edi restructuring presentation to ppc: provincial & local government by
DESCRIPTION
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 - PowerPoint PPT PresentationTRANSCRIPT
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
29 May 2007 Slide 11
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
29 May 2007 Slide 12
CABINET DECISION: 25 OCTOBER 2006
29 May 2007 Slide 13
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
29 May 2007 Slide 14
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
29 May 2007 Slide 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
29 May 2007 Slide 16
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
29 May 2007 Slide 17
KEY IMPLEMENTATION ENABLERS
AND THEIR STATUS
29 May 2007 Slide 18
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
29 May 2007 Slide 19
WHAT ARE REDs?
29 May 2007 Slide 20
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)
29 May 2007 Slide 21
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)
29 May 2007 Slide 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
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
29 May 2007 Slide 24
GOVERNANCE OF REDS
29 May 2007 Slide 25
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
29 May 2007 Slide 26
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
29 May 2007 Slide 27
HOW WILL WE GET THERE?
29 May 2007 Slide 28
RED Establishment Roadmap
29 May 2007 Slide 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)
29 May 2007 Slide 30
KEY PROGRESS TO DATE
29 May 2007 Slide 31
Industry Readiness
29 May 2007 Slide 32Slide 32
STAKEHOLDER ENGAGEMENT
29 May 2007 Slide 33
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
29 May 2007 Slide 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
29 May 2007 Slide 35
WHAT SUPPORT CAN BE EXPECTED?
29 May 2007 Slide 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
29 May 2007 Slide 37
CONCLUSION
29 May 2007 Slide 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
THANK YOUTHANK YOU
www.ediholdings.co.za