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Policy and Regulatory Considerations - Getting it right EDI Maintenance Summit by Phindile Nzimande CEO: EDI Holdings 9 &10 June 2008
Presentation Outline
The Energy White Paper EDI Restructuring Context Key restructuring progress to date Getting it right – Policy & regulatory Considerations Implementation Challenges Conclusion
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9 June 2008
ENERGY WHITE PAPER
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Objectives and Principles
(…1) The energy white paper instructs a restructuring approach that:
Is transparent, builds public confidence, seeks to clarify organisational roles, communicates policy effectively and integrates policy processes
The key policy drivers to energy restructuring is:
To redress economic and social power imbalances To recognise and cope with multi-casual linkages in the energy sector
Energy restructuring occurs within the context of a macro-economic framework that:
Promotes growth Promotes redistribution by creating jobs Reallocates resources through the budget
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Objectives and Principles
(…2) Electricity as a critical energy form has the following challenges
Increasing access and affordability to energy services Improving governance and delivery Stimulating economic development and growth
Key achievables will include:
A comprehensive electrification programme Establishment of a consolidated electricity distribution industry Industry conducive to effective regulation Creation of an authority to manage the restructuring of the electricity distribution industry Creation of viable & sustainable distribution entities (REDs)
The Energy White Paper is currently under review. The Energy Summit held in September 2007 was part of the process to review this White Paper 9 June 2008 Slide 5
EDI Restructuring Objectives
Energy White Paper Objectives
Ensure electrification targets are met Provide low-cost electricity Facilitate better price equality Improve the financial health of the industry Foster proper co-ordination of operations and investment capital Improve quality of service and supply Attract and retain competent employees
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EDI Profile
Revenue Customers Staff Asset Value Energy Purchases Distribution Lines Distribution Cables
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: : : : : : : R33.5 bn ~8.3 m ~31 000 ~R40 bn ~110 TWh >370 000 km >210 000 km
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EDI RESTRUCTURING CONTEXT
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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 Industry 187 Residential Physical Energy Flow Financial Flow
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Metering & Billing Business
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Key Challenges Facing the EDI
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: R7 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)
Inconsistent Electrification Performance
Access to electricity: ~73 % (National)
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
** Source: 2003/4 National Integrated Resource Plan (NIRP) ; # Source: NUS Consulting Study - 2005
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Current Electricity Challenges in Context
The electricity distribution industry (EDI) is part of a broader ESI value chain Challenges experienced in generations filter through to distribution Current load-shedding These generation capacity problems tend to disguise distribution challenges for some time to come Every ‘lights off’ moment will most likely be interpreted as load shedding whilst it could as well be a distribution issue In 5-7 years time major generation challenges will be overcome and distribution will be exposed if nothing happens now The envisaged economic growth will require to be supported by both additional generation capacity and a well oiled distribution business
The restructuring of the electricity distribution industry remains relevant and imminent and should, therefore, be accelerated to avoid undesired future challenges 9 June 2008 Slide 11
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 establishment of 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.
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6 Wall-to-Wall REDs Boundary Map
Provincial Boundaries Cape Town
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RED 1 RED 6
Tshwane Metro (Pretoria) Johannesburg Metro Ekurhuleni Metro
RED 4 RED 2 RED 3
Nelson Mandela Bay Metro (Port Elizabeth)
RED 5
eThekwini Metro (Durban)
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KEY RESTRUCTURING PROGRESS TO DATE
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Key progress to date…(1)
Realigned the regional project governance structures to ensure broader participation by all municipalities in line with the 6 wall to wall Cabinet decision Sponsors Committees (6) Steering Committees (6) Regional Engagement Forums (6) Regional Transitional Labour Relations Structures (6) 121 Municipalities have to-date signed the Accession to Cooperative Agreement; Substantive progress of critical mass participants Section 78 and ring-fencing; Eskom, four Metros and 10 other municipalities are ringfenced 3 Metros and 6 other municipalities have completed MSA S78 Eskom 726 programme Have started developing a systems approach for the industry Transfer Agreement and Placement & Migration Agreements have been adopted by the TLRS R1,2 billion allocated for 3 years through the MYPD and is being disbursed to ensure readiness
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Key progress to date…(2)
The project to quantify various policy options relating to asset evaluation, compensation, and impact analysis is progressing well The output of this project will help to finalise the outstanding RED Establishment Bill and related Regulations Substantive inputs provided on various policies/legislations: RED Establishment Bill Draft Asset Transfer Framework (limited consultation stages) CRC process Policy process on the system of Provincial & Local government The past five years of EDI Holdings as the leader of the EDI restructuring process confirms the critical importance for an enabling legislative , regulatory and policy environment to deliver a consolidated EDI A
Strategic Implementation Plan
(SIP) focusing on national goals; The Deal; and Transition Path has been developed
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Strategic Implementation Plan - Overview
1 3 Key Question What is our Destination?
2 How will we get there?
Conditions for Success?
Answer EDI Restructuring
National Goals for EDI End-state of six wall-to-wall REDs
Content
National Goals Definition of National Goals Formulation of EDI Scorecard through translating National Goals into metrics and targets EDI end-state architecture RED design and positioning in industry value chain Oversight role during transition and end-state High-level description of a staged Transition Path Key decision points to be considered en route to end-state
Transition Path
Assuming voluntary restructuring mode Mitigation of risk and uncertainties by “staging” approach
The Deal
Agreement from asset owners and National Government on preliminary list of 23 Issues Legislative framework and codification to cement agreements Preliminary list of 23 Issues of “The Deal” Point of view on how to develop The Deal, based on analyses across the 23 Issues Codification tools and sequence of codification to implementing The Deal
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The Deal Framework
re invest?
