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National Electricity Regulator On ESI and EDI Restructuring Presentation to Standing Committee on Minerals and Energy Parliament 19 September 2001. Agenda. Setting the scene: White Paper on Energy Why regulate the ESI? Developments in the ESI

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Agenda

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  1. National Electricity RegulatorOn ESI and EDI RestructuringPresentation to Standing Committee on Minerals and EnergyParliament19 September 2001

  2. Agenda • Setting the scene: White Paper on Energy • Why regulate the ESI? • Developments in the ESI • NER’s proposed way forward on ESI restructuring • Developments in the EDI • NER’s views on EDI restructuring • Gas Bill • Conclusion

  3. 1998 White Paper on Energy Policy: Objectives • Five main government energy policy objectives: • Increasing access to affordable energy services • Improving energy governance • Stimulating economic development • Managing energy related environmental and health impacts • Achieving security of supply by ensuring diversity of sources

  4. 1998 White Paper on Energy Policy: ESI and EDI objectives • Introduce competition to the industry, especially the generation sector • Give customers the right to choose their electricity supplier • Permit open, non-discriminatory access to the transmission system • Encourage private sector participation in the industry • Eskom will have to be restructured into separate generation and transmission companies • Government intends to separate power stations into a number of companies

  5. Government’s goals for restructuring state owned enterprises (SOEs) • Boost economic growth • Create wider ownership in the economy • Fund basic needs programmes • Mobilise private sector capital and foreign direct investment • Enhance competitiveness of state enterprises • Promote fair competition • Finance growth and requirements for competitiveness

  6. What is regulation? • ‘Process established by law which restricts or controls some specified decisions made by the affected firm’ – Baumol and Blinder • ‘Regulation is, quite simply, the control of a business enterprise in a particular way’ – Ernst and Young

  7. Role of National Regulators • Ensure efficient Electricity Supply Industry • Ensure cost effective electricty prices • Ensure optimal quality of service and supply • Ensure long term provision and development of electricy services • Ensure fair play amongst suppliers – level playing fields • Protect interest of customers

  8. How National Regulators fulfill this role • Promote competition • Regulate prices of monopoly elements • Set quality of supply and service standards and monitor compliance • Mediate and arbitrate within the ESI • Oversee Integrated Resource Planning • Maintain industry information for regulatory purposes and dissemanation

  9. Stages of ESI Restructuring

  10. ESI Developments • Government’s decision to implement ‘Pro-competitive Reform Programme‘ for generation • ‘Managed Liberalisation’ • Implications for regulation are big • Rationalisation of distribution industry into REDs underway • Government also considering establishing other energy regulators • Gas • Liquid fuels

  11. NER approach to ESI restructuring • Phased restructuring designed to fit with South Africa’s circumstances • Benefits realized before next stage of reform is undertaken • Three phased approach to reform to competitive sector • Eskom corporatisation • Corporatisation of generation and independent transmission • Private sector involvement and competition

  12. Phase I: Eskom Corporatisation Eskom Conversion Act converts Eskom from a parastatal into a company – wholly owned by the State. • Formation of Holding Company with subsidiaries • Eskom Holdings Limited forms 4 subsidiaries: Eskom Generation, Eskom Transmission, Eskom Distribution and Eskom Enterprises • Transfer of assets and liabilities • “Ringfence” generators into clusters (portfolios) for internal competition • Transmission “ringfences” operations into wires, system operator and market operator

  13. Eskom Holdings Eskom Generation Internal Pool Imports Eskom Transmission Eskom Enterprises IPP RED2 RED6 Special Customers RED1 Customers

  14. Phase II: Corporatisation of generation and independent transmission • Eskom Generation creates separate generation companies (GenCos) following portfolios • Transfer of assets and liabilities • Establish State - owned transmission company with “ringfenced” operations for wires, system operator and market operator

