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Programme 726

Financial Implications for Municipalities

Eskom’s view on how to establish the financial impact of restructuring - as input to the EDIH Finance Sectoral

Committee - & related matters

March 2005

For the Portfolio Committees of Provincial and Local Government

& Public Enterprises

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Programme 726

Financial ImplicationsInevitable financial impact on split of current entity

Overall municipality with

zero surplus

Economies of scale at risk:

Shared overheads

Joint purchasing power

Portion of municipality with surplus

++Portion of

municipality with deficit

- -

Services purchased from Municipality

Financial surplus transferred

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Programme 726

Required Financial Analysis

What is the current financial impact? Value of electricity surplus Value of shared overheads (economy of scale) Value of joint purchasing power (economy of scale)

Design cross subsidies to alleviate financial impact Limit surcharge on electricity to maintain low cost Make other service charges cost reflective Create a mechanism to collect charges for payment to

municipalities (including key customers)

Use municipal ringfencing to identify financial impact

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Programme 726

Some Other Implications of REDs for MunicipalitiesSome thoughts by Eskom

Better service Local economic growth from improved service to consumers,

managed electrification & implemented FBE

Credit management - no cut-offs In future, municipalities cannot cut-off electricity to support

payment for other services

Pension & Benefit Funds - loss of members Changes in membership may impact investment portfolios

Proposed RED efficiencies Aggressive cost saving in REDs may cut employment in rural

municipalities

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Programme 726

RED support for National Govt. ObjectivesObjectives from Energy White Paper, including free basic electricity services

Low cost equitable tariffs to all regional consumers

Enhanced regional quality of supply

Electrification & FBE

Regional employee opportunity

Financial viability

RED controls regional tariff strategy & NER price applications

RED identifies entire regional backlog & plans upgrades

RED obtains NER approved tariffs to finance upgrade plans

RED plans & manages projects within Govt. subsidies

RED creates entire regional workforce plan & facilitates secondments to implement entire regional priorities.

RED performs financial planning for entire regional viability

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Programme 726

No impact of REDs on Eskom FBE serviceSource: MD’s Report to DME, January 2005

Municipal contracts Eskom has contracts with 57% of municipalities

Agreements expire every 12 months - complex renewal process Municipalities identified 597 000 customers Eskom verified & configured 462 000 customers

Difficult to identify Eskom customer from municipal data FBE claimed by 227 000 customers in November 2004

Eskom Actions Improve placement of vending stations Automatically issue FBE tokens to qualifying customers Enhance communication Propose a perpetual agreement

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Programme 726

Progress on Implementation: Key issues

Agree s.197 issues & approach with organised labour10. People issues

Provide training, organisation, communication, etc.9. Change management

Provide RED financial competency & infrastructure8. Full financial functions

Convert 187 distributors to RED systems7. RED systems

Secure service contracts with Eskom & municipal parents

6. Inherited parent contracts

Identify backlog. Obtain NER support for revenue requirements & financial resources

5. Capital & operations backlog within viability

Provide effective processes & systems for volumes4. Billing & collection

Support tariff affordability & municipal viability3. Subsidies & municipal levies

Complex contracts worth R100bn - with tax implications2. Transfer schemes

Objective: lowest cost of capital across the ESI & municipalities

1. Valuation, compensation & RED capital structure