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EDI RESTRUCTURING PRESENTATION to PPC: PROVINCIAL & LOCAL GOVERNMENT by

EDI RESTRUCTURING PRESENTATION to PPC: PROVINCIAL & LOCAL GOVERNMENT by PHINDILE NZIMANDE: CEO of EDI HOLDINGS 29 MAY 2007. Presentation Outline. EDI Holdings Overview Electricity Distribution Industry (EDI) Historical Context 25 October 2006 Cabinet Decision

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EDI RESTRUCTURING PRESENTATION to PPC: PROVINCIAL & LOCAL GOVERNMENT by

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  1. EDI RESTRUCTURING PRESENTATION to PPC: PROVINCIAL & LOCAL GOVERNMENT by PHINDILE NZIMANDE: CEO of EDI HOLDINGS 29 MAY 2007

  2. Presentation Outline • EDI Holdings Overview • 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? • Key Progress to Date • Conclusion

  3. EDI HOLDINGS OVERVIEW

  4. EDI Holdings - Strategic Statements • Mandate • Restructure the electricity distribution industry in South Africa • Vision • A consolidated and sustainable Electricity Distribution Industry for the benefit of the economy and the people of South Africa • Mission • To create 6 wall to wall REDs as viable and efficient public entities

  5. EDI HISTORICAL CONTEXT

  6. Generation Transmission Distribution Current Electricity Supply Industry Structure Currently, South Africa operates in the traditional mode of vertical integration with financial and physical flows following the same path Scheduling ESKOM Industry 180 Residential Municipalities Physical Energy Flow Metering & Billing Business Financial Flow

  7. EDI Profile • Revenue : R33.5 bn • Customers : ~8.3 m • Staff : ~31 000 • Asset value : ~R30 bn • Energy Purchases : ~110 TWh • Distribution Lines : >370 000 km • Distribution Cables : >210 000 km

  8. Key Challenges Facing the EDI (…1) • 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. ** Source: 2003/4 National Integrated Resource Plan (NIRP) ; # Source: NUS Consulting Study - 2005

  9. Key Challenges Facing the EDI (…2) • Inconsistent Electrification Performance • Access to electricity: ~73 % (National) • Institutional misalignment adds complexity • Slow and Inconsistent Roll-Out of 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

  10. EDI Restructuring Objectives

  11. Considerable Debate over EDI Blueprint approved by Cabinet REDs Approach Endorsed ERIC Report EDI Holdings established RED 1 established Cabinet Approved Start of Restructuring Process Cabinet decision Cabinet decision EDIRC Established Blueprint Approved by EDIRC Appointment of PWC Early 1990s May 2001 July 2003 1997 July 2005 1999 Oct 2006 End 1999 Sept 2005 April 2000 Aug 2000 History of Restructuring

  12. CABINET DECISION: 25 OCTOBER 2006

  13. 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 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.

  14. Cape Town UniCity Ekurhuleni Metro Nelson Mandela Metro Johannesburg Metro eThekwini Metro Tshwane Metro RED 6 Provincial Boundaries RED 4 RED 2 RED 5 RED 1 RED 3 6 Wall-to-Wall RED Boundary Map

  15. Underlying Boundary Rationale • Size • Ensuring economies of scale, benchmarking, and critical mass • Balance • Urban / rural balance, Customer numbers (700 000 – 1.4m rising to 1.1m – 2.4m) , Rural electrification • Implementation Costs • Do not violate significant geographical boundaries / features • Minimization of network re-configuration requirements • Financial Viability • Each RED is able to fund their on-going operations and be able to earn a reasonable return on equity on the business, at prices which reflect efficient levels of underlying supply cost

  16. REDs Statistical Information

  17. KEY IMPLEMENTATION ENABLERS AND THEIR STATUS

  18. Key Considerations and Implementation Enablers

  19. WHAT ARE REDs?

  20. Future REDs (…1) • New companies into which both municipalities and Eskom will transfer their electricity distribution businesses • Shareholding to be split between Eskom, National and Local Government • Options for allocation of shares still under consideration • 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

  21. Future REDs (…2) • 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

  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

  23. RED Future Business Model 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 Slide 23

  24. GOVERNANCE OF REDS

  25. Governance of REDs The principal legal instruments which will govern the operation of a RED when established will be:

  26. Relationship Governance

  27. HOW WILL WE GET THERE?

  28. RED Establishment Roadmap

  29. Requirements for Participation • Signing of the Accession Agreement for participation in the RED • MSA Section 78 Process Completed (toolkit available) • Ringfencing Completed (toolkit available) • Due Diligence Completed (EDI Holdings support)

  30. KEY PROGRESS TO DATE

  31. Industry Readiness

  32. STAKEHOLDER ENGAGEMENT Slide 32

  33. Regional Project Governance Structures

  34. Provincial & Local Government / EDI Holdings Partnership • EDI Holdings continues to work closely with SALGA through various planned forums including Provincial Workshops and Ministerial Roadshows to accelerate the restructuring process • The Cabinet decision of 25 October 2006 was welcomed by the SALGA NEC in December 2006, and endorsed at its 3rd National Conference in April 2007. • We continue to engage MECs for Local Government across all provinces • We have addressed the MINMEC on the restructuring process • SALGA and Provincial Government participates in the established RED creation structures namely, Regional Engagement Forums, Sponsors Committees and the Steering Committees

  35. WHAT SUPPORT CAN BE EXPECTED?

  36. EDI Holdings Support Toolkits available for: Ringfencing MSA S78 Modeling Information Financial Statistical Funding NERSA approved, through Eskom Multi Year Price Determination, the allocation of R1,2bn over a 3 year period Projects initiated after 1 April 2006 will be considered for pro-rata funding Establishment of a Central Panel of Service Providers for Ringfencing and MSA S78 Restructuring funding criteria and process to be communicated in due course

  37. CONCLUSION

  38. 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 • We remain committed to continue working with all stakeholders to ensure fast-tracking of the restructuring process in order to ensure the realization of the restructuring objectives • The PPC on Provincial & Local Government to monitor and evaluate progress and provide leadership of the EDI restructuring process • All municipalities should be encouraged to support the implementation of the Cabinet Decision by: • Signing Accession to Co-operative Agreement, • Commencing the preparatory work: • MSA Section 78 • Ringfencing • Due Diligence; and • Establish and join the Regional Engagement Forum

  39. THANK YOU www.ediholdings.co.za

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