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

29 May 2007 Slide 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

29 May 2007 Slide 3

EDI HOLDINGS OVERVIEW

29 May 2007 Slide 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

29 May 2007 Slide 5

EDI HISTORICAL CONTEXT

29 May 2007 Slide 6

Industry

Business

Residential

Scheduling

Physical Energy Flow

Financial Flow

Mu

nicip

alities

Metering & Billing

Currently, South Africa operates in the traditional mode of vertical integration with financial and physical flows following the same path

ES

KO

M

Current Electricity Supply Industry Structure

180

29 May 2007 Slide 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

29 May 2007 Slide 8

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.

Key Challenges Facing the EDI (…1)

** Source: 2003/4 National Integrated Resource Plan (NIRP) ; # Source: NUS Consulting Study - 2005

29 May 2007 Slide 9

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

Key Challenges Facing the EDI (…2)

29 May 2007 Slide 10

EDI Restructuring Objectives

Energy White Paper Objectives (1998) EDI Restructuring Blueprint Objectives (2001)

Ensure electrification targets are met Achievement of government’s electrification programme Universal access to electricity for all South Africans

Provide low-cost electricity Sustainable electricity supply to low-income consumers, regardless of location, at affordable prices

Facilitate better price equality

Improve the financial health of the industry Future REDs to operate on a sustained, financially viable basis as independent businesses

Improve quality of service and supply Acceptable and sustainable levels of supply security and quality

Foster proper co-ordination of operations and investment capital

Attract and retain competent employees Future REDs to provide secure employment to their employees, provide skills development and training consistent with a high technology, modern distribution business

Transition to be done within the context of a comprehensive human resources strategy and an agreed social plan

Planned and managed transition


Early 1990s

Considerable Debate over EDI

1997

RED s Approach EndorsedERIC Report

1999

Cabinet ApprovedStart of Restructuring Process

End 1999

EDIRC Established

April 2000

Appointment of PWC

Aug 2000

Blueprint Approved by EDIRC

May 2001

Blueprint approved by Cabinet

July 2003

EDI Holdings established

July 2005

RED 1 established

Sept 2005

Cabinet decision

History of Restructuring

Oct 2006

Cabinet decision


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.

Cabinet Decision: 25 October 2006


6 Wall-to-Wall RED Boundary Map

RED 1

RED 4

RED 2

RED 3

RED 6

RED 5

Provincial Boundaries

Cape Town UniCityEkurhuleni MetroNelson Mandela MetroJohannesburg MetroeThekwini Metro

Tshwane Metro


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


REDs Statistical Information

DESCRIPTIONRED ONE

RED TWO

RED THREE

RED FOUR

RED FIVE

RED SIX

2004 FIGURES

No of customers: Eskom No 279122 363832 496490 636527 506564 1234667

No of customers: Municipality No 977742 936180 536661 651320 889157 819781

Energy Sales: Eskom TWh 3.860 4.112 1.312 6.597 3.186 7.644

Energy Sales: Municipality TWh 11.269 11.671 4.818 12.945 14,745 13.737

Assets: Eskom Rbn 2.196 2.694 2.297 3.414 3.652 6.375

Assets: Municipalities Rbn 3.581 4.154 2.693 5.537 5.731 2.634

Personnel No 5069 5059 2649 5707 5302 7899

Revenue Rbn 5.169 4.775 1.959 5.268 5.119 5.957

PROJECTED

5 Year Refurbishment Capital Requirement Rbn 1.437 1.923 1.306 2.197 2.833 2.444


KEY IMPLEMENTATION ENABLERS

AND THEIR STATUS


Key Considerations and Implementation Enablers

Key Implementation Enabler Responsible Status

Governance of the REDs DME This issue will be addressed in the EDI Restructuring Bill

Electricity Restructuring Legislation DME The process is driven by DME and indication from them is that the Electricity Restructuring Act is targeted for mid 2007

Promulgation of Asset Transfer Framework to enable effective and orderly transfer of assets from local government and Eskom to the REDs

National Treasury NT exempted municipalities and municipal entities from sections 14 & 90 of the LG: MFMA with regard to electricity transfers.

National Electricity Pricing System NERSA The process is driven by NERSA

National Tariff Harmonisation Framework to ensure rationalisation of tariffs nationally

NERSA EDI Holdings will submit a position paper by 31 March 2007 for input into the NERSA process

Salary Harmonisation Framework EDI Holdings A proposal served at the TLRS during January 2007 as part of the process of addressing the COS and salary harmonisation

Capital Investment Strategy for Infrastructure DME /

EDI Holdings

Will be attended to through the RED Establishment Business Case

Surcharge Principles Framework National Treasury The principles are being covered in the Municipal Fiscal Powers and Functions Bill to be promulgated during 2007


WHAT ARE REDs?


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

Future REDs (…1)


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

Future REDs (…2)


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

29 May 2007 Slide 23Slide 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


GOVERNANCE OF REDS


PRINCIPAL LEGAL INSTRUMENT OBJECTIVE

PFMA Regulates governance and financial management of public and state owned entities

Companies Act Regulates governance of companies as well as other aspects of running companies

Shareholders Agreement To regulate the relationship between shareholder

King II Report For sound corporate governance guidelines for boards

SDA To regulate the provision of electricity reticulation services by a RED on behalf of a municipality

NERSA Distribution Licence Regulates the operation of networks, tariffs, quality of supply and customer management

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

Governance of REDs


Relationship Governance

RELATIONSHIP OWNER RELATIONSHIP PARTNER GOVERNANCE INSTRUMENT

National Government RED Board Shareholders Agreement

Shareholder Compact

Business Plan

Local Government (Service Authority)

RED Board (Service Provider) Shareholders Agreement

Service Delivery Agreement (SDA)

Eskom Holdings RED Board Shareholders Agreement

Asset Transfer Agreement

RED Board RED Management Business Plan

Performance Contract

National Energy Regulator of South Africa (NERSA)

RED Board NERSA Licence


HOW WILL WE GET THERE?


RED Establishment Roadmap


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)


KEY PROGRESS TO DATE


Industry Readiness

29 May 2007 Slide 32Slide 32

STAKEHOLDER ENGAGEMENT


Regional Project Governance Structures

RED TECHNICAL STEERING

COMMITTEE

WORKGROUPS

Finance

Wires

Retail

Human Capital

Business Processes and

Systems

LEGAL / CHANGE MANAGEMENT / COMMUNICATIONS

SPONSORS COMMITTEE

RegionalTLRS

REGIONAL ENGAGEMENT

FORUM


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


WHAT SUPPORT CAN BE EXPECTED?


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


CONCLUSION


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

THANK YOUTHANK YOU

www.ediholdings.co.za

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