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Towards a Restructured Electricity Distribution Industry. Presented by: P Nzimande CEO - EDI Holdings 19 November 2003. Notes. Presentation Outline. History of Restructuring Challenges Facing the Industry Vision of Restructuring Main Features of The Blueprint Maps of REDs

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Presentation Transcript
slide1

Towards a Restructured

Electricity Distribution Industry

  • Presented by:P Nzimande
  • CEO - EDI Holdings
    • 19 November 2003

Notes

presentation outline
Presentation Outline
  • History of Restructuring
  • Challenges Facing the Industry
  • Vision of Restructuring
  • Main Features of The Blueprint
  • Maps of REDs
  • Restructuring Process
  • REDs Characteristics
  • Effects On Stakeholders
  • EDI Holdings Company and Role
  • Co-operative Agreements
  • Key Milestones
  • Benefits of Restructuring
  • Short-term Objectives
  • Risks
  • Conclusion
slide3

History of Restructuring

Considerable Debate over EDI

REDs Approach Endorsed

ERIC Report

Cabinet Approved

Start of Restructuring Process

EDIRC Established

Appointment of PWC

Blueprint Submitted

to EDIRC

Early 1990s

1997

1999

End 1999

April 2000

Aug 2000

Blue Print

Approved by Cabinet: May 2001

slide4

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

slide5

Current Situation

PERCENTAGE OF CONSUMERS

SALES VOLUME

234

Municipalities

Eskom

Distribution

Eskom

Distribution

234

Municipalities

slide6

Challenges Facing the Industry

  • Current industry structure is highly inefficient owing to fragmentation
  • Inadequate maintenance of networks
  • Inability to supply electricity to the indigent
  • Unequal treatment of consumers across the country
  • Significant disparities in tariffs
  • Current industry structure is highly inefficient owing to fragmentation
  • Absence of economies of scale in respect of investing in assets, sharing of facilities, services, regulation, people development etc.
  • Limited opportunity to introduce competition
slide7

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

slide8

Vision of Restructuring

To Consolidate the South African

Electricity Distribution Industry

Into

Six Financially Viable

Regional Electricity Distributors

slide9

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

slide10

Main Features of Blue Print

  • Six REDS
  • Creation of EDI holdings
  • EDI holdings to have effective control over REDS
  • Human Resources Planning including Social Plan
  • RED ownership
  • Cost reflective tariffs
  • Prices to poor households to be capped
  • Local government levy on electricity prices
slide11

Main Features of Blue Print (Cont..)

  • Special deals for large industry to be honoured
  • Mitigate the required increase in tariffs
  • Electrification to continue
  • Competition for large customers
  • Regulation of EDI
  • Transitional support to the weakest distributors
  • Support from EDI Holdings for the restructuring process
slide12

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

rationale for boundaries
Rationale For Boundaries
  • 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 (domestic consumption which is the key driver of customer service costs, is balanced)
    • Assets employed (line length and transformer capacity per customer)
    • Income per household
rationale for boundaries1
Rationale For Boundaries
  • 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 must be able to fund their:
      • On-going operations
      • Required new capital
      • Service debt to a gearing level of up to 70%
      • Earn a reasonable return on equity on the business
slide16

RED 4

Customers (000’s) 720

Load (TWh) 31

Electrified (%) 70

RED 2

Customers (000’s) 1006

Load (TWh) 29

Electrified (%) 73

RED 6

MAP & BOUNDARIES

Customers (000’s) 1008

Load (TWh) 28

Electrified (%) 60

6

6

Pretoria

Pietersburg

Pretoria

Lydenburg

East Rand

Rustenburg

Nelspruit

4

East Rand

Lichtenberg

Vryburg

5

5

Witbank

Kroonstad

Johannesburg

2

4

Johannesburg

Newcastle

Gauteng area enlarged

Ulundi

2

2

Harrismith

Kimberley

Upington

Bergville

Richards

Bay

Bloemfontein

Pietermaritzburg

Durban

Prieska

RED 5

Household income less

than R15,000 per year

De Aar

Calvinia

Customers (000’s) 683

Load (TWh) 37

Electrified (%) 60

1

Victoria West

Umtata

District Management Areas (few customers)

RED 1

Graaf Reinet

Customers (000’s) 857

Load (TWh) 14

Electrified (%) 81

3

Large Industrial Customers

RED 3

Customers (000’s) 1400

Load (TWh) 29

Electrified (%) 56

East London

Cape Town

Port Elizabeth

slide17

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

slide18

Restructuring Process

Stakeholder Management

Establish Holding Company

Blue

Print

Planning and

Ring fencing

Of EDBs

Establish REDs

Support

And

Oversee

REDs

Phasing Out

Of

Holding

Co

May 01

June 03

18 Months

24 Months

24 Months

+-6 Months

EDIR Project Office

EDI Holdings

EDIRC

EDI Holdings Board

slide19

Restructuring Process (Cont..)