Influential Shareholders
Local and National Government / Shareholders of CAO
receive pay-out?
Facilitator
EDI Holdings (EDIH) facilitates “The Deal” Compen sation/ Conditions
Influential Shareholders
National Gov. / Shareholders of REDs
provide means to RED?
provide returns?
Current Asset Owner (CAO)* EDI assets Future RED or Proxy for RED
Signatories Signatories Legislative Environment
Guiding principles are still to be developed and agreed with stakeholders 9 June 2008 Slide 18
GETTING IT RIGHT
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Policy & Regulatory Considerations
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Policy Environment
What would help fast-track restructuring?
RED Establishment Bill
DME has made significant advances in the drafting of the RED Establishment Bill.
The Deal
The project to quantify various policy options relating to asset evaluation, compensation, and impact analysis is progressing well
Asset Transfer Framework for Municipalities
National Treasury issued an Asset Transfer framework exemption from s.14 of the MFMA in April 2007 NT has already prepared draft regulations for Asset Transfer in terms of s.14 of the MFMA
The Municipal Fiscal Power & Functions Act
The Municipal Fiscal Powers and Functions Act, 2007 (Act No 12 0f 2007) was passed in September 2007 and will, amongst others, legislate the municipal surcharge; Supporting regulations need to be accelerated
Industry Regulation Voluntary mode of restructuring 9 June 2008
RED Establishment Bill & Regulation
(…1) Provide legislative guidance and parameters for –
The establishment of REDs The transfer by Eskom of its electricity distribution business into REDs The transfer by municipalities of their electricity distribution businesses into REDs
Legislation should contain provisions, inter alia, to:
Regulate the transfers of employees to the REDs Streamline existing legislation governing the EDI Provide for the conditions under which a RED may be wound up Regulate RED reporting and oversight requirements Strengthen s. 93C of the Local Government: Municipal Systems Act, 2000 (Act no. 32 of 2000) co-operation procedures between municipalities
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RED Establishment Bill & Regulation
(…2)
Spell out enabling provisions regulating – Ring-fencing of municipal and Eskom distribution businesses Resolution of disputes between municipalities, REDs and Eskom Treatment of transfers affecting the Registrar of Deeds Exemption from transfer duties / vesting provisions for property transfer Dealing with way-leaves, servitudes, rights of access etc.
Safeguard unforeseen exits from REDs Would provide National Government with tools to achieve EDI reform objectives Exemptions from, or amendments to, provisions in the Systems Act and the MFMA, as obtained e.g. to facilitate budget approval processes, or s.78 processes
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The Current Industry Regulatory Landscape
The relative roles of NERSA (Electricity Regulation Act, as amended) and municipalities (Constitution, Systems Act) in regulating the EDI are unclear and currently appear to conflict.
According to the Electricity Regulation Amendment Act, 2007: The electricity supply and supply system supplying non-reticulation customers would be regulated directly by NERSA On the other hand, the electricity system to reticulation customers will be regulated by municipalities in terms of norms and standards prescribed by the Minister of Minerals and Energy REDs will have to comply with the Electricity Regulation Act and municipal legislation regarding: Tariff setting powers Tariff harmonisation Regulation of quality of supply issues
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Ideal regulatory environment
Economic regulation
NERSA’s appropriately empowered as a professional and independent regulator to regulate the entire electricity supply chain by determining tariffs using a holistic approach
Tariff Rationalisation
A single economic regulator will achieve one of the critical objectives of EDI reform - fair and equitable electricity tariffs.
Appropriate Licences and monitoring and enforcement of non-compliance
NERSA appropriately capacitated to monitor and enforce non-compliance in particular to technical licence conditions , i.e. quality of service and supply
Future role of local government in relation to REDs
Municipalities to still play a role in electrification planning and in overseeing the provision of free basic electricity services. Municipalities should also be free to contract with REDs to perform various municipal functions such as public lighting, the operation of billing systems, cash receipting and so on.
Clarity and streamlined regulatory regime is necessary to ensure effective regulation of the industry 9 June 2008 Slide 24
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IMPLEMENTATION CHALLENGES
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Implementation Challenges
Navigating through the complex restructuring environment characterized by: Ambivalent stakeholder support The negotiated/voluntary nature of the restructuring process makes it difficult to assure anticipated objectives and results within timeframes Lack of enabling legislation Resolution of key enablers/outstanding policy issues
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CONCLUSION
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Conclusion
Never before has the environment for the establishment of the REDs looked so substantially promising The constraints that were protracting the process are well on their way to being resolved The current electricity challenges calls for an integrated and holistic approach to the solution from all industry players, business and citizens of this country to address the entire value chain of the ESI EDI Holdings is an active member of the National Electricity Response Team, the joint presidential work Group and is assisting the provincial and local government structures to cascade the process to the other spheres of government The refurbishment and maintenance of the electricity distribution assets can no longer be postponed In line with the Asgisa request, EDI Holdings is coordinating an EDI infrastructure investment project We believe that a summit like this one will go a long way in creating awareness about the state of the EDI but most importantly will help create a platform for stakeholders to craft workable corrective solutions to avoid unintended future challenges.
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