution lines • 11 415 km of underground cables • 14 164 employees Highlights and output Key challenges and priorities • Improvement of the system average interruption duration index Improved level of energy losses due to increased interventions in the management thereof • Electrified a total of 4 206 181 homes (2011: 4 050 968 ) since the inception of the electrification programme in 1991 • Step change in safety performance • Step change in technical performance • Reduce energy theft • Active partnering with the Distribution industry in resolving industry issues • Electrification 9

Eskom Distribution’s role currently needs to balance two imperatives Contemplating on the contribution we need to make in the interest of the wider industry Maintain and refurbish our own infrastructure • Maintain own asset base of: • 47 509 km of distribution lines • 311 831 km of Reticulation Lines • 11 415 km of underground cables • Deteriorating state of assets in the wider industry • Significant industry backlog maintenance estimated at R 27 bn • Industry Skills and Capacity constraints • EDI Restructuring shelved This is ultimately about how to address the industry infrastructure issues in an holistic manner across the wider industry

Refurbishing our own infrastructure • The total Electricity Distribution Industry estimated maintenance backlog is R27 bn • Our capital plan is addressing the refurbishment backlog • We plan to spend about R68 bn on CAPEX in the next 6 years • Of this, about R14,5 bn will be dedicated to refurbishment • Spending on refurbishment aims to eliminate the backlog over a 10-year period • We are adapting our refurbishment strategies and seeking ways to deal with our constrained capacity to execute the strategy • The bulk of the DX asset creation occurred in the last 20 years. • Based on an asset replacement value of approximately R130bn and a 30 year cycle, Distribution is under-spending on refurbishment • Refurbishment should cater for the replacement of existing plant as it reaches end of life. Our asset base has grown significantly over the last 20 years

Maintaining our own infrastructure • Eskom Distribution’s assets are generally in a good condition but there are “pockets” where plant condition and performance is a concern. • Distribution’s maintenance expenditure has been increased significantly during the last 4 years to increase our Preventative Maintenance (PM)/Corrective Maintenance (CM) ratio. • Maintenance expenditure will continue to increase in nominal terms in the Eskom Business Plan • All equipment is maintained in accordance with Eskom Distribution’s Maintenance Policy and Standards and compliance to the maintenance plan is currently 95%.

The main cost drivers for maintaining and upgrading our own infrastructure • Change in Low Voltage Maintenance Philosophy • Implementation of Planned Maintenance Strategy for low voltage networks • Increased Maintenance on ageing Plant and Network Infrastructure in Electrification Areas • Increase in Electrification Infrastructure in Rural and Deep Rural Areas • Increase in Electrification Customers • Establishment of additional Customer Network Centres (CNCs) to meet Regulatory Standards for service delivery • Refurbishment back logs • Network Reliability Improvement

Contents • Introduction and Background • Looking after our own assets • Industry Challenges • Key Lessons Learnt from the previous EDI process • An Alternative Approach is required • Discussions

The industry issues remain...... Although the EDI restructuring process has been formally suspended, the issues that this process sought to address are still there We believe that a collaborative and all inclusive approach should be employed that will address these contentious EDI issues. Industry “system thinking” should be applied.

The electricity industry in South Africa is confronted by major challenges ... Key Industry Issues Network maintenance and refurbishment • Lack of optimal systems capabilities to operate, maintain the network and service customers • Shortage of facilities to service the customer and the network infrastructure. • Some electricity departments operate on a low level of maintenance maturity in terms of their practices. Disparate Tariffs & Customer Services inconsistency • Municipalities offer a base set of electricity delivery services, but gaps exist leading to inequitable customer experience across segments. • Disparate municipal electricity surcharges lead to tariff discrepancies across and within the municipalities. Skills Availability and Retention • High levels of staff attrition within the industry due to lack of attractive career paths. • Low levels of investment in the critical technical & financial skills training . • Lack of standardisation on staff compensation arrangements and stabilisation of labour-related issues. Security and quality of supply • Increasing electricity demand places pressure on supply. • Reactive maintenance increases distribution losses- technical and non-technical. • Ageing infrastructure, increasing intensity of maintenance and associated costs Industry issues hamper our ability to maintain and upgrade our own infrastructure as the wider industry issues eventually translate into major risks for Eskom and the country in general 16