  • restructuring process will take place in a controlled manner with minimal risk to ongoing operations
  • .... whilst maintaining sufficient momentum to ensure completion
slide20

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

reds characteristics transition
REDS Characteristics [transition]
  • REDs will be owned by asset contributors transferred to the RED through a share scheme and are subsidiaries of the Holdings Company
  • Eskom assets contributed to the REDs would be held by National Government provided this has no effect on Eskom’s credit rating
  • For the businesses transferred into a RED, the RED will
    • be service providers of electricity and Municipalities are service Authorities
    • have its own Board appointed by shareholders
    • be registered under the Companies Act
    • hold distribution licenses
    • comprise employees working for Municipal distributors and Eskom distribution transferred to the REDs
  • On day one REDs will be similar but will subsequently diversify
  • Municipalities not yet transferred will
    • be customers of the REDs
    • hold distribution licenses
    • Business as usual
slide22

REDs Characteristics [post transition]

  • REDs will be owned by asset contributors through a share scheme
  • Eskom assets contributed to the REDs would be held by National Government provided this has no effect on Eskom’s credit rating
  • REDS will :
    • be service providers of electricity and Municipalities are service Authorities
    • have its own Board appointed by shareholders
    • be registered under the Companies Act
    • hold distribution licenses
    • comprise all employees working for Municipal distributors and Eskom distribution
reds characteristics shareholding
REDs Characteristics [shareholding]

National

Government

Golden

Share

Reducing

EDI Holdings

Voting

Share

Reducing

Municipalities

Dividend

Shares

Increasing

5 Year-period

slide24

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

slide25
MUNICIPALITIES

current surplus earned from the provision of electricity to be assured through the levy and dividends

required to ring-fence electricity business

assets contributed will represent value of shareholding in the REDS

govern the provision of electricity through the service delivery agreement

SALGA will have representation on EDI Holdings Board

ESKOM

separate and ring-fence distribution business into six regions

assets contributed to REDS will be compensated

may choose to be a contestable market retailer

ESKOM will have representation on EDI Holdings Board

Effects on Stakeholders

slide26
EMPLOYEES

employees involved in electricity distribution businesses of municipalities and ESKOM will be transferred to REDS in terms of section 197 of the Labour Relations Act

no change to their conditions of service unless collectively negotiated

Conditions for redeployment will be collectively negotiated

a national bargaining council will be established

focus on skills development and utilisation

a social plan will minimise negative effects to employees as a result of the restructuring

CUSTOMERS

standardised tariff structures will apply

rationalised tariffs

initially those consuming more than 100 GWh per annum will be entitled to select retailer of choice

improved reliability of supply

continued roll-out of electrification schemes

Poor residential customers will be subsidized

Effects on Stakeholders (Cont…)

restructuring of the financial operations
Restructuring of the Financial Operations
  • In the process of RED establishment, the objective is to maintain smooth financial operations. This will be done through:
    • Maintaining internal financial controls
    • Maintaining financial reporting capabilities
    • Planned and structured transfer of financial accountabilities and responsibilities
    • Maintaining compliance with corporate governance principles
    • Avoidance of the loss of essential financial skills and experience
role of edi holdings financial operations
Role of EDI Holdings Financial Operations
  • In the process of RED establishment the role of EDI Holdings Financial Operations will be:
    • To develop asset evaluation methodologies and principles
    • To develop financial ringfencing tools and project manage this process
    • To model the financial viability of REDS
    • To prepare RED financial plans and business plans
    • To develop RED financial reporting systems
role of edi holdings financial operations cont
Role of EDI Holdings Financial Operations cont…
  • In the process of RED establishment the role of EDI Holdings Financial Operations will be to cont…:
    • To develop RED financial policies and procedures
    • To develop RED commercial polices and procedures
    • To develop EDI funding strategies and to obtain funding
    • To plan the structured transfer of financial operations to REDS
    • To manage EDI Holdings financial operations
impact on municipal financial operations
Impact on Municipal Financial Operations
  • In the process of RED establishment the role of Municipal Financial Operations will be:
    • To provide financial services until the REDS have taken over financial operational accountabilities and responsibilities
    • To ringfence the electricity distribution business
    • To undertake data clean-up of the electricity distribution business’s customer base, financials and asset register
    • To provide shared services to the RED as agreed upon in a negotiated SLA
    • To revise commercial processes
    • To revise commercial contracts
    • To transfer customer base, financials and asset register data to the RED
impact on municipal finances
Impact on Municipal Finances
  • Loss of Revenue
    • Surplus will be ensured through dividend and levy
    • Levy currently inherent in municipal tariffs, to be made transparent
    • Discussions with National Treasury underway on how to deal with this matter
  • Challenge
    • Impact on cashflow
impact on municipal finances1
Impact on Municipal Finances
  • The loss of surpluses generated from electricity distributing activities
  • The loss of cash flow
  • Reduced effectiveness of credit control
  • Effect on municipal borrowing; and
  • The costs of restructuring
impact on municipal finances2
Impact on Municipal Finances
  • The effects of corporate taxation
  • The differentiation between fair return on capital and monopoly rent
  • Entitlement to surpluses
  • The impact on municipal cashflows of in the short to medium term; and
  • Municipalities ability to borrow
slide34

