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Restructuring the South African Electricity Distribution Industry: Key Issues and Trends

This presentation discusses the vision for restructuring the South African electricity distribution industry into six financially viable regional electricity distributors. It covers key governance issues, transfer agreements, and the proposed EDI Restructuring Legislation. The presentation also addresses the impact on municipalities, compensation for existing owners, and financial implications.

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Restructuring the South African Electricity Distribution Industry: Key Issues and Trends

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  1. PRESENTATON TO PORTFOLIO COMMITTEE ON MINERALS AND ENERGYPHINDILE NZIMANDECEO - EDI HOLDINGS1 JUNE 2005

  2. Industry Vision for Restructuring To Consolidate the South African Electricity Distribution Industry Into Six Financially Viable Regional Electricity Distributors

  3. Key Issues and Emerging Trends

  4. Governance • A sound governance framework will: • Improve & sustain the economic viability of the electricity distribution industry • Improve overall reliability and service orientation of the industry • Facilitate the fair treatment of all customers • Build a foundation for economic development throughout South Africa • Legal form of entity: • Agreement reached that REDs will be Municipal Entities with certain exemptions. • Exemptions required to create a more conducive environment to achieve the objectives of restructuring

  5. Governance • DAY ONE City Municipality Service Delivery Agreement ME Metro RED Control over Municipal Area of Jurisdiction Operating Agreement Operating Agreement Eskom City Electricity Business

  6. Governance • Transfer instrument: • DAY ONE: Operating Agreement between the RED and CCT and the RED and Eskom • Key attributes: • Services will be provided by Eskom & City of Cape Town • Eskom & City of Cape Town will report to the RED on performance against national standards and other regulatory requirements • Eskom and City of Cape Town will continue to be responsible for making new investment and serving new customers in their service areas • The RED will introduce operational improvements through standardisation of processes and integrating operations. This will be done in conjunction with an action plan to address maintenance backlog • RED ONE will develop tariff framework in its area, subject to the City’s tariff policy and the NER’s regulatory approval (as at present)

  7. Governance • Transfer instrument: • End State: Transfer Agreement • Key attributes: • Full business transfer including assets, liabilities & staff • Incorporation of all municipalities • RED delivering all services • SALGA currently reviewing transfer agreements in order to standardise across all municipalities

  8. EDI Restructuring Legislation Would provide National Government with tools to achieve EDI reform objectives • Establish regulatory and governance frameworks specially designed for REDs • Exemptions from, or amendments to, provisions in the Systems Act and the MFMA • e.g. to facilitate budget approval processes, or s.78 processes • Address dual regulation issues (e.g. tariff regimes) and reduce regulatory uncertainty • Provide legislative guidance and parameters for – • The establishment of REDs, as approved by Cabinet • The transfer by Eskom of its distribution divisions into REDs • The transfer by municipalities of their reticulation businesses • Metering, billing, credit control and surcharge issues • The transfer of employees to the REDs • s. 93C co-operation between municipalities

  9. EDI Restructuring Legislation Legislation would also contain provisions, inter alia, to: • Streamline existing legislation governing the EDI • Provide for the conditions under which a RED may be wound up • Regulate RED reporting and oversight requirements • Spell out enabling provisions regulating – • Ring-fencing of municipal and Eskom distribution businesses • Resolution of disputes between municipalities, REDs and Eskom • Treatment of transfers affecting the Registrar of Deeds • Exemption from transfer duties / vesting provisions for property transfer • Dealing with way-leaves, servitudes, rights of access etc. • Safeguard unforeseen exits from REDs • Standard set of by-laws • Contain essential provisions for Service Delivery Agreements • Legislation not impacting on DAY ONE of RED ONE • Conversion provisions for when legislation is in place

  10. Finance • Ownership and control: • Shareholding structure of the RED • Municipalities to have majority shareholding • Eskom and National Government to hold the rest of the shares • Compensation: • Recommended approach is to use a weighted combination of asset values, income stream and profits • The compensation of existing owners is neither intended to generate windfall gains, nor should it result in unreasonable loss of income or security • Impact on customers to be minimised

  11. Finance • Impact on Municipalities • Guidelines from the 2001 Blueprint on EDI Restructuring • Local Government should not suffer financially from the creation of REDs • Current levels of financial transfers from electricity local government should be maintained, through an explicit levy on tariffs and dividends • Levy on electricity should be transparent. • Local government levy or charge on electricity should be applied as a percentage to all customers except poor households • Principles developed to cover: • Staff cost harmonisation • Credit control • Credit rating

  12. PROGRESS UPDATE

  13. Progress towards RED ONE • Target date for RED ONE is June 2005 • RED DAY ONE aimed at City of Cape Town and Eskom Western Region delivering services on behalf of RED ONE in the area of jurisdiction of City of Cape Town • Incorporation of other municipalities to happen over 18 to 24 months after DAY ONE • City of Cape Town and Eskom Western Region co-operating and working together towards RED DAY ONE