The different government institutions are in agreement that we have serious industry issues COGTA SALGA • Under-investment in people, particularly technical, management and leadership. • No short cuts to get specialist skills other than via education and work experience. • More creative responses needed to address scarce skills, such as partnering with private sector and shared services options. • Not enough attention paid to skills required by politicians. • Political influence - politically acceptable appointments at expense of competence • Poor work environment not conducive to attracting and retaining talent. • Lack of defined and enforced minimum competencies for certain posts. • Outdated, non-functional and unapproved municipal organisation structures • 2005: more than 1/3 of local municipalities. without single civil engineer, technologist or technician; vacancies in local government for engineering practitioners exceeded 1000. • South Africa has only half as many engineers as doctors. Australia, America, Western. Europe, China or India - similar number of engineers to doctors. • Lack of engineering professionals directly impacts on state of municipal infrastructure. • Local Government is in distress & comprehensive turnaround is needed. • Huge service delivery and backlog challenges - many municipalities unable to deliver basic services or grow their economies. • There are serious leadership and governance challenges in municipalities including weak responsiveness and accountability to communities. • Problems with the political/administrative interface. • Corruption and fraud impacting on service delivery. • Poor financial management, illustrated by negative audit opinions. • Insufficient municipal capacity due to lack of scarce skills, high vacancy rates, and lack of performance management, training & career paths (dysfunctional HR function). • There is inadequate human resource capital to ensure professional. administrations or positive relations between labour, management and Councils.

The case for change is compelling...... • The unacceptable state of the wider industry is not debateable. • The industry is in need of a transformational type overhaul. Incremental fire fighting fixes will not address the underlying issues. • We need to consider a practical and workable model, that demonstrates learning from past mistakes and avoids repeats thereof. • Applying system thinking, we understand that the industry issues are all interrelated and in the end they become your issues, regardless of which side of the fence you reside • A well functioning distribution industry is in the national interest.

Some of the key issues that were unresolved when EDIR was stopped • Asset valuation and compensation framework • Framework for tariffs and subsidies • Tax exemptions • Entities credit ratings post move of assets • Section 197 for industry employees to be transferred to the REDs

We need to consider new approaches in dealing with the issues. • An approach that focusses more on resolving industry issues than on the institutional form of the industry • An approach that will foster a shared commitment towards resolving industry issues. • An approach that effectively utilises the strengths and capabilities within the industry to assist those players that lack these strengths and capabilities • An approach for the industry that effectively heals from within • An approach that allows for some consolidation within the industry where this make sense • An approach where own interests are suspended and the national interest dominates

An alternative journey to the end state for the industry should be explored...... The journey to close the gap The Current Reality The Desired State.. A possible vision • The current Burning Platform • How we close the gap between the current reality and the aspirational state? Effective Distribution Industry Strategic Alliances and Partnerships throughout South Africa are providing accessible and sustainable electricity services Active Partnering 23

Active Industry Partnering is a pragmatic approach to achieve these aims • Active Partnering, in our context, can for now, best be described as a model for joint service delivery in the EDI with EDI players working in partnership towards this aim

The Main Premise for the “Active Partnering” Approach • It is important to understand that the Distribution Industry is essentially a “closed system” with 2 key players, Local Government (municipalities) and Eskom. • The collective capacity to resolve the bulk of the industry issues is largely contained within these 2 key industry players • There is currently no appetite for large scale restructuring nor a belief that this is necessary. We need an alternative solution that will still achieve the same objectives • The original EDI Restructuring strategy was to merge the distribution industry capacity into 6 viable independent RED’s • Active partnering aims to utilise the existing industry capacity to the benefit of the wider industry. Essentially an approach of healing from within, and helping entities to help themselves. • Does not exclude some consolidation taking place in the industry