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

edi holdings company
EDI Holdings Company
  • 100% owned by national government through the Department of Minerals and Energy Ministry
  • Board representation - SALGA , ESKOM & GOVERNMENT- 3 non-executive directors each and 3 independent non-executive directors
  • CEO, COO and CFO
  • Led by a competency based board
  • Essentially operating as a project management company to be phased-out in five years
role of edi holdings company
Role of EDI Holdings Company
  • Plan, control and manage the process of the establishment and implementation of 6 independent and financially viable regional electricity distribution (REDS) companies
  • Will retain effective control over the REDs through special voting shares
  • Manage the provision of short-term support by strong and capable electricity providers
  • Prepare and implement an electricity distribution industry-wide social plan
edi holdings board members
EDI Holdings Board Members
  • Advocate Sandile Nogxina-DG, DME (Chairperson)
  • Ms Nelisiwe Magubane-DDG (Electricity & Nuclear), DME
  • Ms Thoko Mashiane-Municipal Manager Ehlanzeni District Council (SALGA)
  • Mr Thabo Mokoena-CEO, SALGA
  • Dr Stephen Lennon-ESKOM
  • Mr Jacob Maroga-ESKOM
  • Ms Dolly Mokgatle-ESKOM
edi holdings board members cont
EDI Holdings Board Members (cont..)
  • Dr Zavareh Rustomjee-IUG
  • Mr Clive Dunstan-IMATU/FEDUSA
  • Mr Oupa Komane-COSATU
  • Ms Judy Parfitt-Resolve Group (Independent)
  • Mr Ashley Ally-LAETOLI (Independent)
  • Ms Annalise Jacobs-ABSA (Independent)
  • Ms Phindile Nzimande-CEO
slide39

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

rationale
Rationale
  • To legislation the parties have agreed that they shall enter into a co-operative agreement that will enable the Holdings company to achieve its mandate of restructuring the electricity distribution industry facilitate the restructuring in the absence of enabling
purpose
Purpose
  • To bind the signatories to the process of restructuring
  • To enable the Holdings company to interact with the signatories as autonomous entities in the industry
  • To facilitate the material assistance to EDI Holdings by industry
contents
Contents
  • Consent of the parties to the restructuring process
  • Definition of how Eskom and Municipalities must ring-fence their distribution activities to advance the restructuring of the industry
  • Framework for provision of resources to Holdings company
status
Status
  • the co-operative agreement has been entered into and signed by the following parties: DME, SALGA, Eskom, NER, EDI Holdings
  • individual municipalities are required to accede to the agreement once their councils have agreed to signing the co-operative agreement
slide44

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

key milestones
Key Milestones
  • Blueprint approved by Cabinet [April 2001]
  • Co-operative Agreement Signed [May 2002]
  • Registration of EDI Holdings Company [March 2003]
  • EDI Holdings operational [July 2003]
  • Business plan and budget to be approved [October 2003]
slide46

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

benefits of restructuring
Benefits of Restructuring
  • A consolidated industry capitalising on economies of scales
  • Financially viable distributors
  • Competitive electricity distribution utilities
  • Rationalised and competitive tariffs
  • Efficient provision of service
  • Improved reliability of supply
  • Continued roll-out of new electrification schemes.
  • Cross pollination of best practices between utilities
slide48

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

short term objectives
Short-term Objectives
  • Boundaries
  • Valuation method
  • Compensation methodology
  • Ring-fencing toolkit for Municipalities
  • Restructuring Bill
slide50

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

risks
Risks
  • Timeline
  • Outstanding Issues
  • Complexity
  • Thought processes, biases, skills and passion
  • Handover
slide52

Presentation Outline

History of Restructuring

Challenges Facing the Industry

Vision of Restructuring

Main Features of The Blueprint

Maps of REDs

Restructuring Process

REDs Characteristics

Effects On Stakeholders

EDI Holdings Company and Role

Co-operative Agreements

Key Milestones

Benefits of Restructuring

Short-term Objectives

Risks

Conclusion

conclusion
Conclusion
  • WE need the SUPPORT of all KEY STAKEHOLDERS to make this electricity distribution industry restructuring exercise an unqualified success, especially the political leaders at local government level- we need buy in from Mayors
  • We will approach your individual councils to formulate council resolutions to accede to the Co-operative Agreement
        • Contact Phindile Nzimande
        • 011 800 2259
        • 082 464 9617