  15. Eskom Holdings GenCo1 GenCo2 GenCon Eskom Enterprises Power Exchange Imports IPP State owned independent Transmission Company (incl. SO) RED1 RED2 RED6 Special Customers Customers

  16. Phase III: Private sector and competition • Power exchange separated from transmission company • Opportunities for BEE to buy mothballed power stations (about 10% of Eskom’s capacity) • Additional sale of one or more generation clusters (portfolios) • Private sector encouraged to invest in new capacity • Eskom to be left in the end with a 70% share of the market

  17. Eskom Holdings GenCo1 GenCo2 GenCon Eskom Generation Power Exchange Imports Eskom Enterprises State owned independent Transmission Company RED1 RED2 RED6 Special Customers Customers

  18. Results of restructuring the ESI • Achieves government’s policy goals • Competition results in improved efficiency and lower prices than would have been the case • Less market power to control prices • Significant BEE is achieved • Fiscal revenue for debt reduction • Considerable inward investment • Private sector participation attracts international strategic investors • Benefits to electricity consumers

  19. EDI Restructuring: Why is this necessary? • Financial viability • Problems in many municipal distributors • Lack of investment, constraints on electrification, non-secure employment prospects • Inequitable treatment of customers • Disparities in tariff structures, electrification needs unevenly spread, unfair discrepancies between Eskom Distribution and municipal distributors • Inefficiencies • Highly fragmented, poor economies of scale, duplication of administrative and technical functions • Difficult to regulate properly, unable to attract high quality management teams, lack of investment in staff development and training

  20. Main recommendations for EDI restructuring • Number of RED’s = 6 • EDI Holdings Company to manage process • To be established shortly • HR planning to be given prominent attention • REDs ownership still to be decided • Electrification to be undertaken by REDs • Uniform system of tariffs and prices

  21. Pretoria Pietersburg Pretoria East Rand Lydenburg Rustenburg Nelspruit East Rand Lichtenberg Vryburg Witbank Kroonstad Johannesburg Johannesburg Newcastle Ulundi Harrismith Kimberley Upington Bergville Richards Bay RED 2 Bloemfontein Customers (000’s)1006 Load (TWh)29 Electrified (%)73 Pietermaritzburg Durban Prieska RED 5 De Aar Calvinia Customers (000’s)683 Load (TWh)37 Electrified (%)60 Victoria West RED 1 Umtata Graaf Reinet Customers (000’s)857 Load (TWh)14 Electrified (%)81 RED 3 Customers (000’s)1400 Load (TWh)29 Electrified (%)56 East London Cape Town Port Elizabeth RED 6 Customers (000’s)1008 Load (TWh)28 Electrified (%)60 RED 4 Customers (000’s)720 Load (TWh)31 Electrified (%)70

  22. Results of restructuring the EDI • Rationalization will achieve improvements in efficiency • Rescue a number of failing municipal distributors • Set up large, financial healthy and sustainable distributors • Uniform pricing and tariffs systems • Successful, well managed businesses capable of continuing with the electrification programme and undertaking rural development programmes • Electrification to be undertaken by REDs • Equitable and fair tariffs

  23. Gas Bill • NER supports process to establish framework for natural gas industry • Major potential new primary energy source for power generation • Remote from the current energy sources and supports the (electricity) transmission system • Promotes regional growth and integration • Very useful demand side management tool (can store gas, but not electricity) • Supportive of the proposed new gas legislation

  24. Gas Bill • NER supportive of establishing one energy regulatory authority • Many benefits to doing this • Many similar regulatory principles • Share regulatory experiences • Blurring of industries • Reduction of costs • NER is prepared to form part of new authority • Support whatever decision government makes

  25. Conclusion • NER focusing on priorities for changing ESI • Lot of work done in putting in place Business Plan • NER will focus its efforts on governments priorities for the sector • Insufficient budget to skill up totally, but best effort will be made • NER committed to serve ESI and its stakeholders, especially customers.

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