Active Partnering will in essence be different from the initial EDI restructuring model • Transfer of assets will be a last resort measure only. Whereas in EDI restructuring, the assets were ultimately going to be transferred to a different entity, namely the particular regional electricity distributor • The mere act of creating REDs would not have solved the underlying problems. Each RED would have needed to pool and leverage the underlying capacity it inherited to the benefit of the wider RED. This is essentially what active partnering would seek to achieve • Active partnering is not a one fit for all solution, but rather a focussed solution for individual local challenges • Active partnering can be a shorter term intervention solution but could also be a key component of a future industry model. • Active partnering is more of an non threatening enabling mechanism as opposed to a forced traumatic intervention to address service delivery issues

We envisage an arrangement where Active Partnering does not place undue pressure on existing business operations and commercial relations... Adaptable Should accommodate partners and situational idiosyncrasies Common Vision There should be a shared vision that addresses the specific needs of all partners. Framework for Active Partnership Flexible Should be accommodating within existing capacity with minimal impact on continuing operations Scalable Can be replicated at multiple locations Repeatable Should be adoptable for similar interventions with minimal customisation required. Value Add Should seek a long term relationship and a willingness to commit time, effort and resources. 2014-10-23

Potential Active Partnering Offerings… examples Maintenance and Operations Demand Side Management Investment , Network and Master Planning Leadership development and Training Business and Financial Management Support Contact Centre Access and/or Setup Energy Losses Management Pricing and Tariff Structure Technical Skills development e.g. accreditation and authorisation of network operators Credit and Revenue Management (knowledge sharing) Formal Integrated Risk Management Proces Technical Standards Industry Strategic Support

The partnership should be inclusive and should be driven by a body which will not suffer credibility issues, i.e. will not be seen as driving its vested interest CoGTA SALGA Agree on the “Chair” Position DME ESKOM Municipalities NERSA An all inclusive partnership model that will drive EDI transformation

Create an inclusive Virtual Industry Strategy Office • Strategic capability needs to be mobilised to map out the desired state for the Industry • This capacity can be created through an active partnering arrangement with existing industry strategic capability, and strengthened with external input where necessary • This capability effectively needs to play three roles Define the overall Industry Strategy , Management Framework, and governance conventions Architect A Define, develop and oversee the execution of industry processes required to manage the industry strategy. Align industry players and other stakeholders B C Process Owner Aligner

Ambitious? Maybe….. but a good strategy begins with a BHAG BigHairyAudaciousGoal “The South Africa’s Electricity Industry Strategic Partnership, has managed to restore service delivery, reduce manufacturing costs by 10% resulting in 20% increase in direct investment and 8% reduction in unemployment” November 2017

In our stakeholder engagements we have become aware of thinking along similar lines The Business-Adopt-A Municipality is an initiative by DCoG that seeks to foster a closer working relationship between Government, SOEs and the private sector towards supporting vulnerable municipalities. The initiative allows private sector companies and State Owned Entities to identify municipalities that they wish to support. On the 6th of June 2012, this MoU was signed • Key Strategic Conversation items raised by SALGA in a previous engagement • Do we really need restructuring to resolve industry issues? • How do we ensure that Electricity budgets in local government are fully cost reflective? • Sustainability of the current applied tariffs at different municipalities? • The responsibility for governance in all areas, including the Eskom supply areas? • How do we deal with the backlog, and the strengthening of the infrastructure? • How do we deliver on UA? • Requested Eskom to explore models on how we can co-operate going forward. Similar discussions took place with EDI Holdings just before they wound down 2014-10-23

Thank You and • Discussion

Eskom’s Submission on possible solutions to Electricity Distribution Industry (EDI) challenges