  14. Progress towards RED ONE • Accomplished so far: • City of Cape Town • Section 78 Approval to have RED ONE as an external provider – 31 January 2005 • Section 84 Feasibility Study Approval – 31 May 2005 • Service Delivery Agreement issued for public comment as per Section 80 (2) • Electricity Business Ringfencing Completed. Due Diligence currently in progress • Mayoral Committee support for Operating Agreement and Transfer Agreement for consideration by Council on 31 May 2005 • Eskom • Region ringfenced within Eskom operations. • Support for Operating Agreement • Support for Transfer Agreement subject to certain conditions

  15. Progress towards RED ONE • Accomplished so far: • License application submitted to the National Electricity Regulator (NER) • Recruitment of board members and Executive Management in progress • Company registered as Regional Electricity Distributor ONE • Operational preparations in progress • SLA’s required identified and included in Operating Agreement • Minimum operational requirements and processes identified • Banking and Treasury manual developed • 3 year business plan developed • Transitional plan and ‘playbook’ being developed

  16. Progress in other REDs • Target: • To launch second RED towards end 2005 or early 2006 • Co-operative agreement • Municipalities that have signed the agreement: 18 (January 2005: 7) • Municipalities in negotiations to sign the agreement: 19 (January 2005: 6) • Ringfencing • Ringfencing toolkit available to all municipalities from EDI Holdings • City of Johannesburg & Mangaung have independent municipal electricity distribution businesses • Municipalities currently in the process of ringfencing: 11 (January 2005: 4)

  17. Progress in RED TWO • Ekurhuleni Council resolution for restructuring support and accession to sign Co-operative Agreement. Ringfencing & asset evaluation processes commenced. Target date for completion Dec 05 (early) or March 06(latest). • Motheo Signed the Co-operative Agreement. • Mangaung Signed the Co-operative Agreement. Created Centlec (Pty) Ltd and continuing with the full establishment of a corporatised entity. Dedicated resources and eager to participate in EDI Holdings regional consultation structures. • Matjhabeng Negotiations underway to sign the Cooperative agreement.

  18. Progress in RED THREE • Nelson Mandela Co-operative Agreement signed. Dedicated resources and participating in EDI Holdings regional consultation structures. Committed to finish ringfencing and Section 78 by October 2005. • Buffalo City Co-operative Agreement signed. Section 78(1) and (2) complete and busy with Section 78(3) and (4).

  19. Progress in RED FOUR • City of Johannesburg Signed the Co-operative Agreement. City Power fully ringfenced and operating as an ME. Dedicated resources and participating in EDI Holdings regional consultation structures. • Emfuleni Council decision to sign Co-operative Agreement. Financial ringfencing of electricity business concluded. Council resolution to embark on Section 78 process. • Mogale City Financial ringfencing complete. Discussion underway to sign Co-operative Agreement. • Klerksdorp Council decision to sign Co-operative Agreement. • The following municipalities signed Co-operative Agreements: • Potchefstroom • Merafong • Ditsobotla

  20. Progress in RED FIVE • eThekwini S78(4) complete. Council resolutions for full ringfencing/due diligence. • uMhlatuze Signed the Co-operative Agreement. • Newcastle Consultants busy with asset and financial ringfencing – almost complete; Council resolution for S78 and Ops ringfencing but need financial support to complete. • Msunduzi S78(4) complete and Council resolution. Ringfencing and asset evaluation in process estimated time for completion – mid 2005. • Ladysmith /Emnambithi Consultants busy with ringfencing and asset evaluation. Assistance with S78 necessary - report to be submitted to Council.

  21. Progress in RED SIX • Tshwane Co-operative Agreement signed. Dedicated resources and participating in EDI Holdings regional consultation structures. Committed to finish ringfencing and Section 78 by October 2005. • The following municipalities signed co-operative Agreements: • Greater Tzaneen • Makhado • Polokwane • Mogalakwena • Rustenburg • Modimolle • Umjindi • Emalahleni • Govan Mbeki

  22. Challenges • Legislative alignment • Voluntary participation and enrolment • Overall stakeholder support and buy-in

  23. Conclusion • RED ONE DAY ONE attainable on 1 July 2005 • Good progress among other RED areas • 2nd RED to be launched before end 2005 or early 2006 • REDs to be Municipal Entities with exemptions • Restructuring Legislation required to: • Regulate restructuring • Ensure alignment among current suite of applicable legislation • Impact on municipalities & customers to be minimised • Inter-governmental process in place between DME, DPE, DPLG & National Treasury

  24. THANK YOU

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